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Abonner Domtar Inc.

Domtar Inc.

Domtar Announces Second Quarter 2006 Financial Results

Montreal, Canada (ots/PRNewswire)

TICKER SYMBOL: (TSX: DTC , NYSE: DTC)
Domtar Inc. announced today a loss from continuing operations of
$3  million ($0.01 per common share) in the second quarter of 2006
compared to a  loss from continuing operations of $22 million ($0.10
per common share) in  the first quarter of 2006 and earnings from
continuing operations of $6  million ($0.02 per common share) in the
second quarter of 2005.
    SUMMARY OF RESULTS
                                             Q2 2006     Q1 2006     Q2 2005
    (In millions of Canadian dollars,
     unless otherwise noted)
    Sales                                      1,159       1,191       1,267
    Operating profit (loss) from
     continuing operations(1)                     26          (6)         37
    Earnings (loss) from continuing
     operations                                   (3)        (22)          6
    Net earnings (loss)                           (9)        (24)          2
    Earnings (loss) from continuing
     operations per common share
     (in dollars)                              (0.01)      (0.10)       0.02
    Net earnings (loss) per common share
     (in dollars)                              (0.04)      (0.10)       0.01
    Excluding specified items(1)
      Operating profit (loss) from
       continuing operations                      44         (15)         39
      Earnings (loss) from continuing
       operations                                  3         (30)          7
    Earnings (loss) from continuing
     operations per common share
     (in dollars)                               0.01       (0.13)       0.03
    (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.
"Overall, our operations continued to benefit from price increases
covering most of our products, as well as continued strength in all
of our  different market segments except for lumber. While our costs
continue to be  impacted by the strong Canadian dollar that reached
its highest level since  the 1970s, today's improved results from the
first quarter also illustrate  our employees' efforts and focus on
executing the restructuring plan  announced in November 2005. The
closure of our Vancouver mill in June was a  major step in a series
of measures aimed at improving the Company's  profitability and cash
flow generation."
"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.
Goverment, 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
In acordance 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 Paper business but  presented as a discontinued operation and
assets held for sale. Subsequent  to quarter-end, we reached an
agreement to sell our Vancouver paper mill  property, subject to a
number of closing conditions.
    PAPERS                                   Q2 2006     Q1 2006    Variance
    (In millions of Canadian dollars)
    Operating profit (loss) from
     continuing operations                        17         (18)         35
    Operating profit (loss) from
     continuing operations, excluding
     specified items                              36         (22)         58
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 pulp and
paper 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                          Q2 2006     Q1 2006    Variance
    (In millions of Canadian dollars)
    Operating profit from continuing
     operations                                    3           4          (1)
    Operating profit from continuing
     operations, excluding specified items         3           4          (1)
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                                     Q2 2006     Q1 2006    Variance
    (In millions of Canadian dollars)
    Operating loss from continuing
     operations                                  (10)         (5)         (5)
    Operating loss from continuing
     operations, excluding specified items        (9)         (6)         (3)
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                                Q2 2006     Q1 2006    Variance
    (In millions of Canadian dollars)
    Operating profit from continuing
     operations                                   16          11           5
    Operating profit from continuing
     operations, excluding specified items        14           7           7
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
    FREE CASH FLOW(1)                        Q2 2006     Q1 2006     Q2 2005
    (In millions of Canadian dollars)
    Cash flows provided from operating
     activities of continuing operations
     before changes in working capital
     and other items                              79          28          93
    Changes in working capital and
     other items                                 (21)        (42)        (44)
    Cash flows provided from (used for)
     operating activities of continuing
     operations                                   58         (14)         49
    Net additions to property, plant
     and equipment                               (33)        (24)        (37)
    Free cash flow                                25         (38)         12
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 ratio(1) 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 appendix.
                                   OUTLOOK
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
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
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:
www.domtar.com.
    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 9,000 EMPLOYEES
    ACROSS NORTH AMERICA. THE COMPANY ALSO HAS A 50% INVESTMENT INTEREST IN
    NORAMPAC INC., THE LARGEST CANADIAN PRODUCER OF CONTAINERBOARD.
                                   APPENDIX
    NOTES TO THE SUMMARY OF RESULTS
                                   NOTE 1.
                               SPECIFIED ITEMS
In Domtar's view, specified items are items that do not typify
normal  operating activities. The following table reconciles
operating profit (loss ) from continuing operations, earnings (loss)
from continuing operations,  earnings (loss) from continuing
operations per share, determined in  accordance with GAAP(x), to
operating profit (loss) from continuing  operations, earnings (loss)
from continuing operations, earnings (loss)  from continuing
operations per share, excluding specified items.
                                       Q2 2006                       Q2 2006
    (In millions of Canadian dollars, unless otherwise noted)
                                       Earnings
                                         (loss)                         Loss
                                          from     Opera-               from
                 Operating  Earnings     conti-     ting               conti-
                    profit     (loss)    nuing      loss      Loss     nuing
                      from      from     opera-     from      from     opera-
                     conti-    conti-    tions     conti-    conti-    tions
                     nuing     nuing per share     nuing     nuing per share
                     opera-    opera-  (in dol-    opera-   operat-  (in dol-
                     tions     tions      lars)    tions      ions      lars)
    As per GAAP(x)      26        (3)    (0.01)       (6)      (22)    (0.10)
    Specified items:
      Gains on sales
       of property,
       plant and
       equipment (a)     -         -                   -         -
      Closure and
       restructuring
       costs (b)        19        13                   3         2
      Legal
       settle-
       ments (c)         -         -                  (7)       (7)
      Unrealized
        mark-to-market
        (gains)
        losses (d)      (1)       (1)                 (5)       (3)
      Income tax
       legislation
        modification (e) -        (4)                  -         -
      Foreign exchange
       (gains) losses
       on long-
       term debt (f)     -        (2)                  -         -
      Insurance
       recoveries (g)    -         -                   -         -
                       --------------------------  --------------------------
                        18         6      0.02        (9)       (8)    (0.03)
    Excluding          --------------------------  --------------------------
     specified
     items              44         3      0.01       (15)      (30)    (0.13)
                                                                     Q2 2005
                                                          Earnings
                                                              from
                                                  Operat-    conti-
                                                     ing     nuing
                                                    from      from     opera-
                                                   conti-    conti-    tions
                                                   nuing     nuing per share
                                                   opera-    opera-  (in dol-
                                                   tions     tions      lars)
     As per GAAP(x)                                   37         6      0.02
     Specified items:
     Gains on sales
      of property, plant
      and equipment (a)                               (4)       (3)
     Closure and
      restructuring
      costs (b)                                       10         6
     Legal
      settlements (c)                                  -         1
     Unrealized
       mark-to-market
       (gains)
       losses (d)                                     (1)       (1)
     Income tax
      legislation
       modification (e)                                -         -
     Foreign exchange
      (gains)losses
      on long-
      term debt (f)                                    -         -
     Insurance
      recoveries (g)                                  (3)       (2)
                                                       2         1      0.01
     Excluding
      specified items                                 39         7      0.03
    (x) Except for operating profit (loss) from continuing operations which
        is a non-GAAP measure. See note 2.
    a) Sales of property, plant and equipment
    Domtar's results include gains or losses on sales of property, plant and
    equipment. These gains or losses are presented under "Selling, general
    and administrative" expenses in the financial statements.
    b) Closure and restructuring costs
       Domtar's results include closure and restructuring charges. These
       charges are presented under "Closure and restructuring costs" in the
       financial statements.
    c) Legal settlements
       Domtar's results include charges or revenues related to legal
       settlements. These charges or revenues are presented under "Selling,
       general and administrative" expenses in the financial statements.
    d) Unrealized mark-to-market gains or losses
       Domtar's results include unrealized mark-to-market gains or losses on
       commodity swap contracts and foreign exchange contracts not
       considered as hedges for accounting purposes. Such gains or losses
       are presented under "Selling, general and administrative" expenses in
       the financial statements.
    e) Income tax legislation modification
       Domtar's results include charges related to modifications to the
       income tax legislation. These charges are presented under "Income tax
       recovery" in the financial statements.
    f) Foreign exchange impact on long-term debt
       Domtar's results include foreign exchange gains or losses on the
       translation of a portion of its long-term debt. Such gains or losses
       are presented under "Financing expenses" in the financial statements.
    g) Insurance recoveries
       Domtar's results include insurance recoveries. These insurance
       recoveries are presented under "Selling, general and administrative"
       expenses in the financial statements.
                                   NOTE 2.
                           USE OF NON-GAAP MEASURES
Except where otherwise indicated, all financial information
reflected  herein is determined on the basis of Canadian GAAP.
Operating profit (loss) from continuing operations is a non-GAAP
measure that is calculated within Domtar's financial statements.
Domtar  focuses on operating profit (loss) from continuing operations
as this  measure enables it to compare its results between periods
without regard to  debt service or income taxes.
Operating profit (loss) from continuing operations excluding
specified  items, earnings (loss) from continuing operations
excluding specified items , earnings (loss) from continuing
operations per common share excluding  specified items are non-GAAP
measures. Measures excluding specified items  are used in evaluating
the Company's performance between periods without  regard to
specified items that adversely or positively affected its GAAP
measures.
Free cash flow is a non-GAAP measure that is defined as the amount
by  which cash flows provided from continuing operating activities,
as  determined in accordance with GAAP, exceed net additions to
property, plant  and equipment, as determined in accordance with
GAAP. Free cash flow is  used in evaluating the Company's ability to
service its debt and pay  dividends to its shareholders.
Net debt-to-total capitalization ratio is a non-GAAP measure that
is  calculated as long-term debt and bank indebtedness, net of cash
and cash  equivalents, to the sum of net debt and shareholders'
equity. Domtar's  management tracks this ratio on a regular basis in
order to assess its debt  position.
The above non-GAAP measures have no standardized meaning
prescribed by  GAAP and are not necessarily comparable to similar
measures presented by  other companies, and therefore should not be
considered in isolation.  Domtar believes that it would be useful for
investors and other users to be  aware of these measures so they can
better assess the Company's performance.
                           Consolidated Financial
                                 Statements
    CONSOLIDATED    Three months ended June 30      Six months ended June 30
    EARNINGS          2006      2006      2005      2006      2006      2005
    (In millions of
     Canadian dollars,
     unless
     otherwise noted) -------(Unaudited)------      -------(Unaudited)-------
                       US$         $         $       US$         $         $
                   (NOTE 2)                      (NOTE 2)
    Sales            1,039     1,159     1,267     2,108     2,350     2,503
    Operating
     expenses
      Cost of
       sales           879       980     1,068     1,824     2,034     2,115
      Selling,
       general and
       adminis-
       trative          50        56        60       104       116       117
      Amorti-
       zation           70        78        92       142       158       180
      Closure and
       restructuring
       costs (NOTE 3)   17        19        10        20        22        16
                     --------------------------    --------------------------
                     1,016     1,133     1,230     2,090     2,330     2,428
                     --------------------------    --------------------------
    Operating profit
     from continuing
     operations         23        26        37        18        20        75
    Financing
     expenses           37        41        39        72        80        73
    Amortization of
     deferred gain      (2)       (2)       (1)       (3)       (3)       (2)
                     --------------------------    --------------------------
    Earnings (loss)
     from continuing
     operations before
     income taxes      (12)       (13)      (1)      (51)      (57)        4
    Income tax
     recovery           (9)       (10)      (7)      (29)      (32)      (15)
                     --------------------------    --------------------------
    Earnings (loss)
    from continuing
     operations         (3)        (3)       6       (22)      (25)       19
    Loss from
     discontinued
     operations
     (NOTE 4)           (5)        (6)      (4)       (7)       (8)       (7)
                     --------------------------    --------------------------
    Net earnings
     (loss)             (8)        (9)       2       (29)      (33)       12
                     --------------------------    --------------------------
                     --------------------------    --------------------------
    Per common share
     (in dollars)
     (NOTE 5)
      Earnings
       (loss) from
       continuing
       operations
        Basic        (0.01)    (0.01)     0.02     (0.10)    (0.11)     0.08
        Diluted      (0.01)    (0.01)     0.02     (0.10)    (0.11)     0.08
      Net earnings
     (loss)
        Basic        (0.04)    (0.04)     0.01     (0.13)    (0.15)     0.05
        Diluted      (0.04)    (0.04)     0.01     (0.13)    (0.15)     0.05
    Weighted
     average number
     of common
     shares
     outstanding
     (millions)
        Basic        230.4     230.4     229.6     230.3     230.3     229.5
        Diluted      230.4     230.4     230.7     230.3     230.3     230.6
    CONSOLIDATED
    RETAINED        Three months ended June 30      Six months ended June 30
    EARNINGS          2006      2006      2005      2006      2006      2005
    (In millions of
     Canadian dollars,
     unless
     otherwise noted) -------(Unaudited)------      -------(Unaudited)-------
                       US$         $         $       US$         $         $
                   (NOTE 2)                      (NOTE 2)
    Retained
     earnings
     (deficit) at
     beginning
     of period         (39)      (43)      408       (18)      (19)      412
    Net earnings
     (loss)             (8)       (9)        2       (29)      (33)       12
    Dividends on
     common shares       -         -       (14)        -         -       (28)
    Dividends on
     preferred
     shares             (1)       (1)       (1)       (1)       (1)       (1)
                     --------------------------    --------------------------
    Retained earnings
     (deficit) at end
     of period         (48)      (53)       395      (48)      (53)      395
    The accompanying notes are an integral part of the consildated financial
    statements.
    CONSOLIDATED BALANCE SHEETS  As at              June      June  December
                                                      30        30        31
                                                    2006      2006      2005
    (In millions of Canadian dollars,
     unless otherwise noted)                -------------(Unaudited)--------
                                                     US$         $         $
                                                 (NOTE 2)
    Assets
    Current assets
      Cash and cash equivalents                       84        94        83
      Receivables                                    253       282       294
      Inventories                                    561       626       715
      Prepaid expenses                                20        22        11
      Income and other taxes receivable               14        15        16
      Future income taxes                             31        35        38
                                                     963     1,074     1,157
    Property, plant and equipment                  3,073     3,426     3,634
    Assets held for sale (NOTE 4)                     21        24         -
    Goodwill                                          82        91        92
    Other assets                                     276       308       309
                                                   4,415     4,923     5,192
    Liabilities and shareholders' equity
    Current liabilities
      Bank indebtedness                               55        62        21
      Trade and other payables                       481       536       651
      Income and other taxes payable                  29        32        29
      Long-term debt due within one year               2         2         2
                                                     567       632       703
    Long-term debt                                 1,950     2,174     2,257
    Future income taxes                              221       247       292
    Other liabilities and deferred credits           282       314       331
    Shareholders' equity
      Preferred shares                                30        34        36
      Common shares                                1,602     1,786     1,783
      Contributed surplus                             13        14        14
      Deficit                                        (48)      (53)      (19)
      Accumulated foreign currency translation
       adjustments (NOTE 7)                         (202)     (225)     (205)
                                                   1,395     1,556     1,609
                                                   4,415     4,923     5,192
    The accompanying notes are an integral part of the consolidated financial
    statements.
    CONSOLIDATED CASH FLOWS
                    Three months ended June 30      Six months ended June 30
                      2006      2006      2005      2006      2006      2005
    (In millions of
     Canadian dollars,
     unless otherwise
     noted)          ------(Unaudited)--------       -----(Unaudited)-------
                       US$         $         $       US$         $         $
                   (NOTE 2)                      (NOTE 2)
    Operating
     activities
    Earnings (loss)
     from continuing
     operations         (3)       (3)        6       (22)      (25)       19
    Non-cash items:
      Amortization and
       write-down of
       property, plant
       and equipment    70        78        94       142       158       182
      Future income
       taxes           (10)      (12)      (11)      (34)      (38)      (23)
      Amortization of
       deferred gain    (2)       (2)       (1)       (3)       (3)       (2)
      Closure and
       restructuring
       costs, excluding
       write-down of
       property, plant
       and equipment
       (NOTE 3)         17        19         8        20        22        14
      Other             (1)       (1)       (3)       (7)       (7)       (7)
                     -------------------------       -----------------------
                        71        79        93        96       107       183
                     -------------------------       -----------------------
    Changes in working
     capital and other
     items
      Receivables       (2)       (2)       12        (4)       (4)      (29)
      Inventories       42        47         9        56        62       (58)
      Prepaid expenses   3         3        (1)       (7)       (8)       (9)
      Trade and other
       payables        (23)      (26)      (44)      (51)      (57)      (17)
      Income and other
       taxes            (1)       (1)        -         4         4        (1)
      Other              -         -        (7)       (5)       (5)      (17)
    Payments of closure
     and restructuring
     costs             (38)      (42)      (13)      (49)      (55)      (27)
                     -------------------------       -----------------------
                       (19)      (21)      (44)      (56)      (63)     (158)
                     -------------------------       -----------------------
    Cash flows provided
     from operating
     activities of
     continuing
     operations         52        58        49        40        44        25
                     -------------------------       -----------------------
    Cash flows used
     for operating
     activities of
     discontinued
     operations
     (NOTE 4)           (6)       (7)      (11)       (7)       (8)      (21)
                     -------------------------       -----------------------
      Cash flows
       provided from
       operating
       activities       46        51        38        33        36         4
                     -------------------------       -----------------------
    Investing activities
    Additions to
     property, plant
     and equipment     (31)      (34)      (46)      (53)      (59)      (79)
    Proceeds from
     disposals of
     property, plant
     and equipment       1         1         9         2         2        14
    Other                -         -         1        (3)       (3)       (3)
                     -------------------------       -----------------------
    Cash flows used
     for investing
     activities of
     continuing
     operations        (30)      (33)      (36)      (54)      (60)      (68)
                     -------------------------       -----------------------
    Cash flows used
     for investing
     activities of
     discontinued
     operations
     (NOTE 4)            -         -        (1)        -         -        (1)
                     -------------------------       -----------------------
      Cash flows used
       for investing
       activities      (30)      (33)      (37)      (54)      (60)      (69)
                     -------------------------       -----------------------
    Financing activities
    Dividend payments   (1)       (1)      (14)       (1)       (1)      (28)
    Change in bank
     indebtedness       25        28        17        36        40         8
    Change in revolving
     bank credit, net
     of expenses       (41)      (46)       21        (1)       (1)      190
    Repayment of long-
     term debt          (1)       (1)       (1)       (1)       (1)      (90)
    Common shares
     issued, net of
     expenses            1         1         1         2         2         4
    Redemptions of
     preferred shares    -         -        (1)       (1)       (1)       (2)
                     -------------------------       -----------------------
      Cash flows provided
       from (used for)
       financing
       activities
       of continuing
       operations      (17)      (19)       23        34        38        82
                     -------------------------       -----------------------
    Cash flows
     provided from
     financing
     activities of
     discontinued
     operations
     (NOTE 4)            -         -         -         -         -         -
                     -------------------------       -----------------------
      Cash flows
       provided
       from (used for)
       financing
       activities      (17)      (19)       23        34        38        82
                     -------------------------       -----------------------
    Net increase
     (decrease) in
     cash and cash
     equivalents        (1)       (1)       24        13        14        17
    Translation
     adjustments
     related to
     cash and cash
     equivalents        (3)       (3)        -        (3)       (3)        1
    Cash and cash
     equivalents at
     beginning of
     period             88        98        46        74        83        52
                     -------------------------       -----------------------
    Cash and cash
     equivalents at
     end of period      84        94        70        84        94        70
    Cash and cash
     equivalents at
     end of period,
     related to:
      Continuing
       operations       84        94        70        84        94        70
      Discontinued
       operations        -         -         -         -         -         -
    Cash and cash
     equivalents at
     end of period      84        94        70        84        94        70
                     -------------------------       -----------------------
    The accompanying notes are an integral part of the consolidated financial
    statements.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            SECOND QUARTER 2006 (IN MILLIONS OF CANADIAN DOLLARS,
                           UNLESS OTHERWISE NOTED)
                                   NOTE I.
                            BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim
consolidated financial statements, prepared in accordance with
Canadian  generally accepted accounting principles, contain all
adjustments necessary  to present fairly Domtar Inc.'s (Domtar)
financial position as at June 30,  2006 and December 31, 2005, as
well as its results of operations and its  cash flows for the three
months and six months ended June 30, 2006 and 2005.
While management believes that the disclosures presented are
adequate,  these unaudited interim consolidated financial statements
and notes should  be read in conjunction with Domtar's annual
consolidated financial statements.
These unaudited interim consolidated financial statements follow
the  same accounting policies as the most recent annual consolidated
financial  statements.
NOTE 2.
                         UNITED STATES DOLLAR AMOUNTS
The unaudited interim consolidated financial statements are
expressed  in Canadian dollars and, solely for the convenience of the
reader, the 2006  unaudited interim consolidated financial statements
and the tables of  certain related notes have been translated into
U.S. dollars at the June  2006 month- end rate of CAN$1.00 =
US$0.8969. This translation should not  be construed as an
application of the recommendations relating to the  accounting for
foreign currency translation, but rather as supplemental  information
for the reader.
NOTE 3.
                       CLOSURE AND RESTRUCTURING COSTS
In 2005, Domtar's management announced a series of targeted
measures  aimed at returning the Corporation to profitability. The
plan included  closures of the Cornwall and Ottawa, Ontario paper
mills, the Grand-Remous  and Malartic, Quebec sawmills, the sale of
the Vancouver, British Columbia  paper mill and cost-cutting
initiatives. This workforce reduction and restructuring plan is in
addition to the plans announced in 2004, which covered the
Corporation's paper and merchant operations in Canada and the United
States . As at June 30, 2006, the balance of the provision was $50
million, which  includes $42 million related to the Papers segment
and $8 million related  to the Wood segment. For the three months and
six months ended June 30,  2006, the Papers segment incurred
severance payments of $29 million and $39  million, respectively, a
reversal of the provision of nil and $1 million,  respectively, labor
costs of $1 million and $3 million, respectively, and $ 3 million of
other additions during the second quarter of 2006 were  incurred,
included in the table below. In addition, for the three months  and
six months ended June 30, 2006, the Papers segment incurred
write-downs  of $1 million of certain inventory items and spare parts
to their net  recoverable amounts, asset retirement obligations of $1
million and other  closure related costs of $12 million and $13
million, respectively, and the  Wood segment incurred other closure
related costs of $1 million during the  second quarter of 2006.
In 2005, Norampac's management decided to permanently shut down
one  paper machine at its Red Rock, Ontario containerboard plant and
also  decided to close three corrugated products plants located in
Concord,  Ontario, Montreal, Quebec and Buffalo, New York. As at June
30, 2006, the  balance of the provision was nil, representing the
Corporation's  proportionate share. For the three months and six
months ended June 30,  2006, severance payments of nil and $2
million, respectively, and labor  costs of nil and $1 million,
respectively, were incurred, included in the  table below.
The following table provides a reconciliation of all closure and
restructuring cost provisions:
                                                    June      June  December
                                                      30        30        31
                                                    2006      2006      2005
                                                  --------(Unaudited)--------
                                                     US$         $         $
                                                (NOTE 2)
    Balance at beginning of period                   76         85        37
    Severance payments                              (37)       (41)      (32)
    Reversal of provision                            (1)        (1)       (1)
    Additions
      Labor costs                                     4          4        71
      Environmental costs                             -          -        10
      Other                                           3          3         -
    Balance at end of period                         45         50        85
                                   NOTE 4.
                           DISCONTINUED OPERATIONS
In November 2005, as part of its restructuring program, Domtar
announced its intention to sell the Vancouver, British Columbia paper
mill.  Effective in the second quarter of 2006, the Vancouver paper
mill was not  sold and has been permanently closed. Considering the
fact that its major  product line will not continue to be sold, the
Vancouver paper mill will no  longer be included in the Papers
segment but classified as a discontinued  operation in the
consolidated earnings and in the consolidated cash flows  and the
property, plant and equipment as held for sale in the consolidated
balance sheets. The consolidated earnings and cash flows for the
three  months and six months ended June 30, 2005 have been restated
for purposes  of comparability with the basis of presentation adopted
in the current  period. Domtar expects to complete a sale transaction
within the next year.
The loss from discontinued operations of the Vancouver paper mill
is  summarized as follows:
                    Three months ended June 30      Six months ended June 30
                      2006      2006      2005      2006      2006      2005
                     -------(Unaudited)-------     -------(Unaudited)-------
                       US$         $         $       US$         $         $
                   (NOTE 2)                      (NOTE 2)
    Sales               14        16        20        32        36        43
                     -------------------------     -------------------------
    Loss from
     discontinued
     operations
     before
     income taxes       (8)       (9)       (6)      (11)      (12)      (10)
    Income tax
     recovery           (3)       (3)       (2)       (4)       (4)       (3)
                     -------------------------     -------------------------
    Loss from
     discontinued
     operations         (5)       (6)       (4)       (7)       (8)       (7)
    Basic loss from
     discontinued
     operations
     per share
     (in dollars)    (0.03)    (0.03)    (0.01)    (0.03)    (0.04)    (0.03)
    Diluted loss
     from
     discontinued
     operations
     per share
     (in dollars)    (0.03)    (0.03)    (0.01)    (0.03)    (0.04)    (0.03)
                                   NOTE 5.
                          EARNINGS (LOSS) PER SHARE
    The following table provides the reconciliation between basic and
    diluted earnings (loss) per share:
                    Three months ended June 30      Six months ended June 30
                      2006      2006      2005      2006      2006      2005
                     -------(Unaudited)-------     -------(Unaudited)-------
                       US$         $         $       US$         $         $
                   (NOTE 2)                      (NOTE 2)
    Earnings (loss)
     from continuing
     operations         (3)       (3)        6       (22)      (25)       19
    Dividend
     requirements of
     preferred shares    1         1         1         1         1         1
                     -------------------------     -------------------------
    Earnings (loss)
     from continuing
     operations
     applicable to
     common shares      (4)       (4)        5       (23)      (26)       18
    Net earnings
     (loss)             (8)       (9)        2       (29)      (33)       12
    Dividend
     requirements of
     preferred shares    1         1         1         1         1         1
                     -------------------------     -------------------------
    Net earnings (loss)
     applicable to
     common shares      (9)      (10)        1       (30)      (34)       11
    Weighted average
     number of
     common shares
     outstanding
     (millions)      230.4     230.4     229.6     230.3     230.3     229.5
    Effect of
     dilutive stock
     options
     (millions)          -         -       1.1         -         -       1.1
                     -------------------------     -------------------------
    Weighted average
     number of
     diluted common
     shares
     outstanding
     (millions)      230.4     230.4     230.7     230.3     230.3     230.6
                     -------------------------     -------------------------
    Basic
     earnings (loss)
     from
     continuing
     operations
     per share
     (in dollars)    (0.01)    (0.01)     0.02     (0.10)    (0.11)     0.08
    Diluted earnings
     (loss) from
     continuing
     operations
     per share
     (in dollars)    (0.01)    (0.01)     0.02     (0.10)    (0.11)     0.08
    Basic net
     earnings
     (loss) per
     share
     (in dollars)    (0.04)    (0.04)     0.01     (0.13)    (0.15)     0.05
    Diluted net
     earnings
     (loss) per
     share
     (in dollars)    (0.04)    (0.04)     0.01     (0.13)    (0.15)     0.05
The following table provides the securities that could potentially
dilute basic earnings (loss) per share in the future but were not
included  in the computation of diluted earnings (loss) per share
because to do so  would have been anti-dilutive for the periods
presented:
                                                     June 30         June 30
                                                        2006            2005
    Number of shares
    Options                                        4,872,495       4,890,136
    Bonus shares                                      67,875               -
    Rights                                            84,500          84,500
                                   NOTE 6.
                                 RECEIVABLES
As at February 22, 2006, Domtar finalized a new three-year
securitization agreement, which includes both U.S. and Canadian
receivables . The maximum cash consideration that can be received
from the sale of  receivables under this new combined agreement is
$222 million (US$190  million). As at June 30, 2006, the senior
beneficial interest held by third  parties amounted to $193 million
(US$173 million) under this new  securitization program compared to
$163 million (US$140 million) as at  December 31, 2005 under the old
U.S. and Canadian accounts receivable programs.
                                   NOTE 7.
                         ACCUMULATED FOREIGN CURRENCY
                           TRANSLATION ADJUSTMENTS
                                                    June      June  December
                                                      30        30        31
                                                    2006      2006      2005
                                                    -------(Unaudited)-------
                                                     US$         $         $
                                                 (NOTE 2)
    Balance at beginning of period                  (184)     (205)     (190)
    Effect of changes in exchange rates during
     the period:
      On net investment in self-sustaining foreign
       subsidiaries                                  (76)      (85)      (69)
      On certain long-term debt denominated
       in foreign currencies designated as
       a hedge of net investment in
       self-sustaining foreign subsidiaries           71        79        65
      Future income taxes thereon                    (13)      (14)      (11)
    Balance at end of period                        (202)     (225)     (205)
                                   NOTE 8.
                            FINANCIAL INSTRUMENTS
    FOREIGN CURRENCY RISK
In order to reduce the potential negative effects of a fluctuating
Canadian dollar, Domtar has entered into various arrangements to
stabilize  anticipated future net cash inflows denominated in U.S.
dollars. The  following table provides the detail of the arrangements
used as hedging  instruments:
                                          June  December      June  December
                                            30        31        30        31
                                          2006      2005      2006      2005
                                         ------------(Unaudited)-------------
                                  Average exchange rate  Contractual amounts
                                              (CAN$/US$)     (In millions of
                                                                U.S. dollars)
    Forward foreign exchange contracts
      0 to 12 months                      1.20      1.24       300       295
      13 to 24 months                     1.13         -         3         -
    Currency options purchased
      0 to 12 months                      1.15         -       120         -
      13 to 24 months                     1.15         -        20         -
    Currency options sold
      0 to 12 months                      1.22         -        20         -
      13 to 24 months                     1.22         -        20         -
Forward foreign exchange contracts are contracts whereby Domtar
has the  obligation to sell U.S. dollars at a specific rate.
Currency options purchased are contracts whereby Domtar has the
right,  but not the obligation, to sell U.S. dollars at the strike
rate if the U.S.  dollar trades below that rate. Currency options
sold are contracts whereby  Domtar has the obligation to sell U.S.
dollars at the strike rate if the U. S. dollar trades above that
rate.
                                   NOTE 9.
                          DEFINED BENEFIT PLANS AND
                     OTHER EMPLOYEE FUTURE BENEFIT PLANS
                    Three months ended June 30      Six months ended June 30
                      2006      2006      2005      2006      2006      2005
                 ---------(Unaudited)---------  ---------(Unaudited)--------
                       US$         $         $       US$         $         $
                   (NOTE 2)                      (NOTE 2)
    Net periodic
     benefit cost
     for defined
     benefit plans      13        14        11        26        29        20
    Net periodic
     benefit cost for
     other employee
     future benefit
     plans               3         3         3         4         5         6
                                   NOTE 10.
                            SEGMENTED DISCLOSURES
Domtar operates in the four reportable segments described below.
Each  reportable segment offers different products and services and
requires  different technology and marketing strategies. The
following summary  briefly describes the operations included in each
of Domtar's reportable  segments:
-  PAPERS - represents the aggregation of the manufacturing and
       distribution of business, commercial printing and publication, and
       technical and specialty papers, as well as pulp.
    -  PAPER MERCHANTS - involves the purchasing, warehousing, sale and
       distribution of various products made by Domtar and by other
       manufacturers.  These products include business and printing papers,
       graphic arts supplies and certain industrial products.
    -  WOOD - comprises the manufacturing and marketing of lumber and wood-
       based value-added products and the management of forest resources.
    -  PACKAGING - comprises the Corporation's 50% ownership interest in
       Norampac, a company that manufactures and distributes containerboard
       and corrugated products.
Domtar evaluates performance based on operating profit, which
represents sales, reflecting transfer prices between segments at fair
value , less allocable expenses before financing expenses and income
taxes.
    SEGMENTED DATA OF CONTINUING OPERATIONS
                    Three months ended June 30      Six months ended June 30
                      2006      2006      2005      2006      2006      2005
                 ---------(Unaudited)---------  ---------(Unaudited)--------
                       US$         $         $       US$         $         $
                   (NOTE 2)                     (NOTE 2)
    Sales
      Papers           621       693       743     1,260     1,405     1,482
      Paper Merchants  230       256       260       478       533       519
      Wood             117       130       201       249       278       386
      Packaging        145       162       170       283       315       330
                 -----------------------------  ----------------------------
    Total for
     reportable
     segments        1,113     1,241     1,374     2,270     2,531     2,717
      Intersegment
       sales - Papers  (61)      (68)      (68)     (135)     (151)     (139)
      Intersegment
       sales - Wood    (12)      (13)      (38)      (25)      (28)      (72)
      Intersegment
       sales -
       Packaging        (1)       (1)       (1)       (2)       (2)       (3)
                 -----------------------------  ----------------------------
    Consolidated
     sales           1,039     1,159     1,267     2,108     2,350     2,503
                 -----------------------------  ----------------------------
                 -----------------------------  ----------------------------
    Amortization and
     write-down of
     property, plant
     and equipment
      Papers            51        57        69       104       116       136
      Paper Merchants    -         -         1         1         1         2
      Wood               8         9        11        15        17        22
      Packaging          8         9        11        15        17        19
                 -----------------------------  ----------------------------
    Total for
     reportable
     segments           67        75        92       135       151       179
      Corporate          3         3         2         7         7         3
                 -----------------------------  ----------------------------
    Consolidated
     amortization
     and write-down
     of property,
     plant and
     equipment          70        78        94       142       158       182
                 -----------------------------  ----------------------------
                 -----------------------------  ----------------------------
    Operating profit
     (loss) from
     continuing
     operations
      Papers            15        17         8        (1)       (1)       18
      Paper Merchants    3         3         4         6         7         9
      Wood              (9)      (10)       11       (13)      (15)       17
      Packaging         14        16        11        24        27        24
                 -----------------------------  ----------------------------
    Total for
     reportable
     segments           23        26        34        16        18        68
      Corporate          -         -         3         2         2         7
                 -----------------------------  ----------------------------
    Consolidated
     operating
     profit from
     continuing
     operations         23        26        37        18        20        75
                                   NOTE 11.
                             COMPARATIVE FIGURES
To conform with the basis of presentation adopted in the current
period , certain figures previously reported have been reclassified.

Contact:

For further information: Christian Tardif, Senior Manager, Corporate
and Financial Communications, +1-(514)-848-5515,
christian.tardif@domtar.com; INVESTOR RELATIONS: Pascal Bossé
Manager, Investor Relations, +1-(514)-848-5938,
pascal.bosse@domtar.com; SOURCE: Daniel Buron, Senior Vice-President
and Chief Financial Officer, +1-(514)-848-5234,
daniel.buron@domtar.com

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