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Domtar Reports $190 Million Loss: Says most difficult conditions in 10 years

Press release from the issuing company

MONTREAL, Jan. 28 - Domtar Inc. announced today net sales of $4.8 billion in 2003, and when taking into account unusual items, an operating loss of $92 million and a net loss of $190 million, or $0.84 per common share. Excluding these unusual items, Domtar posted an operating profit of $135 million and net earnings of $5 million, or $0.02 per common share. "In 2003, Domtar had to cope with the most challenging market conditions in ten years. We had to face a decline in demand for some of our products as well as a cycle low pricing environment, particularly for copy and offset papers. Moreover, since 85% of our products are sold in the United States and are denominated in US dollars, and since many of our products sold in Canada are based on US prices, the significant and rapid drop in the average value of the US dollar compared to the Canadian dollar in 2003 versus 2002 affected net sales by approximately $550 million. These difficult market conditions also led us to adjust downward the value of our pulp mill at Lebel-sur-Quevillon and to shut down one of the two paper machines at our Vancouver mill. These two unusual items have had an additional impact of 230 million dollars on our earnings," stated Raymond Royer, President and Chief Executive Officer of Domtar. "Despite this situation, our staff relentlessly pursued efforts to reduce costs and improve our company's efficiency by holding 230 continuous improvement workshops in our various facilities. I extend them my warmest thanks. Lastly, it is important to note that our accounting practices since January 1, 2002 have excluded from our earnings the impact of currency fluctuations on the US dollar denominated long-term debt contracted by Domtar. In fact, had we included such gains in earnings in 2003 rather than shareholders' equity, Domtar's net earnings would have increased by $244 million or $1.07 per common share," added Mr. Royer. Operating loss in the Papers segment amounted to $90 million in 2003, or an operating profit of $135 million when excluding unusual items(1a & 1c), compared to an operating profit of $301 million in 2002, or $346 million when excluding unusual items(1c). This decrease was due to the negative impact of a weaker US dollar and lower shipments for paper and pulp caused by weaker demand, market downtime, labor disruptions, and the mid-August power outage, as well as higher energy and purchased fiber costs. These factors were partially offset by higher selling prices for pulp and by the benefits stemming from our profitability improvement programs. Domtar's shipments-to- capacity ratio dropped from 95% in 2002 to 91% in 2003. Operating profit in the Paper Merchants segment totaled $20 million in 2003, compared to $25 million in 2002. This decline mainly resulted from the negative impact of a weaker US dollar. Operating loss in the Wood segment amounted to $68 million in 2003 (or $66 million when excluding unusual items(1e)), compared to an operating loss of $16 million in 2002 (or an operating profit of $2 million when excluding unusual items(1c)). These results stemmed from a $34 million net impact of higher duties, a weaker US dollar, lower selling prices and lower shipments. These factors were partially offset by sustained efforts to improve efficiency and reduce costs during the year. Since May 22, 2002, Domtar has made and expensed cash deposits of $76 million for countervailing and antidumping duties. In the Packaging segment, Domtar's 50% share of the operating profit for Norampac Inc. stood at $48 million in 2003 compared to $74 million in 2002. This reduction was mainly attributable to the negative impact of a weaker US dollar, which resulted in lower average net selling prices for both containerboard and corrugated products, partially offset by a decrease in purchased fiber costs. Liquidity and capital Cash flows provided from operations in 2003 amounted to $348 million compared to $677 million for the same period in 2002. This decrease was mainly due to lower profitability in 2003 compared to 2002. Net capital expenditures for 2003 amounted to $225 million (or 59% of amortization), compared to $223 million (or 56% of amortization) in 2002. The decrease in results is primarily due to two factors: first, the significant decline in the value of the US dollar versus the Canadian dollar and overall lower selling prices for our products (a combined impact of approximately $120 million); second, the drop in shipments due to our decision to take market-related downtime because of low prices plaguing the industry, and as a result of an on-going strike at our Vancouver paper mill. These results were partially offset by lower purchased fiber costs. Outlook "Domtar experienced a difficult year in 2003 and was notably impacted by a weaker US dollar and lower demand. Moreover, while Domtar results during fourth quarters are usually seasonally weaker, results in Q4 2003 are not indicative of its business going forward given that they were aggravated by temporary circumstances such as market-related downtime and labor disruptions. While the Company's current business environment is impacted by difficult to predict factors beyond its control such as economic conditions, currency fluctuations and high energy costs, Domtar will maintain its efforts to reduce costs and improve efficiencies in order to continue to pursue its goal of providing its shareholders with superior returns," concluded Mr. Royer. Domtar will therefore strengthen its profitability improvement programs. In order to do so, we will review, before the end of the first quarter, Domtar's Canadian pulp and paper operations in order to ensure that all our Canadian mills are profitable when the Canadian dollar is valued at 75 cents to the US dollar and when prices are at current levels. In addition, we will accelerate efforts to manufacture the Company's best-selling products at multiple facilities located in both Canada and the United States.