Domtar Corporation reports preliminary second quarter 2012 financial results

Good financial results despite the impact of lack-of-order downtime in paper
(All financial information is in U.S. dollars, and all earnings per share results are diluted, unless otherwise noted.)

• Second quarter 2012 net earnings of $1.61 per share, earnings before items¹ of $1.61 per share
• Year-to-date shipments of specialty and packaging paper increased 12% compared to 2011
• Share buybacks totaled $69 million in the second quarter of 2012

TICKER SYMBOL
(NYSE: UFS) (TSX: UFS)

MONTREAL, July 27, 2012 /PRNewswire/ - Domtar Corporation (NYSE: UFS) (TSX: UFS) today reported net earnings of $59 million ($1.61 per share) for the second quarter of 2012 compared to net earnings of $28 million ($0.76 per share) for the first quarter of 2012 and net earnings of $54 million ($1.30 per share) for the second quarter of 2011. Sales for the second quarter of 2012 amounted to $1.4 billion.

Excluding items listed below, the Company had earnings before items¹ of $59 million ($1.61 per share) for the second quarter of 2012 compared to earnings before items¹ of $61 million ($1.65 per share) for the first quarter of 2012 and earnings before items¹ of $98 million ($2.37 per share) for the second quarter of 2011.

Second quarter 2012 items:

• None.

First quarter 2012 items:

• Premium paid and costs related to the debt repurchase of $50 million ($30 million after tax);
• Closure and restructuring costs, including write-down of property, plant and equipment, of $3 million ($2 million after tax); and
• Negative impact of purchase accounting of $1 million ($1 million after tax).

Second quarter 2011 items:

• Charge of $62 million ($38 million after tax) related to the impairment and write-down of property, plant and equipment;
• Net losses on the sale of property, plant and equipment and business of $6 million ($5 million after tax); and
• Closure and restructuring costs of $2 million ($1 million after tax).

"We had a good operating performance in the quarter despite costs associated with lack-of-order downtime," said John D. Williams, President and CEO. "So far this year, our shipments have declined due to softness in market demand for paper but our average pricing and margins are holding up well. The ramp-up of the Appleton paper supply agreement and the conversion of the Marlboro, South Carolina mill to lightweight specialty and packaging grades will remove high volume paper capacity and help reduce the amount of potential downtime for the back half of 2012."

Commenting on the Personal Care segment, Mr. Williams added, "Our Personal Care business continues its growth, reaching annualized sales of over $425 million in the second quarter. The addition of EAM Corporation will provide a long term research capability to help further differentiate our offering and grow the business."

QUARTERLY REVIEW

Operating income before items¹ was $106 million in the second quarter of 2012 compared to an operating income before items¹ of $113 million in the first quarter of 2012. Depreciation and amortization totaled $96 million in the second quarter of 2012.

The decrease in operating income before items¹ in the second quarter of 2012 was the result of lower shipments for papers and pulp and higher costs for both planned maintenance and for lack-of-order downtime in papers. These factors were partially offset by higher selling prices for paper and pulp, lower SG&A costs and the inclusion of Attends Europe for a full quarter.

When compared to the first quarter of 2012, paper shipments decreased 5.9% and pulp shipments decreased 5.4%. Paper deliveries of Ariva® decreased 9% when compared to the first quarter of 2012. The shipments-to-production ratio for paper was 98% in the second quarter of 2012, compared to 100% in the first quarter of 2012. Lack-of-order downtime and machine slowdowns in papers totaled 23,000 tons. Paper inventories increased by 13,000 tons while pulp inventories increased by 15,000 metric tons as at the end of June, compared to March levels.

LIQUIDITY AND CAPITAL

Cash flow provided from operating activities amounted to $175 million and capital expenditures amounted to $76 million, resulting in free cash flow¹ of $99 million for the three months ended June of 2012. Domtar's net debt-to-total capitalization ratio¹ stood at 19% at June 30, 2012 compared to 12% at December 31, 2011.

OUTLOOK

Paper shipments are expected to continue to decline with market demand and due to a shift to lower basis weight papers from the conversion of Communication paper to Specialty and packaging paper grades. Pulp markets are expected to remain challenging. We anticipate cost inflation to be moderate for the balance of the year.

EARNINGS CONFERENCE CALL

The Company will hold a conference call today at 11:00 a.m. (ET) to discuss its second quarter 2012 financial results. Financial analysts are invited to participate in the call by dialing at least 10 minutes before start time 1 (866) 321-8231 (toll free - North America) or 1 (416) 642-5213 (International), while media and other interested individuals are invited to listen to the live webcast on the Domtar Corporation website at www.domtar.com.

The Company will release its third quarter 2012 earnings on October 26, 2012 before markets open, followed by a conference call at 11:00 a.m. (ET) to discuss results. The date is tentative and will be confirmed approximately three weeks prior to the official earnings release date.

About Domtar

Domtar Corporation (NYSE: UFS) (TSX: UFS) designs, manufactures, markets and distributes a wide variety of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. The foundation of its business is a network of world class wood fiber converting assets that produce papergrade, fluff and specialty pulps. The majority of its pulp production is consumed internally to manufacture paper and consumer products. Domtar is the largest integrated marketer of uncoated freesheet paper in North America with recognized brands such as Cougar®, Lynx® Opaque Ultra, Husky® Opaque Offset, First Choice® and Domtar EarthChoice®. Domtar is also a leading marketer and producer of a complete line of incontinence care products marketed primarily under the Attends® brand name. Domtar owns and operates Ariva®, an extensive network of strategically located paper and printing supplies distribution facilities. In 2011, Domtar had sales of US$5.6 billion from nearly 50 countries. The Company employs approximately 9,500 people. To learn more, visit www.domtar.com.

Forward-Looking Statements

All statements in this news release that are not based on historical fact are "forward-looking statements." While management has based any forward-looking statements contained herein on its current expectations, the information on which such expectations were based may change. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of risks, uncertainties, and other factors, many of which are outside of our control that could cause actual results to materially differ from such statements. Such risks, uncertainties, and other factors include, but are not necessarily limited to, those set forth under the captions "Forward-Looking Statements" and "Risk Factors" of the latest Form 10-K filed with the SEC as periodically updated by subsequently filed Form 10-Q's. Unless specifically required by law, we assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances.

Domtar Corporation
Highlights
(In millions of dollars, unless otherwise noted)

Domtar Corporation
Consolidated Statements of Earnings
(In millions of dollars, unless otherwise noted)

Domtar Corporation
Consolidated Balance Sheets at
(In millions of dollars)

Domtar Corporation
Consolidated Statements of Cash Flows
(In millions of dollars)

Domtar Corporation
Quarterly Reconciliation of Non-GAAP Financial Measures
(In millions of dollars, unless otherwise noted)

The following table sets forth certain non-U.S. generally accepted accounting principles ("GAAP") financial metrics identified in bold as "Earnings before items", "Earnings before items per diluted share", "EBITDA", "EBITDA margin", "EBITDA before items", "EBITDA margin before items", "Free cash flow", "Net debt" and "Net debt-to-total capitalization." Management believes that the financial metrics presented are frequently used by investors and are useful to evaluate our ability to service debt and our overall credit profile. Management believes these metrics are also useful to measure the operating performance and benchmark with peers within the industry. These metrics are presented as a complement to enhance the understanding of operating results but not in substitution for GAAP results.

The Company calculates "Earnings before items" and "EBITDA before items" by excluding the after-tax (pre-tax) effect of items considered by management as not reflecting our current operations. Management uses these measures, as well as EBITDA and Free cash flow, to focus on ongoing operations and believes that it is useful to investors because it enables them to perform meaningful comparisons between periods. Domtar believes that using this information along with Net earnings provides for a more complete analysis of the results of operations. Net earnings and Cash flow provided from operating activities are the most directly comparable GAAP measures.

"Earnings before items", "Earnings before items per diluted share", "EBITDA", "EBITDA margin", "EBITDA before items", "EBITDA margin before items", "Free cash flow", "Net debt" and "Net debt-to-total capitalization" have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation or as a substitute for Net earnings, Operating income or any other earnings statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items may be presented in different lines by different companies on their financial statements thereby leading to different measures for different companies.

Domtar Corporation
Quarterly Reconciliation of Non-GAAP Financial Measures - By Segment 2012
(In millions of dollars, unless otherwise noted)

The following table sets forth certain non-U.S. generally accepted accounting principles ("GAAP"), financial metrics identified in bold as "Operating income (loss) before items", "EBITDA before items" and "EBITDA margin before items" by reportable segment. Management believes that the financial metrics presented are frequently used by investors and are useful to measure the operating performance and benchmark with peers within the industry. These metrics are presented as a complement to enhance the understanding of operating results but not in substitution for GAAP results.

The Company calculates the segmented "Operating income (loss) before items" by excluding the pre-tax effect of items considered by management as not reflecting our ongoing operations. Management uses these measures to focus on ongoing operations and believes that it is useful to investors because it enables them to perform meaningful comparisons between periods. Domtar believes that using this information along with Operating income (loss) provides for a more complete analysis of the results of operations. Operating income (loss) by segment is the most directly comparable GAAP measure.

"Operating income (loss) before items", "EBITDA before items" and "EBITDA margin before items" have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation or as a substitute for Operating income (loss) or any other earnings statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items may be presented in different lines by different companies on their financial statements thereby leading to different measures for different companies.

⁽¹⁾ On March 1, 2012, the Company acquired 100% of the shares of Attends Healthcare Limited. 

On May 1, 2012, the Company acquired 100% of the shares of EAM Corporation. 

Domtar Corporation
Quarterly Reconciliation of Non-GAAP Financial Measures - By Segment 2011
(In millions of dollars, unless otherwise noted)

The following table sets forth certain non-U.S. generally accepted accounting principles ("GAAP"), financial metrics identified in bold as "Operating income (loss) before items", "EBITDA before items" and "EBITDA margin before items" by reportable segment. Management believes that the financial metrics presented are frequently used by investors and are useful to measure the operating performance and benchmark with peers within the industry. These metrics are presented as a complement to enhance the understanding of operating results but not in substitution for GAAP results.

The Company calculates the segmented "Operating income (loss) before items" by excluding the pre-tax effect of items considered by management as not reflecting our ongoing operations. Management uses these measures to focus on ongoing operations and believes that it is useful to investors because it enables them to perform meaningful comparisons between periods. Domtar believes that using this information along with Operating income (loss) provides for a more complete analysis of the results of operations. Operating income (loss) by segment is the most directly comparable GAAP measure.

"Operating income (loss) before items", "EBITDA before items" and "EBITDA margin before items" have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation or as a substitute for Operating income (loss) or any other earnings statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items may be presented in different lines by different companies on their financial statements thereby leading to different measures for different companies.

⁽¹⁾ On September 1, 2011, the Company acquired 100% of the shares of Attends Healthcare Inc. 

Domtar Corporation
Supplemental Segmented Information
(In millions of dollars, unless otherwise noted)

SOURCE DOMTAR CORPORATION

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