Strong execution and higher prices drive solid results

(All financial information is in U.S. dollars, and all earnings per share results are diluted, unless otherwise noted).

• Second quarter 2016 net earnings of $0.29 per share; earnings before items¹ of $0.61 per share
• Personal Care sales growth of 6% year-over-year
• Announced a 4% increase to quarterly dividend

FORT MILL, S.C. - Domtar Corporation (NYSE: UFS) (TSX: UFS) today reported net earnings of $18 million ($0.29 per share) for the second quarter of 2016 compared to net earnings of $4 million ($0.06 per share) for the first quarter of 2016 and net earnings of $38 million ($0.60 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 items¹ of $38 million ($0.61 per share) for the second quarter of 2016 compared to earnings before items¹ of $22 million ($0.35 per share) for the first quarter of 2016 and earnings before items¹ of $39 million ($0.61 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 & equipment of $3 million ($2 million after tax); and
• 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); and
• Impairment of property, plant & 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); and
• Impairment of property, plant & 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 roadmap of pursuing growth opportunities that capitalize on our core competencies."

Mr. Williams added, "In Personal Care, our sales momentum continues to build, with sales increasing 6% 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 to operating income of $18 million in the first quarter of 2016. Depreciation and amortization totaled $87 million in the second quarter of 2016.

Operating income before items¹ was $65 million in the second quarter of 2016 compared to an operating income before items¹ of $41 million in the first quarter of 2016.

The increase in operating income in the second quarter of 2016 was the result of lower impairment of property, plant & 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, unfavorable exchange rates and a litigation settlement.

When compared to the first quarter of 2016, manufactured paper shipments were down 4.3% and pulp shipments decreased 2.4%. The shipments-to-production ratio for paper was 105% in the second quarter of 2016, compared to 100% in the first quarter of 2016. Paper inventories decreased by 37,000 tons and pulp inventories decreased by 16,000 metric tons when compared to 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 flow¹ of $1 million for the second quarter of 2016. Domtar's net debt-to-total capitalization ratio¹ stood at 30% 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. Our paper business should continue to benefit from recently announced price increases while we expect 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.