Montreal - Domtar Corporation today reported net earnings of $31 million ($0.71 per share) for the second quarter of 2010 compared to net earnings of $58 million ($1.34 per share) for the first quarter of 2010 and net earnings of $48 million ($1.12 per share) for the second quarter of 2009. Sales for the second quarter of 2010 amounted to $1.5 billion. Excluding items listed below, the Company had earnings before items(1) of $116 million ($2.67 per share) for the second quarter of 2010 compared to earnings before items(1) of $69 million ($1.59 per share) for the first quarter of 2010 and a loss before items(1) of $33 million ($0.77 per share) for the second quarter of 2009.

Second quarter 2010 items:
- Loss on sale of the Wood business of $50 million ($50 million after tax);
- Costs for debt repurchase, including premium paid, of $40 million
($24 million after tax);
- Charge of $14 million ($9 million after tax) related to the impairment and write-down of property, plant and equipment;
- Closure and restructuring costs of $5 million ($4 million after tax); and
- Gain on sale of property, plant and equipment of $2 million ($2 million after tax).

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); and
- Gain on sale of property, plant and equipment of $1 million ($1 million after tax).

Second quarter 2009 items:
- Refundable excise tax credit for the production and use of alternative bio fuel mixtures of $131 million ($79 million after tax);
- Gain on debt repurchase of $9 million ($6 million after-tax); and
- Closure and restructuring costs of $6 million ($4 million after tax).

"We continue to execute remarkably well to deliver strong financial results. I am pleased that these efforts, coupled with our successful debt tender, have been recognized by rating agencies," said John D. Williams, President and Chief Executive Officer. Commenting on strategic initiatives, Mr. Williams added, "We continue our work to streamline our portfolio; we exited the coated groundwood paper business and successfully closed the sale of our Wood business. We also announced an exciting and innovative partnership in the development of fiber-based nanotechnologies. As we continue to look for opportunities to address our issues of cyclicality and the secular decline of paper demand, our strong balance sheet provides us with financial flexibility to consider various options to create sustainable, long term value for our stockholders."

Segment Review

Papers
Operating income before items(1) was $165 million in the second quarter of 2010 compared to operating income before items(1) of $137 million in the first quarter of 2010. Depreciation and amortization totaled $95 million in the second quarter of 2010. When compared to the first quarter of 2010, paper shipments decreased by 7% while pulp shipments increased by 25%. The shipments-to-production ratio for paper was 101% in the second quarter of 2010, compared to 106% in the first quarter of 2010. Paper and pulp inventories decreased by 9,000 tons and 95,000 metric tons, respectively, at the end of June when compared to end of March levels.

The increase in operating income before items(1) in the second quarter of 2010 was the result of higher average selling prices in pulp and paper, and higher shipments for pulp. These factors were partially offset by higher costs related to scheduled maintenance downtime, lower shipments for paper, and an unfavorable exchange rate including hedging.

Paper Merchants
Operating loss was $1 million in the second quarter of 2010 compared to operating income of $1 million in the first quarter of 2010. Depreciation and amortization was $1 million in the second quarter of 2010. Deliveries remained flat when compared to the first quarter of 2010.

The decrease in operating income in the second quarter of 2010 was primarily the result of margins temporarily contracting due to supplier price increases. This factor was partially offset by higher selling prices.

Wood
Operating income before items(1) was nil in the second quarter of 2010, compared to an operating loss before items(1) of $6 million in the first quarter of 2010. Depreciation and amortization totaled $5 million in the second quarter of 2010. When compared to the first quarter of 2010, lumber shipments increased 14%.

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

Liquidity And Capital
Cash flow provided from operating activities amounted to $610 million and free cash flow(1) amounted to $567 million in the second quarter of 2010. Cash received with regards to the alternative fuel tax credits amounted to $368 million in the second quarter of 2010. Domtar's net debt-to-total capitalization ratio(1) stood at 22% at June 30, 2010 compared to 33% at March 31, 2010.

Outlook
The Company expects third quarter paper shipments to be flat compared to the second quarter, before gradually declining towards year-end due to seasonal factors. Selling prices for paper grade pulp are expected to come under pressure. As previously communicated, costs related to planned maintenance shutdowns will be materially reduced in the third quarter. Inflation on input costs is expected to be marginal for the second half of the year.