Canfor : 2023 Management's Discussion and Analysis

2023

MANAGEMENT'S DISCUSSION & ANALYSIS

CANFOR CORPORATION

2023 MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") provides a review of Canfor Corporation's ("Canfor" 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 Canfor'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-Downs and Impairments, Adjusted Operating Income (Loss) before Amortization, Asset Write-Downs and Impairments, and Adjusted Operating Income (Loss) which Canfor considers to be a relevant indicator for measuring trends in the performance of each of its operating segments and the Company's ability to generate funds to meet its debt repayment and capital expenditure requirements. Reference is also made to Adjusted Shareholder Net Income (Loss) (calculated as Shareholder 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 Shareholder Net Income (Loss) per Share (calculated as Adjusted Shareholder Net Income (Loss) divided by the weighted average number of shares outstanding during the period). Operating Income (Loss) before Amortization, Asset Write-Downs and Impairments, Adjusted Operating Income (Loss) before Amortization, Asset Write-Downs and Impairments, Adjusted Operating Income (Loss), Adjusted Shareholder Net Income (Loss) and Adjusted Shareholder 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, Canfor's Operating Income (Loss) before Amortization, Asset Write-Downs and Impairments, Adjusted Operating Income (Loss) before Amortization, Asset Write-Downs and Impairments, Adjusted Operating Income (Loss), Adjusted Shareholder Net Income (Loss), and Adjusted Shareholder 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-Downs and Impairments to Operating Income (Loss) and Adjusted Shareholder 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 Canfor.

All financial references are in millions of Canadian dollars unless otherwise noted. Certain comparative amounts have been reclassified to conform to current presentation. 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 Canfor assumes no obligation to update such information to reflect later events or developments, except as required by law.

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2023 HIGHLIGHTS

2023 was a challenging year for Canfor, as the weak global lumber market conditions experienced late in 2022 continued throughout the current year. Ongoing inflationary pressures and high interest rates gave rise to persistent affordability concerns for consumers, reducing global lumber demand and increasing lumber inventory levels in most global regions. Despite the economic uncertainty, demand in the repair and remodel segment remained strong through 2023, especially in North America, exceeding levels observed before the pandemic.

In response to these global market conditions as well as a constrained fibre supply environment, the Company reduced production at its Western Canadian operations by a total of 760 million board feet in 2023. In the US South, the Company successfully started-up its greenfield sawmill in DeRidder, Louisiana, early in 2023, and continues work on two major growth projects at Urbana, Arkansas and Axis, Alabama.

In British Columbia ("BC"), the Company continued to face significant challenges accessing economically viable fibre, both logs and residuals, to support BC operations, resulting in closure announcements early in 2023. Canfor Pulp Products Inc. ("CPPI") made the decision to permanently close the pulp line at its Prince George Pulp and Paper Mill ("PG"). In connection with this closure, CPPI's Intercontinental ("Intercon") Northern Bleached Softwood Kraft ("NBSK") pulp mill was successfully converted to provide slush pulp to its specialty paper facility, formerly supplied by PG.

In addition, the Company made the difficult decision to further restructure its lumber operations in BC, by permanently closing its Chetwynd sawmill and pellet plant and temporarily closing its Houston sawmill. Late in 2023, the Company also announced a fibre-driven indefinite curtailment at its Polar sawmill starting in January 2024.

For 2023, Canfor reported an operating loss of $531.6 million, compared to operating income of $1,074.1 million in 2022. After taking account of adjusting items, including inventory valuation adjustments and an asset write-down and impairment charge in 2022, the Company's adjusted operating loss was $588.8 million for the current year (adjusted shareholder net loss per share of $2.79), compared to adjusted operating earnings of $1,306.2 million for the prior year (adjusted shareholder net income per share of $7.15).

2023 Lumber Segment Highlights

For the lumber segment, the adjusted operating loss for 2023 was $403.5 million compared to the adjusted operating earnings of $1,421.9 million in 2022. These results were mostly driven by a substantial decline in global lumber market prices in the current year, principally reflecting a 50% decline in the average Western Spruce/Pine/Fir ("SPF") 2x4 #2&Btr, a 44% decline in the average Southern Yellow Pine ("SYP") East 2x4 #2 price and a 40% decline in the average SYP East 2x6 #2 price year-over-year. This downward pricing pressure was coupled with modestly lower production and shipment volumes in 2023, mainly due to the permanent and temporary curtailments at the Company's Western Canadian sawmills, slightly offset by a 3 cent, or 4%, weaker Canadian dollar (versus the US-dollar) in the current year.

North American lumber market conditions were under pressure for most of 2023, as persistent affordability constraints and a resultant decline in new home construction, was combined with an influx of lumber supply from Europe early in the year, which led to an uptick in North American lumber inventory levels and, consequently, a substantial drop in North American benchmark lumber prices. Despite these market conditions, the repair and remodel sector demand remained strong, especially in the first half of the year, with demand well above pre-pandemic levels throughout 2023, largely tied to an aging housing market.

Offshore lumber markets and pricing in Asia remained relatively soft throughout 2023, most notably in Japan and Korea, due to the combined impact of high inflation and interest rates, as well as elevated lumber inventory levels in those regions. In China, despite the introduction of government stimulus measures early in the year, lumber demand and pricing continued to be negatively impacted by high inventory levels through most of 2023 with an influx of supply from Europe and Russia into that region.

For 2023 overall, Europe also experienced a decline in lumber market conditions compared to the prior year. Early in the current year, European lumber demand and pricing saw a modest improvement, driven largely by a slight uptick in residential construction activity, particularly in the United Kingdom ("UK") combined with restricted lumber supply from Russia and Belarus. Despite remaining relatively stable through to the middle of the year, European lumber demand and pricing declined significantly in the latter part of 2023 primarily correlated with a substantial reduction in home building activity.

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2023 Pulp and Paper Segment Highlights

For the pulp and paper segment, 2023 was a difficult year, as a deterioration in global pulp market fundamentals was combined with ongoing cost and operational impacts driven by sustained fibre shortages in BC.

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 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.

As a result, CPPI's adjusted operating loss was $129.9 million for the current year compared to an adjusted operating loss of $58.6 million for the prior year. These results largely reflected substantially lower average NBSK pulp unit sales realizations, tied directly to the weak global pulp market conditions through most of the year, offset somewhat, by the 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 CPPI's Northwood NBSK pulp mill ("Northwood") and Intercon pulp mill year-over-year however, helped mitigate, to a degree, the impact of the PG pulp mill closure, combined with improved pulp unit manufacturing costs and higher energy revenues in 2023.

While CPPI did not record any additional asset write-down and impairment charge in 2023, CPPI 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, CPPI's production, shipments and cost structure will be further affected. These factors could impact CPPI's operating plan, liquidity, cash flows and the valuation of long-lived assets.

COMPANY OVERVIEW

Canfor is a global leader in manufacturing high-value,low-carbon forest products, including dimension and specialty lumber, engineered wood products, pulp and paper, wood pellets, and green energy. Headquartered in Vancouver, BC, Canfor produces renewable products from sustainably managed forests, at more than 50 facilities across its diversified operating platform in Canada, the United States ("US"), and Europe. The Company has a 70% interest in the Vida Group ("Vida"), one of Sweden's largest sawmilling companies, and also owns a 54.8% interest in CPPI, which is one of the largest global producers of NBSK pulp and a leading producer of high-performance kraft paper. As of December 31, 2023, Canfor employed 7,580 people, of which 1,004 were employed by CPPI.

Significant changes to the Company's business in 2023 and early in 2024 include the following:

• On January 3, 2023, the Company announced an extension of BC sawmill curtailments in the month due to ongoing weak market conditions and lack of available economic fibre.
• On January 25, 2023, the Company announced the restructuring of its BC operations to better align manufacturing capacity in the region with available long-term fibre supply, resulting in the permanent closure of its Chetwynd sawmill and pellet plant and the temporary closure of its Houston sawmill for an extended period to facilitate a potential redevelopment on the site. The permanent and temporary curtailment of these aforementioned facilities were completed in April 2023 following an orderly wind-down, removing approximately 750 million board feet of annual Western SPF production capacity. Subsequently, on September 14, 2023, the Company announced its plan to invest approximately $200 million in a new, state-of-the-art manufacturing facility in Houston, British Columbia. The facility will have an annual production capacity of approximately 350 million board feet.
• Also, in January 2023, CPPI announced the decision to restructure its operating footprint to align its manufacturing capacity with the long-term supply of economic residual fibre and, as a result, in April 2023, CPPI wound down and permanently closed the pulp line at its PG NBSK pulp and paper mill. In connection with this closure, Intercon was successfully converted to provide slush pulp to its specialty paper facility. The combined impact of these operating structure changes was a reduction of approximately 280,000 tonnes of market kraft pulp production annually.

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• In July 2023, NBSK pulp production was impacted by a labour dispute at the Ports of Vancouver and Prince Rupert, which put pressure on an already constrained logistics network in BC. As a direct result, with pulp mill inventories at capacity, CPPI curtailed Northwood for approximately one week, with 10,000 tonnes of reduced NBSK pulp production. Furthermore, while Northwood successfully completed its scheduled maintenance in September 2023, the restart was delayed into the fourth quarter of 2023 by numerous operational challenges unrelated to the scheduled maintenance downtown, resulting in approximately 40,000 tonnes of reduced NBSK pulp production late in 2023.
• On November 14, 2023, the Company announced an indefinite curtailment of its Polar facility due to the shortage of economically available fibre in that region. The curtailment will reduce Western SPF production by approximately 140 million board feet over the first six months of 2024.
• On December 7, 2023, Vida announced that it will invest approximately $85 million (700 million SEK) at its Bruza Sawmill in Hjältevad, Sweden, increasing its annual production capacity by approximately 65 million board feet. Construction will commence in the spring of 2024 and is expected to be completed in 2026.
• On February 7, 2024, CPPI announced that it had entered into an asset purchase agreement to sell its Taylor Bleached Chemi-Thermo Mechanical Pulp ("BCTMP") mill site for a price of $7.0 million. The transaction is anticipated to close in the first quarter of 2024.

Lumber

As at December 31, 2023, Canfor's lumber operations had an annual production capacity of approximately 6.7 billion board feet. The majority of lumber produced by Canfor from its facilities is construction and high-value specialty grade dimension lumber that ranges in size from one by three inches to two by twelve inches and in lengths from six to twenty-six feet. A significant and increasing proportion of Canfor's lumber production is comprised of specialty products that command premium prices and high-value products, including Square Edge lumber for the North American market, J-grade lumber for the Japanese market, and machine stress rated ("MSR") lumber used in engineered applications such as roof trusses and floor joists. As a result of its recent acquisitions, Canfor has expanded its product offering to include high-value engineered wood products, higher-grade MSR lumber, premium one-inch boards, as well as an array of custom specialty products, including strength-rated trusses, beams, and tongue-and-groove timber.

Canfor's North American lumber operations also include one finger-joint plant, two glulam plants, one whole log chipping plant, and a trucking division. As at December 31, 2023, the Company operated a pellet plant at the Fort St. John sawmill site. Canfor's North American lumber business segment also includes a 60% interest in Houston Pellet Inc., which has an annual capacity of approximately 200,000 tonnes of wood pellets. Canfor's European lumber operation includes its 70% interest in Vida's ten value-added facilities (including the manufacturing and selling of wood packaging, modular housing, industrial products and energy).

As at December 31, 2023, Canfor held approximately 9.9 million cubic metres (including Mackenzie) of annual harvesting rights for its solid wood operations under various forest tenures located in the interior region of BC and northern Alberta and harvests logs from those tenures to supply its Western Canadian lumber operations. Any mill requirements shortfalls are made up of wood purchased from other tenure holders in those areas. The wood fibre requirements in the US and Europe are met through open market purchases, substantially from private timberland owners.

Canfor markets lumber products throughout North America and overseas through its sales offices in Canada, the US, Japan, Sweden, the UK, Denmark, the Netherlands and Australia. In addition to its production, Canfor also markets lumber produced externally to complement its product line. While a significant proportion of Canfor's product is sold to markets in the US, shipments into Europe have increased following the acquisition of Vida. In contrast, volumes to other offshore markets remain steady. The Company transports substantially all lumber shipped domestically (in the US, Canada, and Sweden) by truck and rail, while the vast majority of products sold offshore are transported by container ship and breakbulk.

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Pulp and Paper

During 2023, Canfor's pulp and paper segment was comprised of two NBSK pulp mills, one NBSK pulp and paper mill located in Prince George, BC, and a BCTMP mill located in Taylor, BC, all of which are owned by CPPI. As at December 31, 2023, CPPI produces NBSK pulp and specialty paper. NBSK is a primarily bleached product, although unbleached and semi-bleached grades were also produced by CPPI.

As at December 31, 2023, CPPI had an annual production capacity of approximately 780,000 tonnes of northern softwood market kraft pulp, the significant majority of which was bleached to become NBSK pulp, and approximately 140,000 tonnes of kraft paper.

As at December 31, 2023, CPPI also owned the Taylor BCTMP mill, located in Taylor, British Columbia. Subsequent to year-end, CPPI 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.

Canfor supplies CPPI with residual wood chips and hog fuel (principally bark) produced at certain, specified sawmills. Prices paid by CPPI for residual wood chips are based on a pricing formula to reflect market prices and conditions, with hog fuel purchased by CPPI at market prices. CPPI also has fibre supply agreements with third parties to supplement its supply of wood chips and hog fuel.

Business Strategy

Canfor's overall business strategy and purpose is to be a global leader in supplying high-value,low-carbon forest products, including dimension and specialty lumber, engineered wood products, pulp and paper, wood pellets, and green energy to high-value customers, accomplished by:

• Attaining world-class safety performance;
• Achieving top-quartile margin performance while producing high-value products and maximizing the value from all available fibre sources;
• Implementing a sustainability strategy aimed at helping to protect our planet, supporting our people and communities, and producing forest and pulp and paper products that are an important part of a low-carbon economy;
• Growing an enterprise-wide culture of innovation, inclusion, diversity, respect, and engagement by attracting, retaining, and developing our employees;
• Expanding geographical markets, increasing market share of value-added products, and building strong long- term partnerships with valued customers;
• Attaining world-class supply chain performance and providing excellence in customer service; and
• Focusing on an efficient allocation of capital and deployment of resources to sustain top-quartile operational performance, capitalizing on attractive growth opportunities.

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OVERVIEW OF CONSOLIDATED RESULTS - 2023 COMPARED TO 2022

Selected Financial Information and Statistics

• Amortization includes amortization of certain capitalized major maintenance costs.
  2 Adjusted for asset write-down and impairment charges of $138.6 million in 2022.
  3 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 for the period).

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Selected Cash Flow Information

• Amortization includes amortization of certain capitalized major maintenance costs.

• Adjusted to true-up preliminary anti-dumping duty deposits to the Company's current accrual rates.

• Further information on cash flows can be found in the Company's annual consolidated financial statements.

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

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

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OPERATING RESULTS BY BUSINESS SEGMENT - 2023 COMPARED TO 2022

The following discussion of Canfor'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. Canfor's operations include the Lumber and Pulp and Paper segments.

Lumber

Selected Financial Information and Statistics - Lumber

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

• 2023 includes sales of $1,333.2 million, operating income of $80.3 million and operating income before amortization of $149.1 million from European operations (2022 - sales of $1,611.1 million, operating income of $420.8 million and operating income before amortization of $486.8 million). Operating income from the European operations in 2023 includes $36.7 million (2022 - $37.2 million) of incremental amortization and other expenses driven by the purchase price allocation at the acquisition date.
  10 Adjusted operating income (loss) is a non-IFRS financial measure. Refer to the "Non-IFRS Financial Measures" section for further details.
  11 Western Spruce/Pine/Fir, per thousand board feet (Source - Random Lengths Publications, Inc.)
  12 Southern Yellow Pine, Eastside, per thousand board feet (Source - Random Lengths Publications, Inc.)
  13 Average lumber prices in Cdn$ calculated as average price in US$ multiplied by the average exchange rate - Cdn$ per US$1.00 according to Bank of Canada monthly average for the period.
  14 Source - US Census Bureau, seasonally adjusted annual rate ("SAAR").
  15 Excluding production of trim blocks.
  16 Includes Canfor produced lumber, as well as lumber purchased for resale, remanufacture and engineered wood, excluding trim blocks, wholesale shipments and lumber sold on behalf of third parties.

Markets

The weak global lumber market conditions and pricing seen at the end of 2022 lasted well into 2023, with global lumber market fundamentals remaining under pressure for most of the current year. General economic uncertainty, persistent inflationary cost pressures and a high interest rate environment continued throughout 2023, significantly impacting affordability and leading to lower levels of residential construction activity across the globe. Market-related curtailments and wildfires, particularly in Western Canada, as well as operational disruptions associated with geopolitical tensions, constrained lumber supply at certain times of the year and led to intermittent and short upticks in North American benchmark pricing. In the repair and remodeling sector, demand remained strong throughout 2023, particularly in the first half of the year, principally driven by an aging housing stock in North America. Despite the benefit of these supply

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pressures and the continued strength in the repair and remodel segment, affordability constraints weighed heavily on overall North American demand and US-dollar benchmark lumber prices throughout most of 2023.

US housing starts, on a seasonally adjusted basis, averaged 1,415,000 units17 in 2023, a decrease of 9% from 2022 (Chart 1). Single-family starts, which consume approximately three times as much lumber as multi-family starts, averaged 943,000 units17, down 6% from 2022, principally reflecting the aforementioned persistent affordability challenges stemming from high inflation and rising interest rates through most of 2023. Multi-family starts experienced more pronounced decreases than that seen in single-family, declining from the near-record high levels in 2022 to average 459,000 units17 in 2023, down 14% from the prior year.

Chart 1

In Canada, the housing market continued to weaken through 2023 with a seasonally adjusted annual rate of 242,000 units18, a decline of 8% from 2022 (Chart 2), with multi-family starts making up 75% of overall starts in 2023 (2022 - 70%). Despite falling from 2022 levels, Canadian housing starts remained well above historical norms as underlying demand for housing continued to be solid, largely due to favorable demographic trends, particularly in urban centres.

Chart 2

1. US Bureau of the Census
2. Canada Mortgage and Housing Corporation ("CMHC")

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