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Domtar Reports First Quarter 2008 Results

May 6, 2008 - Domtar Corp. today reported net earnings of $36 million ($0.07 per diluted share) for the first quarter of 2008 compared to a net loss of $26 million ($0.05 per diluted share) for the fourth quarter of 2007. Sales for the first quarter amounted to $1.7 billion. Excluding the items listed below, the Company earned $25 million ($0.05 per diluted share) in the first quarter of 2008 compared to $29 million ($0.06 per diluted share) in the fourth quarter of 2007. The inflation on fiber, chemical, energy and freight costs reduced earnings by approximately $0.05 per diluted share in the first quarter of 2008 compared to the fourth quarter of 2007.

"Our first quarter financial performance was affected by higher-than-expected inflation on raw materials, which was only partially offset by price increases implemented late in the quarter. Nevertheless, we were able to maintain a balance in our paper production system with a shipments-to-production ratio above 100 percent, resulting in a papers inventory reduction," said Mr. Raymond Royer, President and Chief Executive Officer of Domtar. "Compared to the fourth quarter, we had few incremental savings from synergies but our plans are on track. Our goal is to surpass $200 million of synergies on a run-rate basis before year-end while, in the near term, reaping the benefits from the carry-over of recently implemented price increases in papers and pulp," added Mr. Royer.

Commenting on capital allocation, Mr. Royer said, "Our business fundamentals are sound and I am pleased with the progress Domtar has made since March 2007 toward paying down debt to improve its investment profile. Nevertheless, the uncertain financial markets remind us of the importance of maintaining access to capital markets. Given the added challenges of a slowing economy and current inflationary pressures, we must further increase our financial strength. Consistent with our targeted leverage ratios, we will continue to apply our excess cash flow to debt reduction to lower our cost of capital with the objective to get as close as possible to investment grade for the benefit of our shareholders."

SEGMENT REVIEW

Papers
Operating income was $114 million in the first quarter of 2008 compared to operating income of $25 million in the fourth quarter of 2007. The first quarter of 2008 included the impact of a reversal of a $23 million provision due to the early termination by the counterparty of an unfavorable contract while the fourth quarter of 2007 included a $92 million charge for the impairment of property, plant and equipment associated with the reorganization of our Dryden, Ontario mill. Depreciation and amortization totaled $110 million in the first quarter. When compared to the fourth quarter of 2007, sales remained unchanged at $1.4 billion. The shipments-to-production ratio was 103% in the first quarter compared to 98% in the fourth quarter. Paper inventories decreased 27,000 tons throughout the quarter.

Excluding the above noted provision reversal and impairment charge, the decrease in operating income in the first quarter was the result of higher costs related to fiber, chemicals and freight as well as an increase in costs related to direct energy consumption. These factors were partially mitigated by higher average selling prices for paper and pulp, higher paper shipments, lower synergy and integration costs, lower depreciation and amortization expense and the positive impact of a stronger U.S. dollar.

Paper Merchants
Operating income was $3 million in the first quarter of 2008 compared to operating income of $1 million in the fourth quarter of 2007. Depreciation and amortization was nil in the first quarter of 2008. Sales were unchanged at $262 million while deliveries increased 1%.

When compared to the fourth quarter, the increase in operating income is the result of an increase in deliveries and no depreciation and amortization expense in the first quarter.

Wood
Operating loss was $22 million in the first quarter of 2008, compared to an operating loss of $26 million in the fourth quarter of 2007 which included a $4 million charge for the impairment of goodwill. Depreciation and amortization totaled $6 million in the first quarter of 2008. When compared to the fourth quarter of 2007, sales decreased 20% to $63 million with lumber shipments decreasing 7%.

Excluding the $4 million goodwill impairment in the fourth quarter of 2007, operating loss in the first quarter of 2008 was unchanged when compared to the fourth quarter of 2007. The results were negatively impacted by lower average selling prices and lower shipments, offset by lower severance costs, lower depreciation and amortization expense and a favorable foreign exchange rate.

OUTLOOK

Rising energy prices are expected to continue to negatively impact energy-related raw material costs as well as freight costs. The uncoated freesheet market is currently in balance but the risks of a demand decline greater than the long-term trend are now heightened due to a weakening economy. Domtar will continue to monitor its order books and inventory levels and adjust production with customer demand. The costs related to maintenance are expected to increase in the second quarter of 2008 compared to the first quarter of 2008 due to scheduled planned maintenance shutdowns.

SOURCE: Domtar Corp.




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