“With regard to the softwood lumber dispute, Domtar remains critical of the proposed framework agreement, considering Canada’s many key legal victories. The settlement would deprive our shareholders of 20% of the duties collected so far by the U.S. Government, with no guarantee of a long-standing trade peace,” said Raymond Royer, Domtar’s President and Chief Executive Officer.

OPERATIONAL REVIEW
 SECOND QUARTER 2006 COMPARED TO FIRST QUARTER 2006
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In accordance with Canadian generally accepted accounting principles, effective in the second quarter of 2006, the information pertaining to our Vancouver paper mill will no longer be included in our Papers business but presented as a discontinued operation and assets held for sale. Subsequent to quarter-end, we reached an agreement to sell Vancouver paper mill property, subject to a number of closing conditions.

PAPERS
(In millions of Canadian dollars)

The $58 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 paper and pulp as well as the benefit pursuant to the closures of the Cornwall and Ottawa paper mills which were effective at the end of the first quarter. These factors were partially offset by lower shipments for paper as well as the negative impact of a stronger Canadian dollar.

PAPER MERCHANTS
(In millions of Canadian dollars)

The $1 million decrease in operating profit from continuing operations excluding specified items in the Paper Merchants segment was primarily due to lower margins offset by operating cost reductions. 

WOOD
(In millions of Canadian dollars)

The $3 million increase in operating loss from continuing operations excluding specified items in the Wood segment was mainly attributable to lower average selling prices and the negative impact of a stronger Canadian dollar. These factors were partially mitigated by the Ontario government’s one-time retroactive reduction in Crown stumpage fees related to 2005 and 2006. The previously announced closures of the Malartic and Grand-Remous sawmills became effective in the second quarter of 2006.

PACKAGING
(In millions of Canadian dollars)

The $7 million increase in operating profit from continuing operations 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, higher shipments of corrugated containers and lower costs for purchased recycled fiber and energy, partially offset by the negative impact of a stronger Canadian dollar and lower containerboard shipments.

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

Free cash flow amounted to $25 million in the second quarter of 2006 including $21 million of cash requirements for working capital. 
Domtar’s net debt-to-total capitalization ratio1 as at June 30, 2006 stood at 57.9% compared to 57.7% as at December 31, 2005. Domtar’s net indebtedness decreased by $53 million, largely due to the positive impact of a stronger Canadian dollar (based on month-end exchange rates) on our U.S. dollar denominated debt.

(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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The Papers segment continues to enjoy improved market conditions in our core uncoated freesheet markets. While we remain concerned by the potentially negative consequences of the softwood lumber negotiations, we expect a favorable pulp, paper, and containerboard market environment for the remainder of 2006, and we are determined to achieve the full potential of our restructuring plan.

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).

SECOND 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 second quarter 2006 financial results. It will take place at 4:00 p.m. (EDT) on the Domtar corporate website at: http://www.domtar.com/en/investors/2782.asp.