The past year marked further progress in Domtar’s journey towards sustainable growth and long-term value creation. Led by the strong performance of our papers business, higher sales of market pulp, and good productivity across our mill system, we achieved solid operating results in 2017. Over half of our consolidated sales were in growing markets—specialty papers, fluff and softwood pulp, and personal care products.

Domtar’s current business mix reflects the capital deployment decisions we have made over the last several years to strengthen our core paper business, repurpose assets to manufacture products with growing demand, and establish meaningful positions in new markets. We have executed the necessary steps—organizationally, financially and culturally—to transition Domtar into a diversified, agile business, backed by a portfolio of competitive assets and nearly 10,000 skilled employees.

Domtar today holds top-three positions in three market segments, accounting for nearly three quarters of our business. We are the North American leader in uncoated freesheet; we are the third largest global fluff pulp producer by installed capacity; and we are ranked second in North American sales of store-brand infant diapers. In all of our markets, we are a supplier of choice, delivering innovation, quality and great service to our customers.

1 Free cash flow is a non-GAAP financial measure.

Please see “Reconciliation of non-GAAP Financial Measures”

at the end of this document.

Shareholders who have supported our journey have been rewarded for their confidence in Domtar’s management team and employees. We returned $104 million in dividends in 2017. Since 2011, we have returned $1.5 billion of capital through share buybacks and a growing dividend, or 69% of our cumulative free cash flow¹ over this period. We are proud to have made good on our promise to return the majority of cash to shareholders. We’re even more proud to have generated $2.2 billion of free cash flow¹ over the past seven years.

PULP AND PAPER

We are adjusting our capacity to customer demand, implementing continuous improvements to reduce costs and maintain strong customer service, and investing in our mills annually to sustain reliability and product quality. The success of our actions is reflected in the cash generation over the past years, and we have confidence this will continue. We are well positioned to support customer demand, and we are fully committed to remaining a partner of choice as the leading North American uncoated freesheet producer for the long term.

With a relentless focus on operational excellence and production discipline, we continue to transition our paper business and unlock value from our mill assets. We have reduced our uncoated freesheet capacity by 1.5 million tons. We converted a mill to produce higher-value products in growing markets, namely specialty papers, and converted three mills to produce market pulp, which demonstrates the underlying value of our assets.

Domtar now owns 1.8 million tons of high-quality market pulp capacity, mainly serving global softwood and fluff pulp markets. This includes the recently converted Ashdown uncoated freesheet machine, where we continue to make good progress with fluff pulp qualifications at several internal and external customer locations in North America and abroad. What was once one of the largest operating paper machines in North America is now a world-class fluff pulp machine. Domtar is the world’s third largest manufacturer of high-quality fluff pulp, helping to meet the growing demand for absorbent hygiene products.

PERSONAL CARE

Beginning with a strategy in 2011, we have built a billion-dollar global personal care business with manufacturing locations in North America and Europe, and distribution to customers in 50 countries. Following multiple acquisitions and investments in infrastructure and people, we are using innovative and differentiated go-to-market strategies to win in both the adult incontinence and infant diaper segments.

We are making progress in both of these highly competitive sectors, but results have been impacted by competitive market conditions, pricing pressure and rising raw material costs. Despite these headwinds, sales increased 10% in 2017 as a result of our HDIS acquisition and new customer wins, and we have been focused on actions to strengthen our operations and enhance our flexibility. We will continue to focus on driving cost savings while converting our strong pipeline of potential new customers into sales growth.

TRANSITIONING TO GROWTH

As we continue our transition to growth, we are focused on repurposing opportunities and remain on the lookout for mergers and acquisitions that will accelerate our trajectory and maximize value for our shareholders.

Near term, we have initiated a containerboard feasibility study by an independent third party after internal analysis confirmed the suitability of several existing assets for this purpose. We expect to make a final decision during 2018.

Longer term, we are assessing opportunities to leverage our expertise in fiber, our existing assets and our supply chain, to develop higher value applications for the individual components of wood fiber. I am proud of the strides we have made in unlocking and recombining the chemical building blocks of trees in new and interesting ways to make advanced, sustainable biomaterials.

BUILDING A SUSTAINABLE BUSINESS

Acting responsibly and being a steward of the environment is deeply embedded in Domtar’s culture. Our pursuit of ethical and sustainable business practices differentiates us in the eyes of our customers, who care about the integrity of their supply chain. This also provides Domtar with a distinct advantage in recruiting the next generation of talent.

We are focused on repurposing opportunities and remain on the

lookout for mergers and acquisitions

that will accelerate our trajectory and

maximize value for our shareholders.

Caring about our environment, our communities and our people also enables us to better meet our business objectives. Our 2017 Sustainability Report shows that we have achieved a 33% reduction in waste sent to landfills since 2013, a 13% reduction in greenhouse gas emissions since 2010, and made significant efficiency improvements in our use of water at our pulp and paper mills. Furthermore, we have reduced recordable safety incidents by more than 50% over the past 10 years, and our employees have more than doubled the number of volunteer hours to improve the communities where we live.

BUILDING A MORE DIVERSE WORKFORCE

That brings me to our most important asset—our employees. We are building a stronger company by hiring talented people with experience in different industries and who come from different backgrounds. Given the fast pace of change in our businesses, we believe our efforts to enhance the diversity of our workforce will be a competitive advantage that helps us advance our culture of innovation.

LOOK CLOSER

Domtar’s core values of agility, caring and innovation remain constant and support our management approach to transitioning and growing our businesses. We are proud papermakers, but our product mix will continue to evolve significantly. We have many opportunities in our pipeline, and the financial capacity and expertise to execute our strategy. As in the past, we remain focused on the long term while continuing to deliver results in the short term.

I wish to thank our shareholders for their confidence and the members of the Board of Directors for their counsel and support on this journey.

John D. Williams

President and Chief Executive Officer

BUSINESS OVERVIEW

PULP AND PAPER SEGMENT

Domtar is the largest integrated manufacturer and marketer of uncoated freesheet papers in North America, and an important supplier of specialty and packaging papers. We also are a large manufacturer of high quality papergrade, fluff and specialty pulps for customers around the world.

The foundation of our business is driven by 13 pulp and paper mills with access to nearly 17 million green tons of fiber. Since 2007, we have converted 1.5 million tons of commodity paper capacity into growing and profitable businesses. These included fluff and papergrade pulp and specialty paper grades, and we believe there are further opportunities for repurposing.

PAPER

Domtar sold nearly 3 million short tons of paper in 2017, mainly to customers in the United States and Canada, maintaining its North American leadership position in uncoated freesheet.

Business papers are one of our largest product categories under communication papers. They are sold mainly to major North American retailers, independent office supply dealers, and paper merchants. We offer a selection of our own recognized brands, including Xerox^® Paper and Specialty Media, First Choice^® and EarthChoice^® Office Paper, and assist our customers in developing store brands.

Our communication papers are also used for commercial printing and publishing. Our customers in this category are printers and converters who further process the paper into its final end-use state. Cougar^®, Lynx^® Opaque Ultra and Husky^® Opaque Offset are among our most recognized brands.

BUSINESS OVERVIEW

PULP AND PAPER SEGMENT

We continue to leverage our innovation and new product development pipeline to grow our position in specialty paper grades. Our three main product categories include:

We also supply base stock for thermal papers for cash register receipts, ATM print outs, and lottery and entertainment tickets, as well as an extensive range of industrial papers for applications such as wallboard tape, sandpaper and tile backing, paint filters and other uses.

MARKET DYNAMICS¹

In 2017, 7.4 million short tons of uncoated freesheet paper were manufactured in North America, a 2.9% decline compared to the previous year. North American demand was approximately 7.5 million short tons, a 4.8% decrease compared to 2016. Global demand for uncoated freesheet was estimated at 45.1 million short tons, flat compared to the previous year. For its part, the specialty and packaging papers market is growing in line with GDP.

PULP

Domtar sold over 1.7 million air dry metric tons (ADMT) of market pulp—papergrade, fluff and specialty—to customers in over 40 countries in 2017, a 14% increase compared to the previous year.

This growth was driven by stronger global demand and an increase in our manufacturing capacity with the addition of our fluff pulp line at the Ashdown mill in Arkansas. Commissioned at the end of 2016, Ashdown’s fluff pulp line is one of the largest and most advanced in the world.

Most of the pulp we sell is used in products that serve growing end-use markets. Our papergrade pulp is used for manufacturing everyday consumer products such as bathroom and facial tissue, and paper towels. Domtar Lighthouse^® fluff pulp is mainly used in the absorbent core of infant diapers, adult incontinence products, feminine hygiene products and airlaid nonwovens. Our specialty pulp customers produce a wide variety of products ranging from specialty and packaging papers to electrical insulating papers and building products.

Although market pulp is subject to short-term fluctuations in selling prices, the trend in average prices over a period of consecutive years has been positive.

Domtar is a leading manufacturer of high-quality and innovative branded and partner-branded absorbent hygiene products, serving the adult incontinence and infant markets, primarily in North America and Europe.

We design and manufacture adult incontinence products such as protective underwear, briefs, underpads, pads and washcloths, as well as infant diapers and training pants. We also offer a complete range of related absorbency and hygiene products, including body liners for accidental bowel leaks.

Despite this being a highly competitive sector, with many players, we have strong relationships with established retailers in North America and Europe.

Our products are highly engineered and built on research. We begin with consumer needs and work together to come up with the best possible solutions. Innovation drives our ability to create high-quality and cost-effective products, whether it’s through consumer testing, developing new materials or designing new processes.

Adult incontinence products are mainly sold to health institutions. We also supply major retailers and sell through the direct-to-consumer channel. Our recognized brands include Attends^®, IncoPack^®, Indasec^®, Reassure^® and Butterfly^®.

Domtar is a leading provider of infant diaper store brands in North America. Helping retailers develop strong store brands—we call them partner brands—is our key differentiator in the infant market. We also develop and market our own brands, including Comfees^®.

Our EAM business develops and manufactures airlaid and ultrathin laminated absorbent cores for our own products and also sells them to third parties. EAM’s customers include some of the world’s largest branded and private label feminine hygiene, adult incontinence, infant diaper, healthcare and packaging companies.

We operate six manufacturing facilities in the United States and Europe that can produce multiple product categories.