Domtar Inc., based in Montreal, Canada, reported a net loss of $10 million ($.07 net loss per common share) for the second quarter ended June 30, 1997, compared with net earnings of $72 million ($0.55 net earnings per common share) in the second quarter of 1996, or, to use a comparable base, earnings from continuing operations before non-recurring items of $3 million ($.01 per share) in the second quarter of 1996. Despite an increase in overall shipments, net sales for the second quarter of 1997 were $482 million, compared with $493 million for the corresponding period of 1996, primarily due to lower selling prices.

Although price increases were implemented in fine papers during the quarter, prices for Packaging and fine papers were below the levels experienced in the second quarter last year, resulting in a significant drop in operating results. However, higher shipments and lower operating costs in Fine Papers, which are indicative of a strong operational performance, partially offset the impact of lower selling prices on operating results.

Domtar's net loss for the first half of 1997 totalled $22 million ($.15 net loss per common share), compared with net earnings of $93 million ($.69 net earnings per common share) in the corresponding period of 1996. Domtar reported earnings from continuing operations before non-recurring items of $19 million ($.12 per share) in the first half of 1996. First-half 1997 net sales of $929 million decreased 6% from the corresponding period in 1996. This was mainly due to the impact of lower selling prices, which was partially offset by an increase in overall shipments.

Operational Performance "Although our financial results for the second quarter of 1997 reflect poor market conditions, the good operational performance of our fine papers division is worth mentioning. We will pursue our efforts to improve both our financial and operational performance such that Domtar can make a profit even during periods of weak selling prices," said Domtar's President and CEO, Raymond Royer.

"Our objectives for the packaging division, which is facing very difficult market conditions, are to increase its overall efficiency, specifically by completing the start-up at Red Rock and, on the converting side, by building on strengths that include a solid national market presence and expertise in high-quality graphics," Royer said. "Delivering the expansion benefits at Red Rock is key to generating an acceptable return on investment for the division."

Liquidity and Capital Resources In the second quarter of 1997, net cash flow from continuing operations was $53 million, compared to $79 million in the corresponding quarter of 1996. Cash flow before financing was $22 million, compared to $572 million in the corresponding quarter in 1996, which included cash proceeds of $604 million from the divestiture of the gypsum and decorative panels in businesses. The corporation's percentage of net debt to total capitalization stood at 36% as of June 30, 1997, compared to 32% as of December 31, 1996, due in large part to a seasonal build-up of working capital in the first quarter of the year.

Division Breakdown Pulp and Forest Products Norscan inventories continued to decline during the quarter, reflecting a better balance between supply and demand for pulp. The price of Northern Bleached Softwood Kraft (NBSK) pulp, although still low at a list price of US$580 per ton, started to improve towards the end of the quarter, with the discount on the list price declining. A price increase of US$30 per ton was also implemented effective July 1, 1997, that moved the list price for NBSK pulp to US$610 per ton.

Packaging The division experienced severely depressed product pricing during the second quarter. Prices for linerboard were 16% below those of the prior-year period due to the combined effect of high inventory levels and industry overcapacity.

However, there are signs of improvement. A recovery of corrugated container shipment, fueled by an increase in industrial production together with the significant downtime taken by most containerboard producers, is contributing to less volatile market conditions and improved supply-demand balance. As a result, the price for corrugating medium was increased by US$40 per ton on June 1, 1997. Additional price increases in the order of US$40 per ton for both linerboard and corrugated medium were announced for implementation in the third quarter.

Furthermore, corrugated container price increases in the range of 12% are expected to be implemented subsequent to the linerboard increases in the third quarter.

Given the supply-demand imbalance in the industry in the second quarter, the Red Rock mill took 10 days of market-related downtime. In addition, the mill lost an equivalent of 16 days of production due to inefficiencies and difficulties encountered in the start-up. At Mississauga, the planned installation of a new press resulted in curtailment of 14 days of production.

Outlook "We remain cautiously optimistic regarding the pricing of our main products for the remainder of 1997. We should see further improvement for the fine papers and pulp grades, while the packaging segment's recently announced price increases should allow the division to recover from the current trough," Royer added.