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Domtar Swings to Third Quarter Profit on Pricing

Oct. 31, 2006 - Domtar Inc. announced today earnings from continuing operations of $38 million ($0.16 per common share) in the third quarter of 2006 compared to a loss from continuing operations of $3 million ($0.01 per common share) in the second quarter of 2006 and a loss from continuing operations of $48 million ($0.21 per common share) in the third quarter of 2005.

"I am pleased with Domtar's third quarter results, the best we've seen for several quarters, as our decisions over the past year and the sustained efforts of our employees to deliver on restructuring initiatives have been rewarded," said Raymond Royer, President and Chief Executive Officer.

"Higher selling prices for paper, pulp, and packaging combined with lower operating costs have also contributed to these positive results. Given the better operating rates in the North American uncoated freesheet market, we believe we can grow and prosper in this business. On the softwood lumber front, Domtar will start receiving refunds for duties collected by the United States in the near future. Meanwhile, the deteriorating housing market and high fiber costs will keep the lumber industry in a challenging position," added Royer.

Royer also stated that "the transition work to create the new Domtar, the largest fine paper company in North America, in the first quarter of 2007, is progressing according to plan, and we are encouraged by the recent favorable decision of the United States antitrust authorities regarding the transaction. We continue to work on the other closing conditions, including regulatory approvals under the Competition Act (Canada) and the Investment Canada Act."

THIRD QUARTER 2006 COMPARED TO SECOND QUARTER 2006

In accordance with Canadian generally accepted accounting principles, effective in the second quarter of 2006, the information pertaining to Domtar's Vancouver paper mill was no longer included in the company's Papers business, but presented as a discontinued operation and assets held for sale. In July 2006, Domtar reached an agreement to sell the Vancouver paper mill property, subject to a number of closing conditions.

The $47 million increase in operating profit from continuing operations excluding specified items in the Papers segment was mainly the result of higher average selling prices for paper and pulp, the settlement of a contract dispute resulting in a payment to Domtar of $14 million, recognition of investment tax credits related to research and development expenditures from prior years, lower energy and freight costs as well as the realization of savings stemming from restructuring activities. These factors were partially offset by lower shipments for paper.

Operating profit from continuing operations in the Paper Merchants segment remained stable. Although shipments were down during the quarter, it was offset by higher average selling prices for paper.

Operating loss from continuing operations excluding specified items in the Wood segment increased by $8 million, or $1 million if we exclude the $7 million Crown stumpage fees refund recorded in the second quarter of 2006. This increase is mainly attributable to lower average selling prices, partially offset by lower duties on softwood lumber and benefits realized pursuant to the closure in the second quarter of 2006 of the Malartic and Grand-Remous sawmills.

Effective October 12, 2006, Domtar is entitled to receive a refund for duties collected by the U.S. Government since 2002 plus interest, for a total consideration of approximately US$183 million ($204 million). This refund could be subject to a special charge of 19% by the Canadian Government.

The $10 million increase in operating profit from continuing operations excluding specified items in the Packaging segment (Domtar's 50% share of Norampac Inc.) was mainly attributable to higher average selling prices for both containerboard and corrugated containers with lower maintenance costs, partially offset by higher fiber costs.

Free cash flow amounted to $52 million in the third quarter of 2006 including $37 million of cash requirements for working capital.

Domtar's net debt-to-total capitalization ratio(1) as at September 30, 2006 stood at 56.7% compared to 57.7% as at December 31, 2005. Domtar's net indebtedness decreased by $105 million, largely due to the positive impact of a stronger Canadian dollar (based on month-end exchange rates) on the company's U.S. dollar denominated debt and repayments on its revolving credit facility.

OUTLOOK

Domtar does not anticipate any significant changes to current paper and pulp market conditions. The company will continue to monitor market conditions and respond accordingly. Domtar expects lumber markets to remain weak for the foreseeable future. Nonetheless, the company intends to realize the full potential of its restructuring plan.

SOURCE: Domtar Inc.




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