UFS Domtar Corporation

Domtar’s journey to sustainable growth remains firmly on track and our actions in 2016 will further advance our progress. Our manufacturing efficiency is improving each year and we continue to deliver innovation, quality and excellent service to our customers. As a result, we are generating strong cash flow to support the execution of our growth strategy while also returning capital to our shareholders.

Strong sales growth of personal care products was a highlight of 2016. In uncoated freesheet, we generated solid margins and maintained our leadership position in North America. The successful start-up of the world’s most modern fluff pulp line at our Ashdown mill, a major capital project, marked the second half of the year. As well, process and other improvements across Domtar delivered meaningful efficiency gains and cost savings. With these achievements in both of our divisions, we built momentum for our growth strategy for years to come.

PERSONAL CARE DIVISION

Our personal care business made notable progress in 2016 in both adult incontinence and infant diapers, with sales increasing 6%.

New customer wins through our partner-brand model resulted in significantly higher volumes in North America and Europe, supported by operational cost savings from recent investments in our manufacturing platform. We also completed a number of capital projects including strategic investments in capacity to keep pace with customer demand in both our adult incontinence and infant diaper businesses.

We expect to build on our sales momentum in 2017 by winning additional volume through our partner-brand model and new marketing initiatives in the North American institutional healthcare channel. Growth is anticipated to be driven by additional production capacity for our retail brands in Europe and expansion of direct-to-consumer sales in the U.S., a new channel established through the acquisition of HDIS in the fourth quarter.

PULP AND PAPER DIVISION

In our pulp and paper businesses, our relentless focus on execution and operational excellence continued to unlock value from our assets.

We maintained margins in our core paper business through lower production costs and price increases in some paper grades. Our continuous improvement and reliability programs generated savings across our mill network, and we closely matched production volumes with our customer demand. We took market downtime and permanently removed 364,000 short tons of paper capacity early in the year with the closing of a paper machine at our Ashdown mill.

Our pulp business benefitted from strong demand and productivity throughout the year. In late 2016, we began the qualification process at our new fluff line in Ashdown, with very good initial results. This line will add up to 516,000 air dry metric tons of high-quality pulp capacity to our system with the capability of switching between fluff pulp and softwood bales depending on market demand. This positions Domtar as a significant player in this growing global market.

As fiber innovators, we are also accelerating our research and development program in biomaterials, including advanced fibers, extractives, lignin, biofuels and wood-based cellulose derivatives. These are longer-term opportunities and we are casting a wide net to attract potential commercial partners.

TRANSITION TO GROWTH

Domtar is now a supplier of choice in three markets with growing demand—personal care, pulp and specialty papers. We aim to grow our scale and profitability in these markets, and in adjacent markets, while maintaining our leadership in communication papers.

Our objective is to generate $300 to $500 million in EBITDA from growing businesses; we currently have the capacity to reach close to the half-way point of our target with our new fluff line at Ashdown and our growing personal care business.

A solid balance sheet and our proven ability to sustain strong cash generation provide the means to fund continued growth while returning cash to shareholders. We will continue to pursue this balanced approach to capital deployment in the years ahead.

ACKNOWLEDGEMENTS

The performance of our people was exemplary in 2016. Our employees are working smart every day and living our values of agility, caring and innovation. They are making Domtar a stronger company, and I thank them sincerely for their dedication. Protecting their safety and wellness is a top priority, backed by rigorous programs. Health and safety performance was positive across Domtar in 2016, and we remain committed to continuous improvement.

OUR EMPLOYEES ARE WORKING

SMART EVERY DAY AND LIVING

OUR VALUES OF AGILITY, CARING

AND INNOVATION.

I also wish to reiterate our deep attachment to the communities we call home. In 2016, Domtar employees doubled the number of volunteer hours invested in company-sponsored community programs in support of literacy, health and wellness, and sustainability—a striking example of caring.

Finally, I wish to thank our shareholders for supporting our journey to sustainable growth.

For our pulp and paper division, working smart means taking a disciplined, methodical and measured approach to continuous improvement (CI). Using a common set of tools, processes and metrics, Domtar colleagues are finding savings and increasing productivity across the mill system.

“The entire success of our CI program is dependent on the support, participation and commitment of our employees,” says Michael D. Garcia, President, Pulp and Paper Division. “The power in CI is really about engaging the people closest to the work, getting their ideas on how to make improvements and giving them the opportunity to make processes run better.”

CI initiatives driven by engaged people are instrumental in optimizing Domtar’s pulp and paper operations and reducing manufacturing costs per ton, in many cases with little or no capital spending. From increasing machine uptime to reducing scrap, there is no shortage of areas for improvement in a complex manufacturing process such as ours.

By actively working with all of our bleached pulp mills in 2016 to reduce variability and optimize targets, we reduced the cost per ton of chemicals.

An ongoing and focused CI effort at our Plymouth mill resulted in more stable and efficient digester cooking and chemical bleaching operating parameters that helped lower manufacturing costs and set annual production records in 2016.

Despite more frequent grade changes and shorter runs, our Johnsonburg mill improved downtime, reduced the amount of paper being put back in the pulper, as well as time spent on grade changes. This led to an increase in machine efficiency in 2016.

New and ongoing CI projects are expected to support cost reduction and productivity increases across our mill system in 2017. The same principles are also being successfully applied to Domtar-wide health and safety initiatives. We will continue to maximize the contribution of reliable and efficient assets through the efforts of engaged and motivated employees who are empowered to make a difference.

At Domtar, working smart goes hand in hand with working safe. Our focus is on maintaining hazard-free work environments through the development and application of various strategies, including Human Performance Improvement principles, to continually reduce injuries. Every colleague at Domtar knows that their safety and wellbeing is our number one priority.

LEAP FORWARD FOR PULP AND PAPER

In 2016, the pulp and paper division continued to drive safety performance improvements across the mill system, supported by improved data analysis, corrective action tracking, and predictive analytics to provide proactive and preventative measures.

Results for the year show a 19% reduction in recordable events and a 28% reduction in serious events classified as lost time. This represents the most significant improvement since 2012, and is ahead of the plan to reach a total frequency rate of 0.50 by 2020.

HEALTH AND SAFETY ACCOLADES

In 2016, nine Domtar locations won Pulp and Paper Safety Association awards, including five converting sites, three pulp and paper mills and one personal care facility.

RECORD FOR PERSONAL CARE

The personal care division achieved a record low total frequency rate in 2016 of 0.68, a 23% improvement over the prior year. All sites executed a hand safety campaign in early 2016, which led to a reduction in hand injuries from nine in 2015 to only five in 2016.

Over 200 colleagues in personal care were trained to become safety leaders during the year, and all remaining sites completed Domtar’s safety audit program. The division ended the year with the last 80 days injury free.

TOTAL FREQUENCY RATES

Domtar upholds the highest standards of business integrity and social responsibility. Our commitment to operating responsibly is supported by our Code of Business Conduct and Ethics —applicable to Board members and employees alike—strict Corporate Governance Guidelines and a robust compliance program.

We have adopted a wide range of policies, regularly reviewed and updated, to promote strong governance, best practices, diversity and sustainability. Often going beyond what the law requires, our policies set the tone for the way we conduct our business at all levels and at all times, providing a solid foundation for working smart.

For more information on governance at Domtar, or to consult our proxy statement, please visit domtar.com.