MONTREAL, Oct. 27 -- Domtar Inc. announced today a net loss of $52 million ($0.23 per common share) in the third quarter of 2005 compared to net earnings of $29 million ($0.13 per common share) in the third quarter of 2004 and net earnings of $2 million ($0.01 per common share) in the second quarter of 2005.
"The current business environment and changing markets pose unprecedented challenges for our industry. Pressure will remain high in all production cost areas, amplified by lower revenues caused by a strong canadian dollar. We continue to be focused on cost reduction and, as it stands, the Company today has achieved 80% of its goal on delivering annualized targeted savings of $100 million by the end of 2005. However, these savings were more than offset by factors such as high costs, especially for purchased energy, fiber and chemicals as well as freight, and an overall soft market. The impact of these factors on our earnings is compounded by the strengthening of the Canadian dollar and we don't expect a reversal of this situation in the short term.
For these business reasons, and in order to ensure its long-term profitability and free cash flow availability, Domtar has decided to suspend its common share dividend. Also, the Company is further pursuing the review of all of its business segments and will announce additional targeted actions before year-end. Although it is premature to reach conclusions, we are considering a broad range of options including disposals, indefinite and/or permanent closures of facilities, as well as further cost reduction initiatives across the Company," said Raymond Royer, Domtar's President and Chief Executive Officer.
The $23 million decline in operating profit in the Wood segment was mainly attributable to lower average selling prices and shipments for lumber as well as the negative impact of a stronger canadian dollar and higher freight costs. In addition, during the third quarter, several sawmills undertook the usual summer shutdown, also contributing to higher overall costs. These factors were partially offset by lower duties on softwood lumber exports due to a lower level of shipments being exported to the U.S., as well as the realization of savings stemming from restructuring activities. Since January 1, 2005, the countervailing and antidumping duties rate has decreased gradually from 27.22% to 20.15%. Since May 22, 2002, Domtar has made and expensed cash deposits of $188 million for export duties.
The $9 million decline in operating profit excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was mainly attributable to lower average selling prices, the negative impact of a stronger canadian dollar, as well as higher energy and freight costs.
Free cash flow declined by $22 million in the third quarter of 2005 compared to the second quarter of 2005. This deterioration mainly reflects a decline in profitability primarily attributable to lower overall average selling prices for all our major products, the negative impact of a stronger canadian dollar and lower shipments for lumber and packaging, partially offset by reduced requirements for working capital.
Domtar's net debt-to-total capitalization ratio(1) as at September 30, 2005 stood at 51.4% compared to 49.5% as at December 31, 2004. Domtar's total long-term debt increased by $37 million, largely due to additional net borrowings of $113 million, partially offset by the $76 million positive impact of a stronger canadian dollar (based on month-end foreign exchange rates) on its US dollar denominated debt. During the third quarter, Domtar successfully completed its public offering in the U.S. of US$400 million 7.125% notes due in 2015 and used the gross proceeds from the sale to subsequently redeem its US$150 million 8.75% notes due in 2006 and to repay a substantial portion of its unsecured revolving credit facility.
Domtar's results were affected by lower average selling prices in all its segments in the third quarter of 2005 compared to the second quarter of the year, as well as higher overall costs and a stronger canadian dollar. Domtar expects these difficult market conditions to prevail in the coming quarters. Thus, the Company is further pursuing the review of all of its business segments and will announce additional targeted actions before year-end in order to ensure it's long-term profitability and free cash flow availability.
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