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Domtar Posts 4Q Loss on Slow Orders, Downtime

Feb. 5, 2009 - Domtar Corp. today reported a net loss of $676 million ($1.31 per diluted share) for the fourth quarter of 2008 compared to net earnings of $43 million ($0.08 per diluted share) for the third quarter of 2008 and a net loss of $26 million ($0.05 per diluted share) for the fourth quarter of 2007. Excluding items(1) listed below, the Company lost $20 million ($0.04 per diluted share(1)) for the fourth quarter of 2008 compared to earnings of $51 million ($0.10 per diluted share(1)) for the third quarter of 2008 and earnings of $29 million ($0.06 per diluted share(1)) for the fourth quarter of 2007. Sales for the fourth quarter of 2008 amounted to $1.5 billion.

"Balancing our production to customer demand through lack-of-order downtime and machine slowdowns at various mills was very costly, yet prices for our papers held steady in the quarter. Undoubtedly, the economic crisis is a challenge for our business," said John D. Williams, President and Chief Executive Officer.

"Our organization must continue to execute quickly the right sizing of the manufacturing system to extract costs and preserve production efficiencies. Domtar's priority is cash flow generation with an immediate focus on reducing discretionary spending, reviewing procurement costs and pursuing the balancing of production and inventory control," added Mr. Williams.

FISCAL YEAR 2008 HIGHLIGHTS

For fiscal year 2008, net loss amounted to $573 million ($1.11 per diluted share) compared to net earnings of $70 million ($0.15 per diluted share) for fiscal year 2007. Excluding items(1), the Company earned $88 million ($0.17 per diluted share(1)) for fiscal 2008 compared to earnings of $131 million ($0.28 per diluted share(1)) for fiscal 2007. Domtar pursued its synergy program in 2008 and successfully achieved its revised target of $250 million on a run-rate basis at the end of December 2008. Sales amounted to $6.4 billion for fiscal year 2008.

Commenting on the performance, Mr. Williams said, "The 2008 results were negatively impacted by the weak volumes in our papers business including costs related to lack-of-order downtime and higher costs for wood fiber, chemicals, energy and freight. Despite the difficult operating environment, we were able to raise our selling prices in papers and to reduce costs through the synergy program."

SEGMENT REVIEW

Papers
Operating income before items(1) was $29 million in the fourth quarter of 2008 compared to operating income before items(1) of $131 million in the third quarter of 2008. Depreciation and amortization totaled $104 million in the fourth quarter. When compared to the third quarter, paper shipments decreased 9% while pulp shipments increased 9%. The shipments-to-production ratio for papers was 104% in the fourth quarter, compared to 97% in the third quarter. Paper inventories were 32,000 tons lower at the end of December when compared to end of September levels.

The decrease in operating income before items(1) in the fourth quarter was the result of lower paper shipments, costs related to lack-of-order downtime and machine slowdowns, lower average selling prices for pulp, higher usage for energy and higher costs for chemicals and fiber. These factors were partially offset by lower energy prices, lower freight costs, a favorable exchange rate net of hedging, and higher pulp shipments.

The carrying value of certain pulp, paper and converting assets has been tested for impairment resulting in a reduction of $359 million. In addition, some other fixed-assets have been written down for a total of $14 million.

Paper Merchants
Operating income was $2 million in the fourth quarter of 2008 compared to operating income of $1 million in the third quarter of 2008. Depreciation and amortization was $1 million in the fourth quarter. Deliveries decreased 11% when compared to the third quarter.

The increase in operating income in the fourth quarter was the result of an increase in allowance for doubtful accounts recorded in the third quarter, partially offset by lower paper deliveries.

Wood
Operating loss before items(1) was $9 million in the fourth quarter of 2008, compared to operating loss before items(1) of $11 million in the third quarter of 2008. Depreciation and amortization totaled $5 million in the fourth quarter. When compared to the third quarter, lumber shipments decreased 11%.

The decrease in operating loss before items(1) in the fourth quarter was the result of a favorable exchange rate. This factor was partially offset by lower average selling prices and lower shipments.

The carrying value of certain fixed-assets and harvesting rights have been written down as a result of the fourth quarter decision to rationalize operations which resulted in reductions in property, plant and equipment and intangible assets of $10 million and $4 million, respectively.

LIQUIDITY AND CAPITAL
During the fourth quarter, Domtar made early contributions to its pension trust funds of $96 million that reduces the Company's future funding requirements. Also, Domtar repurchased a notional amount of $60 million of the 7 7/8% Notes due 2011 for a total cash consideration of $51 million.

Including the aforementioned early contributions to pension trust funds, cash flow from operations amounted to 197 million dollars and free cash flow(1) amounted to $34 million in 2008. Domtar's net debt-to-total capitalization ratio(1) increased to 50% at year end compared to 41% as at December 30, 2007. Long-term debt decreased by $102 million over the same period. Amounts drawn on our revolving credit facility amounted to $60 million at December 31, 2008 compared to $50 million at December 30, 2007.

OUTLOOK
In the midst of a recession, the high level of uncertainty makes it difficult to predict sales volumes as none of our markets are showing any signs of demand recovery as of yet. Nonetheless, prices remain stable for Domtar's uncoated freesheet paper products. Depending on customer demand, we expect to continue to take lack-of-order downtime and machine slowdowns in papers and pulp in the first half of 2009 while all efforts will be made to manage and reduce costs.

SOURCE: Domtar Corp.




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