Canfor Pulp Products : 2023 Management's Discussion and Analysis

2023

MANAGEMENT'S DISCUSSION & ANALYSIS

CANFOR PULP PRODUCTS INC.

2023 MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") provides a review of Canfor Pulp Products Inc.'s ("Canfor Pulp", "CPPI" or "the Company") financial performance for the year ended December 31, 2023 relative to the year ended December 31, 2022, and the financial position of the Company at December 31, 2023. It should be read in conjunction with CPPI's Annual Information Form and its audited consolidated financial statements and accompanying notes for the years ended December 31, 2023 and 2022 (available at www.canfor.com). The financial information contained in this MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS"), which is the required reporting framework for Canadian publicly accountable enterprises.

Throughout this discussion, reference is made to Operating Income (Loss) before Amortization, Asset Write-Down and Impairment, Adjusted Operating Income before Amortization, Asset Write-Down and Impairment, and Adjusted Operating Income (Loss) which CPPI considers to be a relevant indicator for measuring trends in the Company's performance and its ability to generate funds to meet its debt repayment and capital expenditure requirements, and to pay dividends. Reference is also made to Adjusted Net Income (Loss) (calculated as Net Income (Loss) less specific items affecting comparability with prior periods - for the full calculation, see reconciliation included in the section "Overview of Consolidated Results - 2023 Compared to 2022") and Adjusted Net Income (Loss) per Share (calculated as Adjusted Net Income (Loss) divided by the weighted average number of shares outstanding during the period). Operating Income (Loss) before Amortization, Asset Write-Down and Impairment, Adjusted Operating Income before Amortization, Asset Write-Down and Impairment, Adjusted Operating Income (Loss) and Adjusted Net Income (Loss) per Share are not generally accepted earnings measures under IFRS and should not be considered as an alternative to net income (loss) or cash flows as determined in accordance with IFRS. As there is no standardized method of calculating these measures, CPPI's Operating Income (Loss) before Amortization, Asset Write-Down and Impairment, Adjusted Operating Income before Amortization, Asset Write-Down and Impairment, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share may not be directly comparable with similarly titled measures used by other companies. Reconciliations of Operating Income (Loss) before Amortization, Asset Write-Down and Impairment to Operating Income (Loss) and Adjusted Net Income (Loss) to Net Income (Loss) reported in accordance with IFRS are included in the "Non-IFRS Financial Measures" section of this MD&A.

Also in this MD&A, reference is made to net debt (cash), net debt (cash) to total capitalization and return on invested capital ("ROIC") which the Company considers to be relevant performance indicators that are not generally accepted under IFRS. Therefore these indicators, defined herein, may not be directly comparable with similarly titled measures used by other companies. Refer to the "Non-IFRS Financial Measures" section of this MD&A for further details.

Factors that could impact future operations are also discussed. These factors may be influenced by known and unknown risks and uncertainties that could cause the actual results to be materially different from those stated in this discussion. Factors that could have a material impact on any future oriented statements made herein include, but are not limited to: general economic, market and business conditions; product selling prices; raw material and other operating costs; currency exchange rates; interest rates; changes in law and public policy; the outcome of labour and trade disputes; and opportunities available to or pursued by CPPI.

All financial references are in millions of Canadian dollars unless otherwise noted. The information in this report is as at March 5, 2024.

Forward-Looking Statements

Certain statements in this press release constitute "forward-looking statements" which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Words such as "expects", "anticipates", "projects", "intends", "plans", "will", "believes", "seeks", "estimates", "should", "may", "could", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on Management's current expectations and beliefs and actual events or results may differ materially. There are many factors that could cause such actual events or results expressed or implied by such forward-looking statements to differ materially from any future results expressed or implied by such statements. Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law.

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COMPANY OVERVIEW

CPPI is a company incorporated and domiciled in Canada and listed on the Toronto Stock Exchange. The consolidated financial statements of the Company as at and for the year ended December 31, 2023 comprise the Company and its subsidiary entities. Throughout 2023, the Company's operations consisted of two Northern Bleached Softwood Kraft ("NBSK") pulp mills and one NBSK pulp and paper mill located in Prince George, British Columbia ("BC"); a Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") mill located in Taylor, BC and a marketing group based in Vancouver, BC.

At December 31, 2023, Canfor Corporation ("Canfor") held a 54.8% interest in CPPI, unchanged from December 31, 2022.

CPPI employed 1,004 people in its wholly owned subsidiaries as at December 31, 2023.

The following chart illustrates, on a simplified basis, the ownership structure of CPPI (collectively "the Company") as at December 31, 2023.

Simplified Ownership Structure

CANFOR

CORPORATION

(British Columbia)

100% of Shares

CANADIAN FOREST
PRODUCTS LTD.	54.8% of Shares
(British Columbia)

Shareholders

45.2% of Shares

CANFOR PULP

PRODUCTS INC.

(British Columbia)

100% of Shares

CANFOR PULP LTD. (Canada)

The Pulp and Paper

Business

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Pulp

The Company owns and operates two NBSK pulp mills with an annual production capacity of approximately 780,000 tonnes of northern softwood market kraft pulp, the significant majority of which is bleached to become NBSK pulp, and approximately 140,000 tonnes of kraft paper.

The Northwood NBSK pulp mill ("Northwood"), a two-line pulp mill with an annual production capacity of approximately 600,000 tonnes of NBSK market pulp, continues to be the largest NBSK pulp facility in North America. Northwood's pulp is used to make a variety of products including specialty products, premium tissue, as well as printing and writing papers, and is primarily delivered to customers in North America and Asia.

The Intercontinental NBSK pulp mill ("Intercon") is a single-line pulp mill with an annual gross production capacity of approximately 320,000 tonnes of NBSK pulp. In April 2023, Intercon was converted to provide slush pulp to the Company's specialty paper facility in Prince George. Following the conversion, Intercon produces approximately 180,000 tonnes of NBSK market pulp annually, which is used to make substantially the same products as that of Northwood, to supply pulp markets in North America, Asia and Europe.

The Prince George NBSK pulp and paper mill ("PG") was an integrated two-line pulp and paper mill with an annual market pulp production capacity of 150,000 tonnes of kraft pulp and approximately 140,000 tonnes of kraft paper. In April 2023, the pulp line at the Company's Prince George pulp and paper mill was permanently closed.

As at December 31, 2023, the Company also owned the Taylor BCTMP mill, located in Taylor, British Columbia. In February 2024, the Company announced that it had entered into an asset purchase agreement to sell its Taylor BCTMP mill site for total proceeds of $7.0 million. The transaction is anticipated to close in the first quarter of 2024.

Paper

The Company's paper machine, located at the Prince George pulp and paper mill, has an annual production capacity of approximately 140,000 tonnes of kraft paper, including a wide range of high performance bleached and unbleached kraft and specialty papers. The paper mill supplies primarily North American, Asian and European markets.

Business Strategy

CPPI's overall business strategy is to be a sustainable pulp and paper industry leader with strong financial performance, accomplished through:

• Attaining world-class safety performance;
• Demonstrating efficient and reliable operational performance, while optimizing the value from its high- quality premium reinforced pulp and paper products, particularly in specialty end use applications;
• Implementing a sustainability strategy that is helping to protect our planet, support our people and communities, and produce pulp and paper products that are an important part of a low-carbon economy;
• Growing an enterprise-wide culture of innovation, achievement, inclusion, diversity, respect and engagement through empowerment, collaborative performance and leadership;
• Attaining world-class supply chain performance and providing excellence in customer service; and
• Maintaining a strong financial position focusing on an efficient allocation of capital and deployment of resources to achieve top-quartile operational performance, capitalizing on attractive growth opportunities.

2023 HIGHLIGHTS

2023 was a difficult year for Canfor Pulp, as a deterioration in global pulp market fundamentals was combined with ongoing cost and operational challenges driven by sustained fibre shortages in British Columbia.

With continuing fibre cost pressures and a declining outlook for economic residual fibre in BC, in January 2023, Canfor Pulp made the decision to restructure its operations. As a result, in April 2023, the Company wound down and permanently closed the pulp line at its Prince George NBSK pulp and paper mill. In connection with this closure, the Company's Intercontinental NBSK pulp mill was successfully converted to provide slush pulp to its specialty paper facility, formerly supplied by PG. The combined impact of these operating structure changes is a reduction of approximately 280,000 tonnes of market kraft pulp production annually.

Canfor Pulp reported an operating loss for 2023 of $127.5 million, compared to an operating loss of $106.0 million in 2022. After taking account of adjusting items, including an asset write-down and impairment charge in 2022, the

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Company's adjusted operating loss was $129.9 million for the current year, with adjusted net loss of $1.47 per share, compared to an adjusted operating loss of $58.6 million for the prior year, and adjusted net loss of $0.66 per share.

While global pulp market conditions were positive heading into 2023, market fundamentals experienced a sharp decline late in the first quarter of 2023 and remained challenging through most of the year, as purchasing activity waned and global pulp producer inventories climbed to well above the balanced range. As a result, prices to China, the world's largest consumer of softwood pulp, dropped from a high of US$913 per tonne in February to a low of US$648 per tonne in June. Late in the year, however, as global producer inventories began to reduce, global pulp pricing saw some modest upward momentum, with China pulp prices finishing the year at US$730 per tonne. For the 2023 year as a whole, NBSK pulp list prices to China averaged US$747 per tonne, a decrease of US$202 per tonne, or 21%, from the average price in 2022.

Operating losses for the pulp segment were $127.2 million in 2023. After taking account of adjusting items, the pulp segment losses for the current year were $129.6 million, compared to an adjusted operating loss of $63.5 million in the previous year. These results largely reflected substantially lower average NBSK pulp unit sales realizations, tied directly to weak global pulp market conditions through most of the year, offset somewhat, by a 3 cent, or 4%, weaker Canadian dollar. Operationally, current year results were impacted by reduced pulp production and shipments associated with the aforementioned operational changes that took effect early in the year. Improved pulp productivity at both Northwood and Intercon year-over-year, however, helped mitigate, to a degree, the impact of the PG pulp mill closure, combined with improved unit manufacturing costs and higher energy revenues in 2023.

The Company's paper business continued to deliver a solid operational performance in 2023, as the conversion of Intercon to provide slush pulp to the PG specialty paper facility was seamless, with minimal impact on paper production or shipments. Operating earnings, however, declined year-over-year, as tepid demand, particularly in North America, was combined with higher energy costs in the current year, following the closure of the PG pulp mill.

Over the last few years, like other central and northern BC Interior pulp producers, the Company's supply of sawmill residual chips has been significantly reduced, primarily driven by extensive permanent and indefinite sawmill curtailments in the region. Looking forward, there remains significant uncertainty with regards to the availability of economically viable fibre within BC, especially in the near-term. As a result, the Company continues to anticipate that escalating log cost pressures and transportation costs in BC will translate into a higher cost fibre supply for its pulp mills (both for sawmill residual chips and whole log chips).

Recognizing these increased fibre costs as well as the ongoing uncertainty surrounding fibre availability, the Company permanently closed the pulp line at its Prince George pulp and paper mill and recorded asset write-down and impairment charges in 2021 and 2022 totaling $144.6 million. While the Company did not record any additional asset write-down and impairment charge in 2023, the Company continues to closely monitor the direct and indirect impacts associated with the constraints on economic fibre, especially in the near-term. If the availability of economically viable fibre within BC is further reduced, the Company's production, shipments and cost structure will be further affected. These factors could impact the Company's operating plan, liquidity, cash flows and the valuation of long-lived assets.

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OVERVIEW OF CONSOLIDATED RESULTS - 2023 COMPARED TO 2022

Selected Financial Information and Statistics

(millions of Canadian dollars, except for per share amounts)		2023		2022
Sales	$	875.5	$	1,085.6
Operating income (loss) before amortization, asset write-down and impairment1,2	$	(42.5)	$	41.4
Operating loss	$	(127.5)	$	(106.0)
Adjusted operating income (loss) before amortization, asset write-down and
impairment1,2,3	$	(44.9)	$	39.2
Adjusted operating loss3	$	(129.9)	$	(58.6)
Net loss	$	(96.1)	$	(79.1)
Net loss per share, basic and diluted	$	(1.47)	$	(1.21)
Adjusted net loss3	$	(96.1)	$	(42.9)
Adjusted net loss per share, basic and diluted3	$	(1.47)	$	(0.66)
ROIC - Consolidated3		(22.3)%		(16.3)%
Average exchange rate (US$ per Cdn$1.00)4	$	0.741	$	0.768

• Amortization includes amortization of certain capitalized major maintenance costs.

• Adjusted for an asset write-down and impairment charge totaling $49.6 million in 2022.

• Adjusted results and consolidated ROIC are non-IFRS financial measures. Refer to the "Non-IFRS Financial Measures" section for further details.
  4 Source - Bank of Canada (monthly average rate for the period).

Selected Cash Flow Information

(millions of Canadian dollars)		2023		2022
Operating income (loss) by segment:
Pulp	$	(127.2)	$	(110.9)
Paper	$	11.9	$	18.2
Unallocated	$	(12.2)	$	(13.3)
Total operating loss	$	(127.5)	$	(106.0)
Add: Amortization5	$	85.0	$	97.8
Add: Asset write-down and impairment	$	-	$	49.6
Total operating income (loss) before amortization, asset write-down and
impairment	$	(42.5)	$	41.4
Add (deduct):
Working capital movements	$	64.0	$	(4.0)
Defined benefit plan contributions, net	$	(5.8)	$	(3.3)
Income taxes received (paid), net	$	1.6	$	(3.6)
Other operating cash flows, net	$	19.0	$	14.8
Cash from operating activities	$	36.3	$	45.3
Add (deduct):
Capital additions, net	$	(60.5)	$	(112.6)
Repayment of term debt	$	(50.0)	$	-
Finance expenses paid	$	(11.4)	$	(5.8)
Other, net	$	-	$	(0.5)
Change in cash / operating loans	$	(85.6)	$	(73.6)
5 Amortization includes amortization of certain capitalized major maintenance costs.

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Analysis of Specific Items Affecting Comparability of Net Income (Loss)

After-tax impact
(millions of Canadian dollars, except for per share amounts)		2023			2022
Net loss, as reported	$	(96.1)		$	(79.1)
Asset write-down and impairment	$	-		$	36.2
Adjusted net loss6	$	(96.1)		$	(42.9)
Net loss per share (EPS), as reported	$	(1.47)		$	(1.21)
Net impact of above items per share	$	-		$	0.55
Adjusted net loss per share6	$	(1.47)		$	(0.66)

• Adjusted net income (loss) is a non-IFRS financial measure. Refer to the "Non-IFRS Financial Measures" section for further details.

OPERATING RESULTS BY BUSINESS SEGMENT - 2023 COMPARED TO 2022

The following discussion of CPPI's operating results relates to the operating segments and the non-segmented items as per the Segment Information note in the Company's consolidated financial statements.

CPPI's operations include the Pulp and Paper segments.

Pulp

Selected Financial Information and Statistics - Pulp

Summarized results for the Pulp segment for 2023 and 2022 are as follows:

(millions of Canadian dollars, unless otherwise noted)		2023		2022
Sales	$	673.4	$	888.7
Operating income (loss) before amortization, asset write-down and impairment7	$	(44.8)	$	34.4
Operating loss	$	(127.2)	$	(110.9)
Asset write-down and impairment	$	-	$	49.6
Inventory write-down (recovery)	$	(2.4)	$	(2.2)
Adjusted operating loss8	$	(129.6)	$	(63.5)
Capital expenditures	$	57.8	$	110.0
Average NBSK pulp price delivered to China - US$9	$	747	$	949
Average NBSK pulp price delivered to China - Cdn$9	$	1,008	$	1,236
Production - pulp (000 mt)		603		718
Shipments - pulp (000 mt)		609		750
7 Amortization includes amortization of certain capitalized major maintenance costs.

• Adjusted operating income (loss) is a non-IFRS financial measure. Refer to the "Non-IFRS Financial Measures" section for further details.

• Per tonne, NBSK pulp list net price delivered to China (as published by Resource Information Systems, Inc. ("RISI")); Average NBSK pulp list net price delivered to China in Cdn$ calculated as average NBSK pulp list net price delivered to China - US$ multiplied by the average exchange rate - Cdn$ per US$1.00 according to Bank of Canada monthly average rate for the period.

Markets

The strong global pulp market fundamentals experienced in the latter part of 2022 continued into the early part of 2023, as a positive pricing environment was primarily driven by global transportation challenges and unplanned global production outages. Pricing came under pressure during the middle of the year, however, as a moderation in purchasing activity from China, the world's largest consumer of pulp, was combined with a notable uplift in global pulp producer inventory levels. Towards the end of the year, as global producer inventories returned to more normalized levels and demand from China improved, global pulp pricing experienced some positive momentum.

As a result of the aforementioned factors, US-dollar NBSK pulp list prices to China began the 2023 year at US$895 per tonne, peaked in February at US$913 per tonne and declined sharply to a low of US$648 per tonne in June. As global pulp market fundamentals, and therefore pricing, improved in the latter part of the year, China pulp prices ended the year at US$730 per tonne. For 2023 overall, US-dollar NBSK pulp list prices to China averaged US$747 per tonne, down US$202 per tonne, or 21%, from the average price in 2022. North American pulp prices experienced similar trends to Asia, with list prices to that region starting the year at US$1,700 per tonne in January, declining to US$1,270 per tonne in August, before recovering to US$1,350 per tonne in December (before taking account of customer discounts, which were broadly unchanged year-over-year).

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Global softwood pulp producer inventories began 2023 at 48 days of supply10 and continued to climb through the first part of the year, reaching 54 days of supply10 in May. As the year progressed, these elevated producer inventory levels continued until a modest uptick in purchasing activity from China was experienced late in the third quarter and through the fourth quarter of 2023. Consequently, global softwood pulp inventories trended down to within the balanced range through the latter part of 2023, ending the year at 40 days of supply10. Market conditions are generally considered balanced when inventories are in the 32-43 days of supply range10.

The following charts show the China NBSK pulp list price movements in 2023, before taking account of customer discounts and rebates (Chart 1) and global pulp shipments by destination (Chart 2).

Chart 1

Chart 2

10 World 20 data is based on twenty producing countries representing 80% of the world chemical market pulp capacity and is based on information compiled and prepared by the Pulp and Paper Products Council ("PPPC"). The upper and lower limits of the of the balanced range are the average level plus or minus one standard deviation, based on the last 60 data points (i.e. last five years).

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Sales

The Company's pulp shipments in 2023 were 609,000 tonnes, down 141,000 tonnes, or 19%, from 2022, principally driven by a 16% reduction in pulp production year-over-year.

As mentioned, for the 2023 year as a whole, NBSK pulp list prices to China averaged US$747 per tonne, down $202 per tonne, or 21%, compared to the average in 2022. North American NBSK pulp list prices averaged US$1,448 per tonne for the current year, down US$256 per tonne, or 15%, year-over-year (before discounts, which were largely unchanged). As a direct result, the Company's average NBSK pulp unit sales realizations were significantly lower in 2023, offset to a degree, by the 4% weaker Canadian dollar.

Energy revenues in 2023 were up compared to the prior year primarily driven by an improvement in Northwood's pulp productivity year-over-year and the associated increase in its turbine operating days.

Operations

Pulp production was 603,000 tonnes in 2023, down 115,000 tonnes, or 16%, from the prior year, largely reflecting operational footprint changes as a result of ongoing fibre shortages, offset in part by improved NBSK productivity and reduced downtime in the current year.

For 2023 overall, despite the uplift in productivity at both Northwood and Intercon year-over-year, pulp production in the current year continued to be impacted by efficiency and reliability challenges. Sustained fibre shortages weighed heavily on pulp production, as the Company's Intercon pulp mill started the year curtailed, and in April, the Company wound down and permanently closed the pulp line at its PG Pulp and Paper mill. Mid-year, NBSK pulp production was impacted by a labour dispute at the Ports of Vancouver and Prince Rupert. Finally, while Northwood's scheduled maintenance was successfully completed in September, its restart was delayed into the fourth quarter by numerous operational challenges unrelated to the scheduled maintenance downtime. Combined, these factors reduced NBSK pulp production by approximately 420,000 tonnes in 2023, of which the operating structure change associated with the PG pulp line represented approximately 210,000 tonnes in the current year.

In 2022, pulp production was most notably impacted by transportation shortages early in the year, an indefinite curtailment at the Company's Taylor BCTMP mill, as well as temporary fibre-driven production curtailments at the Intercon pulp mill. When combined with Northwood's recovery boiler number one ("RB1") capital upgrade and scheduled maintenance outages at both Northwood and Intercon, NBSK pulp production was reduced by approximately 300,000 tonnes and BCTMP production by approximately 210,000 tonnes in the prior year.

Pulp unit manufacturing costs were moderately lower compared to the prior year, principally tied to a decrease in pulp unit conversion costs associated with reduced energy and maintenance costs, offset, to a degree, by the decline in production year-over-year and slightly higher fibre costs.

Asset Write-Down and Impairment

An impairment expense of $49.6 million was recorded in 2022 on the property, plant, and equipment for the pulp segment, driven by the announced permanent closure of the Company's pulp line at PG, combined with ongoing pressure on fibre costs and continued uncertainty surrounding fibre availability for the Company's pulp mills. The Company did not recognize any additional asset write-down or impairment charge in the current year. See "Critical Accounting Estimates - Asset Write-Down and Impairment" for further details.

Paper

Selected Financial Information and Statistics - Paper

Summarized results for the Paper segment for 2023 and 2022 are as follows:

(millions of Canadian dollars, unless otherwise noted)		2023		2022
Sales	$	202.1	$	196.9
Operating income before amortization11	$	14.4	$	20.2
Operating income	$	11.9	$	18.2
Capital expenditures	$	2.0	$	0.6
Production - paper (000 mt)		130		132
Shipments - paper (000 mt)		129		129

11 Amortization includes amortization of certain capitalized major maintenance costs.

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Markets

Global bleached kraft paper markets remained solid through the first half of 2023, as steady demand and balanced inventories in the North American market was offset by slight declines in offshore markets. Inflationary pressures and rising global paper inventories, however, led to a softening of global paper markets through most of the second half of 2023, before a slight uptick in North American demand was experienced in December.

Sales

The Company's paper shipments were consistent year-over-year, at 129,000 tonnes. Despite some softening in demand in the North American market during the current year, paper unit sales realizations for 2023 were slightly higher than the prior year, largely reflecting the weaker Canadian dollar.

Operations

Paper production in 2023 was broadly in line with prior year, at 130,000 tonnes. Paper unit manufacturing costs in 2023 were slightly higher, as a decrease in slush pulp costs (linked to lower Canadian dollar NBSK pulp market prices), were more than offset by higher energy costs in the current year following the closure of the Company's PG pulp mill in April 2023, as well as an increase in maintenance spend (timing-related).

Unallocated and Other Items

Selected Financial Information

(millions of Canadian dollars)		2023		2022
Corporate costs	$	(12.2)	$	(13.3)
Finance expense, net	$	(13.2)	$	(7.3)
Other income, net	$	8.2	$	5.0

Corporate Costs

Corporate costs, which comprise corporate, head office and general and administrative expenses, were $12.2 million in 2023, down $1.1 million from 2022, largely reflecting a decline in head office and general and administrative expenses year-over-year.

Finance Expense, Net

Net finance expense for 2023 was $13.2 million, up $5.9 million from 2022. The increase was principally driven by higher financing fees associated with letters of credit, as well as an uplift in interest expense associated with the Company's operating loan facility and non-revolving term debt.

Other Income, Net

Other income, net, of $8.2 million for 2023 largely reflected the receipt of insurance proceeds related to operational downtime experienced at Northwood in recent years, slightly offset by unfavorable foreign exchange movements on US-dollar denominated working capital balances. Other income, net, of $5.0 million for 2022 primarily related to favourable foreign exchange movements on US-dollar denominated working capital balances.

Subsequent to year-end, on March 1, 2024, the Company received insurance proceeds totalling $15.0 million related to operational downtime experienced at Northwood in recent years that will be recognized in 'Other income, net' during the first quarter of 2024.

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