We make renewable, wood-based building products

for the world, contributing to a more sustainable future.

Our business strategy focuses on profitability and excellence in people, driven by three key elements.

Why Wood

Wood is a sustainable, high-value building material that stores carbon. With the least embodied energy of all major building materials, it requires less energy from harvest to transport, manufacturing, installation, maintenance and disposal or recycling. Wood is known for its strength and durability in addition to its visual appeal when used in building structures and finishings.

2023 Sales by Business Segment to External Customers

in millions of U.S. dollars

Our Products

SPF				SYP
Spruce Pine Fir (SPF) is a species that includes Engelmann spruce, white spruce, hybrid white spruce, lodgepole pine and subalpine fir. This lumber is lightweight, easily worked, takes paint well, holds nails well and exhibits small knots.				Southern Yellow Pine (SYP), known for its strength and durability, grows in the southern United States from Virginia to Florida and west to Texas. SYP lumber is a versatile product used in a variety of applications.
OSB				Plywood
Oriented Strand Board (OSB) is a versatile structural wood panel. Used in roofs, walls and floor applications, OSB makes use of wood that may not otherwise have commercial value, which helps to maximize forest utilization.				Plywood is made from multiple layers, or ply, of softwood veneer glued together with the grain of each layer perpendicular to adjacent layers. Plywood panels have superior dimensional stability, two-way strength and stiffness properties and an excellent strength-to-weight ratio.
LVL				MDF
Laminated Veneer Lumber (LVL) is manufactured primarily for structural framing in residential and commercial construction. LVL is made from rotary-peeled veneers bonded together under heat and pressure into large panels that are cut into a range of widths.				Medium-Density Fibreboard (MDF) is an engineered non-structural wood panel made from 100% western white softwoods that have a consistent light sandy colour. The purity and long fibre allow the finishing to fit a variety of interior applications.
Particleboard				Pulp
Particleboard is a non-structural, engineered wood panel produced by pressing recycled wood fibre to create a product with a consistent, pristine surface that caters to many everyday applications, such as furniture or cabinets.				Pulp is created through a chemical process, transforming chips into pulp fibres. The fibres, often referred to as reinforcing pulp, are very strong and are the basis for an extensive range of high-end paper products, from tissues and paper towels to cardboard and packaging materials.

Five-Year Financial Review

(in millions of U.S. dollars, except where indicated)

Sales		Adjusted EBITDA2		Cash flows from operating activities
in millions of U.S. dollars		in millions of U.S. dollars		in millions of U.S. dollars

INTRODUCTION

This discussion and analysis by management (“MD&A”) of West Fraser Timber Co. Ltd.’s (“West Fraser”, the “Company”, “we”, “us”, or “our”) financial performance for the year and three months ended December 31, 2023 should be read in conjunction with our annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2023 (the “Annual Financial Statements”).

The Company’s fiscal year is the calendar year ending December 31. Effective January 1, 2023, the Company’s fiscal quarters are the 13-week periods ending on the last Friday of March, June, and September with the fourth quarter ending on December 31. References to the three months ended December 31, 2023 and the fourth quarter of 2023 relate to the period between September 30, 2023 and December 31, 2023.

Unless otherwise indicated, the financial information contained in this MD&A is derived from our Annual Financial Statements, which have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS Accounting Standards”). This MD&A uses various Non-GAAP and other specified financial measures, including “Adjusted EBITDA”, “Adjusted EBITDA by segment”, “available liquidity”, “total debt to capital ratio”, “net debt to capital ratio”, and “expected capital expenditures”. An explanation with respect to the use of these Non-GAAP and other specified financial measures is set out in the section titled “Non-GAAP and Other Specified Financial Measures”.

This MD&A includes statements and information that constitute “forward-looking information” within the meaning of Canadian securities laws and “forward-looking statements” within the meaning of United States securities laws (collectively, “forward-looking statements”). Please refer to the cautionary note entitled “Forward-Looking Statements” below for a discussion of these forward-looking statements and the risks that impact these forward-looking statements.

Dollar amounts are expressed in the United States (“U.S.”) currency unless otherwise indicated. This MD&A uses capitalized terms, abbreviations and acronyms that are defined under “Glossary of Key Terms”. Figures have been rounded to millions of dollars to reflect the accuracy of the underlying balances and as a result certain tables may not add due to rounding impacts. The information in this MD&A is as at February 14, 2024 unless otherwise indicated.

OUR BUSINESS AND STRATEGY

West Fraser is a diversified wood products company with facilities in Canada, the U.S., the U.K. and Europe, manufacturing, selling, marketing and distributing lumber, engineered wood products (OSB, LVL, MDF, plywood, particleboard), pulp, newsprint, wood chips and other residuals and renewable energy. As at December 31, 2023, our business is comprised of 34 lumber mills, 15 OSB facilities, 6 renewable energy facilities, 3 plywood facilities, 3 MDF facilities, 2 treated wood facilities, 1 particleboard facility, 1 LVL facility, 1 veneer facility, and 5 pulp and paper mills (as at December 31, 2023, three of our pulp mills are held for sale, one of which has since been sold).

Our goal at West Fraser is to generate strong financial results through the business cycle, supported by robust product and geographic diversity, and relying on our committed workforce, the quality of our assets and our well-established people and culture. This culture emphasizes cost control in all aspects of the business and operating in a responsible, sustainable, financially conservative and prudent manner.

The North American wood products industry is cyclical and periodically faces difficult market conditions. Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Asia and Europe and particularly to the U.S. housing market for new construction and repair and renovation spending. Most of our revenues are from sales of commodity products for which prices are sensitive to variations in supply and demand. As many of our costs are denominated in Canadian dollars, British pounds sterling and Euros, exchange rate fluctuations of the Canadian dollar,

British pound sterling and Euro against the United States dollar can and are anticipated to be a significant source of earnings volatility for us.

West Fraser strives to make sustainability a central principle upon which we and our people operate, and we believe the Company’s renewable building materials that sequester carbon are a truly natural solution in the fight against climate change. There are numerous government initiatives and proposals globally to address climate-related issues. Within the jurisdictions of West Fraser’s operations, some of these initiatives would regulate, and do regulate and/or tax the production of carbon dioxide and other greenhouse gases to facilitate the reduction of carbon emissions, providing incentives to produce and use cleaner energy. In April 2023, the Science Based Targets Initiative (“SBTi”) completed its validation of the science-based targets we set in the first quarter of 2022. This validation further supports West Fraser’s plan to achieve near-term greenhouse gas (“GHG”) reductions across all our operations located in the United States, Canada, U.K. and Europe.

We believe that maintaining a strong balance sheet and liquidity profile, along with our investment-grade debt rating, enables us to execute a balanced capital allocation strategy. Our goal is to reinvest in our operations across all market cycles to strategically enhance productivity, product mix, and capacity and to maintain a leading cost position. We believe that a strong balance sheet also provides the financial flexibility to capitalize on growth opportunities, including the pursuit of opportunistic acquisitions and larger-scale strategic growth initiatives, and is a key tool in managing our business over the long term including returning capital to shareholders.

RECENT DEVELOPMENTS

Markets

In North America, changes in new home construction activity in the U.S. are a significant driver of lumber and OSB demand. According to the U.S. Census Bureau, the seasonally adjusted annualized rate of U.S. housing starts averaged 1.46 million units in December 2023, with permits issued averaging 1.50 million units. U.S. housing starts were 1.41 million units for full year 2023, down 9% from 1.55 million units in 2022. The level of new housing construction began to rebound somewhat in the final months of the year as central bankers paused rate increases and inflation and mortgage rates moderated. Coupled with ongoing evidence of easing inflationary risks, the latest rate hiking cycle appears to be nearing its end. Low supply of existing homes for sale and a large cohort of the population entering the typical home buying age demographic are expected to support longer-term core demand for home construction activity. Notwithstanding these factors, should the economy and employment slow more broadly, interest rates begin to track meaningfully higher or housing prices not adjust sufficiently lower to offset a potential rise in mortgage rates, housing affordability may be adversely impacted, which could reduce near-term demand for new home construction and thus near-term demand for our wood-based building products.

In the fourth quarter, demand for our products used in repair and remodelling applications was relatively stable but remained below the elevated demand levels seen in recent years. There is a risk that historically low rates of existing home sales and a slowing economy will put further downward pressure on short-term repair and remodelling demand, consistent with near-term industry forecasts for repair and remodelling spending. However, over the medium and longer term, an aging housing stock and stabilization of inflation and interest rates are expected to stimulate renovation and repair spending that supports growth in lumber, plywood and OSB demand.

Regarding lumber supply fundamentals, significant new capacity announcements in the U.S. South have not translated into a meaningful increase in overall domestic supply. Capacity contraction within other key lumber producing regions of North America have contributed to this trend, as have meaningful reductions in production from less competitive mills in the U.S. South, a region that is generally lower-cost but is also heterogeneous in terms of mill costs associated with fibre supply, modernization levels and labour reliability. Lower demand from offshore markets for North American lumber is also a continuing factor, resulting in more domestically produced lumber remaining in the continent. Imports of lumber from Europe, which had been elevated earlier in 2023, have slowed in recent months. However, should this import trend reverse and head higher again, the rebalancing of supply and demand for lumber products in North America could experience an extended time to recovery, particularly for SPF products that compete more directly with European lumber imports. In the very near term, unusually warm weather in Western Canada has hampered logging activities so far this winter, which has limited the accumulation of log inventories at some of our mills and has the potential to constrain our ability to manufacture and ship SPF lumber.

A number of OSB mill greenfield and re-start projects have been announced in recent years, although actual new supply has been slow to come to market. We believe this is largely a function of extended vendor equipment backlogs and limited contractor availability, coupled with the 18-24 month start-up curves typical of OSB mills. While some of the announced mill projects are apt to be completed over the near-to-medium term, we continue to see meaningful constraints to significant new OSB supply in the near term. However, should new OSB supply come to market sooner, and production ramp more quickly than is typical for mill start-ups, OSB markets may experience a period of imbalance between supply and demand.

Completion of the Spray Lake Acquisition

On November 17, 2023, we completed the acquisition of the Spray Lake lumber mill located in Cochrane, Alberta and associated timber tenures for $102 million (CAD$140 million), net of cash acquired of $1 million. This acquisition has been accounted for as an acquisition of a business in accordance with IFRS 3, Business Combinations. Note 3 to our Annual Financial Statements provides details on the preliminary purchase price allocation as at December 31, 2023.

Facility Closures and Curtailments

On January 9, 2024, we announced the permanent closure of our lumber mill in Maxville, Florida and the indefinite curtailment of operations at our lumber mill in Huttig, Arkansas. High fibre costs at Maxville and the current low-price commodity environment have impaired the ability of both mills to profitably operate. In aggregate, this will reduce our U.S. lumber capacity by approximately 270 million board feet. The closure of Maxville and the indefinite curtailment of our Huttig lumber mill better aligns our U.S. lumber capacity with demand. We recorded restructuring and impairment charges of $47 million in the fourth quarter of 2023 associated with this announcement.

On January 22, 2024, we announced the permanent closure of our lumber mill in Fraser Lake, B.C., following an orderly wind-down. The decision is the result of our inability to access economically viable fibre in the region and will reduce our Canadian lumber capacity by approximately 160 million board feet. We recorded restructuring and impairment charges of $81 million in the fourth quarter of 2023 related to facility closures and curtailments due to availability of economic fibre sources in B.C.

Completion of sale of Hinton pulp mill

On July 10, 2023, we announced an agreement to sell our unbleached softwood kraft pulp mill in Hinton, Alberta to Mondi Group plc (“Mondi”). The transaction closed on February 3, 2024 following the completion of regulatory reviews and satisfaction of customary closing conditions.

CVD and ADD Duty Rates

On February 1, 2024, the USDOC released the preliminary results from AR5 POI covering the 2022 calendar year, which indicated a rate of 6.74% for CVD and 5.33% for ADD for West Fraser. The duty rates are subject to an appeal process, and we will record an adjustment once the rates are finalized. If the AR5 rates were to be confirmed, it would result in an expense of $35 million before the impact of interest for the POI covered by AR5. This adjustment would be in addition to the amounts already recorded on our balance sheet. If these rates were finalized, our combined cash deposit rate would be 12.07%.

Senior Leadership Transition

Effective January 1, 2024, Sean McLaren succeeded Ray Ferris as President and Chief Executive Officer and joined the Board of Directors.

 ANNUAL RESULTS

In 2023, our revenues were $6,454 million and we incurred a loss of $167 million, or $2.01 of diluted loss per share. This compares with revenues of $9,701 million and earnings of $1,975 million, or $20.86 of diluted earnings per share, in 2022, and revenues of $10,518 million and earnings of $2,947 million, or $27.03 of diluted earnings per share, in 2021. Our 2023 results were impacted primarily by decreases in lumber and OSB pricing, offset in part by lower input costs. We recorded higher restructuring and impairment charges in 2023 related to the sale of certain of our pulp mills as well as announced facility closures and curtailments in our lumber segment.

Discussion & Analysis of Annual Results by Product Segment

Lumber Segment

Sales and Shipments

Lumber sales decreased compared to 2022 due primarily to lower product pricing and, to a lesser extent, lower shipments. The price variance resulted in a decrease in operating earnings and Adjusted EBITDA of $1,588 million compared to 2022.

SPF shipment volumes were comparable versus 2022. SPF shipment volumes in Q1-23 increased year-over-year as Q1-22 was impacted by disruptions to rail and truck services resulting from severe weather and flooding in B.C. carried over from Q4-21. This increase was substantially offset by lower shipment volumes resulting from weaker demand during the balance of the year.

SYP shipment volumes decreased compared to 2022 due primarily to reductions in production volumes, discussed further in the section below.

The volume variance resulted in an increase in operating earnings and Adjusted EBITDA of $4 million compared to 2022.

We ship SPF to several export markets, while our SYP sales are almost entirely within the U.S. The relative proportion of shipments of SPF by destination was comparable versus prior year. Exports of SPF outside North America have declined in recent years due to reduced exports of low-grade lumber to China.

Wood chip and other residual sales decreased compared to 2022 due primarily to decreases in the pricing of chips and lower lumber production in the U.S. South. Logs and other sales were broadly comparable to prior year.

Costs and Production

SPF production volumes were comparable versus 2022 due primarily to fewer reductions in operating schedules taken in the current year, offset in part by the impact of the previously announced permanent curtailment of one shift at our Fraser Lake and Williams Lake lumber mills and reduced production at certain of our lumber mills in Alberta in the summer due to wildfire evacuation impacts.

SYP production volumes decreased compared to 2022 due primarily to the curtailment of operations at our lumber mill in Perry, Florida and incremental production curtailments to manage inventory.

Cost inflation across a number of our inputs including supplies and materials, energy, labour costs, and transportation has moderated.

Costs of products sold decreased compared to 2022 due primarily to lower log and manufacturing costs in our Canadian operations, lower SYP shipment volumes, and a favourable $77 million variance relating to inventory write-downs. We recorded significant inventory valuation reserves in Q4-22 due to low product pricing at period-end. Required inventory valuation reserves were lower in 2023 due to decreases in inventory costs, primarily from lower log costs, and lower overall inventory levels. Log harvesting in Western Canada in Q4-23 has been slowed by warm weather.

Most of our SPF log requirements are harvested from crown lands owned by the provinces of B.C. or Alberta. B.C.’s stumpage system is tied to reported lumber prices, with a time lag, and publicly auctioned timber harvesting rights. Alberta’s stumpage system is correlated to published lumber prices with a shorter time lag.

SPF log costs decreased compared to 2022 due primarily to lower stumpage rates in Alberta and B.C. and lower purchased log costs.

SPF unit manufacturing costs decreased compared to 2022 due primarily to lower energy, supplies and materials, and labour costs. The weakening of the CAD against the USD was also a contributing factor.

SYP log costs decreased compared to 2022 as availability of logs improved. SYP unit manufacturing costs increased compared to 2022 due to higher maintenance and labour costs, offset by lower energy costs.

Freight and other distribution costs decreased compared to 2022 due primarily to lower trucking rates, favourable changes in customer geography mix, and lower shipment volumes.

Export duty expense decreased compared to 2022. As disclosed in the table below, prior to consideration of the impact of duty recoveries attributable to finalization of POIs, export duties for 2023 decreased compared to 2022 due primarily to lower pricing, and a lower CVD cash deposit rate, offset in part by a higher estimated ADD rate. Export duties in 2023

included a recovery of $62 million related to the USDOC finalization of AR4 duty rates whereas export duties in 2022 included a recovery of $81 million related to the USDOC finalization of AR3 duty rates.

The following table reconciles our cash deposits paid during the year to the amount recorded in our statements of earnings:

Amortization expense was comparable versus 2022.

Selling, general and administration costs decreased compared to 2022 due primarily to lower variable compensation costs, offset in part by annual salary increases.

Restructuring and impairment charges of $137 million were recorded in 2023. Of this amount, $128 million related to facility closures and curtailments due to availability of economic fibre sources in the U.S. South and B.C. The remaining balance relates to impairment losses relating to an equity accounted investment that produces and distributes wood pellets and the closure of a regional corporate office.

Restructuring and impairment charges of $31 million were recorded in 2022 relating to the curtailment of operations at our lumber mill in Perry, Florida.

Operating earnings for the Lumber Segment decreased by $1,430 million compared to 2022 for the reasons explained above.

Adjusted EBITDA for the Lumber Segment decreased by $1,326 million compared to 2022. The following table shows the Adjusted EBITDA variance for the period. The impact of the contribution from our Spray Lake lumber mill from November 17, 2023, the date of acquisition, to December 31, 2023 is nominal and included under Other. This impact includes a one time charge of $2 million related to inventory purchase price accounting. The impact of changes in pricing, cost and volume for wood chip and other residuals is also included under Other. Energy revenues were also lower compared to the prior year.

Softwood Lumber Dispute

On November 25, 2016, a coalition of U.S. lumber producers petitioned the USDOC and the USITC to investigate alleged subsidies to Canadian softwood lumber producers and levy CVD and ADD duties against Canadian softwood lumber imports. The USDOC has and continues to choose us as a “mandatory respondent” to both the countervailing and antidumping investigations, and as a result, we have received unique company-specific rates.

Developments in CVD and ADD rates

We began paying CVD and ADD duties in 2017 based on the determination of duties payable by the USDOC. The CVD and ADD cash deposit rates are updated upon the finalization of the USDOC’s AR process for each POI, as summarized in the tables below.

On March 14, 2023, the USDOC initiated AR5 POI covering the 2022 calendar year. West Fraser was selected as a mandatory respondent, which will result in West Fraser continuing to be subject to a company-specific rate.

The respective Cash Deposit Rates, the AR POI Final Rate and the West Fraser Estimated ADD Rate for each period are as follows:

Accounting policies for duties

The CVD and ADD rates apply retroactively for each POI. We record CVD as export duty expense at the cash deposit rate until an AR finalizes a new applicable rate for each POI. We record ADD as export duty expense by estimating the rate to be applied for each POI by using our actual results and a similar calculation methodology as the USDOC and adjust when an AR finalizes a new applicable rate for each POI. The difference between the cumulative cash deposits paid and cumulative export duty expense recognized for each POI is recorded on our balance sheet as export duty deposits receivable or payable.

The difference between the cash deposit amount and the amount that would have been due based on the final AR rate will incur interest based on the U.S. federally published interest rate. We record interest income on our duty deposits receivable, net of any interest expense on our duty deposits payable, based on this rate.

Appeals

On May 22, 2020, the North American Free Trade Agreement (“NAFTA”) panel issued its final decision on “Injury”. The NAFTA panel rejected the Canadian parties’ arguments and upheld the USITC’s remand determination in its entirety.

On August 28, 2020, the World Trade Organization’s (“WTO”) dispute-resolution panel ruled unanimously that U.S. countervailing duties against Canadian softwood lumber are inconsistent with the WTO obligations of the United States. The decision confirmed that Canada does not subsidize its softwood lumber industry. On September 28, 2020, the U.S. announced that it would appeal the WTO panel’s decision.

Under U.S. trade law, the International Trade Commission (“ITC”) must review antidumping and countervailing orders every 5 years from the date of issuance. This process is referred to as a “Sunset Review”. On November 30, 2023, the ITC voted to maintain the ADD and CVD orders on softwood lumber from Canada on the grounds that the revocation would

likely lead to the continuation or recurrence of material injury to the U.S. domestic industry within a reasonably foreseeable time.

The softwood lumber case will continue to be subject to NAFTA or the new Canada-United States-Mexico Agreement (“CUSMA”), WTO dispute resolution processes, and litigation in the U.S. In the past, long periods of litigation have led to negotiated settlements and duty deposit refunds. In the interim, duties remain subject to the USDOC AR process, which results in an annual adjustment of duty deposit rates.

Notwithstanding the deposit rates assigned under the investigations, our final liability for CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.

North America Engineered Wood Products Segment

Our NA EWP segment includes our North American OSB, plywood, MDF, and LVL operations.

Sales and Shipments

Sales decreased compared to 2022 due primarily to lower product pricing, in particular OSB, offset in part by higher OSB shipment volumes.

The price variance resulted in a decrease in operating earnings and Adjusted EBITDA of $1,254 million compared to 2022.

OSB shipment volumes increased compared to 2022 as shipments in the first half of 2022 were constrained due to limited availability of railcars to service our Western Canada and Ontario manufacturing facilities. Higher production volumes, discussed further in the section below, was also a contributing factor. Plywood shipment volumes were slightly higher compared to 2022.

The volume variance resulted in an increase in operating earnings and Adjusted EBITDA of $22 million compared to 2022.

Costs and Production

OSB production volumes increased compared to 2022. OSB production volumes in 2022 were impacted by reduced operating schedules in the first half of the year to manage inventory levels as a result of transportation disruptions. Improved productivity at a number of our facilities and the ramp-up of our Allendale, South Carolina mill were also contributing factors to the increase year over year.

Plywood production volumes increased slightly compared to 2022 as improved recovery and reliability offset the impacts of the previously announced permanent curtailment of one shift at our plywood mill located in Quesnel, B.C. that was effective Q4-22.

Costs of products sold decreased compared to 2022 due to lower input prices, lower energy and fibre costs, lower labour costs, improved productivity, and the weakening of the CAD against the USD. These factors were offset in part by higher costs due to Allendale ramp-up.

Costs of products sold include the impact of incremental Allendale startup costs incurred in the current year. The 2023 NA EWP segment results include $13 million incurred through the second quarter in connection with the preparation of the Allendale, South Carolina mill for startup.

Freight and other distribution costs were comparable to 2022 as the impact of higher OSB shipment volumes was offset by lower trucking rates.

Amortization expense decreased compared to 2022 as certain assets reached the end of their estimated useful lives.

Selling, general and administration costs were lower than 2022 due primarily to lower variable compensation costs, offset in part by annual salary increases.

Operating earnings for the NA EWP Segment decreased $1,055 million compared to 2022 due to the reasons explained above.

Adjusted EBITDA for the NA EWP Segment decreased by $1,088 million from 2022. The following table shows the Adjusted EBITDA variance for the period.

Pulp & Paper Segment

Our Pulp & Paper segment results include the results of the Hinton pulp mill, Quesnel River Pulp mill, and Slave Lake Pulp mill held for sale as the transactions had not completed as at December 31, 2023.

Sales and Shipments

Sales decreased compared to 2022 due primarily to lower pulp pricing and the volume impact of the transition of our Hinton pulp mill to UKP. The price variance resulted in a decrease in operating earnings and Adjusted EBITDA of $144 million compared to 2022.

Pulp shipments decreased compared to 2022 due primarily to reduction in production volumes, discussed further in the section below. The volume variance resulted in an increase in operating earnings and Adjusted EBITDA of $6 million compared to 2022.

Costs and Production

Pulp production decreased compared to 2022 due primarily to the impact of transitioning our Hinton pulp mill, offset in part by a recovery of volumes lost in the prior year due to reductions in operating schedules taken as a result of transportation disruptions, in particular for our BCTMP mills, and lower production curtailments related to power prices in Alberta.

Costs of products sold decreased compared to 2022 due primarily to lower shipment volumes, lower fibre costs driven by lower pulp pricing, lower spend on chemicals and energy as a result of the Hinton pulp mill transition to UKP, and lower power prices. This was partially offset by a $12 million unfavourable impact relating to inventory write-downs and higher maintenance expenditures in the current year.

Freight and other distribution costs decreased compared to 2022 due to lower shipment volumes and lower ocean freight costs.

Amortization expense decreased compared to 2022. The decrease in amortization expense relates to the write-down and transfer of property, plant and equipment associated with the Hinton pulp mill, Quesnel River Pulp mill, and Slave Lake Pulp mill to a disposal group held for sale. No further amortization expense was taken on the assets upon transfer to the disposal group held for sale.

Selling, general, and administration costs decreased compared to 2022 due primarily to lower variable compensation costs, offset in part by annual salary increases.

In 2023, we recorded impairment losses of $142 million relating to the sale of the Hinton pulp mill, Quesnel River Pulp mill, and Slave Lake Pulp mill, including remeasurement of estimated working capital adjustments specified in the asset purchase agreements. In 2022, we recorded impairment losses of $13 million related to equipment that was decommissioned as part of the transition of the Hinton pulp mill to UKP.

Operating loss for the Pulp & Paper Segment increased by $220 million compared to 2022 due to the reasons explained above.

Adjusted EBITDA for the Pulp & Paper Segment decreased by $103 million compared to 2022. The following table shows the Adjusted EBITDA variance for the period.

The Hinton pulp mill, Quesnel River Pulp mill, and Slave Lake Pulp mill held for sale comprise a significant portion of the Pulp & Paper segment’s sales and operating earnings.

Europe Engineered Wood Products Segment

Our Europe EWP segment includes our U.K. and Belgium OSB, MDF, and particleboard operations. Revenues and expenses of our European operations, which have British pound sterling and Euro functional currencies, are translated at the average rate of exchange prevailing during the period.

Sales and Shipments

Sales decreased compared to 2022 due to lower product pricing in local currency terms and, to a lesser extent, lower shipment volumes.

The price variance resulted in a decrease in operating earnings and Adjusted EBITDA of $133 million compared to 2022. The price variance represents the impact of changes in product pricing in local currency terms, with any associated foreign exchange impact from the strengthening or weakening of the GBP against USD presented under Other in the Adjusted EBITDA variance table.

Overall shipment volumes decreased versus 2022 due to weaker demand. The impact of modestly higher OSB shipment volumes was more than offset by a significant decrease in MDF and particleboard shipment volumes. OSB shipment volumes increased as 2022 shipment volumes were adversely impacted by the impacts of customer destocking in the second half of the year. Shipment volumes of MDF and particleboard are highly correlated to home building activity and decreased significantly compared to 2022 due to weaker demand driven by higher interest rates over the past year. The volume variance resulted in a decrease of $25 million compared to 2022.

Costs and Production

Production volumes in both years were impacted by production curtailments taken to manage inventory levels for the reasons discussed above. OSB had higher production curtailments in 2022 and MDF and particleboard had higher production curtailments in 2023.

Costs of products sold decreased compared to 2022 due primarily to lower shipment volumes from MDF and particleboard as well as lower energy and resin costs, offset in part by higher OSB shipment volumes and fibre costs.

Freight and other distribution costs decreased compared to 2022 due primarily to lower shipment volumes.

Amortization decreased compared to 2022 as certain assets reached the end of their estimated useful lives. The impairment of our South Molton, England location in 2022 was also a contributing factor.

Selling, general and administration costs decreased compared to 2022 due primarily to lower variable compensation costs, offset in part by annual salary increases.

Restructuring and impairment charges of $15 million were recorded in 2022 relating to our South Molton, England location.

Operating earnings for the Europe EWP Segment decreased by $120 million compared to 2022 due to the reasons explained above.

Adjusted EBITDA for the Europe EWP Segment decreased by $140 million from 2022. The following table shows the Adjusted EBITDA variance for the period. The variances presented represent the impact of changes in price, volume and cost in local currency terms, with any associated foreign exchange impact from the strengthening or weakening of the GBP against USD presented under Other. The impact of the sale of carbon allowances is also included under Other.

Discussion & Analysis of Specific Items

Selling, general and administration

Selling, general and administration costs for 2023 were $307 million (2022 - $365 million).

Selling, general and administration costs decreased compared to 2022 due primarily to lower variable compensation costs, offset in part by annual salary increases.

Selling, general and administration expense related to our operating segments are also discussed under “Discussion & Analysis of Annual Results by Product Segment”.

Equity-based compensation

Our equity-based compensation includes our share purchase option, phantom share unit, and deferred share unit plans (collectively, the “Plans”). Our Plans are fair valued at each period-end, and the resulting expense or recovery is recorded in equity-based compensation over the vesting period.

Our valuation models consider various factors, with the most significant being the change in the market value of our shares from the beginning to the end of the relevant period. The expense or recovery does not necessarily represent the value that the holders of options and units will ultimately receive.

We recorded an expense of $25 million during 2023 (2022 - expense of $5 million). The expense for 2023 reflects an increase in the price of our common shares traded on the TSX, changes in the expected payout multiple on our performance share units, and additional vesting of units granted.

The expense for 2022 reflects changes in the expected payout on our performance share units and vesting of granted units, offset in part by a decrease in the price of our common shares.

Finance income (expense), net

Finance income (expense), net includes interest earned on short-term deposits and interest recognized on our duty deposits.

Finance income, net increased compared to 2022 due primarily to higher interest income earned on our cash equivalents, higher net interest income related to export duties, including the impact of AR4 finalization in Q3-23, and higher net interest income on our defined-benefit pension plans as our overall funded position has increased.

Other income

Other income of $5 million was recorded in 2023 (2022 - other income of $37 million). Other income in 2023 relates primarily to gains on our electricity swaps driven by increases in forward electricity prices over the remaining term of the contracts and settlement gains relating to pension annuity purchase agreements for certain retired and terminated vested employees. These factors were offset in part by foreign exchange losses recorded on our CAD-denominated monetary assets and liabilities as the CAD appreciated against the USD.

Other income in 2022 relates primarily to foreign exchange gains recorded on our CAD-denominated monetary assets and liabilities and mark-to-market gains on our interest rate swap contracts.

Tax recovery (provision)

We recorded an income tax recovery in 2023 of $61 million compared to an income tax expense of $618 million in 2022. The effective tax rate was 27% in 2023 compared to 24% in 2022. Note 20 to the Annual Financial Statements provides a reconciliation of income taxes calculated at the statutory rate to the income tax expense.

Other comprehensive earnings – translation of operations with different functional currencies

Our European operations have British pound sterling and Euro functional currencies. Our Spray Lake lumber mill and jointly-owned newsprint operation have Canadian dollar functional currency. Assets and liabilities of these entities are translated at the rate of exchange prevailing at the reporting date, and revenues and expenses at average rates during the period. Gains or losses on translation are included as a component of shareholders’ equity in Accumulated other comprehensive loss.

We recorded a translation gain of $34 million during 2023 (2022 - translation loss of $83 million).

In general, a strengthening (weakening) of the USD against the Canadian dollar, British pound sterling or Euro results in a translation loss (gain). The translation gain in the current year reflects a weakening of the USD against the aforementioned currencies.

Other comprehensive earnings – actuarial gains/losses on retirement benefits

The funded position of our defined benefit pension plans and other retirement benefit plans is estimated at the end of each period. The funded position, as shown in note 14 to the Annual Financial Statements, is determined by subtracting the value of the plan assets from the plan obligations.

We recorded an after-tax actuarial loss of $35 million during 2023 (2022 - after-tax actuarial gain of $164 million).

The actuarial loss in 2023 reflects a decrease in the discount rate used to calculate plan liabilities and adjustments to actuarial assumptions.

The actuarial gain in 2022 reflects an increase in the discount rate used to calculate plan liabilities offset in part by lower returns on plan assets.

 FOURTH QUARTER RESULTS