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Domtar Posts Net Earnings of $8 Million

Press release from the issuing company

MONTREAL, Aug. 5 - Domtar Inc. today announced net earnings of $8 million, or $0.03 per common share, and an operating profit of $56 million on net sales of $1.2 billion during the second quarter of 2003. "Past efforts to improve the quality of our products and customer service, as well as reduce costs allowed Domtar to mitigate difficult market conditions and post net earnings during the second quarter, despite a $20 million loss in our lumber business. However, we believe that the joint venture with Tembec, announced on June 19th, will help improve our Wood segment's performance. Indeed, we anticipate that the joint venture will be able to generate $30 to $40 million of annual synergies, half of which will benefit Domtar. Finally, it will also contribute to much needed consolidation and rationalization in the North American lumber industry," said Raymond Royer, President and Chief Executive Officer of Domtar. "It is also important to note that our accounting practices since 2002 exclude from our earnings the impact of currency fluctuations on the U.S. dollar denominated long-term debt contracted by Domtar. As such, our reported net earnings more adequately reflect our operational performance. In fact, had we included such gains in the second quarter, Domtar's net earnings would have increased by $94 million or $0.41 per common share," added Mr. Royer. Operational review Operating profit in the Papers segment reached $58 million in the second quarter of 2003 compared to $60 million for the same period in 2002. Higher selling prices for pulp and certain paper products, as well as benefits stemming from our quality and profitability improvement programs enabled this segment to maintain its performance despite the negative effect of a stronger Canadian dollar, higher energy and fiber costs, as well as lower shipments. This segment's results were also impacted by our decision to adjust production to our customers' needs. As result of market-related and maintenance-related downtime, and production slowdown and disruptions, Domtar's shipment to capacity ratio stood at 93% for the second quarter of 2003 compared to 95% in the same period last year. Operating profit in the Paper Merchants segment amounted to $5 million in the second quarter of 2003, compared to $7 million in the corresponding period of 2002. This decrease is attributable to lower profit stemming from erosion in prices for certain paper products and a change in customer mix. Operating loss in the Wood segment amounted to $20 million in the second quarter of 2003 compared to an operating profit of $33 million in the second quarter of 2002. As shown in the table below, operating loss in the second quarter of 2003 would have been $9 million compared to an operating profit of $10 million in the corresponding period of 2002 if the net impact of duties related to softwood exports to the U.S. were excluded. Since May 22, 2002, Domtar has made and expensed cash deposits of $50 million for countervailing and antidumping duties. Sustained efforts allowed our Wood segment to improve efficiency and reduce costs during the quarter. These efforts were, however, more than offset by a $21 million erosion in prices, lower shipments and the negative impact of a stronger Canadian dollar, which explain the $19 million variation from the second quarter 2003 compared to the same quarter in 2002. In the Packaging segment, Domtar's second quarter share of the operating profit of Norampac Inc. stood at $13 million compared to $18 million in the same quarter of 2002. This reduction was mainly attributable to a decrease in selling prices for both corrugated containers and containerboard caused by the negative impact of a stronger Canadian dollar; lower shipments due to market- related downtime, and higher fiber and energy costs. Liquidity and capital Cash flows provided from operations in the first six months of 2003 amounted to $121 million, a decrease of $137 million compared to the same period in 2002. This decrease was mainly due to higher requirements for working capital in the first quarter and lower net earnings. Net capital expenditures for the six months ended June 30, 2003 amounted to $84 million compared to $82 million for the same period in 2002. Domtar's net debt-to-total capitalization ratio as at June 30, 2003 was 47%, a decrease from 49% as at December 31, 2002. Outlook Domtar's current business environment is impacted by factors beyond its control, such as soft economic conditions, currency fluctuations and high energy costs. Domtar will maintain efforts to reduce costs and improve efficiency. Domtar will also continue to monitor inventory closely and curtail production in order to match supply with customer demand, even if this leads to market-related downtime and affects our profitability improvement programs. Nonetheless, Domtar will pursue its objectives of providing shareholders with superior returns even in difficult market conditions and of positioning itself to take full advantage of any improvement in the economy.