Domtar Corporation Reports Preliminary Second Quarter 2011 Financial Results

Solid performance despite seasonally high level of scheduled maintenance in the mills
(All financial information is in U.S. dollars, and all earnings per share results are diluted, unless otherwise noted.)

• Second quarter net earnings of $1.30 per share, earnings before items¹ of $2.37 per share
  
• Free cash flow¹ including changes in working capital of $286 million in the second quarter
  
• Company recently added to the Standard and Poor's MidCap 400 Index

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

MONTREAL, July 28, 2011 /PRNewswire/ - Domtar Corporation (NYSE: UFS) (TSX: UFS) today reported net earnings of $54 million ($1.30 per share) for the second quarter of 2011 compared to net earnings of $133 million ($3.14 per share) for the first quarter of 2011 and net earnings of $31 million ($0.71 per share) for the second quarter of 2010. Sales for the second quarter of 2011 amounted to $1.4 billion.

Excluding items listed below, the Company had earnings before items¹ of $98 million ($2.37 per share) for the second quarter of 2011 compared to earnings before items¹ of $138 million ($3.25 per share) for the first quarter of 2011 and earnings before items¹ of $116 million ($2.67 per share) for the second quarter of 2010.

Second quarter 2011 items:

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

First quarter 2011 items:

• Closure and restructuring costs of $11 million ($8 million after tax);
• Gains and losses on the sale of property, plant and equipment and business resulting in a revenue of $7 million ($5 million after tax); and
• Charge of $3 million ($2 million after tax) related to the impairment and write-down of property, plant and equipment.

Second quarter 2010 items:

• Loss on sale of the Wood business of $50 million ($50 million after tax);
• Costs for debt repurchase, including premium paid, of $40 million ($24 million after tax);
• Charge of $14 million ($9 million after tax) related to the impairment and write-down of property, plant and equipment;
• Closure and restructuring costs of $5 million ($4 million after tax); and
• Gains and losses on sale of property, plant and equipment resulting in a revenue of $2 million ($2 million after tax).

"We had a good sales performance from a price and volumes standpoint. However these benefits were more than offset by a seasonally high level of scheduled maintenance in our mills," said John D. Williams, President and Chief Executive Officer. On paper demand trends, Mr. Williams added, "Domtar paper shipments continue to trend better than forecast with healthy export volumes and good demand in our packaging paper grades. We continue to be successful in servicing our customers while keeping paper inventories tight."

QUARTERLY REVIEW

Operating income before items² was $165 million in the second quarter of 2011 compared to an operating income before items¹ of $218 million in the first quarter of 2011. Depreciation and amortization totaled $95 million in the second quarter of 2011. When compared to the first quarter of 2011, paper shipments decreased 1% while pulp shipments decreased 4%. The shipments-to-production ratio for paper was 101% in the second quarter of 2011, compared to 102% in the first quarter of 2011. Paper inventories declined by 11,000 tons while pulp inventories decreased by 8,000 metric tons as at the end of June, compared to March levels. Operating loss before items¹ of Ariva^TM, our Paper Merchants segment, remains under pressure and declined by $2 million when compared to the first quarter of 2011. This is mostly due to lower deliveries resulting from difficult market conditions in the paper merchants channel and to the sale of a business unit at the end of the first quarter of 2011.

The decrease in operating income before items¹ in the second quarter of 2011 was the result of higher maintenance costs, lower pulp and paper shipments, higher freight costs and higher unit costs for wood fiber and chemicals as well as the negative impact of a stronger Canadian dollar. These factors were partially offset by higher average selling prices in pulp and paper.

LIQUIDITY AND CAPITAL

Cash flow provided from operating activities amounted to $306 million including a source of cash resulting from a reduction in working capital of $77 million. Capital expenditures amounted to $20 million resulting in free cash flow³ of $286 million in the second quarter of 2011.

Domtar returned a total of $175 million to its shareholders through a combination of dividend and stock buyback in the second quarter of 2011. Under its stock repurchase program, Domtar repurchased 1,682,047 shares of common stock during the second quarter and a total of 3,210,051 shares of common stock at an average price of $86.88 per share since the implementation of the program.

On June 23, 2011, the Company entered into a new unsecured $600 million credit agreement maturing in June 2015 to replace the existing secured revolving credit facility of $750 million that was scheduled to mature in March of 2012.

OUTLOOK

Looking into the second half of 2011, the benefits from announced price increases for business papers and lower costs stemming from maintenance in the mills are expected to favorably impact financial results. While selling prices for pulp are likely to decline on average compared to the first half of the year, uncoated freesheet paper shipments for 2011 are expected to remain steady when compared to 2010. Inflation pressures due to recent rises in commodity prices are expected to continue throughout the second half of the year.

EARNINGS CONFERENCE CALL

The Company will hold a conference call today at 10:00 a.m. (ET) to discuss its second quarter 2011 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 2011 earnings on October 27, 2011 before markets open, followed by a conference call at 10:00 a.m. (ET) to discuss results. The date is tentative and will be confirmed approximately three weeks prior to the official earnings release date.

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About Domtar

Domtar Corporation (NYSE/TSX:UFS) is the largest integrated manufacturer and marketer of uncoated freesheet paper in North America and the second largest in the world based on production capacity, and is also a manufacturer of papergrade, fluff and specialty pulp. The Company designs, manufactures, markets and distributes a wide range of business, commercial printing and publishing as well as converting and specialty papers including recognized brands such as Cougar^®, Lynx^® Opaque Ultra, Husky^® Opaque Offset, First Choice^® and Domtar EarthChoice^® Office Paper, part of a family of environmentally and socially responsible papers. Domtar owns and operates Ariva^TM, an extensive network of strategically located paper distribution facilities. The Company employs approximately 8,500 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.
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¹  Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures in the appendix.

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 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.

Domtar Corporation
Quarterly Reconciliation of Non-GAAP Financial Measures - By Segment 2010
(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.

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

SOURCE DOMTAR CORPORATION