Our restructuring plan announced in November 2005 is progressing well.  The permanent shutdown of our Cornwall pulp and paper mill as well as our Ottawa paper mill became effective at the end of the first quarter of 2006, and with the ongoing efforts of our employees, we are implementing a series of measures aimed at improving cash flow, and supply chain initiatives that are expected to reduce operational costs and improve customer satisfaction”, said Raymond Royer, Domtar’s President and Chief Executive Officer.

OPERATIONAL REVIEW
 FIRST QUARTER 2006 COMPARED TO FOURTH QUARTER 2005
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PAPERS
(In millions of Canadian dollars)

The $30 million decrease in operating loss excluding specified items in the Papers segment was mainly the result of higher shipments and average selling prices for paper, lower amortization expense, as well as 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.

PAPER MERCHANTS
(In millions of Canadian dollars)

The $1 million increase in operating profit excluding specified items in the Paper Merchants segment was primarily due to higher operating margins, partially offset by higher bad debt expenses. 

WOOD
(In millions of Canadian dollars)

The $2 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. and higher average selling prices. These factors were partially mitigated by the negative impact of a stronger Canadian dollar, lower shipments and higher freight costs.
The countervailing and antidumping duties rate decreased gradually from 21.21% in December 2004 to 20.15% in February 2005, and in December 2005, the rate was lowered to 10.80%.

PACKAGING
(In millions of Canadian dollars)

The $7 million increase in operating profit 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, and lower costs for purchased recycled fiber and energy, partially offset by lower shipments of corrugated containers.

LIQUIDITY AND CAPITAL
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FREE CASH FLOW⁽¹⁾
(In millions of Canadian dollars)

Free cash flow amounted to negative $39 million in the first quarter of 2006 reflecting $41 million of cash requirements for working capital, including the benefit of $59 million of additional receivables sold through our off balance sheet securitization program.
Domtar’s net debt-to-total capitalization ratio⁽¹⁾ as at March 31, 2006 stood at 58.6% compared to 57.7% as at December 31, 2005. Domtar’s total long-term debt increased by $48 million, largely due to additional net borrowings of $45 million.

(1) For a discussion on the use of non-GAAP measures, see “Notes to the summary of results” in the complete Quaterly report in PDF.

OUTLOOK
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Although we expect challenging market conditions for the remainder of the year, we are encouraged by higher selling prices for most of our key products.  Our focus will remain on the implementation of our announced restructuring plan with a view to improving our efficiency and returning to profitability.

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).

FIRST QUARTER 2006 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 first quarter 2006 financial results. It will take place at 4:30 p.m. (EDT) on the Domtar corporate website at: http://www.domtar.com/en/investors/2628.asp.