MESSAGE

TO SHAREHOLDERS

With a legacy of 170 years, Domtar is ready for the future. Our confidence stems from our clear strategy to create value by remaining the supplier of choice to our paper customers, while building new businesses in growing markets.

Domtar generated $725 million of EBITDA before items1 and cash flows from operating activities of $554 million in 2018. We returned $108 million to shareholders in the form of dividends, re-invested $195 million in our business, and repaid $276 million of debt. Our net debt-to-total capitalization ratio1 at year-end stood at a comfortable 23%.

Our strong financial performance was driven by our papers business, complemented by one of our strongest performances in market pulp. We closed the year with a robust fourth quarter, strong momentum in pulp and paper, and greater visibility on our path forward.

The results and progress achieved in 2018 demonstrate that we are well-positioned to create value in the years ahead.

EXECUTING OUR PAPER STRATEGY

The North American paper market reached a positive inflection point in 2018 driven by improved demand and permanent supply curtailments in the industry. Through a combination of market share gains, price increases and higher productivity across our mill system, we achieved a strong performance in this business.

We were able to capitalize on the favorable market dynamics because of our long-standing commitment to be the leading North American supplier of uncoated freesheet. In this regard, the significant cash flows we derive annually from this business are evidence of its resilience.

THE RECENT DECISION BY A MAJOR SUPPLIER TO EXIT THE UNCOATED FREESHEET MARKET IS STRENGTHENING DOMTAR’S POSITION. IN LINE WITH OUR LONG-TERM STRATEGY, WE WILL CONTINUE TO FOCUS ON EXTENDING THE CASH FLOW RUNWAY IN PAPER BY LEVERAGING OUR LOW-COST POSITION, FLEXIBLE SERVICE MODEL AND CUSTOMER RELATIONSHIPS.

GENERATING HIGH RETURNS IN PULP

In market pulp, we benefited from strong global demand for tissue, absorbent hygiene products and packaging, as well as rising prices to more than double our EBITDA1 in 2018 compared to the prior year. In so doing, we confirmed the potential of market pulp as a major source of cash flow for Domtar.

As a result of investments in mill conversions, we now have the capacity to produce 1.8 million air-dry metric tons of market pulp – mostly in softwood, fluff and specialty grades – for a global customer base.

Now that we have achieved scale, our focus is on driving growth and enhancing our customer value proposition. We are also investing in high-return initiatives to optimize production and increase efficiencies across our mills with the objective of driving cost performance. As one of the leaders in the global softwood and fluff markets, we are looking at pulp as a long-term generator of earnings growth for Domtar.

LEVERAGING OUR ASSET BASE

While generating steady cash flows, we have been actively finding new uses for our paper mills and repurposing these assets to manufacture products in growing markets. Over the past several years, we have reduced paper capacity by 1.5 million short tons to balance our supply with our customer demand. Today, these repurposed mills produce market pulp and/or specialty papers, thereby maximizing the value of these assets and maintaining the thousands of jobs they support in our communities.

WE ADDED AN IMPORTANT NEW DIMENSION TO OUR STRATEGY IN 2018 BY DETAILING A LONG-TERM CONVERSION ROADMAP FOR FOUR OF OUR LARGEST PAPER MILLS.

Our studies have confirmed that Domtar can be a significant and competitive supplier to the containerboard market in addition to increasing our pulp production.

The optionality embedded in our paper assets provides a path for their future. Our conversion roadmap significantly de-risks our business for the benefit of Domtar’s many stakeholders – shareholders, employees and communities among them.

We are taking a long-term view, with the timing and sequence of potential mill conversions to be determined by market and economic conditions affecting our paper business.

IMPROVING MARGINS IN PERSONAL CARE

Over several years, we have established a billion-dollar business in the personal care market. Although this business is currently not providing the returns we expected, its long-term value is underpinned by attractive demographic and market trends, as well as an efficient manufacturing platform.

Stiff headwinds in the form of escalating raw materials prices and intense price competition have led to disappointing results. Faced with margin erosion, we initiated actions across the division in 2018 to improve our financial performance.

These actions include division-wide cost reductions, product rationalization, and manufacturing optimization with the closure of one North American facility and equipment relocation to sister plants. The objective is to realize annual margin improvement of approximately $25 million to $30 million, with full run-rate effect by the end of 2020.

Global demand for adult incontinence products is growing at a rate of 3-5% annually due to an aging population and increased product adoption rates. The sizeable infant diaper category continues to see a shift to store-brand products in North America and Europe, creating a significant opportunity for market penetration. By executing its margin improvement plan, our personal care division will be a more agile competitor in a growing market.

OPTIMIZING CAPITAL DEPLOYMENT

Our businesses have remained highly cash-generative throughout the years, and we have been very disciplined in our capital deployment decisions to strike an optimal balance between shareholder returns and the execution of our business strategy.

Since 2011, Domtar has returned $1.6 billion to shareholders in the form of dividends and share repurchases. Our annual dividend payout for 2018 was $108 million and the yield for our shareholders is among the highest in our industry. In the years ahead, we will remain true to our commitment of returning the majority of our free cash flow to shareholders while continuing to invest in the future of our businesses.

OPERATING RESPONSIBLY

Our long-standing pursuit of sustainable business practices remains an integral part of our DNA and of our long-term strategy. Our track record in environmental and social responsibility differentiates us in the eyes of our customers and contributes to our financial results.

Over the past decade, we have made progress in key areas such as forest certification, environmental performance, and the beneficial reuse of manufacturing byproducts. Our workplaces are inclusive, welcoming people from diverse backgrounds. We treat our employees with respect and prioritize their health and safety.

I am also proud to highlight Domtar’s award-winning disclosure in environmental and social reporting. We will publish our next Sustainability Report in 2019, outlining our targets, challenges and achievements.

READY FOR THE FUTURE

We ended 2018 feeling confident about our short-term prospects and our positioning for the long term. We have some of the best paper assets in North America, a world-class pulp business, great asset optionality, and flexibility in the timing of future conversions.

I THANK OUR EMPLOYEES FOR THEIR EFFORTS, OUR SHAREHOLDERS FOR THEIR CONTINUED CONFIDENCE, AND THE MEMBERS OF OUR BOARD OF DIRECTORS FOR THEIR VALUED COUNSEL AND SUPPORT.

Our strategy as a leading fiber-based technology company is delivering value and we are keenly focused on seizing market opportunities. Domtar is ready for the future.

John D. Williams

President and Chief Executive Officer

STRONG

PAPER

PERFORMANCE

Domtar’s sales of uncoated freesheet papers increased 7% in 2018, while shipments were up 3% to approximately 3 million short tons. Already North America’s largest manufacturer of communication papers, we gained new business as some competitors announced permanent uncoated freesheet capacity reductions.

North American production of uncoated freesheet paper declined 3.4% in 2018 to 7.1 million short tons. Demand was approximately 7.5 million short tons, a 0.5% decrease compared to 2017. Global demand for uncoated freesheet was estimated at 44.4 million short tons in 2018, similar to the previous year.

RELIABLE

LONG-TERM

PAPER SUPPLIER

Domtar has been steadfast in its strategy to remain North America’s largest uncoated freesheet producer and reliable long-term supplier to its customers. This strategy has served us well and continues to be our path.

We are keeping our promise to customers by investing annually in our paper mills to increase operational reliability and efficiency, as well as in ongoing product development and innovation to meet their needs.

We offer a broad selection of high-quality uncoated papers – from office, printing, publishing, digital and inkjet papers, to innovative converting and specialty papers – and responsive, world-class service.

NORTH AMERICAN

UNCOATED FREESHEET

CAPACITY¹

Domtar Market Share vs. Next Four Competitors

Source: RISI

HIGH RETURNS

IN PULP

Domtar’s market pulp shipments totalled 1.5 million air-dry metric tons in 2018, with strong demand in the markets we serve and higher prices across all

product categories. We are one of the world’s largest producers of market pulp, selling our products to customers in over 40 countries.

Global demand for chemical market pulp was approximately 61.5 million tons in 2018, similar to the prior year. North American demand decreased 4.8% to 7.5 million tons, while in China, a key driver of global pulp consumption, demand was 20.9 million tons, stable when compared to 2017.

Supply disruptions were a key factor in the global pulp market in 2018, with significant unplanned capacity outages

in the industry due to weather and other events. Domtar experienced an orderly weather-related shutdown at one location, but total production across the mill system was consistent with the prior year.

We entered 2019 with sound market fundamentals, with strong demand in our end markets, and no major industry capacity increase announcements. Because China has accounted for a significant share of demand growth for softwood pulp over the past several years, its economy will be an important factor in price trends in 2019.

 EXPLORING THE POTENTIAL

 OF WOOD-BASED BIOMATERIALS

A YEAR OF TRANSITION

Significant increases in input costs, over and above the commodity inflation experienced in the prior year, and intense pricing pressure have compressed margins in our personal care business in 2018. We were also affected by an unfavorable tender balance, and costs associated with ramping up a significant new customer beginning in the final quarter of the year.

We responded to market conditions by launching a division-wide margin improvement plan in the second half of 2018. This included streamlining administrative and sales expenses, cost reductions, product rationalization, and commercial initiatives.

Our Waco, Texas facility will be permanently shut by the third quarter of 2019, and some of the equipment will be installed in other locations as part of a manufacturing optimization. Our guiding principle is to reduce complexity to improve efficiency and productivity.

We expect these actions to generate $25 million to $30 million in annual margin improvement and to strengthen our long-term competitive position. The full run rate effect of the margin improvement initiatives is expected by the end of 2020.

FOCUS ON PRODUCTS AND CUSTOMERS

A globally integrated provider of absorbent hygiene solutions, Domtar is gaining traction as a supplier of partner-branded adult incontinence and infant products in North America and Europe. This strategy continues to be a major focus going forward.

We are making inroads in the institutional market for adult incontinence products in Europe, and we completed the installation of a new protective underwear line with the objective of capturing additional market share.

Continued investments will also be made in our direct-to-consumer channel in North America to drive sales of our full line of branded adult incontinence products, including protective underwear, briefs, underpads, pads and washcloths.

With our ability to create high-quality and cost-effective products, our well-invested manufacturing footprint, and dedicated employees, we are determined to rise to the challenge of a competitive market and to champion health, dignity and comfort through effective and affordable care.

PULP AND PAPER

PERSONAL CARE

1 Including HDIS since October 1, 2016