Management's discussion and analysis of  the financial condition



 Exhibit 4.6 
 Management’s Discussion and Analysis 
 for the quarter ended
December 25, 2010 
 The following interim Management Discussion and Analysis (MD&A) provides a review of the significant
developments and issues that influenced Tembec’s financial performance during its first fiscal quarter ended December 25, 2010. The MD&A should be read in conjunction with the interim consolidated financial statements for the period
ended December 25, 2010 and the audited consolidated financial statements and annual MD&A for the fiscal year ended September 25, 2010, included in the Company’s Financial Report. All references to quarterly or Company information
relate to Tembec’s fiscal quarters. EBITDA, net debt, total capitalization, free cash flow and certain other financial measures utilized in the MD&A are non-GAAP (Generally Accepted Accounting Principles) financial measures. As they have no
standardized meaning prescribed by GAAP, they may not be comparable to similar measures presented by other companies. Non-GAAP financial measures are described in the Definitions section on the last page of the MD&A. 

The interim MD&A includes “forward-looking statements” within the meaning of securities laws. Such statements relate, without limitation,
to the Company’s or management’s objectives, projections, estimates, expectations or predictions of the future and can be identified by words such as “may”, “will”, “could”, “anticipate”,
“estimate”, “expect” and “project”, the negative or variations thereof, and expressions of similar nature. Forward-looking statements are based on certain assumptions and analyses made by the Company in light of its
experience, information available to it and its perception of future developments. Such statements are subject to a number of risks and uncertainties, including, but not limited to, changes in foreign exchange rates, product selling prices, raw
material and operating costs and other factors identified in the Company’s periodic filings with securities regulatory authorities. Many of these risks are beyond the control of the Company and, therefore, may cause actual actions or results to
materially differ from those expressed or implied herein. The forward-looking statements contained herein reflect the Company’s expectations as of the date hereof and are subject to change after such date. The Company disclaims any intention to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable securities legislation. The information in the MD&A is as at January 27, 2011, the date of
filing in conjunction with the Company’s press release announcing its results for the first fiscal quarter. Disclosure contained in this document is current to that date, unless otherwise stated. 

CONSOLIDATED RESULTS 
  

																																	
	 	  	Quarterly Results ($ millions)	 
	 	  	Fiscal 2010	 	 	Fiscal 2011	 
	 	  	Dec 09	 	 	Mar 10	 	 	Jun 10	 	 	Sep 10	 	 	Dec 10	 	 	Mar 11	 	  	Jun 11	 	  	Sep 11	 
	 Sales
	  	 	412	  	 	 	476	  	 	 	545	  	 	 	444	  	 	 	422	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Freight and other deductions
	  	 	49	  	 	 	56	  	 	 	70	  	 	 	59	  	 	 	57	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Lumber export duties / taxes
	  	 	2	  	 	 	3	  	 	 	3	  	 	 	2	  	 	 	3	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Cost of sales
	  	 	339	  	 	 	366	  	 	 	394	  	 	 	327	  	 	 	329	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 SG&A
	  	 	18	  	 	 	18	  	 	 	17	  	 	 	20	  	 	 	18	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Share-based compensation
	  	 	—  	  	 	 	1	  	 	 	1	  	 	 	—  	  	 	 	4	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 EBITDA
	  	 	4	  	 	 	32	  	 	 	60	  	 	 	36	  	 	 	11	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Depreciation & amortization
	  	 	15	  	 	 	15	  	 	 	14	  	 	 	12	  	 	 	12	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Other items
	  	 	(1	) 	 	 	15	  	 	 	(10	) 	 	 	9	  	 	 	3	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Operating earnings (loss)
	  	 	(10	) 	 	 	2	  	 	 	56	  	 	 	15	  	 	 	(4	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Interest, foreign exchange & other
	  	 	13	  	 	 	13	  	 	 	15	  	 	 	10	  	 	 	13	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Exchange loss (gain) on long-term debt
	  	 	(16	) 	 	 	(11	) 	 	 	1	  	 	 	(1	) 	 	 	(6	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Pre-tax earnings (loss)
	  	 	(7	) 	 	 	—  	  	 	 	40	  	 	 	6	  	 	 	(11	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Income tax expense (recovery)
	  	 	1	  	 	 	—  	  	 	 	(20	) 	 	 	4	  	 	 	1	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Non-controlling interest
	  	 	1	  	 	 	—  	  	 	 	1	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Net earnings (loss)
	  	 	(9	) 	 	 	—  	  	 	 	59	  	 	 	2	  	 	 	(12	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 








 CONSOLIDATED RESULTS 
 On May 7, 2010, the Company announced that its European subsidiary, Tembec SAS, had completed the sale of two kraft pulp mills located in Tarascon and Saint-Gaudens, France. The purchaser paid the
equivalent of $86 million in cash including preliminary working capital adjustments and assumed $41 million of debt, for total consideration of $127 million. As a result of the sale, the Company recorded a pre-tax gain of $12 million in the June
2010 financial results. 
 On September 2, 2010, the Company announced the permanent closure of its Pine Falls, Manitoba newsprint mill. As
a result, a charge of $7 million was recorded in the September 2010 financial results. 
 BUSINESS SEGMENTS 

During the December 2010 quarter, the Company reorganized its internal reporting structure, which impacted the operating segment disclosure included in
the current period financial statements. Prior to the changes, the Company had reported its financial results based on five reportable segments: Forest Products, Pulp, Paper, Chemicals, and Corporate. The Pulp segment included six pulp mills.
Subsequent to the organizational changes, the Pulp segment has been divided into two segments: Dissolving and Chemical Pulp and High-Yield Pulp. Each segment includes three pulp mills. As well, the Chemicals segment is now part of the Dissolving and
Chemical Pulp segment. A significant portion of Chemicals sales are related to by-products generated by the two dissolving pulp mills. The Forest Products, Paper and Corporate segments were unaffected by the organizational changes. Comparative prior
period segment information has been restated to conform with the new segment presentation. 
 The following summarizes the annual operating
levels of each facility for the two new reporting segments: 
  

					
	 Dissolving and Chemical Pulp
	  	Tonnes	 
	 Softwood kraft - Skookumchuck, BC
	  	 	270,000	  
		  	 	 	 
	 Dissolving and specialty cellulose - Temiscaming, QC
	  	 	160,000	  
	 Dissolving and specialty cellulose - Tartas, France
	  	 	150,000	  
		  	 	 	 
		  	 	310,000	  
		  	 	 	 
	 High-Yield Pulp
	  	 	 
	 Hardwood high-yield - Temiscaming, QC
	  	 	315,000	  
	 Hardwood high-yield - Matane, QC
	  	 	250,000	  
	 Hardwood high-yield - Chetwynd, BC
	  	 	240,000	  
		  	 	 	 
		  	 	805,000	  
		  	 	 	 


  
 - 2 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

CONSOLIDATED SUMMARY 
 SALES

  

																					
	 $ millions
	  	September
2010	 	 	December
2010	 	 	Total
Variance	 	 	Price
Variance	 	 	Volume
& Mix
Variance	 
	 Forest Products
	  	 	113	  	 	 	113	  	 	 	—  	  	 	 	1	  	 	 	(1	) 
	 Dissolving and Chemical Pulp
	  	 	166	  	 	 	148	  	 	 	(18	) 	 	 	(3	) 	 	 	(15	) 
	 High-Yield Pulp
	  	 	104	  	 	 	107	  	 	 	3	  	 	 	(16	) 	 	 	19	  
	 Paper
	  	 	96	  	 	 	87	  	 	 	(9	) 	 	 	(1	) 	 	 	(8	) 
	 Corporate
	  	 	1	  	 	 	1	  	 	 	—  	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	480	  	 	 	456	  	 	 	(24	) 	 	 	(19	) 	 	 	(5	) 
	 Less: Intersegment Sales
	  	 	(36	) 	 	 	(34	) 	 	 	2	  	 				 			
		  	 	 	 	 	 	 	 	 	 	 	 	 				 			
	 Sales
	  	 	444	  	 	 	422	  	 	 	(22	) 	 				 			
		  	 	 	 	 	 	 	 	 	 	 	 	 				 			

 Sales decreased by $22 million as compared to the prior quarter. Currency had a negative effect on pricing as the
Canadian dollar averaged US $0.986, a 2.5% increase from US $0.962 in the prior quarter. Forest Products segment sales were relatively unchanged. Dissolving and Chemical Pulp segment sales declined by $18 million due primarily to lower shipments.
High-Yield Pulp segment sales increased by $3 million, with higher shipments offsetting lower prices. Paper segment sales declined by $9 million primarily due to lower shipments. 
 EBITDA 
  

																					
	 $ millions
	  	September
2010	 	 	December
2010	 	 	Total
Variance	 	 	Price
Variance	 	 	Cost &
Volume
Variance	 
	 Forest Products
	  	 	(5	) 	 	 	(11	) 	 	 	(6	) 	 	 	1	  	 	 	(7	) 
	 Dissolving and Chemical Pulp
	  	 	30	  	 	 	19	  	 	 	(11	) 	 	 	(3	) 	 	 	(8	) 
	 High-Yield Pulp
	  	 	13	  	 	 	7	  	 	 	(6	) 	 	 	(16	) 	 	 	10	  
	 Paper
	  	 	4	  	 	 	4	  	 	 	—  	  	 	 	(1	) 	 	 	1	  
	 Corporate
	  	 	(6	) 	 	 	(8	) 	 	 	(2	) 	 	 	—  	  	 	 	(2	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	36	  	 	 	11	  	 	 	(25	) 	 	 	(19	) 	 	 	(6	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 EBITDA declined by $25 million as compared to the prior quarter. The Forest Products segment EBITDA declined by $6 million
as the segment experienced higher costs. Dissolving and Chemical Pulp segment EBITDA declined by $11 million due to higher costs and lower prices. High-Yield Pulp segment EBITDA declined by $6 million with lower costs partially offsetting a decline
in selling prices. The paper segment EBITDA was unchanged. Corporate expenses for the current quarter include a charge of $4 million relating to share-based compensation. There was no share-based compensation expense recorded in the prior quarter.


  
 - 3 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

OPERATING EARNINGS (LOSS) 
  

																									
	 $ millions
	  	September
2010	 	 	December
2010	 	 	Total
Variance	 	 	EBITDA
Variance	 	 	Depreciation
& Amortization
Variance	 	 	Other
Items
Variance	 
	 Forest Products
	  	 	(9	) 	 	 	(15	) 	 	 	(6	) 	 	 	(6	) 	 	 	—  	  	 	 	—  	  
	 Dissolving and Chemical Pulp
	  	 	24	  	 	 	14	  	 	 	(10	) 	 	 	(11	) 	 	 	1	  	 	 	—  	  
	 High-Yield Pulp
	  	 	11	  	 	 	5	  	 	 	(6	) 	 	 	(6	) 	 	 	—  	  	 	 	—  	  
	 Paper
	  	 	(3	) 	 	 	3	  	 	 	6	  	 	 	—  	  	 	 	(1	) 	 	 	7	  
	 Corporate
	  	 	(8	) 	 	 	(11	) 	 	 	(3	) 	 	 	(2	) 	 	 	—  	  	 	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		  	 	15	  	 	 	(4	) 	 	 	(19	) 	 	 	(25	) 	 	 	—  	  	 	 	6	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

 The Company generated an operating loss of $4 million compared to operating earnings of $15 million in the prior quarter.
The decrease was due to the previously noted decline in EBITDA. Other Items provided a partial offset as the prior quarter Paper segment results included a charge of $7 million related to the permanent closure of the Pine Falls, Manitoba newsprint
mill. 

  
 - 4 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

SEGMENT RESULTS – FOREST PRODUCTS 
  

													
	 	  	September
2010	 	 	December
2010	 	 	Variance	 
	 Financial ($ millions)
	  				 				 			
	 Sales (1)
	  	 	113	  	 	 	113	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 
	 EBITDA
	  	 	(5	) 	 	 	(11	) 	 	 	(6	) 
	 Depreciation and amortization
	  	 	4	  	 	 	4	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 
	 Operating loss
	  	 	(9	) 	 	 	(15	) 	 	 	(6	) 
		  	 	 	 	 	 	 	 	 	 	 	 
	 Shipments
	  				 				 			
	 SPF lumber (mmbf)
	  	 	209	  	 	 	218	  	 	 	9	  
		  	 	 	 	 	 	 	 	 	 	 	 
	 Reference Prices
	  				 				 			
	 Western SPF KD #2 & better
	  				 				 			
	 (US $ per mbf)
	  	 	222	  	 	 	267	  	 	 	45	  
	 KD #2 & better delivered G.L.
	  				 				 			
	 (US $ per mbf)
	  	 	316	  	 	 	349	  	 	 	33	  
	 KD stud delivered G.L.
	  				 				 			
	 (US $ per mbf)
	  	 	282	  	 	 	295	  	 	 	13	  
		  	 	 	 	 	 	 	 	 	 	 	 

  

	(1)	Includes intersegment sales eliminated on consolidation 

 The Forest Products segment generated negative EBITDA of $11 million on sales of $113 million. This compares to negative EBITDA of $5 million on sales of $113 million in the prior quarter. Demand for SPF
lumber remained relatively weak with shipments equal to 54% of capacity, as compared to 52% in the prior quarter. US $ reference prices for random lumber increased by approximately US $39 per mbf on average while stud lumber increased by US $13 per
mbf. Currency partially offset the US $ price increase as the Canadian dollar averaged US $0.986, a 2.5% increase from US $0.962 in the prior quarter. As well, the product mix was not as favourable as in the prior quarter. The net price effect was
an increase in EBITDA of $1 million or $5 per mbf. Mill level costs increased by $7 million. The prior quarter had benefited from favourable adjustments related to harvesting activities. The most recent quarter absorbed approximately $3 million of
unfavourable operating variances. During the December quarter, the Company incurred $3 million of lumber export taxes, up from $2 million in the prior quarter. Lumber export taxes are payable based on the 2006 agreement between Canada and the United
States. Applicable export tax rates may vary based upon selling prices. During the December quarter, the Company incurred a tax of 15% on both Western and Eastern lumber shipments. 
 The Forest Products segment generated an operating loss of $15 million as compared to an operating loss of $9 million in the prior quarter. The previously noted decline in EBITDA led to the increased
operating loss. 

  
 - 5 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

SEGMENT RESULTS – DISSOLVING AND CHEMICAL PULP 
  

													
	 	  	September
2010	 	  	December
2010	 	  	Variance	 
	 Financial ($ millions)
	  				  				  			
	 Sales - Pulp (1)
	  	 	143	  	  	 	125	  	  	 	(18	) 
	 Sales - Chemicals
	  	 	23	  	  	 	23	  	  	 	—  	  
		  	 	 	 	  	 	 	 	  	 	 	 
		  	 	166	  	  	 	148	  	  	 	(18	) 
	 EBITDA
	  	 	30	  	  	 	19	  	  	 	(11	) 
	 Depreciation and amortization
	  	 	6	  	  	 	5	  	  	 	1	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Operating earnings
	  	 	24	  	  	 	14	  	  	 	(10	) 
		  	 	 	 	  	 	 	 	  	 	 	 
	 Shipments
	  				  				  			
	 Dissolving and specialty pulp (000’s tonnes)
	  	 	66	  	  	 	62	  	  	 	(4	) 
	 Chemical pulp (000’s tonnes)
	  	 	58	  	  	 	49	  	  	 	(9	) 
	 Internal (000’s tonnes)
	  	 	8	  	  	 	4	  	  	 	(4	) 
		  	 	 	 	  	 	 	 	  	 	 	 
	 Total
	  	 	132	  	  	 	115	  	  	 	(17	) 
		  	 	 	 	  	 	 	 	  	 	 	 
	 Reference Prices
	  				  				  			
	 NBSK - delivered China (US $ per tonne)
	  	 	840	  	  	 	830	  	  	 	(10	) 
	 NBSK - delivered U.S. (US $ per tonne)
	  	 	1,000	  	  	 	967	  	  	 	(33	) 
		  	 	 	 	  	 	 	 	  	 	 	 

  

	(1)	Includes intersegment sales eliminated on consolidation 

 The Dissolving and Chemical Pulp segment generated EBITDA of $19 million on sales of $148 million for the quarter ended December 25, 2010 compared to EBITDA of $30 million on sales of $166 million in
the prior quarter. Sales decreased by $18 million primarily as a result of lower shipments of chemical pulp. During the most recent quarter, shipments were equal to 79% of capacity, as compared to 89% in the prior quarter. During the December
quarter, the Company incurred 11,700 tonnes of maintenance downtime. This was more than in the prior quarter, which included 5,900 tonnes of maintenance downtime. In the prior quarter, shipments of chemical pulp exceeded production by 5,100 tonnes,
leading to unsustainably low levels of chemical pulp inventory. In the most recent quarter, production exceeded shipments by 6,500 tonnes and inventories increased by the same amount. US $ reference prices for chemical pulp decreased over the prior
quarter. Currency was also unfavourable as the Canadian dollar averaged US $0.986, a 2.5% increase from US $0.962 in the prior quarter. The combined effect was a decrease of $57 per tonne, reducing EBITDA by $3 million. Dissolving and specialty pulp
prices increased by $16 per tonne, increasing EBITDA by $1 million. Mill level costs at the Tartas, France dissolving pulp mill increased by $10 million as a result of the planned annual maintenance shutdown combined with reduced productivity
associated with an equipment failure that occurred after the shutdown. The equipment was repaired in late December and the mill subsequently returned to normal production levels. Inventories were at 20 days of supply at the end of December 2010, as
compared to 19 days at the end of September 2010. 
 The Dissolving and Chemical Pulp segment generated operating earnings of $14 million
compared to operating earnings of $24 million in the prior quarter. The previously noted decrease in EBITDA accounted for the decline in operating earnings. 

  
 - 6 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

SEGMENT RESULTS – HIGH-YIELD PULP 
  

													
	 	  	September
2010	 	  	December
2010	 	  	Variance	 
	 Financial ($ millions)
	  				  				  			
	 Sales (1)
	  	 	104	  	  	 	107	  	  	 	3	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 EBITDA
	  	 	13	  	  	 	7	  	  	 	(6	) 
	 Depreciation and amortization
	  	 	2	  	  	 	2	  	  	 	—  	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Operating earnings
	  	 	11	  	  	 	5	  	  	 	(6	) 
		  	 	 	 	  	 	 	 	  	 	 	 
	 Shipments
	  				  				  			
	 External (000’s tonnes)
	  	 	141	  	  	 	168	  	  	 	27	  
	 Internal (000’s tonnes)
	  	 	13	  	  	 	14	  	  	 	1	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Total
	  	 	154	  	  	 	182	  	  	 	28	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Reference Prices
	  				  				  			
	 BEK - delivered China (US $ per tonne)
	  	 	783	  	  	 	757	  	  	 	(26	) 
		  	 	 	 	  	 	 	 	  	 	 	 

  

	(1)	Includes intersegment sales eliminated on consolidation 

 The High-Yield Pulp segment generated EBITDA of $7 million on sales of $107 million for the quarter ended December 25, 2010 compared to EBITDA of $13 million on sales of $104 million in the prior
quarter. Sales increased by $3 million as higher shipments more than offset lower selling prices. During the most recent quarter, shipments were equal to 90% of capacity, as compared to 77% in the prior quarter. On June 30, 2010, a fire
occurred at the Chetwynd, BC high-yield pulp mill. The fire and related damages were primarily concentrated in the log storage and chip pile area. The mill was out of service for a period of approximately two weeks and subsequently resumed
production at a reduced rate. It returned to full production on September 22, 2010. The total amount of lost production during the September quarter was approximately 17,400 tonnes. A further 5,300 tonnes of maintenance downtime was taken at
the other two high-yield pulp mills in the prior quarter. During the December quarter, the Company incurred only 1,200 tonnes of maintenance downtime. US $ reference prices decreased over the prior quarter. Currency was also unfavourable as the
Canadian dollar averaged US $0.986, a 2.5% increase from US $0.962 in the prior quarter. The combined effect was a decrease of $82 per tonne, reducing EBITDA by $15 million. Cost of sales declined by $9 million. The insurance deductible of $5
million on the Chetwynd fire had increased costs by that amount in the prior quarter. The previously noted increased productivity generated the balance of the cost improvement. Inventories were at 27 days of supply at the end of December 2010, as
compared to 26 days at the end of September 2010. 
 The High-Yield Pulp segment generated operating earnings of $5 million compared to
operating earnings of $11 million in the prior quarter. The previously noted decrease in EBITDA accounted for a significant portion of the decline in operating earnings. 

  
 - 7 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

SEGMENT RESULTS – PAPER 
  

													
	 	  	September
2010	 	 	December
2010	 	  	Variance	 
	 Financial ($ millions)
	  				 				  			
	 Sales
	  	 	96	  	 	 	87	  	  	 	(9	) 
		  	 	 	 	 	 	 	 	  	 	 	 
	 EBITDA
	  	 	4	  	 	 	4	  	  	 	—  	  
	 Depreciation and amortization
	  	 	—  	  	 	 	1	  	  	 	(1	) 
	 Other items
	  	 	7	  	 	 	—  	  	  	 	7	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 Operating earnings (loss)
	  	 	(3	) 	 	 	3	  	  	 	6	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 Shipments
	  				 				  			
	 Bleached Board (000’s tonnes)
	  	 	46	  	 	 	41	  	  	 	(5	) 
	 Newsprint (000’s tonnes)
	  	 	63	  	 	 	58	  	  	 	(5	) 
		  	 	 	 	 	 	 	 	  	 	 	 
	 Total
	  	 	109	  	 	 	99	  	  	 	(10	) 
		  	 	 	 	 	 	 	 	  	 	 	 
	 Reference Prices
	  				 				  			
	 15 pt. Coated Bleached Board (US $ per short ton)
	  	 	1,107	  	 	 	1,150	  	  	 	43	  
	 Newsprint - 48.8 gram East Coast (US $ per tonne)
	  	 	635	  	 	 	640	  	  	 	5	  
		  	 	 	 	 	 	 	 	  	 	 	 

 The Paper segment generated EBITDA of $4 million on sales of $87 million. This compares to EBITDA of $4 million on sales of
$96 million in the prior quarter. Lower shipments of bleached board and newsprint led to the decline in sales. The decline in bleached board shipments was not caused by a decline in demand as markets were strong and shipments equalled 92% of
capacity. The shipment to capacity ratio of +100% experienced in the prior two quarters was due to inventory reductions and was not sustainable. During the most recent quarter, newsprint shipments were equal to 69% of capacity, as compared to 49% in
the prior quarter. As a result of the continued weak demand for newsprint, the Company continued with production curtailments. The Company incurred 22,800 tonnes of market related downtime at the newsprint mill and 1,800 tonnes of maintenance
downtime. In the prior quarter, the Company incurred 68,300 tonnes of market related downtime. This included 45,500 tonnes of market downtime at the Pine Falls, Manitoba newsprint mill. The facility was permanently closed at the end of September and
is no longer counted as market downtime. The US $ reference price for coated bleached board was up by US $43 per short ton while the reference price for newsprint increased by US $5 per tonne. Currency more than offset the US $ price increases as
the Canadian dollar averaged US $0.986, a 2.5% increase from US $0.962 in the prior quarter. The net effect was a reduction of $1 million in EBITDA. Cost of sales was relatively unchanged from the prior quarter. 

The Paper segment generated operating earnings of $3 million, compared to an operating loss of $3 million in the prior quarter. The prior quarter
operating results included a $7 million charge related to the permanent closure of the Pine Falls newsprint facility. 

  
 - 8 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

SEGMENT RESULTS – CORPORATE 
  

									
	 	  	September
2010	 	  	December
2010	 
	 Financial ($ millions)
	  				  			
	 General and administrative expenses
	  	 	6	  	  	 	4	  
	 Share-based compensation
	  	 	—  	  	  	 	4	  
	 Other items
	  	 	2	  	  	 	3	  
		  	 	 	 	  	 	 	 
	 Operating expenses
	  	 	8	  	  	 	11	  
		  	 	 	 	  	 	 	 

 The Company incurred $4 million of share-based compensation expense in the current quarter. The expense relates to two
long-term incentive programs maintained by the Company. Senior executives participate in a “Performance Conditioned Restricted Share Unit” (PCRSU) plan. The PCRSUs have a defined vesting period and performance conditions that will
ultimately determine the amount of PCRSUs that will vest and be paid to participating employees. Non-executive members of the board of directors receive a portion of their fees in the form of “Deferred Share Units” (DSU). The DSUs vest at
specified dates. Details regarding both of these plans can be found in note 11 of the 2010 annual audited financial statements and in the Management Information Circular. The period expense for these two plans consists of normal periodic accruals
based on anticipated or normal vesting, but is also impacted by the change in the value of the Company’s share price, as the PCRSUs and DSUs have the same value as one common share. The increase in expense was driven primarily by the
appreciation of the Company’s shares, which ended the quarter at $4.03 per share, up from $2.01 per share at the end of the prior quarter. 

The Corporate segment’s “Other items” consist of $3 million of expenses relating to several permanently idled facilities. The costs
include pension and healthcare benefits for past employees of the St. Francisville coated paper facility. They also include legal costs, site security and custodial costs pertaining to the closed Marathon, Ontario NBSK pulp mill. Also included are
custodial, pension and benefit costs for the recently permanently closed Pine Falls, Manitoba newsprint operation. In the prior quarter, the costs for St. Francisville and Marathon had totalled $2 million. Operating expenses of $1 million relating
to the Pine Falls facility were included in the Paper segment results as the mill’s status at the time was one of indefinite closure. 

  
 - 9 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

INTEREST, FOREIGN EXCHANGE AND OTHER 

The following table summarizes interest, foreign exchange and other expenses by component: 

 

									
	 	  	$ millions	 
	 	  	September
2010	 	 	December
2010	 
	 Interest on long-term debt
	  	 	7	  	 	 	8	  
	 Interest on short-term debt
	  	 	1	  	 	 	—  	  
	 Debt prepayment premium
	  	 	6	  	 	 	—  	  
	 Foreign exchange items
	  	 	(4	) 	 	 	5	  
		  	 	 	 	 	 	 	 
		  	 	10	  	 	 	13	  
		  	 	 	 	 	 	 	 

 There were no significant interest variances quarter over quarter. In August 2010, the Company repaid a US $300 million term
loan and issued US $255 million of senior secured notes maturing in December 2018. The prepayment of the term loan resulted in a charge of $6 million. Foreign exchange items relate primarily to gains or losses on the translation of US $ net monetary
assets. When the Canadian dollar weakens versus the US dollar, as was the case during the prior quarter, gains are generated. If the Canadian dollar strengthens, as was the case in the current quarter, losses are generated. 

TRANSLATION OF FOREIGN DEBT 
 During the
December 2010 quarter, the Company recorded a gain of $5 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar increased from US $0.975 to US $0.994. The Company recorded a gain of $1 million on the
translation of its euro-denominated debt as the relative value of the euro versus the Canadian dollar decreased from C $1.384 to C $1.320. 

During the September 2010 quarter, the Company recorded a gain of $3 million on the translation of its US $ denominated debt as the relative value of the
Canadian dollar increased from US $0.965 to US $0.975. The Company recorded a loss of $2 million on the translation of its euro-denominated debt as the relative value of the euro versus the Canadian dollar increased from C $1.283 to C $1.384.

 INCOME TAXES 
 During the
December 2010 quarter, the Company recorded an income tax expense of $1 million on a loss before income taxes and non-controlling interests of $11 million. The income tax expense reflected a $4 million unfavourable variance versus an anticipated
income tax recovery of $3 million based on the Company’s effective tax rate of 27.8% . The current quarter absorbed a $4 million unfavourable change in valuation allowance. Based on past financial performance, future income tax assets of the
Company’s Canadian operations have not been recognized as it has not been determined that the future realization of these tax assets is “more likely than not” to occur. 
 During the September 2010 quarter, the Company recorded an income tax expense of $4 million on earnings before income taxes and non-controlling interests of $6 million. The income tax expense reflected a
$2 million unfavourable variance versus an anticipated income tax expense of $2 million based on the Company’s effective tax rate of 29.8% . The prior quarter absorbed a $2 million unfavourable change in valuation allowance. 

  
 - 10 -









 DECEMBER 2010 QUARTER VS SEPTEMBER 2010 QUARTER 

NET EARNINGS (LOSS) 
 The Company
generated a net loss of $12 million or $0.12 per share for the quarter ended December 25, 2010. This compares to net earnings of $2 million or $0.02 per share for the quarter ended September 25, 2010. As noted previously, the
Company’s financial results were impacted by certain specific items. The following table summarizes the impact of these items on the reported financial results. The Company believes it is useful supplemental information as it provides an
indication of results excluding the specific items. This supplemental information is not intended as an alternative measure for net earnings as determined by Canadian GAAP. The table below contains one recurring item, namely the gain or loss on
translation of foreign debt. Because the Company has a substantial amount of US $ denominated debt, relatively minor changes in the value of the Canadian dollar versus the US dollar can lead to large unrealized periodic gains or losses. As well,
this item receives capital gains/loss tax treatment and is not tax-affected at regular business income rates. 
  

																	
	 	  	Quarter ended
September 25, 2010	 	 	Quarter ended
December 25, 2010	 
	 	  	$ millions	 	 	$ per share	 	 	$ millions	 	 	$ per share	 
	 Net earnings (loss) as reported - in accordance with GAAP
	  	 	2	  	 	 	0.02	  	 	 	(12	) 	 	 	(0.12	) 
	 Specific items (after-tax):
	  				 				 				 			
	 Gain on translation of foreign debt
	  	 	(1	) 	 	 	(0.01	) 	 	 	(5	) 	 	 	(0.05	) 
	 Costs for permanently idled facilities
	  	 	1	  	 	 	0.01	  	 	 	2	  	 	 	0.02	  
	 Pine Falls closure charge
	  	 	6	  	 	 	0.06	  	 	 	—  	  	 	 	—  	  
	 Debt prepayment premium
	  	 	4	  	 	 	0.04	  	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net earnings (loss) excluding specific items - not in accordance with GAAP
	  	 	12	  	 	 	0.12	  	 	 	(15	) 	 	 	(0.15	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  
 - 11 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

CONSOLIDATED SUMMARY 
 SALES

  

																					
	 $ millions
	  	December
2009	 	 	December
2010	 	 	Total
Variance	 	 	Price
Variance	 	  	Volume
& Mix
Variance	 
	 Forest Products
	  	 	95	  	 	 	113	  	 	 	18	  	 	 	4	  	  	 	14	  
	 Dissolving and Chemical Pulp
	  	 	211	  	 	 	148	  	 	 	(63	) 	 	 	11	  	  	 	(74	) 
	 High-Yield Pulp
	  	 	62	  	 	 	107	  	 	 	45	  	 	 	2	  	  	 	43	  
	 Paper
	  	 	79	  	 	 	87	  	 	 	8	  	 	 	3	  	  	 	5	  
	 Corporate
	  	 	2	  	 	 	1	  	 	 	(1	) 	 	 	—  	  	  	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 
		  	 	449	  	 	 	456	  	 	 	7	  	 	 	20	  	  	 	(13	) 
	 Less: Intersegment Sales
	  	 	(37	) 	 	 	(34	) 	 	 	3	  	 				  			
		  	 	 	 	 	 	 	 	 	 	 	 	 				  			
	 Sales
	  	 	412	  	 	 	422	  	 	 	10	  	 				  			
		  	 	 	 	 	 	 	 	 	 	 	 	 				  			

 Sales increased by $10 million as compared to the same quarter a year ago. Currency was unfavourable as the
Canadian dollar averaged US $0.986, a 4.3% increase from US $0.945 in the prior year quarter. Forest Products segment sales increased by $18 million primarily as a result of higher shipments. Dissolving and Chemical Pulp segment sales declined by
$63 million due to significantly lower shipments, partially offset by higher prices. High-Yield Pulp segment sales increased by $45 million due to higher shipments. Paper segment sales increased by $8 million due to higher prices and shipments.

 EBITDA 
  

																					
	 $ millions
	  	December
2009	 	 	December
2010	 	 	Total
Variance	 	 	Price
Variance	 	  	Cost &
Volume
Variance	 
	 Forest Products
	  	 	(8	) 	 	 	(11	) 	 	 	(3	) 	 	 	4	  	  	 	(7	) 
	 Dissolving and Chemical Pulp
	  	 	15	  	 	 	19	  	 	 	4	  	 	 	11	  	  	 	(7	) 
	 High-Yield Pulp
	  	 	4	  	 	 	7	  	 	 	3	  	 	 	2	  	  	 	1	  
	 Paper
	  	 	(2	) 	 	 	4	  	 	 	6	  	 	 	3	  	  	 	3	  
	 Corporate
	  	 	(5	) 	 	 	(8	) 	 	 	(3	) 	 	 	—  	  	  	 	(3	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 
		  	 	4	  	 	 	11	  	 	 	7	  	 	 	20	  	  	 	(13	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 

 EBITDA improved by $7 million over the prior year quarter. Forest Products segment EBITDA declined by $3 million due to
higher costs, partially offset by higher prices. Dissolving and Chemical Pulp segment EBITDA increased by $4 million due to higher prices, partially offset by higher costs. High-Yield Pulp segment EBITDA increased by $3 million primarily due to
higher prices. Paper segment EBITDA increased by $6 million on a combination of higher prices and lower costs. Corporate expenses for the current quarter include a charge of $4 million relating to share-based compensation. There was no share-based
compensation expense recorded in the prior year quarter. 

  
 - 12 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

OPERATING EARNINGS (LOSS) 
  

																									
	 $ millions
	  	December
2009	 	 	December
2010	 	 	Total
Variance	 	 	EBITDA
Variance	 	 	Depreciation
& Amortization
Variance	 	  	Other
Items
Variance	 
	 Forest Products
	  	 	(11	) 	 	 	(15	) 	 	 	(4	) 	 	 	(3	) 	 	 	—  	  	  	 	(1	) 
	 Dissolving and Chemical Pulp
	  	 	8	  	 	 	14	  	 	 	6	  	 	 	4	  	 	 	2	  	  	 	—  	  
	 High-Yield Pulp
	  	 	1	  	 	 	5	  	 	 	4	  	 	 	3	  	 	 	1	  	  	 	—  	  
	 Paper
	  	 	(3	) 	 	 	3	  	 	 	6	  	 	 	6	  	 	 	—  	  	  	 	—  	  
	 Corporate
	  	 	(5	) 	 	 	(11	) 	 	 	(6	) 	 	 	(3	) 	 	 	—  	  	  	 	(3	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 
		  	 	(10	) 	 	 	(4	) 	 	 	6	  	 	 	7	  	 	 	3	  	  	 	(4	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 

 The Company generated an operating loss of $4 million compared to an operating loss of $10 million in the same quarter a
year ago. The previously noted improvement in EBITDA generated the improvement in operating results. 

  
 - 13 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

SEGMENT RESULTS – FOREST PRODUCTS 
  

													
	 	  	December
2009	 	 	December
2010	 	 	Variance	 
	 Financial ($ millions)
	  				 				 			
	 Sales (1)
	  	 	95	  	 	 	113	  	 	 	18	  
		  	 	 	 	 	 	 	 	 	 	 	 
	 EBITDA
	  	 	(8	) 	 	 	(11	) 	 	 	(3	) 
	 Depreciation and amortization
	  	 	4	  	 	 	4	  	 	 	—  	  
	 Other items
	  	 	(1	) 	 	 	—  	  	 	 	(1	) 
		  	 	 	 	 	 	 	 	 	 	 	 
	 Operating loss
	  	 	(11	) 	 	 	(15	) 	 	 	(4	) 
		  	 	 	 	 	 	 	 	 	 	 	 
	 Shipments
	  				 				 			
	 SPF lumber (mmbf)
	  	 	177	  	 	 	218	  	 	 	41	  
		  	 	 	 	 	 	 	 	 	 	 	 
	 Reference Prices
	  				 				 			
	 Western SPF KD #2 & better
	  				 				 			
	 (US $ per mbf)
	  	 	206	  	 	 	267	  	 	 	61	  
	 KD #2 & better delivered G.L.
	  				 				 			
	 (US $ per mbf)
	  	 	294	  	 	 	349	  	 	 	55	  
	 KD stud delivered G.L.
	  				 				 			
	 (US $ per mbf)
	  	 	283	  	 	 	295	  	 	 	12	  
		  	 	 	 	 	 	 	 	 	 	 	 

  

	(1)	Includes intersegment sales eliminated on consolidation 

 The Forest Products segment generated negative EBITDA of $11 million on sales of $113 million. This compares to negative EBITDA of $8 million on sales of $95 million in the comparable quarter of the prior
year. Higher volumes and prices for SPF lumber caused the majority of the $18 million sales increase. Demand for SPF lumber remained relatively weak with shipments equal to 54% of capacity, as compared to 44% in the year ago quarter. US $ reference
prices for random lumber increased by US $58 per mbf on average while the reference price for stud lumber was up US $12 per mbf. Currency partially offset the increase as the Canadian dollar averaged US $0.986, a 4.3% increase from US $0.945 in the
prior year quarter. As a net result, the average selling price of SPF lumber increased by $18 per mbf, increasing EBITDA by $4 million. Cost of sales increased by $7 million. In the prior year quarter, the segment had benefited from a $5 million
favourable adjustment to the carrying values of logs and lumber inventories. During the December 2010 quarter, the Company incurred $3 million of lumber export taxes, as compared to $2 million a year ago. 

The Forest Products segment generated an operating loss of $15 million, as compared to an operating loss of $11 million in the prior year quarter. The
comparable period of the prior year had included a gain of $1 million on the sale of land. 

  
 - 14 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

SEGMENT RESULTS – DISSOLVING AND CHEMICAL PULP 
  

													
	 	  	December
2009	 	  	December
2010	 	  	Variance	 
	 Financial ($ millions)
	  				  				  			
	 Sales - Pulp (1)
	  	 	187	  	  	 	125	  	  	 	(62	) 
	 Sales - Chemicals
	  	 	24	  	  	 	23	  	  	 	(1	) 
		  	 	 	 	  	 	 	 	  	 	 	 
		  	 	211	  	  	 	148	  	  	 	(63	) 
	 EBITDA
	  	 	15	  	  	 	19	  	  	 	4	  
	 Depreciation and amortization
	  	 	7	  	  	 	5	  	  	 	2	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Operating earnings
	  	 	8	  	  	 	14	  	  	 	6	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Shipments
	  				  				  			
	 Dissolving and specialty pulp (000’s tonnes)
	  	 	65	  	  	 	62	  	  	 	(3	) 
	 Chemical pulp (000’s tonnes)
	  	 	158	  	  	 	49	  	  	 	(109	) 
	 Internal (000’s tonnes)
	  	 	9	  	  	 	4	  	  	 	(5	) 
		  	 	 	 	  	 	 	 	  	 	 	 
	 Total
	  	 	232	  	  	 	115	  	  	 	(117	) 
		  	 	 	 	  	 	 	 	  	 	 	 
	 Reference Prices
	  				  				  			
	 NBSK - delivered China (US $ per tonne)
	  	 	690	  	  	 	830	  	  	 	140	  
	 NBSK - delivered U.S. (US $ per tonne)
	  	 	820	  	  	 	967	  	  	 	147	  
		  	 	 	 	  	 	 	 	  	 	 	 

  

	(1)	Includes intersegment sales eliminated on consolidation 

 The Dissolving and Chemical Pulp segment generated EBITDA of $19 million on sales of $148 million. This compares to EBITDA of $15 million on sales of $211 million in the year ago quarter. The $63 million
decrease in sales was caused by significantly lower shipments of chemical pulp. In May 2010, the Company completed the sale of two kraft pulp mills and related operations located in Southern France. During the December 2009 quarter, these operations
contributed $70 million to sales and EBITDA of $2 million. The two mills shipped 106,800 tonnes in the prior year quarter. During the most recent quarter, shipments were equal to 79% of capacity, as compared to 80% in the prior year quarter. During
the December 2010 quarter, the Company incurred 11,700 tonnes of maintenance downtime, compared to 8,600 tonnes of maintenance downtime in the year ago quarter. While US $ reference prices were up significantly, the current quarter pricing was
impacted by a stronger Canadian dollar which averaged US $0.986, a 4.3% increase from US $0.945 in the prior year quarter. The net price effect was an increase of $113 per tonne, increasing EBITDA by $13 million. Cost of sales increased by $9
million. Mill level costs at the Tartas, France dissolving pulp mill increased by $12 million as a result of the planned annual maintenance shutdown combined with reduced productivity associated with an equipment failure that occurred after the
shutdown. 
 The Dissolving and Chemical Pulp segment generated operating earnings of $14 million compared to operating earnings of $8 million
in the comparable quarter of the prior year. The previously noted increase in EBITDA accounted for the majority of the improvement in operating earnings. The balance results from a $2 million reduction in depreciation expense resulting from the sale
of the two pulp mills located in Southern France. 

  
 - 15 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

SEGMENT RESULTS – HIGH-YIELD PULP 
  

													
	 	  	December	 	  	December	 	  	 	 
	 	  	2009	 	  	2010	 	  	Variance	 
	 Financial ($ millions)
	  				  				  			
	 Sales (1)
	  	 	62	  	  	 	107	  	  	 	45	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 EBITDA
	  	 	4	  	  	 	7	  	  	 	3	  
	 Depreciation and amortization
	  	 	3	  	  	 	2	  	  	 	1	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Operating earnings
	  	 	1	  	  	 	5	  	  	 	4	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Shipments
	  				  				  			
	 External (000’s tonnes)
	  	 	95	  	  	 	168	  	  	 	73	  
	 Internal (000’s tonnes)
	  	 	14	  	  	 	14	  	  	 	—  	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Total
	  	 	109	  	  	 	182	  	  	 	73	  
		  	 	 	 	  	 	 	 	  	 	 	 
	 Reference Prices
	  				  				  			
	 BEK- delivered China (US $ per tonne)
	  	 	610	  	  	 	757	  	  	 	147	  
		  	 	 	 	  	 	 	 	  	 	 	 

  

	(1)	Includes intersegment sales eliminated on consolidation 

 The High-Yield Pulp segment generated EBITDA of $7 million on sales of $107 million. This compares to EBITDA of $4 million on sales of $62 million in the year ago quarter. The $45 million increase in
sales was caused by significantly higher shipments. During the most recent quarter, shipments were equal to 90% of capacity, as compared to 54% in the prior year quarter. Pulp demand was up significantly from the year ago quarter. As a result, the
Company incurred only 1,200 tonnes of maintenance downtime in the quarter. This compares to 55,600 tonnes of market related downtime and 5,000 tonnes of maintenance downtime in the comparable period a year ago. While US $ reference prices were up
significantly, the current quarter pricing was impacted by a stronger Canadian dollar which averaged US $0.986, a 4.3% increase from US $0.945 in the prior year quarter. The net price effect was an increase of $11 per tonne, increasing EBITDA by $2
million. Cost of sales was relatively unchanged. 
 The High-Yield Pulp segment generated operating earnings of $5 million compared to operating
earnings of $1 million in the comparable quarter of the prior year. The previously noted increase in EBITDA accounted for the majority of the improvement in operating earnings. 

  
 - 16 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

SEGMENT RESULTS – PAPER 
  

													
	 	  	December	 	 	December	 	  	 	 
	 	  	2009	 	 	2010	 	  	Variance	 
	 Financial ($ millions)
	  				 				  			
	 Sales
	  	 	79	  	 	 	87	  	  	 	8	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 EBITDA
	  	 	(2	) 	 	 	4	  	  	 	6	  
	 Depreciation and amortization
	  	 	1	  	 	 	1	  	  	 	—  	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 Operating earnings (loss)
	  	 	(3	) 	 	 	3	  	  	 	6	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 Shipments
	  				 				  			
	 Bleached Board (000’s tonnes)
	  	 	38	  	 	 	41	  	  	 	3	  
	 Newsprint (000’s tonnes)
	  	 	55	  	 	 	58	  	  	 	3	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 Total
	  	 	93	  	 	 	99	  	  	 	6	  
		  	 	 	 	 	 	 	 	  	 	 	 
	 Reference Prices
	  				 				  			
	 15 pt. Coated Bleached Board
(US $ per short ton)
	  	 	1,020	  	 	 	1,150	  	  	 	130	  
	 Newsprint - 48.8 gram East
Coast (US $ per tonne)
	  	 	505	  	 	 	640	  	  	 	135	  
		  	 	 	 	 	 	 	 	  	 	 	 

 The Paper segment generated EBITDA of $4 million on sales of $87 million. This compares to negative EBITDA of $2 million on
sales of $79 million in the same quarter a year ago. The $8 million increase in sales results from higher newsprint prices and higher shipments. Continued strong demand for bleached board resulted in shipments to capacity of 92% versus 84% in the
prior year quarter. During the most recent quarter, newsprint shipments were equal to 69% of capacity, as compared to 43% in the prior year quarter. As a result of the very weak demand for newsprint, the Company continued with significant production
curtailments. The Company incurred 22,800 tonnes of market related downtime at the newsprint mill in the most recent quarter and 1,800 tonnes of maintenance downtime. In the prior year period, the Company had incurred 22,800 tonnes of market
downtime and 3,800 tonnes of maintenance related downtime. A further 45,500 tonnes of production were lost due to the indefinite closure of the Pine Falls, Manitoba newsprint mill. The facility was permanently closed in September 2010. The US $
reference price for coated bleached board increased by US $130 per short ton. The US $ reference price for newsprint increased by US $135 per tonne. Currency partially offset the increases as the Canadian dollar averaged US $0.986, a 4.3% increase
from US $0.945 in the prior year quarter. The net price effect was an increase in EBITDA of $3 million. The balance of the improvement in EBITDA related to the closure of the Pine Falls newsprint mill. The facility had negative EBITDA of $4 million
in the prior year quarter. 
 The Paper segment generated operating earnings of $3 million compared to an operating loss of $3 million a year
ago. The previously noted increase in EBITDA generated the improved operating results. 

  
 - 17 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

SEGMENT RESULTS – CORPORATE 
  

									
	 	  	December	 	  	December	 
	 	  	2009	 	  	2010	 
	 Financial ($ millions)
	  				  			
	 General and administrative expenses
	  	 	5	  	  	 	4	  
	 Share-based compensation
	  	 	—  	  	  	 	4	  
	 Other items
	  	 	—  	  	  	 	3	  
		  	 	 	 	  	 	 	 
	 Operating expenses
	  	 	5	  	  	 	11	  
		  	 	 	 	  	 	 	 

 The Company incurred $4 million of share-based compensation expense in the current quarter. The expense relates to two
long-term incentive program maintained by the Company. Senior executives participate in a “Performance Conditioned Restricted Share Unit” (PCRSU) plan. The PCRSUs have a defined vesting period and performance conditions that will
ultimately determine the amount of PCRSUs that will vest and be paid to participating employees. Non-executive members of the board of directors receive a portion of their fees in the form of “Deferred Share Units” (DSU). The DSUs vest at
specified dates. Details regarding both of these plans can be found in note 11 of the 2010 annual audited financial statements and in the Management Information Circular. The period expense for these two plans consists of normal periodic accruals
based on anticipated or normal vesting, but is also impacted by the changes in the value of the Company’s share price, as the PCRSUs and DSUs have the same value as one common share. The increase in expense was driven primarily by the
appreciation of the Company’s shares, which ended the quarter at $4.03 per share, up from $2.01 per share at the end of the September 2010 quarter. 
 The Corporate segment’s “Other items” consist of $3 million of expenses relating to several permanently idled facilities. The costs include pension and healthcare benefits for past
employees of the St. Francisville coated paper facility. They also include legal costs, site security and custodial costs pertaining to the closed Marathon, Ontario NBSK pulp mill. Also included are custodial, pension and benefit costs for the
recently permanently closed Pine Falls, Manitoba newsprint operation. In the prior year quarter, the costs for St. Francisville and Marathon had totalled nil. Operating expenses of $4 million relating to the Pine Falls facility were included in the
Paper segment results as the mill’s status at the time was one of indefinite closure. 

  
 - 18 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

INTEREST, FOREIGN EXCHANGE AND OTHER 
 The following table summarizes interest, foreign exchange and other expenses by component: 
  

									
	 	  	$ millions	 
	 	  	December	 	  	December	 
	 	  	2009	 	  	2010	 
	 Interest on long-term debt
	  	 	7	  	  	 	8	  
	 Interest on short-term debt
	  	 	1	  	  	 	—  	  
	 Foreign exchange items
	  	 	5	  	  	 	5	  
		  	 	 	 	  	 	 	 
		  	 	13	  	  	 	13	  
		  	 	 	 	  	 	 	 

 There were no significant interest variances. The major portion of the prior period interest on long-term debt related to a
US $300 million term loan. This credit facility was repaid in August 2010. The Company issued US $255 million of senior secured notes maturing in December 2018. Foreign exchange items relate primarily to gains or losses on the translation of US $
net monetary assets. When the Canadian dollar strengthens versus the US dollar, as was the case during the prior year quarter and the current quarter, losses are generated. If the Canadian dollar weakens, gains are generated. 

TRANSLATION OF FOREIGN DEBT 
 During the
December 2010 quarter, the Company recorded a gain of $5 million on the translation of its US $ denominated debt as the relative value of the Canadian dollar increased from US $0.975 to US $0.994. The Company recorded a gain of $1 million on the
translation of its euro-denominated debt as the relative value of the euro versus the Canadian dollar decreased from C $1.384 to C $1.320. 

During the December 2009 quarter, the Company recorded a gain of $13 million on the translation of its US $ denominated debt as the relative value of the
Canadian dollar increased from US $0.916 to US $0.953. The Company recorded a gain of $3 million on the translation of its euro-denominated debt as the relative value of the euro versus the Canadian dollar decreased from C $1.602 to C $1.507.

 INCOME TAXES 
 During the
December 2010 quarter, the Company recorded an income tax expense of $1 million on a loss before income taxes and non-controlling interests of $11 million. The income tax expense reflected a $4 million unfavourable variance versus an anticipated
income tax recovery of $3 million based on the Company’s effective tax rate of 27.8% . The current quarter absorbed a $4 million unfavourable change in valuation allowance. Based on past financial performance, future income tax assets of the
Company’s Canadian operations have not been recognized as it has not been determined that the future realization of these assets is “more likely than not” to occur. 
 During the December 2009 quarter, the Company recorded an income tax expense of $1 million on a loss before income taxes and non-controlling interests of $7 million. This income tax expense reflected a $3
million unfavourable variance versus an anticipated income tax recovery of $2 million based on the Company’s effective tax rate of 29.8% . The non-recognition of period losses reduced the income tax recovery by $5 million. 

  
 - 19 -









 DECEMBER 2010 QUARTER VS DECEMBER 2009 QUARTER 

NET LOSS 
 The Company generated a net
loss of $12 million or $0.12 per share for the quarter ended December 25, 2010 compared to a net loss of $9 million or $0.09 per share for the quarter ended December 26, 2009. As noted previously, the Company’s financial results were
impacted by certain specific items. The following table summarizes the impact of these items on the reported financial results. The Company believes it is useful supplemental information as it provides an indication of results excluding the specific
items. This supplemental information is not intended as an alternative measure for net earnings as determined by Canadian GAAP. The table below contains one recurring item, namely the gain or loss on translation of foreign debt. Because the Company
has a substantial amount of US $ denominated debt, relatively minor changes in the value of the Canadian dollar versus the US dollar can lead to large unrealized periodic gains or losses. As well, this item receives capital gains/loss tax treatment
and is not tax-affected at regular business income rates. 
  

																	
	 	  	Quarter ended	 	 	Quarter ended	 
	 	  	December 26, 2009	 	 	December 25, 2010	 
	 	  	$ millions	 	 	$ per share	 	 	$ millions	 	 	$ per share	 
	 Net loss as reported - in accordance with GAAP
	  	 	(9	) 	 	 	(0.09	) 	 	 	(12	) 	 	 	(0.12	) 
	 Specific items (after-tax):
	  				 				 				 			
	 Gain on translation of foreign debt
	  	 	(13	) 	 	 	(0.13	) 	 	 	(5	) 	 	 	(0.05	) 
	 Costs for permanently idled facilities
	  	 	—  	  	 	 	—  	  	 	 	2	  	 	 	0.02	  
	 Gain on sale of land
	  	 	(1	) 	 	 	(0.01	) 	 	 	—  	  	 	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Net loss excluding specific items - not in accordance with GAAP
	  	 	(23	) 	 	 	(0.23	) 	 	 	(15	) 	 	 	(0.15	) 
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


  
 - 20 -









 SELECTED QUARTERLY INFORMATION 

Selected quarterly information for the eight most recently completed fiscal quarters is disclosed below. 

 

																																	
	 	  	$ millions (except as otherwise noted)	 
	 	  	Mar 09	 	 	Jun 09	 	 	Sept 09	 	 	Dec 09	 	 	Mar 10	 	  	Jun 10	 	  	Sept 10	 	  	Dec 10	 
	 Sales
	  	 	417	  	 	 	407	  	 	 	451	  	 	 	412	  	 	 	476	  	  	 	545	  	  	 	444	  	  	 	422	  
	 EBITDA
	  	 	(63	) 	 	 	(42	) 	 	 	(9	) 	 	 	4	  	 	 	32	  	  	 	60	  	  	 	36	  	  	 	11	  
	 Operating earnings (loss)
	  	 	(81	) 	 	 	(61	) 	 	 	(24	) 	 	 	(10	) 	 	 	2	  	  	 	56	  	  	 	15	  	  	 	(4	) 
	 Net earnings (loss)
	  	 	(99	) 	 	 	(38	) 	 	 	(17	) 	 	 	(9	) 	 	 	—  	  	  	 	59	  	  	 	2	  	  	 	(12	) 
	 Net earnings (loss) per share ($)
	  	 	(0.99	) 	 	 	(0.38	) 	 	 	(0.17	) 	 	 	(0.09	) 	 	 	—  	  	  	 	0.59	  	  	 	0.02	  	  	 	(0.12	) 

 FINANCIAL
POSITION 
  

																																	
	 	  	Fiscal 2010	 	 	Fiscal 2011	 
	 	  	Dec 09	 	 	Mar 10	 	 	Jun 10	 	 	Sep 10	 	 	Dec 10	 	 	Mar 11	 	  	Jun 11	 	  	Sep 11	 
	 Net debt / total capitalization
	  	 	42	% 	 	 	43	% 	 	 	27	% 	 	 	27	% 	 	 	28	% 	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 EBITDA / interest on indebtedness (times)
	  	 	0.5	  	 	 	4.5	  	 	 	9.3	  	 	 	4.9	  	 	 	1.4	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Cash flow from (used by) operations before working capital changes ($ millions)
	  	 	(6	) 	 	 	8	  	 	 	44	  	 	 	12	  	 	 	(10	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Net fixed asset additions ($ millions)
	  	 	(6	) 	 	 	(5	) 	 	 	(6	) 	 	 	(8	) 	 	 	(8	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Free cash flow (negative) ($ millions)
	  	 	(12	) 	 	 	3	  	 	 	38	  	 	 	4	  	 	 	(18	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 

 Cash Flow – Operations 
 Cash flow from operations before working capital changes in the first quarter of fiscal 2011 was negative $10 million, compared to negative $6 million from the same period a year ago as operating losses
were generated in both periods. In the first quarter of fiscal 2011, non-cash working capital items generated $5 million as compared to $2 million used in the prior year. After allowing for net fixed asset additions of $8 million, free cash flow in
the first quarter of fiscal 2011 was negative $18 million versus a negative amount of $12 million in the prior year. 
 Net Fixed Asset
Additions 
 During the first quarter of fiscal 2011, net fixed asset additions totalled $8 million compared to $6 million in the prior year.
The Company estimates that annual capital expenditures of $35 million to $40 million are required to adequately maintain its facilities. 
 On
October 9, 2009, the Company was advised that it had qualified for $24 million of credits under the federal government’s Pulp and Paper Green Transformation Program. The credits can be used to finance capital projects that generate
environmental benefits, including investments in energy efficiency or the production of renewable energy from forest biomass. To date, the Company has obtained approval for two projects that will utilize $20 million of the available credits. Other
projects are currently under development and the Company anticipates that it will utilize the full $24 million within the program’s specified time limits. 

  
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 FINANCIAL POSITION 
 Liquidity 
 At the end of December 2010, the Company had total cash (including cash held in
trust) of $61 million plus unused operating lines of $78 million, for total liquidity of $139 million. At September 2010, the date of the last audited financial statements, the Company had net cash of $74 million and unused operating lines of $100
million. 
 The following table summarizes operating line availability and utilization: 

 

									
	Operating Lines	  				 			
	$ millions	  	September	 	 	December	 
	 	  	2010	 	 	2010	 
	 Borrowing base
	  	 	212	  	 	 	190	  
	 Less: availability reserve
	  	 	(76	) 	 	 	(75	) 
		  	 	 	 	 	 	 	 
	 Net availability
	  	 	136	  	 	 	115	  
	 Outstanding letters of credit
	  	 	(35	) 	 	 	(34	) 
	 Amount drawn
	  	 	(1	) 	 	 	(3	) 
		  	 	 	 	 	 	 	 
	 Unused amount
	  	 	100	  	 	 	78	  
		  	 	 	 	 	 	 	 

 As part of the financial recapitalization that occurred in February 2008, the Company negotiated a $205 million revolving
working capital facility maturing in December 2011. The facility is subject to a permanent availability reserve of $25 million. This amount can be increased to $35 million if the Company’s trailing 12-month EBITDA falls below $80 million. The
facility has a first priority charge over the receivables and inventories and a second priority charge over the remainder of the assets of the Company’s significant North American operations. As part of the long-term debt refinancing that
occurred during the September 2010 quarter and which is discussed in the following section, the lenders of the revolving working capital facility sought and obtained an increase of US $50 million to the availability reserve. This facility matures in
December 2011 and the Company is currently in the process of replacing it with a new multi-year revolving working capital line. 
 The
outstanding letters of credit constitute security for various operating items, principally the unfunded portion of supplementary retirement plans, future landfill closure liabilities and performance guarantees related to electricity generation
agreements. 
 Long-term debt 

In August 2010, the Company completed a private offering of US $255 million of 11.25% senior secured notes maturing in December 2018. The notes were sold
in a private offering to “qualified institutional buyers” as defined in Rule 144A under the U.S. Securities Act of 1933 and outside the U.S. in reliance on Regulation S under the Securities Act. The notes are senior secured obligations of
the Company, secured by a first priority lien on the majority of the property and fixed assets of the Company. They are secured by a second priority lien on accounts receivable, inventories and certain intangibles. The net proceeds of the offering,
together with cash on hand, were used to repay all outstanding indebtedness under the Company’s existing US $300 million term loan facility maturing in February 2012, including related fees, expenses and a 2% prepayment premium. 

Credit Ratings 
 Pursuant to the
previously noted issuance of the 2018 senior secured notes, Moody’s Investors Service (Moody’s) assigned a B3 rating to the new long-term debt and the same level for the Company’s corporate credit rating. Standard and Poor’s
(S&P) assigned a B- rating to the senior secured notes as well as the Company’s corporate credit rating. Both Moody’s and S&P have a “stable” outlook with respect to their ratings. 

  
 - 22 -









 CAPITAL STOCK INFORMATION 
 As at December 25, 2010, issued and outstanding capital stock consisted of 100,000,000 common shares (100,000,000 as at September 25, 2010) and 11,093,943 warrants (11,093,943 as at
September 25, 2010). 
 The warrants are convertible into an equal amount of common shares and expire on February 29, 2012. They will
automatically convert into new common shares if the 20-day volume weighted average trading price of the common shares reaches or exceeds $12 or immediately prior to any transaction that would constitute a change of control. 

A total of 158,265 stock options are also issued and outstanding (161,123 as at September 25, 2010). In the first quarter of fiscal 2011, 2,383
options expired and 475 options were forfeited. 
 CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 

CONVERSION PROGRESS 
 In 2005, the
Accounting Standards Board of Canada (AcSB) announced that accounting standards in Canada are to converge with International Financial Reporting Standards (IFRS). On February 13, 2008, the AcSB confirmed that publicly accountable entities will
be required to prepare financial statements in accordance with IFRS, in full and without modification, for interim and annual financial statements for fiscal years beginning on or after January 1, 2011, which in the case of the Company,
represents interim and fiscal year-end periods beginning on or after September 25, 2011 (the “Changeover” date). In the Company’s reporting for those periods following the Changeover date, comparative data for equivalent periods
in the previous fiscal year will be required, making September 26, 2010 the “Transition” date for the Company. 
 IFRS uses a
conceptual framework similar to Canadian GAAP, but presents significant differences on certain recognition, measurement and disclosure principles. Further, the International Accounting Standards Board (IASB) will continue to issue new, or amend
existing accounting standards during the conversion period, and as a result, the final impact on the Company’s consolidated financial statements of applying IFRS in full will only be entirely measurable once all applicable IFRS standards at the
final Changeover date are known. 
 The Company’s transition to full implementation of IFRS consists of five phases: 

 

	•	 	 Preliminary Study Phase – This phase involves performing a high-level assessment to identify key areas of accounting differences and their impact
(high, medium or low priority) that may arise from the transition to IFRS. 


  

	•	 	 Project Set-up Phase – This phase includes the identification of a project team and IFRS Steering Committee, the development of a detailed
conversion plan, a change management plan, as well as other key conversion processes and tools. 


  

	•	 	 Component Evaluations and Issues Resolution Phase – In this phase, the Company completes a detailed assessment of all accounting differences,
including those identified in the preliminary study phase, and their impact on the Company. It involves specification of changes required to existing accounting policies, information systems and business processes, together with an analysis of
policy alternatives allowed under IFRS and impacts on drafting of financial statements under IFRS. The analysis and decisions made during this phase are included in IFRS Accounting Policy Choice Memos challenged and approved by the IFRS Steering
Committee and External Auditors, which are then submitted to the Audit Committee. 


  

	•	 	 Conversion Phase – This phase includes execution of changes to information systems, business processes and accounting policies. It also involves
the development of a communication and training program for the Company’s finance and other staff, as necessary. 



  
 - 23 -









 CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 

 

	•	 	 Embedding Phase – The project will culminate in the collection of financial information necessary to compile IFRS- compliant financial statements,
embedding IFRS in business processes, eliminating unnecessary data collection processes and submitting IFRS financial statements to the Audit Committee for approval. Implementation also involves further training of staff as revised systems begin to
take effect. 


 To ensure adequate management of this process, the Company has established a project team and an IFRS Steering
Committee, both of which are comprised of finance and accounting senior management as well as representatives from various areas of the organization, as deemed appropriate. Progress reporting to the Audit Committee on the status of the IFRS
implementation project has been instituted. The Company completed the Preliminary Study Phase in July 2008, the Project Set-up Phase in January 2009, the Component Evaluations and Issues Resolution Phase in September 2009 and the Conversion Phase in
September 2010. The IFRS team is currently focusing on the Embedding Phase. 
 POTENTIAL IMPACT OF IMPLEMENTATION ON THE COMPANY

 The comparisons of IFRS with Canadian GAAP, which are currently reflected in the Company’s accounting policies, have helped identify
a number of areas of differences. 
 IFRS 1, First-Time Adoption of International Financial Reporting Standards, provides entities
adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirement for full retrospective application of IFRS. 
 Most adjustments required on transition to IFRS will be made, retrospectively, against opening retained earnings as of the date of the first comparative balance sheet presented based on standards
effective September 2012. Transitional adjustments relating to those standards where comparative figures are not required to be restated will only be made as of the first day of the year of adoption. 

Following a detailed analysis of the various accounting policy choices available under IFRS, the Company has selected the policies that it expects to
apply in preparing IFRS financial statements. 
 The following are selected key areas of accounting differences where changes in accounting
policies in conversion to IFRS may impact the Company’s consolidated financial statements. The list and comments should not be construed as a comprehensive list of changes that will result from transition to IFRS, but rather highlights those
areas of accounting differences the Company currently believes to be most significant. Standard-setting bodies that promulgate Canadian GAAP and IFRS have significant ongoing projects that could affect the ultimate differences between Canadian GAAP
and IFRS and their impact on the Company’s consolidated financial statements in future years. The areas of differences highlighted below are based on existing Canadian GAAP and IFRS effective at December 25, 2010. At this stage, the
Company is not able to reliably quantify the full impact of these and other differences on the Company’s consolidated financial statements. 
 Fresh Start Accounting 
 IFRS does not provide specific guidance on the accounting by
entities subject to a financial reorganization. Instead, usual requirements of IFRS apply. In particular, fresh start accounting is not permitted in such circumstances. In order to mitigate the impact of this accounting difference, IFRS 1 provides
the choice of recording assets and liabilities based on a deemed cost, which can be an event driven valuation where some or all of the assets and liabilities were valued and recognized at fair value. The Company has selected this accounting policy
choice and therefore, the difference between Canadian GAAP and IFRS regarding fresh start accounting is not expected to impact the accounting measurement of the assets and liabilities that were revalued on February 29, 2008. 

  
 - 24 -









 CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 

Foreign Exchange Translation 
 IAS 21,
The Effects of Changes in Foreign Exchange Rates, requires an operation to determine its functional currency in accordance with the standard and translate all foreign currency items into its functional currency. Upon consolidation, the
Company translates all assets and liabilities of consolidated operations with a functional currency that is different than the presentation currency at the closing rate at the date of that balance sheet. Canadian GAAP, on the other hand, requires a
company to classify each foreign operation as integrated or self-sustaining operations. The translation of the assets and liabilities of foreign operations to the Company’s presentation currency will impact the accounting measurement of the
non-financial assets and liabilities of the Company’s foreign operations as well as the gain or loss resulting from the translations. 

Provisions 
 IAS 37, Provisions,
Contingent Liabilities and Contingent Assets, requires a provision to be recognized when: there is a present obligation as a result of a past transaction or event; it is probable that an outflow of resources will be required to settle the
obligation; and a reliable estimate can be made of the obligation. “Probable” in this context means more likely than not. Under Canadian GAAP, the criterion for recognition in the financial statements is “likely”, which is a
higher threshold than “probable”. Therefore, it is possible that there may be some provisions or contingent liabilities, which would meet the recognition criteria under IFRS that were not recognized under Canadian GAAP. Other differences
between IFRS and Canadian GAAP exist in relation to the measurement of provisions, such as the methodology for determining the best estimate where there is a range of equally possible outcomes (IFRS uses the mid-point of the range, whereas Canadian
GAAP uses the low-end of the range), and the requirement under IFRS for provisions to be discounted where material. At this point, management has not identified provisions or contingent liabilities that would meet the recognition criteria under IFRS
that were not recognized under Canadian GAAP. 
 Actuarial Gains and Losses 
 IAS 19, Employee Benefits, permits an entity to recognize actuarial gains and losses in profit or loss, or alternatively immediately in other comprehensive income. Under Canadian GAAP, the Company
recognized actuarial gains and losses in profit or loss using the corridor approach where an entity recognizes amortization of actuarial gains and losses in a period in which, as of the beginning of the period, the unamortized net actuarial gain or
loss exceeded 10 percent of the greater of: (a) the accrued benefit obligation at the beginning of the year; and (b) the fair value, or market-related value, of the plan assets at the beginning of the year. The Company has selected a
policy to recognize the actuarial gains and losses immediately in other comprehensive income which will result in significant differences in other long-term liabilities and operating income or loss. 

The Company will continue to review all proposed and ongoing projects of the IASB and assess their impact on its conversion process. 

Entity-specific Internal Control over Financial Reporting and Disclosure Controls and Procedures Disclosure 

Management has made the appropriate changes to ensure the integrity of internal control over financial reporting (ICFR) and disclosure controls and
procedures (DC&P). The changes address accounting policies required for first-time adoption as well as ongoing IFRS reporting. 
 At this
point, management has not identified any significant changes to ICFR or DC&P. They will evaluate the effectiveness of any changes in the design during fiscal 2011 to prepare for certification under IFRS in 2012. 

Entity-specific Financial Reporting Expertise Disclosure 
 The Company has identified the resource requirements to establish appropriate IFRS financial reporting expertise at all levels of the business. Training of finance and other staff has been completed.


  
 - 25 -









 CONVERSION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 

The IFRS Conversion Project Manager meets with the Audit Committee quarterly and informs the Committee on specifics of the project as well as
developments in IFRS. The Committee members follow the progress very closely and have been informed of the timeline for implementation, expected impacts of different accounting policies as well as costs of conversion. 

Entity-specific Business Activities Disclosure 
 The Company is party to many contracts with suppliers and customers. Following a detailed review of all contracts, it is not expected that the conversion to IFRS will have a significant impact on any of
these contracts. The Company has no significant contracts which include financial covenants. 
 As previously mentioned, IAS 21, The Effects
of Changes in Foreign Exchange Rates, will have an impact on the translation of the Company’s foreign operations to the presentation currency. Under Canadian GAAP, certain foreign operations situated in Europe and the U.S. were considered
to be fully integrated entities with the Canadian dollar as their functional currency. Under IFRS, the Company has determined that these foreign operations’ functional currency is the euro or the US dollar. The change in functional currency
will have an impact on the consolidated balance sheet and statement of operations. 
 Entity-specific Information Technology and Data Systems
Disclosure 
 The Company completed a detailed assessment of its IT systems and has determined that the current systems will be adequate for
proper reporting under IFRS. The systems allow the Company to track and report on all financial information required under current Canadian GAAP (required from now until September 24, 2011), under IFRS (required as at September 25, 2011)
and for the compilation of a comparative year of financial information beginning September 26, 2010. 
 INTERNAL CONTROLS
OVER FINANCIAL REPORTING 
 During the quarter ended December 25, 2010, the Company did not make any changes to its internal controls
over financial reporting that would have materially affected, or would likely materially affect, such controls. 
 OUTLOOK

 While a decline in the December 2010 quarterly results was anticipated, several unforeseen items negatively impacted financial
performance. The relative strength of the Canadian dollar, which averaged nearly $0.99 versus the US dollar, reduced the EBITDA of all operating segments. In Forest Products, the higher prices for premium random lumber grades did not spill over into
stud and lower quality grades. As well, lower seasonal productivity combined with timber quality issues at a few sawmills increased costs and led to unacceptable operating results. We anticipate better results in the coming quarters. As planned, the
Dissolving and Chemical Pulp segment absorbed significant maintenance costs during the quarter. It was a tactical decision to take the downtime ahead of what promises to be the best dissolving pulp pricing environment in recent memory. We will see a
significant improvement in this segment’s results in the March 2011 quarter. The decline in High-Yield Pulp results was anticipated as hardwood paper pulp markets are seeing more challenging conditions than those of softwood markets. We
anticipate prices will move sideways in the coming quarters. The Paper segment results were in line with expectations. We anticipate gradual improvement in the segment’s results over the next few quarters. Finally, corporate expenses included a
charge of $4 million for share-based compensation, as the value of the Company’s common shares doubled in the quarter. The share appreciation is consistent with the Company’s view that consolidated financial performance will improve
significantly in the coming quarters. 

  
 - 26 -









 FINANCIAL PERFORMANCE & OTHER DATA 

 

																																			
	 	  	Fiscal 2010	 	  	Fiscal 2011	 
	 	  	Dec 09	 	  	Mar 10	 	  	Jun 10	 	  	Sep 10	 	  	Dec 10	 	  	Mar 11	 	  	Jun 11	 	  	Sep 11	 
	 Shares outstanding - end of quarter (millions)
	  	 	100	  	  	 	100	  	  	 	100	  	  	 	100	  	  	 	100	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 Book value per share ($)
	  	 	3.04	  	  	 	3.04	  	  	 	3.62	  	  	 	3.65	  	  	 	3.53	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 Foreign exchange:
	  				  				  				  			 	  				  				  				  			
	 1 C $ = US $
	  	- average	  	 	0.945	  	  	 	0.960	  	  	 	0.973	  	  	 	0.962	  	  	 	0.986	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
		  	- period end	  	 	0.953	  	  	 	0.974	  	  	 	0.965	  	  	 	0.975	  	  	 	0.994	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 1 euro = US $
	  	- average	  	 	1.478	  	  	 	1.385	  	  	 	1.273	  	  	 	1.287	  	  	 	1.359	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
		  	- period end	  	 	1.435	  	  	 	1.342	  	  	 	1.239	  	  	 	1.349	  	  	 	1.312	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
	 1 euro = C $
	  	- average	  	 	1.564	  	  	 	1.442	  	  	 	1.308	  	  	 	1.338	  	  	 	1.378	  	  	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 - period end
	  	 	1.507	  	  	 	1.377	  	  	 	1.283	  	  	 	1.384	  	  	 	1.320	  	  	 	—  	  	  	 	—  	  	  	 	—  	  


  
 - 27 -









 DEFINITIONS – NON-GAAP FINANCIAL MEASURES 

The following summarizes non-GAAP financial measures utilized in the MD&A. As there is no generally accepted method of calculating these financial
measures, they may not be comparable to similar measures reported by other companies. 
 EBITDA refers to earnings before
interest, income taxes, depreciation and amortization. EBITDA does not have any standardized meaning according to GAAP. The Company defines EBITDA as sales less cost of sales and selling, general and administrative expenses, meaning it represents
operating earnings before depreciation, amortization and other specific or non-recurring items. The Company considers EBITDA to be a useful indicator of the financial performance of the Company, the business segments and the individual business
units. The most comparable Canadian GAAP financial measure is operating earnings. The following table is a reconciliation of quarterly operating earnings to the Company’s definition of EBITDA: 

 

																																	
	 	  	$ millions	 
	 	  	Fiscal 2010	 	  	Fiscal 2011	 
	 	  	Dec 09	 	 	Mar 10	 	  	Jun 10	 	 	Sep 10	 	  	Dec 10	 	 	Mar 11	 	  	Jun 11	 	  	Sep 11	 
	 Operating earnings (loss)
	  	 	(10	) 	 	 	3	  	  	 	56	  	 	 	15	  	  	 	(4	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Depreciation and amortization
	  	 	15	  	 	 	15	  	  	 	14	  	 	 	12	  	  	 	12	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Other items
	  	 	(1	) 	 	 	14	  	  	 	(10	) 	 	 	9	  	  	 	3	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 EBITDA
	  	 	4	  	 	 	32	  	  	 	60	  	 	 	36	  	  	 	11	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 

 Free Cash Flow refers to cash provided by operating activities before changes in non-cash working capital
balances less net fixed asset additions. Working capital changes are excluded as they are often seasonal and temporary in nature. The Company considers free cash flow to be a useful indicator of its ability to generate discretionary cash flow,
thereby improving its overall liquidity position. 
 Net Debt refers to debt less cash, cash equivalents, and cash held in trust.

 Total Capitalization refers to net debt plus future income taxes, other long-term liabilities and credits, and
shareholders’ equity. 
 Net Debt to Total Capitalization is used by the Company to measure its financial leverage.

  

																																	
	 	  	$ millions	 
	 	  	Fiscal 2010	 	 	Fiscal 2011	 
	 	  	Dec 09	 	 	Mar 10	 	 	Jun 10	 	 	Sep 10	 	 	Dec 10	 	 	Mar 11	 	  	Jun 11	 	  	Sep 11	 
	 Long-term debt
	  	 	364	  	 	 	359	  	 	 	333	  	 	 	271	  	 	 	263	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Current portion of long-term debt
	  	 	19	  	 	 	19	  	 	 	16	  	 	 	17	  	 	 	17	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Operating bank loans
	  	 	108	  	 	 	88	  	 	 	—  	  	 	 	1	  	 	 	3	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Less: total cash
	  	 	(80	) 	 	 	(43	) 	 	 	(125	) 	 	 	(74	) 	 	 	(61	) 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Net debt
	  	 	411	  	 	 	423	  	 	 	224	  	 	 	215	  	 	 	222	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Other long-term liabilities and credits
	  	 	255	  	 	 	248	  	 	 	232	  	 	 	209	  	 	 	209	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
	 Shareholders’ equity
	  	 	304	  	 	 	304	  	 	 	363	  	 	 	365	  	 	 	353	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Total capitalization
	  	 	970	  	 	 	975	  	 	 	819	  	 	 	789	  	 	 	784	  	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 
	 Net debt to total capitalization ratio
	  	 	42	% 	 	 	43	% 	 	 	27	% 	 	 	27	% 	 	 	28	% 	 	 	—  	  	  	 	—  	  	  	 	—  	  
		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 


  
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