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Profitability Improvement Programs Bring Domtar Strong Earnings

Friday, November 01, 2002

Press release from the issuing company

MONTREAL, Oct. 31- Domtar Inc. today announced net earnings of $59 million, or $0.26 per common share, and an operating profit of $136 million on net sales of $1.4 billion during the third quarter of 2002. HIGHLIGHTS OF THE THIRD QUARTER 2002 * Net earnings of $59 million or $0.26 per common share. * Acquisition synergies reached an annualized run rate of US$60 million as at September 30, 2002 vs. a US$65 million target at the end of 2002. * Free cash flow for the first nine months of 2002 totaled $308 million ($1.36 per common share), of which $252 million was used to reduce debt. * Average selling prices for Domtar products were 2% lower than those of the same quarter last year. However, effective September 30, 2002 new US$40 per ton price increases for copy and offset papers. * Creation of a new forest products group, which combines both timber and lumber operations. * Domtar stock reconfirmed for a fourth consecutive year in the Dow Jones Sustainability Group Index. "The strong demand for our papers and the rigorous execution of our two profitability improvement programs allowed us to have an excellent third quarter and to triple our earnings per common share compared to the same quarter last year," said Raymond Royer, President and Chief Executive Officer of Domtar. "One year after the acquisition of our four US mills, we are well on our way to reducing our net debt-to-total-capitalization ratio below 50%," added Mr. Royer. OPERATIONAL REVIEW Operating profit in the Papers segment reached $121 million in the third quarter of 2002 compared to $59 million for the same period last year. This important increase in earnings is attributable firstly to our four new U.S. mills' contribution for the full three months in 2002 compared to only two months during the same period last year. It is also the result of the synergies stemming from our acquisition as well as the successful implementation of the quality and profitability improvement program that includes cost reductions, and tax credits related to our expenses for new products development. Operating profit in the Paper Merchants segment amounted to $6 million in the third quarter of 2002 compared to $3 million in the corresponding period of 2001. This improvement is due to higher volumes and lower costs, which in turn has allowed us to improve our margin in this business segment. Operating loss in the Wood segment amounted to $10 million compared to $4 million in the third quarter of 2001. The imposition by the United States of countervailing and antidumping duties on exports of softwood lumber led us to review our management of this segment. We are committed to improving its efficiency and profitability, notably by reducing fiber costs and further optimizing wood recovery. In fact, cost reductions and a better sales mix stemming from recent investments made in new equipment had a positive impact on third quarter results, despite lower selling prices. However, these gains were offset by $17 million cash deposits made on exports of softwood lumber to the U.S. during the third quarter 2002 compared to a $6 million provision for duties recorded in the third quarter of 2001. In the Packaging segment, Domtar's third quarter share of the operating profit of Norampac Inc. stood at $21 million compared to $25 million in the same quarter of 2001. This reduction is mainly attributable to an increase in recycled fiber costs and lower selling prices, which were partially offset by higher volumes for corrugated containers resulting from recent acquisitions. LIQUIDITY AND CAPITAL Cash flows from operations in the first nine months of 2002 amounted to $427 million, a $136 million increase compared to the corresponding period of 2001. Net capital expenditures as at September 30, 2002 amounted to $119 million, a $73 million decrease compared to the same period last year. Consequently, free cash flow (cash flows from operating activities less net capital expenditures) for the first nine months of 2002 totaled $308 million compared to $99 million in the corresponding period in 2001, which was applied primarily to debt reduction. As at September 30, 2002 Domtar's net debt-to-total-capitalization ratio was 51% compared to 55% at December 31, 2001. OUTLOOK The improvement in the balance between supply and demand for the uncoated freesheet market presents interesting prospects for the mid- to long-term fundamentals in this market. Domtar's ability to successfully implement its two profitability improvement programs positions the Company to take full advantage of any improvements in the economy and meet its target of 15% return on equity (ROE) or more over a business cycle.




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