Domtar Corporation today reported net earnings of $58 million ($1.34 per share) for the first quarter of 2010 compared to net earnings of $124 million ($2.86 per share) for the fourth quarter of 2009 and a net loss of $45 million ($1.05 per share) for the first quarter of 2009. Sales for the first quarter of 2010 amounted to $1.5 billion.

Excluding items listed below, the Company had earnings before items(1) of $69 million ($1.59 per share) for the first quarter of 2010 compared to earnings before items(1) of $60 million ($1.39 per share) for the fourth quarter of 2009 and a loss before items(1) of $38 million ($0.88 per share) for the first quarter of 2009.

First quarter 2010 items:
- Refundable excise tax credit for the production and use of alternative bio fuel mixtures of $25 million ($18 million after tax);
- Charge of $22 million ($16 million after tax) related to the impairment and write-down of property, plant and equipment;
- Closure and restructuring costs of $20 million ($14 million after tax);
- Gain on sale of property, plant and equipment of $1 million ($1 million after tax).

Fourth quarter 2009 items:
- Refundable excise tax credit for the production and use of alternative bio fuel mixtures of $162 million ($113 million after tax);
- Charge of $27 million ($22 million after tax) related to the impairment and write-down of property, plant and equipment;
- Closure and restructuring costs of $29 million ($24 million after tax);
- Loss on sale of property, plant and equipment of $5 million ($3 million after tax).

First quarter 2009 items:
- 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;
- Closure and restructuring costs of $24 million ($14 million after tax).

"Despite a still modest economic recovery we recorded strong financial results due to price increases and higher pulp, paper and wood shipments," said John D. Williams, President and Chief Executive Officer. Discussing the Company's operations, Mr. Williams added, "Towards the end of the first quarter, our paper manufacturing system was balanced with our customer demand. We are now operating at full capacity with a lengthening backlog as a result of increased paper demand. We also have built inventories of pulp ahead of the second quarter, as we expect a higher level of maintenance work at our mills and in preparation for the first phase of the recently announced investments at our Kamloops pulp mill that will result in a 41-day shutdown."

SEGMENT REVIEW

Papers
Operating income before items(1) was $137 million in the first quarter of 2010 compared to operating income before items(1) of $104 million in the fourth quarter of 2009. Depreciation and amortization totaled $96 million in the first quarter of 2010. When compared to the fourth quarter of 2009, paper shipments increased by 1.8%. The shipments-to-production ratio for paper was 106% in the first quarter of 2010, compared to 104% in the fourth quarter of 2009. Paper inventories were lowered by 53,000 tons while pulp inventories increased by 47,000 metric tons at the end of March when compared to end of December levels.

The increase in operating income before items(1) in the first quarter of 2010 was the result of higher average selling prices, higher shipments and lower costs related to lack-of-order downtime and machine slowdowns. These factors  were partially offset by higher costs for fiber, energy and freight and the impact of an unfavorable exchange rate including hedging.

On October 20, 2009, the Company announced that it would convert its Plymouth NC facility to 100% fluff pulp production by the fourth quarter of 2010. The paper machine has ceased producing uncoated freesheet paper in March and the mill's production will be focused on fluff pulp and roll pulp until the conversion is completed. In connection with this announcement, the Company recognized $13 million of accelerated depreciation in the first quarter of 2010 and is expected to record a further $26 million of accelerated depreciation over the next six months of 2010 in relation to the assets that will cease productive use in October 2010.

Paper Merchants
Operating income before items(1) was $1 million in the first quarter of 2010 compared to operating income before items(1) of $3 million in the fourth quarter of 2009. Depreciation and amortization was $1 million in the first quarter of 2010. Deliveries remained flat when compared to the fourth quarter of 2009.

Wood
Operating loss before items(1) was $6 million in the first quarter of 2010, compared to operating loss before items(1) of $5 million in the fourth quarter of 2009. Depreciation and amortization totaled $5 million in the first quarter of 2010. When compared to the fourth quarter of 2009, lumber shipments increased 2%.

The increase in operating loss before items(1) in the first quarter of 2010 was primarily the result of the impact of higher costs and an unfavorable exchange rate including hedging. These factors were offset by higher average selling prices and higher shipments.

Liquidity and Capital
Cash flow provided from operating activities amounted to $123 million and free cash flow(1) amounted to $92 million in the first quarter of 2010. Domtar's net debt-to-total capitalization ratio(1) stood at 33% at March 31, 2010 compared to 35% at December 31, 2009.

Outlook
Demand for our uncoated freesheet paper remains stable from month to month and we expect the increasing level of economic activity to be supportive of the recent trend. Input costs are expected to rise moderately while we may also be negatively affected by unfavorable exchange rates. Domtar will benefit from price increases in pulp and paper, which are in the process of being implemented. The second quarter will be affected by higher-than-average maintenance costs.