MONTREAL, July 27 -- Domtar Inc. announced today net earnings of $2 million ($0.01 per common share) in the second quarter of 2005 compared to a net loss of $1 million ($0.01 per common share) in the second quarter of 2004 and net earnings of $10 million ($0.04 per common share) in the first quarter of 2005. "Domtar achieved an operating profit in all business segments as a result of efficiency and cost reduction efforts by employees, an increase in average selling prices for pulp and paper, as well as higher pulp and lumber shipments, despite lower demand in the Papers segment, a weak US dollar and elevated levels of costs for freight, fiber, chemicals and energy," said Raymond Royer, President and Chief Executive Officer of Domtar. "Pressure stemming from these high costs continues to negatively impact our profitability. While Domtar progresses internally on its cost reduction initiatives, we have no indications that the increase in costs will ease in the near term. As such, these higher costs should be reflected over time in the selling prices of our products through inflation adjustments. We will continue to work with our customers to provide tailor-made solutions, notably through our supply chain management system and our expanding Domtar EarthChoice line of socially and environmentally responsible papers," added Mr. Royer. The $5 million decline in operating profit excluding specified items in the Papers segment was mainly attributable to lower paper shipments and higher overall costs, namely higher purchased energy, chemicals and fiber costs. In addition, during the second quarter, certain mills undertook capital and maintenance downtime also contributing to higher overall costs. These factors were partially offset by higher average selling prices for paper and pulp and higher pulp shipments as well as the realization of savings stemming from restructuring activities. The $5 million improvement in operating profit in the Wood segment was mainly attributable to higher lumber shipments, partially offset by higher duties on softwood lumber exports due to a higher level of shipments being exported to the U.S. As of January 1, 2005, the countervailing and antidumping duties rate has decreased from 27.22% to 20.95%. Since May 22, 2002, Domtar has made and expensed cash deposits of $175 million for export duties. The $3 million improvement in operating profit excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was mainly attributable to higher shipments for corrugated containers, partially offset by lower shipments of containerboard and higher overall costs. Free cash flow improved by $62 million in the second quarter of 2005 compared to the first quarter of 2005. This improvement mainly reflects reduced working capital requirements, primarily attributable to inventory, trade and other payables and receivables fluctuations. The first quarter of the year is typically impacted by seasonally high requirements for working capital. These factors were partially offset by increased capital expenditures. Domtar's net debt-to-total capitalization ratio(1) as at June 30, 2005 stood at 51.1% compared to 49.5% as at December 31, 2004. Domtar's total long-term debt increased by $135 million, largely due to additional net borrowings of $102 million and the negative impact of $33 million attributable to a stronger US dollar (based on month-end foreign exchange rates) on its US dollar denominated debt. Outlook Although the Company did experience slightly higher average selling prices for most of its pulp and paper products in the second quarter of 2005 compared to the first quarter of the year, the current business environment, mainly higher costs and lower demand for our products, is expected to remain challenging for the balance of the year. Despite the challenges that lie ahead, Domtar remains intent on delivering annualized targeted savings of $100 million by the end of 2005. As at June 30, 2005, the Company already stands at 60% of its goal.