Domtar Announces Second Quarter 2006 Financial Results

Montreal, Canada (ots/PRNewswire) -

TICKER SYMBOL: (TSX: DTC , NYSE: DTC)

Domtar Inc. announced today a loss from continuing operations of
$3 million ($0.01 per common share) in the second quarter of 2006
compared to a loss from continuing operations of $22 million ($0.10
per common share) in the first quarter of 2006 and earnings from
continuing operations of $6 million ($0.02 per common share) in the
second quarter of 2005.

SUMMARY OF RESULTS
Q2 2006 Q1 2006 Q2 2005
-------------------------------------------------------------------------
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(In millions of Canadian dollars,
unless otherwise noted)
Sales 1,159 1,191 1,267
Operating profit (loss) from
continuing operations(1) 26 (6) 37
Earnings (loss) from continuing
operations (3) (22) 6
Net earnings (loss) (9) (24) 2
Earnings (loss) from continuing
operations per common share
(in dollars) (0.01) (0.10) 0.02
Net earnings (loss) per common share
(in dollars) (0.04) (0.10) 0.01
Excluding specified items(1)
Operating profit (loss) from
continuing operations 44 (15) 39
Earnings (loss) from continuing
operations 3 (30) 7
Earnings (loss) from continuing
operations per common share
(in dollars) 0.01 (0.13) 0.03
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-------------------------------------------------------------------------
(1) Operating profit from continuing operations is a non-GAAP measure.
For a discussion on specified items and the use of non-GAAP measures,
see "Notes to the summary of results" in the appendix.

"Overall, our operations continued to benefit from price increases
covering most of our products, as well as continued strength in all
of our different market segments except for lumber. While our costs
continue to be impacted by the strong Canadian dollar that reached
its highest level since the 1970s, today's improved results from the
first quarter also illustrate our employees' efforts and focus on
executing the restructuring plan announced in November 2005. The
closure of our Vancouver mill in June was a major step in a series
of measures aimed at improving the Company's profitability and cash
flow generation."

"With regard to the softwood lumber dispute, Domtar remains
critical of the proposed framework agreement, considering Canada's
many key legal victories. The settlement would deprive our
shareholders of 20% of the duties collected so far by the U.S.
Goverment, with no guarantee of a long- standing trade peace," said
Raymond Royer, Domtar's President and Chief Executive Officer.

OPERATIONAL REVIEW
SECOND QUARTER 2006 COMPARED TO FIRST QUARTER 2006
----------

In acordance with Canadian generally accepted accounting
principles, effective in the second quarter of 2006, the information
pertaining to our Vancouver paper mill will no longer be included in
our Paper business but presented as a discontinued operation and
assets held for sale. Subsequent to quarter-end, we reached an
agreement to sell our Vancouver paper mill property, subject to a
number of closing conditions.

PAPERS Q2 2006 Q1 2006 Variance
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of Canadian dollars)
Operating profit (loss) from
continuing operations 17 (18) 35
Operating profit (loss) from
continuing operations, excluding
specified items 36 (22) 58
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The $58 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 pulp and
paper as well as the benefit pursuant to the closures of the
Cornwall and Ottawa paper mills which were effective at the end of
the first quarter. These factors were partially offset by lower
shipments for paper as well as the negative impact of a stronger
Canadian dollar.

PAPER MERCHANTS Q2 2006 Q1 2006 Variance
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of Canadian dollars)
Operating profit from continuing
operations 3 4 (1)
Operating profit from continuing
operations, excluding specified items 3 4 (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The $1 million decrease in operating profit from continuing
operations excluding specified items in the Paper Merchants segment
was primarily due to lower margins offset by operating cost
reductions.

WOOD Q2 2006 Q1 2006 Variance
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of Canadian dollars)
Operating loss from continuing
operations (10) (5) (5)
Operating loss from continuing
operations, excluding specified items (9) (6) (3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The $3 million increase in operating loss from continuing
operations excluding specified items in the Wood segment was mainly
attributable to lower average selling prices and the negative impact
of a stronger Canadian dollar. These factors were partially
mitigated by the Ontario government's one-time retroactive reduction
in Crown stumpage fees related to 2005 and 2006. The previously
announced closures of the Malartic and Grand-Remous sawmills became
effective in the second quarter of 2006.

PACKAGING Q2 2006 Q1 2006 Variance
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of Canadian dollars)
Operating profit from continuing
operations 16 11 5
Operating profit from continuing
operations, excluding specified items 14 7 7
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-------------------------------------------------------------------------

The $7 million increase in operating profit from continuing
operations excluding specified items in the Packaging segment (our
50% share of Norampac Inc.) was mainly attributable to higher
average selling prices for both containerboard and corrugated
containers, higher shipments of corrugated containers and lower
costs for purchased recycled fiber and energy, partially offset by
the negative impact of a stronger Canadian dollar and lower
containerboard shipments.

LIQUIDITY AND CAPITAL
----------
FREE CASH FLOW(1) Q2 2006 Q1 2006 Q2 2005
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(In millions of Canadian dollars)
Cash flows provided from operating
activities of continuing operations
before changes in working capital
and other items 79 28 93
Changes in working capital and
other items (21) (42) (44)
-------------------------------------------------------------------------
Cash flows provided from (used for)
operating activities of continuing
operations 58 (14) 49
Net additions to property, plant
and equipment (33) (24) (37)
-------------------------------------------------------------------------
Free cash flow 25 (38) 12
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Free cash flow amounted to $25 million in the second quarter of
2006 including $21 million of cash requirements for working capital.

Domtar's net debt-to-total capitalization ratio(1) as at June 30,
2006 stood at 57.9% compared to 57.7% as at December 31, 2005.
Domtar's net indebtedness decreased by $53 million, largely due to
the positive impact of a stronger Canadian dollar (based on
month-end exchange rates) on our U. S. dollar denominated debt.

(1) For a discussion on the use of non-GAAP measures, see "Notes to the
summary of results" in the appendix.
OUTLOOK
----------

The Papers segment continues to enjoy improved market conditions
in our core uncoated freesheet markets. While we remain concerned by
the potentially negative consequences of the softwood lumber
negotiations, we expect a favorable pulp, paper, and containerboard
market environment for the remainder of 2006, and we are determined
to achieve the full potential of our restructuring plan.

FORWARD-LOOKING STATEMENTS
----------

This press release may contain forward-looking statements relating
to trends in, or representing management's beliefs about, Domtar's
future growth, results of operations, performance and business
prospects and opportunities. These forward-looking statements are
generally denoted by the use of words such as "anticipate",
"believe", "expect", "intend", "aim ", "target", "plan", "continue",
"estimate", "may", "will", "should" and similar expressions. These
statements reflect management's current beliefs and are based on
information currently available to management.

Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by
management, are inherently subject to known and unknown risks and
uncertainties such as , but not limited to, general economic and
business conditions, product selling prices, raw material and
operating costs, changes in foreign currency exchange rates, the
ability to integrate acquired businesses into existing operations,
the ability to realize anticipated cost savings, the performance of
manufacturing operations and other factors referenced herein and in
Domtar's continuous disclosure filings. These factors should be
considered carefully and undue reliance should not be placed on the
forward-looking statements. Although the forward-looking statements
are based upon what management believes to be reasonable estimates
and assumptions, Domtar cannot ensure that actual results will not
be materially different from those expressed or implied by these
forward-looking statements. Unless specifically required by law,
Domtar assumes no obligation to update or revise these
forward-looking statements to reflect new events or circumstances.
These risks, uncertainties and other factors include, among other
things, those discussed under "Risk Factors" in Domtar's
Management's Discussion and Analysis (MD&A).

SECOND QUARTER 2006 RESULTS
WEBCAST
----------

You are invited to listen to a live broadcast of the conference
call with financial analysts that the Company will be holding today
to present its second quarter 2006 financial results. It will take
place at 4:00 p.m. (EDT) on the Domtar corporate website at:
www.domtar.com.

DOMTAR IS THE THIRD LARGEST PRODUCER OF UNCOATED FREESHEET PAPER IN NORTH
AMERICA. IT IS ALSO A LEADING MANUFACTURER OF BUSINESS PAPERS, COMMERCIAL
PRINTING AND PUBLICATION PAPERS, AND TECHNICAL AND SPECIALTY PAPERS.
DOMTAR MANAGES ACCORDING TO INTERNATIONALLY RECOGNIZED STANDARDS 17
MILLION ACRES OF FORESTLAND IN CANADA AND THE UNITED STATES, AND PRODUCES
LUMBER AND OTHER WOOD PRODUCTS. DOMTAR HAS APPROXIMATELY 9,000 EMPLOYEES
ACROSS NORTH AMERICA. THE COMPANY ALSO HAS A 50% INVESTMENT INTEREST IN
NORAMPAC INC., THE LARGEST CANADIAN PRODUCER OF CONTAINERBOARD.
APPENDIX
--------
NOTES TO THE SUMMARY OF RESULTS
NOTE 1.
-------
SPECIFIED ITEMS
---------------

In Domtar's view, specified items are items that do not typify
normal operating activities. The following table reconciles
operating profit (loss ) from continuing operations, earnings (loss)
from continuing operations, earnings (loss) from continuing
operations per share, determined in accordance with GAAP(x), to
operating profit (loss) from continuing operations, earnings (loss)
from continuing operations, earnings (loss) from continuing
operations per share, excluding specified items.

Q2 2006 Q2 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of Canadian dollars, unless otherwise noted)
Earnings
(loss) Loss
from Opera- from
Operating Earnings conti- ting conti-
profit (loss) nuing loss Loss nuing
from from opera- from from opera-
conti- conti- tions conti- conti- tions
nuing nuing per share nuing nuing per share
opera- opera- (in dol- opera- operat- (in dol-
tions tions lars) tions ions lars)
As per GAAP(x) 26 (3) (0.01) (6) (22) (0.10)
Specified items:
Gains on sales
of property,
plant and
equipment (a) - - - -
Closure and
restructuring
costs (b) 19 13 3 2
Legal
settle-
ments (c) - - (7) (7)
Unrealized
mark-to-market
(gains)
losses (d) (1) (1) (5) (3)
Income tax
legislation
modification (e) - (4) - -
Foreign exchange
(gains) losses
on long-
term debt (f) - (2) - -
Insurance
recoveries (g) - - - -
-------------------------- --------------------------
18 6 0.02 (9) (8) (0.03)
Excluding -------------------------- --------------------------
specified
items 44 3 0.01 (15) (30) (0.13)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Q2 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings
from
Operat- conti-
ing nuing
from from opera-
conti- conti- tions
nuing nuing per share
opera- opera- (in dol-
tions tions lars)
As per GAAP(x) 37 6 0.02
Specified items:
Gains on sales
of property, plant
and equipment (a) (4) (3)
Closure and
restructuring
costs (b) 10 6
Legal
settlements (c) - 1
Unrealized
mark-to-market
(gains)
losses (d) (1) (1)
Income tax
legislation
modification (e) - -
Foreign exchange
(gains)losses
on long-
term debt (f) - -
Insurance
recoveries (g) (3) (2)
-------------------------------------------------------------------------
2 1 0.01
-------------------------------------------------------------------------
Excluding
specified items 39 7 0.03
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) Except for operating profit (loss) from continuing operations which
is a non-GAAP measure. See note 2.
a) Sales of property, plant and equipment
Domtar's results include gains or losses on sales of property, plant and
equipment. These gains or losses are presented under "Selling, general
and administrative" expenses in the financial statements.
b) Closure and restructuring costs
Domtar's results include closure and restructuring charges. These
charges are presented under "Closure and restructuring costs" in the
financial statements.
c) Legal settlements
Domtar's results include charges or revenues related to legal
settlements. These charges or revenues are presented under "Selling,
general and administrative" expenses in the financial statements.
d) Unrealized mark-to-market gains or losses
Domtar's results include unrealized mark-to-market gains or losses on
commodity swap contracts and foreign exchange contracts not
considered as hedges for accounting purposes. Such gains or losses
are presented under "Selling, general and administrative" expenses in
the financial statements.
e) Income tax legislation modification
Domtar's results include charges related to modifications to the
income tax legislation. These charges are presented under "Income tax
recovery" in the financial statements.
f) Foreign exchange impact on long-term debt
Domtar's results include foreign exchange gains or losses on the
translation of a portion of its long-term debt. Such gains or losses
are presented under "Financing expenses" in the financial statements.
g) Insurance recoveries
Domtar's results include insurance recoveries. These insurance
recoveries are presented under "Selling, general and administrative"
expenses in the financial statements.
NOTE 2.
--------
USE OF NON-GAAP MEASURES

Except where otherwise indicated, all financial information
reflected herein is determined on the basis of Canadian GAAP.

Operating profit (loss) from continuing operations is a non-GAAP
measure that is calculated within Domtar's financial statements.
Domtar focuses on operating profit (loss) from continuing operations
as this measure enables it to compare its results between periods
without regard to debt service or income taxes.

Operating profit (loss) from continuing operations excluding
specified items, earnings (loss) from continuing operations
excluding specified items , earnings (loss) from continuing
operations per common share excluding specified items are non-GAAP
measures. Measures excluding specified items are used in evaluating
the Company's performance between periods without regard to
specified items that adversely or positively affected its GAAP
measures.

Free cash flow is a non-GAAP measure that is defined as the amount
by which cash flows provided from continuing operating activities,
as determined in accordance with GAAP, exceed net additions to
property, plant and equipment, as determined in accordance with
GAAP. Free cash flow is used in evaluating the Company's ability to
service its debt and pay dividends to its shareholders.

Net debt-to-total capitalization ratio is a non-GAAP measure that
is calculated as long-term debt and bank indebtedness, net of cash
and cash equivalents, to the sum of net debt and shareholders'
equity. Domtar's management tracks this ratio on a regular basis in
order to assess its debt position.

The above non-GAAP measures 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. Domtar believes that it would be useful for
investors and other users to be aware of these measures so they can
better assess the Company's performance.

Consolidated Financial
Statements
CONSOLIDATED Three months ended June 30 Six months ended June 30
EARNINGS 2006 2006 2005 2006 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions of
Canadian dollars,
unless
otherwise noted) -------(Unaudited)------ -------(Unaudited)-------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Sales 1,039 1,159 1,267 2,108 2,350 2,503
Operating
expenses
Cost of
sales 879 980 1,068 1,824 2,034 2,115
Selling,
general and
adminis-
trative 50 56 60 104 116 117
Amorti-
zation 70 78 92 142 158 180
Closure and
restructuring
costs (NOTE 3) 17 19 10 20 22 16
-------------------------- --------------------------
1,016 1,133 1,230 2,090 2,330 2,428
-------------------------- --------------------------
Operating profit
from continuing
operations 23 26 37 18 20 75
Financing
expenses 37 41 39 72 80 73
Amortization of
deferred gain (2) (2) (1) (3) (3) (2)
-------------------------- --------------------------
Earnings (loss)
from continuing
operations before
income taxes (12) (13) (1) (51) (57) 4
Income tax
recovery (9) (10) (7) (29) (32) (15)
-------------------------- --------------------------
Earnings (loss)
from continuing
operations (3) (3) 6 (22) (25) 19
Loss from
discontinued
operations
(NOTE 4) (5) (6) (4) (7) (8) (7)
-------------------------- --------------------------
Net earnings
(loss) (8) (9) 2 (29) (33) 12
-------------------------- --------------------------
-------------------------- --------------------------
Per common share
(in dollars)
(NOTE 5)
Earnings
(loss) from
continuing
operations
Basic (0.01) (0.01) 0.02 (0.10) (0.11) 0.08
Diluted (0.01) (0.01) 0.02 (0.10) (0.11) 0.08
Net earnings
(loss)
Basic (0.04) (0.04) 0.01 (0.13) (0.15) 0.05
Diluted (0.04) (0.04) 0.01 (0.13) (0.15) 0.05
Weighted
average number
of common
shares
outstanding
(millions)
Basic 230.4 230.4 229.6 230.3 230.3 229.5
Diluted 230.4 230.4 230.7 230.3 230.3 230.6
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CONSOLIDATED
RETAINED Three months ended June 30 Six months ended June 30
EARNINGS 2006 2006 2005 2006 2006 2005
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(In millions of
Canadian dollars,
unless
otherwise noted) -------(Unaudited)------ -------(Unaudited)-------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Retained
earnings
(deficit) at
beginning
of period (39) (43) 408 (18) (19) 412
Net earnings
(loss) (8) (9) 2 (29) (33) 12
Dividends on
common shares - - (14) - - (28)
Dividends on
preferred
shares (1) (1) (1) (1) (1) (1)
-------------------------- --------------------------
Retained earnings
(deficit) at end
of period (48) (53) 395 (48) (53) 395
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consildated financial
statements.
CONSOLIDATED BALANCE SHEETS As at June June December
30 30 31
2006 2006 2005
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-------------------------------------------------------------------------
(In millions of Canadian dollars,
unless otherwise noted) -------------(Unaudited)--------
US$ $ $
(NOTE 2)
Assets
Current assets
Cash and cash equivalents 84 94 83
Receivables 253 282 294
Inventories 561 626 715
Prepaid expenses 20 22 11
Income and other taxes receivable 14 15 16
Future income taxes 31 35 38
---------------------------------
963 1,074 1,157
Property, plant and equipment 3,073 3,426 3,634
Assets held for sale (NOTE 4) 21 24 -
Goodwill 82 91 92
Other assets 276 308 309
---------------------------------
4,415 4,923 5,192
---------------------------------
---------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness 55 62 21
Trade and other payables 481 536 651
Income and other taxes payable 29 32 29
Long-term debt due within one year 2 2 2
---------------------------------
567 632 703
Long-term debt 1,950 2,174 2,257
Future income taxes 221 247 292
Other liabilities and deferred credits 282 314 331
Shareholders' equity
Preferred shares 30 34 36
Common shares 1,602 1,786 1,783
Contributed surplus 13 14 14
Deficit (48) (53) (19)
Accumulated foreign currency translation
adjustments (NOTE 7) (202) (225) (205)
---------------------------------
1,395 1,556 1,609
---------------------------------
4,415 4,923 5,192
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-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED CASH FLOWS
Three months ended June 30 Six months ended June 30
2006 2006 2005 2006 2006 2005
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-------------------------------------------------------------------------
(In millions of
Canadian dollars,
unless otherwise
noted) ------(Unaudited)-------- -----(Unaudited)-------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Operating
activities
Earnings (loss)
from continuing
operations (3) (3) 6 (22) (25) 19
Non-cash items:
Amortization and
write-down of
property, plant
and equipment 70 78 94 142 158 182
Future income
taxes (10) (12) (11) (34) (38) (23)
Amortization of
deferred gain (2) (2) (1) (3) (3) (2)
Closure and
restructuring
costs, excluding
write-down of
property, plant
and equipment
(NOTE 3) 17 19 8 20 22 14
Other (1) (1) (3) (7) (7) (7)
------------------------- -----------------------
71 79 93 96 107 183
------------------------- -----------------------
Changes in working
capital and other
items
Receivables (2) (2) 12 (4) (4) (29)
Inventories 42 47 9 56 62 (58)
Prepaid expenses 3 3 (1) (7) (8) (9)
Trade and other
payables (23) (26) (44) (51) (57) (17)
Income and other
taxes (1) (1) - 4 4 (1)
Other - - (7) (5) (5) (17)
Payments of closure
and restructuring
costs (38) (42) (13) (49) (55) (27)
------------------------- -----------------------
(19) (21) (44) (56) (63) (158)
------------------------- -----------------------
Cash flows provided
from operating
activities of
continuing
operations 52 58 49 40 44 25
------------------------- -----------------------
Cash flows used
for operating
activities of
discontinued
operations
(NOTE 4) (6) (7) (11) (7) (8) (21)
------------------------- -----------------------
Cash flows
provided from
operating
activities 46 51 38 33 36 4
------------------------- -----------------------
Investing activities
Additions to
property, plant
and equipment (31) (34) (46) (53) (59) (79)
Proceeds from
disposals of
property, plant
and equipment 1 1 9 2 2 14
Other - - 1 (3) (3) (3)
------------------------- -----------------------
Cash flows used
for investing
activities of
continuing
operations (30) (33) (36) (54) (60) (68)
------------------------- -----------------------
Cash flows used
for investing
activities of
discontinued
operations
(NOTE 4) - - (1) - - (1)
------------------------- -----------------------
Cash flows used
for investing
activities (30) (33) (37) (54) (60) (69)
------------------------- -----------------------
Financing activities
Dividend payments (1) (1) (14) (1) (1) (28)
Change in bank
indebtedness 25 28 17 36 40 8
Change in revolving
bank credit, net
of expenses (41) (46) 21 (1) (1) 190
Repayment of long-
term debt (1) (1) (1) (1) (1) (90)
Common shares
issued, net of
expenses 1 1 1 2 2 4
Redemptions of
preferred shares - - (1) (1) (1) (2)
------------------------- -----------------------
Cash flows provided
from (used for)
financing
activities
of continuing
operations (17) (19) 23 34 38 82
------------------------- -----------------------
Cash flows
provided from
financing
activities of
discontinued
operations
(NOTE 4) - - - - - -
------------------------- -----------------------
Cash flows
provided
from (used for)
financing
activities (17) (19) 23 34 38 82
------------------------- -----------------------
Net increase
(decrease) in
cash and cash
equivalents (1) (1) 24 13 14 17
Translation
adjustments
related to
cash and cash
equivalents (3) (3) - (3) (3) 1
Cash and cash
equivalents at
beginning of
period 88 98 46 74 83 52
------------------------- -----------------------
Cash and cash
equivalents at
end of period 84 94 70 84 94 70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash
equivalents at
end of period,
related to:
Continuing
operations 84 94 70 84 94 70
Discontinued
operations - - - - - -
-------------------------------------------------------------------------
Cash and cash
equivalents at
end of period 84 94 70 84 94 70
------------------------- -----------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER 2006 (IN MILLIONS OF CANADIAN DOLLARS,
UNLESS OTHERWISE NOTED)
NOTE I.
---------------------
BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited interim
consolidated financial statements, prepared in accordance with
Canadian generally accepted accounting principles, contain all
adjustments necessary to present fairly Domtar Inc.'s (Domtar)
financial position as at June 30, 2006 and December 31, 2005, as
well as its results of operations and its cash flows for the three
months and six months ended June 30, 2006 and 2005.

While management believes that the disclosures presented are
adequate, these unaudited interim consolidated financial statements
and notes should be read in conjunction with Domtar's annual
consolidated financial statements.

These unaudited interim consolidated financial statements follow
the same accounting policies as the most recent annual consolidated
financial statements.

NOTE 2.
---------------------
UNITED STATES DOLLAR AMOUNTS

The unaudited interim consolidated financial statements are
expressed in Canadian dollars and, solely for the convenience of the
reader, the 2006 unaudited interim consolidated financial statements
and the tables of certain related notes have been translated into
U.S. dollars at the June 2006 month- end rate of CAN$1.00 =
US$0.8969. This translation should not be construed as an
application of the recommendations relating to the accounting for
foreign currency translation, but rather as supplemental information
for the reader.

NOTE 3.
---------------------
CLOSURE AND RESTRUCTURING COSTS

In 2005, Domtar's management announced a series of targeted
measures aimed at returning the Corporation to profitability. The
plan included closures of the Cornwall and Ottawa, Ontario paper
mills, the Grand-Remous and Malartic, Quebec sawmills, the sale of
the Vancouver, British Columbia paper mill and cost-cutting
initiatives. This workforce reduction and restructuring plan is in
addition to the plans announced in 2004, which covered the
Corporation's paper and merchant operations in Canada and the United
States . As at June 30, 2006, the balance of the provision was $50
million, which includes $42 million related to the Papers segment
and $8 million related to the Wood segment. For the three months and
six months ended June 30, 2006, the Papers segment incurred
severance payments of $29 million and $39 million, respectively, a
reversal of the provision of nil and $1 million, respectively, labor
costs of $1 million and $3 million, respectively, and $ 3 million of
other additions during the second quarter of 2006 were incurred,
included in the table below. In addition, for the three months and
six months ended June 30, 2006, the Papers segment incurred
write-downs of $1 million of certain inventory items and spare parts
to their net recoverable amounts, asset retirement obligations of $1
million and other closure related costs of $12 million and $13
million, respectively, and the Wood segment incurred other closure
related costs of $1 million during the second quarter of 2006.

In 2005, Norampac's management decided to permanently shut down
one paper machine at its Red Rock, Ontario containerboard plant and
also decided to close three corrugated products plants located in
Concord, Ontario, Montreal, Quebec and Buffalo, New York. As at June
30, 2006, the balance of the provision was nil, representing the
Corporation's proportionate share. For the three months and six
months ended June 30, 2006, severance payments of nil and $2
million, respectively, and labor costs of nil and $1 million,
respectively, were incurred, included in the table below.

The following table provides a reconciliation of all closure and
restructuring cost provisions:

June June December
30 30 31
2006 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
--------(Unaudited)--------
US$ $ $
(NOTE 2)
Balance at beginning of period 76 85 37
Severance payments (37) (41) (32)
Reversal of provision (1) (1) (1)
Additions
Labor costs 4 4 71
Environmental costs - - 10
Other 3 3 -
---------------------------
Balance at end of period 45 50 85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 4.
---------------------
DISCONTINUED OPERATIONS

In November 2005, as part of its restructuring program, Domtar
announced its intention to sell the Vancouver, British Columbia paper
mill. Effective in the second quarter of 2006, the Vancouver paper
mill was not sold and has been permanently closed. Considering the
fact that its major product line will not continue to be sold, the
Vancouver paper mill will no longer be included in the Papers
segment but classified as a discontinued operation in the
consolidated earnings and in the consolidated cash flows and the
property, plant and equipment as held for sale in the consolidated
balance sheets. The consolidated earnings and cash flows for the
three months and six months ended June 30, 2005 have been restated
for purposes of comparability with the basis of presentation adopted
in the current period. Domtar expects to complete a sale transaction
within the next year.

The loss from discontinued operations of the Vancouver paper mill
is summarized as follows:

Three months ended June 30 Six months ended June 30
2006 2006 2005 2006 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------(Unaudited)------- -------(Unaudited)-------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Sales 14 16 20 32 36 43
------------------------- -------------------------
Loss from
discontinued
operations
before
income taxes (8) (9) (6) (11) (12) (10)
Income tax
recovery (3) (3) (2) (4) (4) (3)
------------------------- -------------------------
Loss from
discontinued
operations (5) (6) (4) (7) (8) (7)
Basic loss from
discontinued
operations
per share
(in dollars) (0.03) (0.03) (0.01) (0.03) (0.04) (0.03)
Diluted loss
from
discontinued
operations
per share
(in dollars) (0.03) (0.03) (0.01) (0.03) (0.04) (0.03)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 5.
---------------------
EARNINGS (LOSS) PER SHARE
The following table provides the reconciliation between basic and
diluted earnings (loss) per share:
Three months ended June 30 Six months ended June 30
2006 2006 2005 2006 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------(Unaudited)------- -------(Unaudited)-------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Earnings (loss)
from continuing
operations (3) (3) 6 (22) (25) 19
Dividend
requirements of
preferred shares 1 1 1 1 1 1
------------------------- -------------------------
Earnings (loss)
from continuing
operations
applicable to
common shares (4) (4) 5 (23) (26) 18
Net earnings
(loss) (8) (9) 2 (29) (33) 12
Dividend
requirements of
preferred shares 1 1 1 1 1 1
------------------------- -------------------------
Net earnings (loss)
applicable to
common shares (9) (10) 1 (30) (34) 11
Weighted average
number of
common shares
outstanding
(millions) 230.4 230.4 229.6 230.3 230.3 229.5
Effect of
dilutive stock
options
(millions) - - 1.1 - - 1.1
------------------------- -------------------------
Weighted average
number of
diluted common
shares
outstanding
(millions) 230.4 230.4 230.7 230.3 230.3 230.6
------------------------- -------------------------
Basic
earnings (loss)
from
continuing
operations
per share
(in dollars) (0.01) (0.01) 0.02 (0.10) (0.11) 0.08
Diluted earnings
(loss) from
continuing
operations
per share
(in dollars) (0.01) (0.01) 0.02 (0.10) (0.11) 0.08
Basic net
earnings
(loss) per
share
(in dollars) (0.04) (0.04) 0.01 (0.13) (0.15) 0.05
Diluted net
earnings
(loss) per
share
(in dollars) (0.04) (0.04) 0.01 (0.13) (0.15) 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The following table provides the securities that could potentially
dilute basic earnings (loss) per share in the future but were not
included in the computation of diluted earnings (loss) per share
because to do so would have been anti-dilutive for the periods
presented:

June 30 June 30
2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of shares
Options 4,872,495 4,890,136
Bonus shares 67,875 -
Rights 84,500 84,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 6.
---------------------
RECEIVABLES

As at February 22, 2006, Domtar finalized a new three-year
securitization agreement, which includes both U.S. and Canadian
receivables . The maximum cash consideration that can be received
from the sale of receivables under this new combined agreement is
$222 million (US$190 million). As at June 30, 2006, the senior
beneficial interest held by third parties amounted to $193 million
(US$173 million) under this new securitization program compared to
$163 million (US$140 million) as at December 31, 2005 under the old
U.S. and Canadian accounts receivable programs.

NOTE 7.
---------------------
ACCUMULATED FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
June June December
30 30 31
2006 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------(Unaudited)-------
US$ $ $
(NOTE 2)
Balance at beginning of period (184) (205) (190)
Effect of changes in exchange rates during
the period:
On net investment in self-sustaining foreign
subsidiaries (76) (85) (69)
On certain long-term debt denominated
in foreign currencies designated as
a hedge of net investment in
self-sustaining foreign subsidiaries 71 79 65
Future income taxes thereon (13) (14) (11)
-------------------------
Balance at end of period (202) (225) (205)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 8.
---------------------
FINANCIAL INSTRUMENTS
FOREIGN CURRENCY RISK

In order to reduce the potential negative effects of a fluctuating
Canadian dollar, Domtar has entered into various arrangements to
stabilize anticipated future net cash inflows denominated in U.S.
dollars. The following table provides the detail of the arrangements
used as hedging instruments:

June December June December
30 31 30 31
2006 2005 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
------------(Unaudited)-------------
Average exchange rate Contractual amounts
(CAN$/US$) (In millions of
U.S. dollars)
Forward foreign exchange contracts
0 to 12 months 1.20 1.24 300 295
13 to 24 months 1.13 - 3 -
Currency options purchased
0 to 12 months 1.15 - 120 -
13 to 24 months 1.15 - 20 -
Currency options sold
0 to 12 months 1.22 - 20 -
13 to 24 months 1.22 - 20 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Forward foreign exchange contracts are contracts whereby Domtar
has the obligation to sell U.S. dollars at a specific rate.

Currency options purchased are contracts whereby Domtar has the
right, but not the obligation, to sell U.S. dollars at the strike
rate if the U.S. dollar trades below that rate. Currency options
sold are contracts whereby Domtar has the obligation to sell U.S.
dollars at the strike rate if the U. S. dollar trades above that
rate.

NOTE 9.
---------------------
DEFINED BENEFIT PLANS AND
OTHER EMPLOYEE FUTURE BENEFIT PLANS
Three months ended June 30 Six months ended June 30
2006 2006 2005 2006 2006 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------(Unaudited)--------- ---------(Unaudited)--------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Net periodic
benefit cost
for defined
benefit plans 13 14 11 26 29 20
Net periodic
benefit cost for
other employee
future benefit
plans 3 3 3 4 5 6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 10.
---------------------
SEGMENTED DISCLOSURES

Domtar operates in the four reportable segments described below.
Each reportable segment offers different products and services and
requires different technology and marketing strategies. The
following summary briefly describes the operations included in each
of Domtar's reportable segments:

- PAPERS - represents the aggregation of the manufacturing and
distribution of business, commercial printing and publication, and
technical and specialty papers, as well as pulp.
- PAPER MERCHANTS - involves the purchasing, warehousing, sale and
distribution of various products made by Domtar and by other
manufacturers. These products include business and printing papers,
graphic arts supplies and certain industrial products.
- WOOD - comprises the manufacturing and marketing of lumber and wood-
based value-added products and the management of forest resources.
- PACKAGING - comprises the Corporation's 50% ownership interest in
Norampac, a company that manufactures and distributes containerboard
and corrugated products.

Domtar evaluates performance based on operating profit, which
represents sales, reflecting transfer prices between segments at fair
value , less allocable expenses before financing expenses and income
taxes.

SEGMENTED DATA OF CONTINUING OPERATIONS
Three months ended June 30 Six months ended June 30
2006 2006 2005 2006 2006 2005
---------(Unaudited)--------- ---------(Unaudited)--------
US$ $ $ US$ $ $
(NOTE 2) (NOTE 2)
Sales
Papers 621 693 743 1,260 1,405 1,482
Paper Merchants 230 256 260 478 533 519
Wood 117 130 201 249 278 386
Packaging 145 162 170 283 315 330
----------------------------- ----------------------------
Total for
reportable
segments 1,113 1,241 1,374 2,270 2,531 2,717
Intersegment
sales - Papers (61) (68) (68) (135) (151) (139)
Intersegment
sales - Wood (12) (13) (38) (25) (28) (72)
Intersegment
sales -
Packaging (1) (1) (1) (2) (2) (3)
----------------------------- ----------------------------
Consolidated
sales 1,039 1,159 1,267 2,108 2,350 2,503
----------------------------- ----------------------------
----------------------------- ----------------------------
Amortization and
write-down of
property, plant
and equipment
Papers 51 57 69 104 116 136
Paper Merchants - - 1 1 1 2
Wood 8 9 11 15 17 22
Packaging 8 9 11 15 17 19
----------------------------- ----------------------------
Total for
reportable
segments 67 75 92 135 151 179
Corporate 3 3 2 7 7 3
----------------------------- ----------------------------
Consolidated
amortization
and write-down
of property,
plant and
equipment 70 78 94 142 158 182
----------------------------- ----------------------------
----------------------------- ----------------------------
Operating profit
(loss) from
continuing
operations
Papers 15 17 8 (1) (1) 18
Paper Merchants 3 3 4 6 7 9
Wood (9) (10) 11 (13) (15) 17
Packaging 14 16 11 24 27 24
----------------------------- ----------------------------
Total for
reportable
segments 23 26 34 16 18 68

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