Press releases

For the full year of 2006, Domtar recorded a net profit of $328 million ($1.42 per common share) compared to a net loss of $388 million ($1.69 per common share) in 2005.

SUMMARY OF RESULTS
(In millions of Canadians dollars, unless otherwise noted)

(1) Operating profit (loss) 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.

Commenting on the 2006 results, Raymond Royer stated: “The past year has been one of decisive actions for Domtar. With the support of our employees, we successfully executed the restructuring plan announced in November 2005. The plan resulted in the permanent closure of six paper machines at three mills, two sawmilling operations, as well as the implementation of cost reduction initiatives across all of the organization. More recently, Domtar sold its 50% investment in Norampac. Finally, throughout the year we continued to adjust our production to changing market conditions. All of these measures, coupled with the duties refund and higher overall selling prices, contributed to Domtar’s strengthened financial position.”

“Our transaction to combine Domtar with Weyerhaeuser’s fine paper business and related assets is progressing well and is on schedule with an expected closing in March. The transaction will be submitted to our shareholders at a special meeting to be held on February 26^th. This combination of assets is a transformational event for Domtar that will create the largest fine paper producer in North America, and we believe that our customers and shareholders will benefit from this leadership position in our core uncoated freesheet business,” added Mr. Royer.

OPERATIONAL REVIEW
2006 COMPARED TO 2005
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During the fourth quarter of 2006, we sold our packaging segment, which consisted of a 50% interest in Norampac. In accordance with Canadian generally accepted accounting principles (GAAP), effective in the fourth quarter of 2006, the information pertaining to Norampac is disclosed as a discontinued operation. Effective in the second quarter of 2006, the information pertaining to our Vancouver paper mill was no longer included in our Papers business but presented as a discontinued operation and assets held for sale, as required by Canadian GAAP. Accordingly, amounts for 2006 and prior periods have been restated to reflect this presentation. Earnings from discontinued operations amounted to $265 million in 2006 and consisted of $37 million of net earnings from Norampac, a $237 million net gain on the sale of our interest in Norampac, and a net loss of $9 million from our Vancouver paper mill. Loss from discontinued operations amounted to $78 million in 2005 which consisted of $3 million of net earnings from Norampac and a $81 million loss from our Vancouver paper mill.

VARIANCE ANALYSIS 2006 VS. 2005
(In millions of Canadian dollars)

PAPERS
(In millions of Canadian dollars)

The $191 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, the realization of savings stemming from restructuring activities, the settlement of a contract dispute resulting in a payment to Domtar of $14 million, higher shipments of pulp and paper (excluding the impact of mills that were indefinitely and permanently closed) as well as recognition of investment tax credits related to research and development expenditures from prior years. These factors were partially offset by the negative impact of a stronger Canadian dollar and higher overall costs.

PAPER MERCHANTS
(In millions of Canadian dollars)

The $3 million decrease in operating profit from continuing operations excluding specified items in the Paper Merchants segment was primarily due to a one time bad debt expense and the negative impact of a stronger Canadian dollar, partially offset by higher shipments.

WOOD
(In millions of Canadian dollars)

The $79 million decrease in operating profit (loss) from continuing operations excluding specified items in the Wood segment was mainly attributable to lower shipments, lower average selling prices and the negative impact of a stronger Canadian dollar. These factors were partially mitigated by the realization of savings stemming from restructuring activities, lower freight and energy costs and the $7 million refund received in the second quarter of 2006 as a result of the Ontario government’s one-time retroactive reduction in Crown stumpage fees related to 2005 and 2006.
Effective October 11, 2006, three of our sawmills (two in Abitibi, Quebec, and one in Ontario) were closed indefinitely due to the pressures of higher timber costs and lower demand for both lumber and wood chips.
Effective October 12, 2006, Domtar was entitled to receive a refund for duties collected by the U.S. Government since 2002 plus interest. Domtar received the refund, amounting to $178 million plus interest of $22 million, during the fourth quarter of 2006. This refund is subject to a special charge of approximately 18% by the Canadian Government. As of December 31, 2006, Domtar recorded a provision relating to this special charge. 

LIQUIDITY AND CAPITAL
2006 COMPARED TO 2005
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FREE CASH FLOW⁽¹⁾
(In millions of Canadians dollars)

Change in working capital for 2006 includes an increase in receivables due to a reduction of off balance sheet securitization in the amount of $136 million (US$120 million).
Free cash flow increased by $301 million in 2006 compared to 2005. This improvement mainly reflects an increase in profitability offset by working capital requirements.
Domtar’s net debt-to-total capitalization ratio⁽¹⁾ as at December 31, 2006 stood at 40.2% compared to 57.7% as at December 31, 2005. Domtar’s total long-term debt decreased by $368 million, largely due to the positive impact of a stronger Canadian dollar (based on month-end foreign exchange rates) on its US dollar denominated debt and debt repayments made on its revolving credit facility resulting from the sale of Domtar’s 50% interest in Norampac.

¹ For a discussion on the use of non-GAAP measures, see “Notes to the summary of results” in the appendix.

OUTLOOK
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Although Domtar benefited from higher operating rates and increasing selling prices for papers and pulp, the North American demand for uncoated freesheet dropped in 2006 when compared to 2005. Looking into 2007, Domtar does not anticipate any significant changes to these demand trends for fine papers in North America, and the Company will continue to adjust its production to meet customer demand.

FORWARD-LOOKING STATEMENTS
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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). 

FOURTH QUARTER AND FULL YEAR 2006 FINANCIAL RESULTS WEBCAST
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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 fourth quarter and full year 2006 financial results. It will take place at 12:00 p.m. (EST) on the Domtar corporate website at: http://www.domtar.com/en/investors/3618.asp.