Domtar Corporation reports preliminary third quarter 2011 financial results

Good results with lower maintenance costs and higher prices for paper offsetting weakness in pulp prices
(All financial information is in U.S. dollars, and all earnings per share results are diluted, unless otherwise noted.)

• Third quarter net earnings of $2.95 per share, earnings before items¹ of $3.10 per share
  
• Operating income of $187 million, EBITDA before items¹ of $286 million in the third quarter
  
• Acquisition of Attends Healthcare, Inc. completed on September 1, 2011

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

MONTREAL, Oct. 27, 2011 /PRNewswire/ - Domtar Corporation (NYSE: UFS) (TSX: UFS) today reported net earnings of $117 million ($2.95 per share) for the third quarter of 2011 compared to net earnings of $54 million ($1.30 per share) for the second quarter of 2011 and net earnings of $191 million ($4.44 per share) for the third quarter of 2010. Sales for the third quarter of 2011 amounted to $1.4 billion. Excluding items listed below, the Company had earnings before items¹ of $123 million ($3.10 per share) for the third quarter of 2011 compared to earnings before items¹ of $98 million ($2.37 per share) for the second quarter of 2011 and earnings before items¹ of $183 million ($4.26 per share) for the third quarter of 2010.

Third quarter 2011 items:

• Gains on the sale of property, plant and equipment and business of $4 million ($3 million after tax);
  
• Charge of $8 million ($4 million after tax) related to the impairment and write-down of property, plant and equipment;
  
• Premium paid on debt repurchase of $4 million ($3 million after tax);
  
• Closure and restructuring costs of $1 million ($1 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).

Third quarter 2010 items:

• Gain on sale of property, plant and equipment, and business of $14 million ($18 million after tax);
  
• Charge of $14 million ($9 million after tax) related to the impairment and write-down of property, plant and equipment; and
  
• Closure and restructuring costs of $1 million ($1 million after tax).

"Our performance remains strong. Our financial results improved when compared to the second quarter despite the decline in average selling prices for pulp and high input costs," said John D. Williams, President and Chief Executive Officer. "While our domestic commodity uncoated paper volumes are in line with market demand, we have developed some business in new markets and geographies which has allowed our volumes to remain steady. The recent acquisition of Attends offers us organic growth prospects and the economic uncertainty provides a backdrop to seize other opportunities and to continue to buy back stock," added Mr. Williams.

Domtar completed the acquisition of privately-held Attends Healthcare, Inc. ("Attends") on September 1, 2011. The results reported for the third quarter of 2011 include the financial results of Attends for the period from September 1, 2011 to September 30, 2011. The segment results are reported under "Personal Care" segment.

QUARTERLY REVIEW

Operating income before items¹ was $193 million in the third quarter of 2011 compared to an operating income before items¹ of $165 million in the second quarter of 2011. Depreciation and amortization totaled $93 million in the third quarter of 2011.

The increase in operating income before items¹ in the third quarter of 2011 was the result of lower maintenance costs and variable compensation, higher average selling prices for paper and the positive impact of a weaker Canadian dollar. These factors were partially offset by lower average selling prices for pulp and lower shipments for paper and pulp. When compared to the second quarter of 2011, paper shipments decreased 1% and pulp shipments decreased 1%. Paper deliveries of Ariva^TM increased 5% when compared to the second quarter of 2011. The shipments-to-production ratio for paper was 102% in the third quarter of 2011, compared to 101% in the second quarter of 2011. Paper inventories declined by 16,000 tons while pulp inventories increased by 21,000 metric tons as at the end of September, compared to June levels.

LIQUIDITY AND CAPITAL

Cash flow provided from operating activities amounted to $257 million and capital expenditures amounted to $31 million resulting in free cash flow¹ of $226 million in the third quarter of 2011.

Under its stock repurchase program, Domtar repurchased 2,515,791 shares of common stock during the third quarter and a total of 5,725,841 shares of common stock at an average price of $82.16 since the implementation of the program in May 2010. Domtar currently has $130 million remaining availability under its Program.

OUTLOOK

Domtar paper shipments are expected to decline in the fourth quarter when compared to the third quarter due to seasonal factors while the cyclical downturn in global pulp markets is expected to lead to further declines in average selling prices for market pulp. Domtar's fourth quarter results will benefit from the inclusion of Attends' financial results for a full quarter.

EARNINGS CONFERENCE CALL

The Company will hold a conference call today at 10:00 a.m. (ET) to discuss its third 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 fourth quarter 2011 earnings on February 2, 2012 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.

About Domtar

Domtar Corporation (NYSE: UFS) (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 also produces a complete line of incontinence care products and distributes washcloths marketed primarily under the Attends^® brand name. Domtar owns and operates Ariva^TM, an extensive network of strategically located paper distribution facilities. The Company employs approximately 8,800 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.

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.

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

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.

⁽¹⁾ As previously reported, Domtar sold 88% of the Wood segment on June 30, 2010 to EACOM Timber Corporation ("EACOM"). During the fourth quarter of 2010, in an unrelated transaction, Domtar sold the remaining 12% of common stock held in EACOM.

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

SOURCE DOMTAR CORPORATION