Domtar

Montreal, Quebec, Canada, 31 October 2006 -- /PRNewswire/ -- Domtar Inc. NYSE, TSX: DTC) announced today earnings from continuing operations of CAD 38 million (CAD 0.16 per common share) in the third quarter of 2006 compared to a loss from continuing operations of CAD 3 million (CAD 0.01 per common share) in the second quarter of 2006 and a loss from continuing operations of CAD 48 million (CAD 0.21 per common share) in the third quarter of 2005.

Summary Of Results

Q3 2006 Q2 2006 Q3 2005
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(In millions of Canadian dollars,
unless otherwise noted)

Sales 1,177 1,159 1,241
Operating profit (loss) from continuing
operations(1) 89 26 (44)
Earnings (loss) from continuing operations 38 (3) (48)
Net earnings (loss) 38 (9) (52)

Earnings (loss) from continuing operations
per common share (in dollars) 0.16 (0.01) (0.21)
Net earnings (loss) per common share
(in dollars) 0.16 (0.04) (0.23)

Excluding specified items(1)
Operating profit (loss) from continuing
operations 98 44 (26)
Earnings (loss) from continuing operations 44 3 (35)

Earnings (loss) from continuing operations
per common share (in dollars) 0.19 0.01 (0.15)
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1) Operating profit 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 of the full report.

"I am pleased with Domtar's third quarter results, the best we've seen for several quarters, as our decisions over the past year and the sustained efforts of our employees to deliver on restructuring initiatives have been rewarded," said Raymond Royer, president and chief executive officer.

"Higher selling prices for paper, pulp, and packaging combined with lower operating costs have also contributed to these positive results. Given the better operating rates in the North American uncoated freesheet market, we believe we can grow and prosper in this business. On the softwood lumber front, Domtar will start receiving refunds for duties collected by the United States in the near future. Meanwhile, the deteriorating housing market and high fiber costs will keep the lumber industry in a challenging position," added Royer.

Royer also stated that "the transition work to create the new Domtar, the largest fine paper company in North America, in the first quarter of 2007, is progressing according to plan, and we are encouraged by the recent favorable decision of the United States antitrust authorities regarding the transaction. We continue to work on the other closing conditions, including regulatory approvals under the Competition Act (Canada) and the Investment Canada Act."

For the full report, visit http://www.domtar.com/files/2006Q3.pdf.

Operational Review

In accordance with Canadian generally accepted accounting principles, effective in the second quarter of 2006, the information pertaining to Domtar's Vancouver paper mill was no longer included in the Papers business but presented as a discontinued operation and assets held for sale. In July 2006, Domtar reached an agreement to sell the Vancouver paper mill property, subject to a number of closing conditions.

PAPERS Q3 2006 Q2 2006 Variance
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(In millions of Canadian dollars)

Operating profit from continuing operations 75 17 58
Operating profit from continuing operations,
excluding specified items 83 36 47
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The CAD 47 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, the settlement of a contract dispute resulting in a payment to Domtar of CAD14 million, recognition of investment tax credits related to research and development expenditures from prior years, lower energy and freight costs, and the realization of savings stemming from restructuring activities. These factors were partially offset by lower shipments for paper.

PAPER MERCHANTS Q3 2006 Q2 2006 Variance
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(In millions of Canadian dollars)

Operating profit from continuing operations 3 3 -
Operating profit from continuing operations,
excluding specified items 3 3 -
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Operating profit from continuing operations in the Paper Merchants segment remained stable. Although shipments were down during the quarter, it was offset by higher average selling prices for paper.

WOOD Q3 2006 Q2 2006 Variance
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In millions of Canadian dollars)

Operating loss from continuing operations (17) (10) (7)
Operating loss from continuing operations,
excluding specified items (17) (9) (8)
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Operating loss from continuing operations excluding specified items in the Wood segment increased by CAD 8 million, or CAD 1 million if the CAD 7 million Crown stumpage fees refund recorded in the second quarter of 2006 is excluded. This increase is mainly attributable to lower average selling prices, partially offset by lower duties on softwood lumber and benefits realized pursuant to the closure in the second quarter of 2006 of the Malartic and Grand-Remous sawmills.

Effective 12 October 2006, Domtar is entitled to receive a refund for duties collected by the U.S. government since 2002 plus interest, for a total consideration of approximately USD 183 million (CAD 204 million). This refund could be subject to a special charge of 19% by the Canadian Government.

PACKAGING Q3 2006 Q2 2006 Variance
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(In millions of Canadian dollars)

Operating profit from continuing operations 23 16 7
Operating profit from continuing operations,
excluding specified items 24 14 10
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The CAD 10 million increase in operating profit from continuing operations
excluding specified items in the Packaging segment (Domtar's 50% share of
Norampac Inc.) was mainly attributable to higher average selling prices for
both containerboard and corrugated containers with lower maintenance costs,
partially offset by higher fiber costs.

Liquidity And Capital

FREE CASH FLOW(1) Q3 2006 Q2 2006 Q3 2005
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(In millions of Canadian dollars)

Cash flows provided from operating
activities of continuing operations
before changes in working capital
and other items 120 79 17
Changes in working capital and other items (37) (21) 1
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Cash flows provided from operating
activities of continuing operations 83 58 18
Net additions to property, plant and
equipment (31) (33) (34)
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Free cash flow 52 25 (16)
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Free cash flow amounted to CAD 52 million in the third quarter of 2006 including CAD 37 million of cash requirements for working capital.

Domtar's net debt-to-total capitalization ratio(1) as at 30 September 2006, stood at 56.7% compared to 57.7% as at 31 December 2005. Domtar's net indebtedness decreased by CAD 105 million, largely due to the positive impact of a stronger Canadian dollar (based on month-end exchange rates) on the company's U.S. dollar-denominated debt and repayments on our revolving credit
facility.
(1) For a discussion on the use of non-GAAP measures, see "Notes to the
summary of results" in the appendix of the full report.

Outlook

Domtar does not anticipate any significant changes to current paper and pulp market conditions. The company will continue to monitor market conditions and respond accordingly. Domtar expects lumber markets to remain weak for the foreseeable future. Nonetheless, the Company intends to realize the full potential of its restructuring plan.

Domtar is the third largest producer of uncoated freesheet paper in North America. It is also a leading manufacturer of business papers, commercial printing and publication papers, and technical and specialty papers. Domtar manages according to internationally recognized standards 17 million acres of forestland in Canada and the United States, and produces lumber and other wood products. Domtar has approximately 8500 employees across North America. The company also has a 50% investment interest in Norampac Inc., the largest Canadian producer of containerboard.

For more information, visit the Domtar corporate Web site at: http://www.domtar.com.