MONTREAL -- Domtar Corporation today reported net earnings of $183 million ($4.24 per share) for the third quarter of 2009 compared to net earnings of $48 million ($1.12 per share) for the second quarter of 2009 and net earnings of $43 million ($1.00 per share) for the third quarter of 2008. Sales for the third quarter of 2009 amounted to $1.4 billion. Excluding items(1) listed below, the Company earned $57 million ($1.32 per share(1)) for the third quarter of 2009 compared to a loss of $33 million ($0.76 per share(1)) for the second quarter of 2009 and earnings of $51 million ($1.19 per share(1)) for the third quarter of 2008.

Third quarter 2009 items:
    * Refundable excise tax credit for the production and use of alternative bio fuel mixtures of $159 million ($116 million after tax);
    * Gains on sale of property, plant and equipment of $12 million ($12 million after tax); and
    * Closure and restructuring costs of $4 million ($2 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).

Third quarter 2008 items:

    * Costs of $10 million ($6 million after tax) related to synergies and integration; and
    * Closure and restructuring costs of $3 million ($2 million after tax).

"All of our businesses posted improved profitability, most notably in pulp which benefited from higher prices, better demand and lower downtime costs due to the restart of our Woodland and Dryden pulp mills. In our paper business, market conditions improved slightly quarter-over-quarter, as we had better shipments while taking the same level of lack-of-order downtime as in the second quarter," said John D. Williams, President and Chief Executive Officer.

"Our initiatives to reduce working capital and improve procurement spending and the sustained focus of our employees on customers, costs, and cash have contributed to generating a strong free cash flow during the quarter. Operational performance and debt repayment remain our priority. The recently announced closure of fine paper capacity and repurposing of the assets at the Plymouth mill is part of our strategy to balance our supply with customer demand and optimize the use of our assets," added Mr. Williams.

SEGMENT REVIEW
Papers

Operating income before items(1) was $138 million in the third quarter of 2009 compared to operating income before items(1) of $23 million in the second quarter of 2009. Depreciation and amortization totaled $95 million in the third quarter of 2009. When compared to the second quarter of 2009, paper shipments increased 5% while pulp shipments increased 13%. The shipments-to-production ratio for papers was 106% in the third quarter of 2009, compared to 102% in the second quarter of 2009. Paper and pulp inventories were lowered by 57,000 tons and 29,000 metric tons, respectively, at the end of September when compared to end of June levels.

The increase in operating income before items(1) in the third quarter of 2009 was the result of higher paper and pulp shipments, higher average selling prices for pulp, and lower materials costs. These factors were partially offset by lower average selling prices for paper and the impact of an unfavorable exchange rates including hedging.

Paper Merchants
Operating income before items(1) was $2 million in the third quarter of 2009 compared to operating income before items(1) of $2 million in the second quarter of 2009. Depreciation and amortization was $1 million in the third quarter of 2009. Deliveries increased 20% when compared to the second quarter. Higher deliveries and lower costs were offset by lower prices.

Wood
Operating loss before items(1) was $9 million in the third quarter of 2009, compared to operating loss before items(1) of $11 million in the second quarter of 2009. Depreciation and amortization totaled $5 million in the third quarter of 2009. When compared to the second quarter of 2009, lumber shipments increased 13%.

The decrease in operating loss before items(1) in the third quarter of 2009 was primarily the result of higher selling prices and higher shipments. These factors were partially offset by the impact of an unfavorable exchange rate including hedging.

LIQUIDITY AND CAPITAL
Cash flow provided from operating activities amounted to $244 million and free cash flow(1) amounted to $220 million in the third quarter of 2009. Domtar's net debt-to-total capitalization ratio(1) stood at 38% at September 30, 2009 compared to 50% at December 31, 2008. Amounts drawn on the off balance sheet receivables securitization program are unchanged since June 30 and stood at $20 million at the end of September.

Domtar Corporation has been allocated CDN$143 million through the Pulp and Paper Green Transformation Program announced by the Government of Canada. The funds are to be spent on capital projects to improve energy efficiency and environmental performance in our Canadian pulp and paper mills. The investments must be made before the expiration of the program on March 31, 2012, and all projects are subject to the approval of the Government of Canada.

OUTLOOK
For the fourth quarter, we expect lower paper volumes due to the seasonality of our business as well as higher costs due to planned maintenance shutdowns when compared to the third quarter. The strengthening of the Canadian dollar will also negatively impact the profitability of our Canadian mills. However, we expect our Papers segment to benefit from recently announced price increases implemented in the fourth quarter. Inventory levels remain lean and Domtar will continue to balance its production with customer demand.