Mr. John Williams reports

DOMTAR CORPORATION REPORTS PRELIMINARY SECOND QUARTER 2016 FINANCIAL RESULTS

Domtar Corp. had net earnings of $18-million (29 cents per share) for the second quarter of 2016 compared with net earnings of $4-million (six cents per share) for the first quarter of 2016 and net earnings of $38-million (60 cents per share) for the second quarter of 2015. Sales for the second quarter of 2016 were $1.3-billion.

Excluding items listed below, the company had earnings before items of $38-million (61 cents per share) for the second quarter of 2016 compared with earnings before items of $22-million (35 cents per share) for the first quarter of 2016 and earnings before items of $39-million (61 cents per share) for the second quarter of 2015.

Second quarter 2016 items:

• Litigation settlement of $2-million ($2-million after tax);
• Impairment of property, plant and equipment of $3-million ($2-million after tax);
• Closure and restructuring costs of $21-million ($16-million after tax).

First quarter 2016 items:

• Closure and restructuring costs of $2-million ($2-million after tax);
• Impairment of property, plant and equipment of $21-million ($16-million after tax).

Second quarter 2015 items:

• Closure and restructuring costs of $1-million ($1-million after tax);
• Gain on disposal of property, plant and equipment of $14-million ($11-million after tax);
• Impairment of property, plant and equipment of $18-million ($11-million after tax).

"We had a solid performance given the extensive scheduled maintenance outages and the Ashdown conversion. Our focus on costs and execution resulted in below-plan maintenance spending, and we benefited from higher pulp and paper prices with the implementation of recently announced price increases," said John D. Williams, president and chief executive officer. "The conversion of the Ashdown paper machine to fluff pulp continues to progress, with the start-up scheduled over the next few days. This is another milestone within our strategic road map of pursuing growth opportunities that capitalize on our core competencies.

"In personal care, our sales momentum continues to build, with sales increasing 6 per cent year over year as a result of new customer wins. During the quarter, we continued to reinvest in growth, mostly to complete our product assortment, enhance consumer and category insights, and deliver innovation to secure additional sales expansion."

Quarterly review

Operating income was $39-million in the second quarter of 2016 compared with operating income of $18-million in the first quarter of 2016. Depreciation and amortization totalled $87-million in the second quarter of 2016.

Operating income before items was $65-million in the second quarter of 2016 compared with an operating income before items of $41-million in the first quarter of 2016.

  
               FINANCIAL HIGHLIGHTS
                   (In millions)    
 
                               Q2 2016 Q1 2016
                                              
Sales                           $1,267  $1,287
Operating income (loss)                       
Pulp and paper segment              35      19
Personal care segment               15      14
Corporate                          (11)    (15)
                                ======  ======
Total operating income              39      18
Operating income before items       65      41
Depreciation and amortization       87      89

The increase in operating income in the second quarter of 2016 was the result of lower impairment of property, plant and equipment charge, higher average selling prices, lower raw material costs, lower freight costs, and lower maintenance and other costs. These factors were partially offset by higher closure and restructuring costs, lower volumes, unfavourable exchange rates, and a litigation settlement.

When compared with the first quarter of 2016, manufactured paper shipments were down 4.3 per cent and pulp shipments decreased 2.4 per cent. The shipments-to-production ratio for paper was 105 per cent in the second quarter of 2016, compared with 100 per cent in the first quarter of 2016. Paper inventories decreased by 37,000 tons and pulp inventories decreased by 16,000 metric tonnes when compared with the first quarter of 2016.

Liquidity and capital

Cash flow provided from operating activities amounted to $118-million and capital expenditures were $119-million, resulting in negative free cash flow of $1-million for the second quarter of 2016. Domtar's net debt-to-total-capitalization ratio stood at 30 per cent at June 30, 2016, and at March 31, 2016.

Outlook

Domtar paper shipments are expected to trend with market demand in the second half of 2016. The paper business should continue to benefit from recently announced price increases while the company expects some short-term pricing volatility in pulp. Lower maintenance activity and better productivity should positively impact results in pulp and paper. Personal care results are expected to benefit from the new customer wins, market growth and cost savings from the new manufacturing platform. Raw material unit costs are expected to moderately increase.

Earnings conference call

The company will hold a conference call today at 10 a.m. ET to discuss its second quarter 2016 financial results. Financial analysts are invited to participate in the call by dialling 1-800-505-9573 (toll free -- North America) or 1-416-204-9498 (international) at least 10 minutes before start time, while media and other interested individuals are invited to listen to the live webcast on the Domtar website.

The company will release its third quarter 2016 earnings results on Oct. 27, 2016, before markets open, followed by a conference call at 10 a.m. ET to discuss results. The date is tentative and will be confirmed approximately three weeks prior to the official earnings release date.

                          CONSOLIDATED STATEMENTS OF EARNINGS
                         (In millions, unless otherwise noted)
    
                                             Three months ended      Six months ended
                                           June 30,     June 30,   June 30,   June 30,
                                              2016         2015       2016       2015

Sales                                       $1,267       $1,310     $2,554     $2,658
Operating expenses
Cost of sales, excluding depreciation
and amortization                             1,013        1,052      2,063      2,114
Depreciation and amortization                   87           91        176        181
Selling, general and administrative            104           99        207        199
Impairment of property, plant and                3           18         24         37
equipment
Closure and restructuring costs                 21            1         23          2
Other operating loss (income), net               -          (13)         4         (8)
                                            ------       ------     ------     ------
                                             1,228        1,248      2,497      2,525
                                            ------       ------     ------     ------
Operating income                                39           62         57        133
Interest expense, net                           15           25         32         51
                                            ------       ------     ------     ------
Earnings before income taxes                    24           37         25         82
Income tax expense (benefit)                     6           (1)         3          8
                                            ------       ------     ------     ------
Net earnings                                    18           38         22         74
                                            ======       ======     ======     ======
Per common share (in dollars)
Net earnings
Basic                                         0.29         0.60       0.35       1.16
Diluted                                       0.29         0.60       0.35       1.16

We seek Safe Harbor.