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Domtar Posts First Quarter Loss

May 1, 2009 - Domtar Corp today reported a net loss of $45 million ($0.09 per share) for the first quarter of 2009 compared to a net loss of $676 million ($1.31 per share) for the fourth quarter of 2008 and net earnings of $36 million ($0.07 per share) for the first quarter of 2008. Sales for the first quarter of 2009 amounted to $1.3 billion. Excluding items(1) listed below, the Company lost $38 million ($0.07 per share(1)) for the first quarter of 2009 compared to a loss of $20 million ($0.04 per share(1)) for the fourth quarter of 2008 and earnings of $25 million ($0.05 per share(1)) for the first quarter of 2008.

First quarter 2009:

  • Refundable excise tax credit for the production and use of alternative bio fuel mixtures of $46 million ($28 million after tax);
  • Charge of $35 million ($21 million after tax) related to the write-down of property, plant and equipment at the Plymouth, North Carolina, mill; and
  • Closure and restructuring costs of $24 million ($14 million after tax).

Fourth quarter 2008:

  • Charge of $387 million ($270 million after tax) related to the impairment and write-down of property, plant and equipment and intangible assets;
  • Charge of $321 million ($321 million after tax) related to the impairment of goodwill;
  • Charge of $52 million related to a valuation allowance on Canadian deferred income tax assets;
  • Closure and restructuring costs of $28 million ($18 million after tax);
  • Gain on debt repurchase of $12 million ($8 million after tax); and
  • Costs of $5 million ($3 million after tax) related to synergies and integration.

First quarter 2008:

  • Reversal of a $23 million provision ($17 million after tax) due to the early termination of an unfavorable contract by the counterparty;
  • Costs of $8 million ($5 million after tax) related to synergies and integration; and
  • Closure and restructuring costs of $1 million ($1 million after tax).

"We continue to face a very hostile environment in pulp with prices reaching cyclical lows. To bring our system back in balance we have announced the indefinite closure of our Woodland pulp mill and idled our Dryden pulp mill for ten weeks," said John D. Williams, President and Chief Executive Officer.

"Our people have responded remarkably well to the mandate of right-sizing the organization, improving its operating performance and reducing procurement costs and discretionary spending. We have generated free cash flow and our paper inventories have been significantly reduced despite a very weak demand environment. This could prove to be a catalyst as demand for fine paper levels off," added Williams.

SEGMENT REVIEW

Papers
Operating income before items(1) was $5 million in the first quarter of 2009 compared to operating income before items(1) of $29 million in the fourth quarter of 2008. Depreciation and amortization totaled $94 million in the first quarter of 2009. When compared to the fourth quarter of 2008, paper shipments decreased 7% while pulp shipments decreased 11%. The shipments-to-production ratio for papers was 105% in the first quarter of 2009, compared to 104% in the fourth quarter of 2008. Paper inventories were 43,000 tons lower at the end of March when compared to year-end levels.

The decrease in operating income before items(1) in the first quarter of 2009 was the result of lower average selling prices for pulp and a resulting higher inventory revaluation charge for pulp, lower paper and pulp shipments, higher usage for energy and higher costs for chemicals. These factors were partially offset by lower maintenance costs, lower freight costs, lower depreciation and amortization, lower energy and fiber costs and a favorable exchange rate including hedging.

Paper Merchants
Operating income was $2 million in the first quarter of 2009 unchanged from the fourth quarter of 2008. Depreciation and amortization was $1 million in the first quarter of 2009. Deliveries decreased 1% when compared to the fourth quarter. Lower selling prices and a decrease in deliveries were offset by lower costs.

Wood
Operating loss before items(1) was $16 million in the first quarter of 2009, compared to operating loss before items(1) of $9 million in the fourth quarter of 2008. Depreciation and amortization totaled $4 million in the first quarter of 2009. When compared to the fourth quarter of 2008, lumber shipments decreased 21%.

The increase in operating loss before items(1) in the first quarter of 2009 was primarily the result of lower average selling prices, an increase in bad debt expense, and higher energy costs. These were partially offset by a favorable exchange rate including hedging.

LIQUIDITY AND CAPITAL

Cash flow provided from operating activities amounted to $57 million and free cash flow(1) amounted to $33 million in the first quarter of 2009. Domtar's net debt-to-total capitalization ratio(1) stood at 51% at March 31, 2009 compared to 50% at December 31, 2008. Amounts drawn on the receivables securitization program were reduced by $15 million when compared to year-end levels to $95 million.

ALTERNATIVE FUEL CREDITS

The U.S. Internal Revenue Code permits a refundable excise tax credit for the production and use of alternative bio fuel mixtures. Domtar submitted an application with the U.S. Internal Revenue Service to be registered as an alternative fuel mixer and received notification that its registration had been accepted in late March 2009. The Company began producing and consuming alternative fuel mixtures in February 2009 at its eligible mills. In the first quarter of 2009, the Company has recorded $46 million in "Other operating (income) expense" related to claims filed for the period ending March 31, 2009. The claims for the refundable credits are based on the volume of bio fuel mixtures produced and burned during that period. The $46 million credit represents approximately 40% of the estimated future eligible alternative fuel tax credits available to the Company each quarter.

According to the Code, the tax credit expires at the end of 2009. The U.S. Congress is currently reviewing the Alternative Fuel Credit law and may enact legislation to amend the Code. Although this does create some uncertainty related to the future of this credit, the Company believes that amounts reflected in income to date have met the revenue recognition criteria.

OUTLOOK

Market conditions in all Domtar businesses remain challenging, although the rapid decline of paper volumes in recent months has been abating.

In pulp, transaction prices have been stabilizing in some overseas markets but inventories are still high.

Domtar will continue to manage its working capital requirements through inventory control and the balancing of production to meet customer demand. The indefinite closure of the Woodland pulp mill will help lower inventories and, in combination with the permanent closure of a paper machine at the Plymouth pulp and paper mill, will contribute to reducing fixed costs in the Papers segment starting in the second quarter.

(1) Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures in the appendix.

ABOUT DOMTAR

Domtar Corp is the largest integrated manufacturer and marketer of uncoated freesheet paper in North America and the second largest in the world based on production capacity, and is also a manufacturer of papergrade, fluff and specialty pulp.

Domtar owns and operates Domtar Distribution Group, an extensive network of strategically located paper distribution facilities. Domtar also produces lumber and other specialty and industrial wood products. The Company employs nearly 11,000 people.

SOURCE: Domtar Corp.




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