(1) Operating profit 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.

“In November 2005, faced with a number of economic conditions that adversely impacted our business, such as higher energy prices and the rapid rise of the Canadian dollar, we announced a plan aimed at returning the Company to profitability as quickly as possible. This plan included permanent closures of mills and paper machines, which will mean an 18% reduction in our work force. Although the plan is on schedule, our fourth quarter performance was hit with a restructuring charge of approximately $400 million. Additional restructuring costs of approximately $80 million will occur over the next few years.

At the same time, we are confident that the various initiatives put in place with the support and commitment of our employees, combined with the loyalty of our customers, will ultimately have a positive effect. We will raise our productivity and optimize the use of our best mills by concentrating production in our more efficient operations. This way, Domtar will be in a better position when industry conditions improve.

Lastly, despite all the challenges encountered, we achieved our goal to deliver annualized targeted savings of $100 million by the end of 2005. We also improved our product offering by broadening our range of Domtar EarthChoice environmental FSC papers and by completing transition to the new 92 bright standard in all our paper mills,” said Raymond Royer, Domtar’s President and Chief Executive Officer.

OPERATIONAL REVIEW
2005 COMPARED TO 2004
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VARIANCE ANALYSIS 2005 VS. 2004
(In millions of Canadian dollars)

PAPERS
(In millions of Canadian dollars)

The $67 million increase in operating loss excluding specified items in the Papers segment was mainly the result of the negative impact of a weaker U.S. dollar, lower shipments and higher overall costs, particularly for purchased energy, fiber and chemicals, as well as freight. These factors were partially offset by higher average selling prices for paper and pulp and the realization of savings stemming from restructuring activities.

PAPER MERCHANTS
(In millions of Canadian dollars)

The $5 million decrease in operating profit excluding specified items in the Paper Merchants segment was primarily due to lower operating margins resulting from higher purchased paper costs not being fully reflected in paper selling prices, partially offset by savings stemming from cost reduction initiatives.

WOOD
(In millions of Canadian dollars)

The $10 million decrease in operating loss excluding specified items in the Wood segment was mainly attributable to lower duties on our softwood lumber exports to the U.S., higher shipments and the realization of savings stemming from restructuring activities. These factors were partially mitigated by the negative impact of a weaker U.S. dollar as well as higher freight and energy costs.
Since January 1, 2005, the countervailing and antidumping duties rate decreased gradually from 27.22% to 20.15% and in December 2005, the rate was lowered to 10.80%. Since May 22, 2002, Domtar has made and expensed cash deposits of $198 million for export duties. 

PACKAGING
(In millions of Canadian dollars)

The $22 million decrease in operating profit excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was mainly attributable to the negative impact of a weaker U.S. dollar, as well as higher overall costs, particularly energy and freight costs, partially offset by higher selling prices and shipments.

LIQUIDITY AND CAPITAL
2005 COMPARED TO 2004
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FREE CASH FLOW⁽¹⁾
(In millions of Canadians dollars)

(1) Free cash flow and net debt-to-total capitalization ratio are non-GAAP measures. For a discussion on the use of non-GAAP measures, see “Notes to the summary of results” in the appendix.

Free cash flow declined by $116 million in 2005 compared to 2004. This deterioration mainly reflects a decline in profitability as well as increased requirements for working capital.
Domtar’s net debt-to-total capitalization ratio⁽¹⁾ as at December 31, 2005 stood at 57.7% compared to 49.5% as at December 31, 2004. Domtar’s total long-term debt increased by $225 million, largely due to additional net borrowings of $293 million, partially offset by the $68 million positive impact of a stronger Canadian dollar (based on month-end foreign exchange rates) on its US dollar denominated debt.

OUTLOOK
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In 2006, we will carry out our announced restructuring plan and continue to improve our operations. Although we expect challenging market conditions in 2006, we are encouraged by recently announced price increases for most of our key products.

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. 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 2005 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 2005 financial results. It will take place at 4:00 p.m. (EDT) on the Domtar corporate website at: http://www.domtar.com/en/investors/2360.asp.