FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our construction of additional converting and paper making capacity and the cost and timing to complete new facilities, including our facilities in Shelby, North Carolina and the delivery of the through-air-dried, or TAD, paper machine, the integration of and expected benefits from the former Cellu Tissue operations, including expected cost savings from synergies, future growth opportunities, the stock repurchase program, future revenues, cash flows, capital expenditures, tax rates, operating costs, manufacturing capability, liquidity, benefit plan funding levels, total selling, general and administrative costs, interest expenses, the tax treatment of the alternative fuels and cellulosic biofuels tax credits and the conversion of additional gallons of fuel from the Alternative Fuel Mixture Tax Credit to the Cellulosic Biofuel Producer Credit. Words such as "anticipate," "expect," "intend," "plan," "target," "project," "believe," "schedule," "estimate," "may," and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management's current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include those risks discussed in the section entitled "Risk Factors" in our 2011 Form 10-K, as well as the following:

• difficulties with the integration process or the realization of the benefits expected from the acquisition of Cellu Tissue;

• difficulties with completion, or significant delays in the construction of, our new tissue manufacturing and converting facilities, including the completion of our new TAD paper machine;

• changes in the cost and availability of wood fiber used in the production of our products;

• changes in transportation costs and disruptions in transportation services;

• changes in raw material and energy costs and availability;

• the loss of business from any large customer;

• changes in customer product preferences and competitors' product offerings;

• our qualification to retain, or ability to utilize, tax credits associated with alternative fuels or cellulosic biofuels and the tax treatment associated with receipt of such credits;

• labor disruptions;

• changes in the United States and international economies and in general economic conditions in the regions and industries in which we operate;

• changes in expenses and required contributions associated with our pension plans;

• cyclical industry conditions;

• competitive pricing pressures for our products;

• changes in exchange rates between the U.S. dollar and other currencies;

• reliance on a limited number of third-party suppliers for raw materials;

• an inability to successfully implement our expansion strategies;

• unforeseen environmental liabilities or expenditures;

• unanticipated manufacturing or operating disruptions, including equipment malfunction and damage to our manufacturing facilities caused by fire or weather-related events and IT system failures;

• restrictions on our business from debt covenants and terms; and

• changes in laws, regulations or industry standards affecting our business.

Forward-looking statements contained in this report present management's views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management's views to reflect events or circumstances occurring after the date of this report.

OVERVIEW

Background

We are principally engaged in the manufacturing and selling of pulp-based products. We currently manufacture quality consumer tissue, away-from-home tissue, parent roll tissue, machine-glazed tissue, foam, bleached paperboard, and pulp at 15 manufacturing locations in the U.S. and Canada. Our private label tissue products, such as facial and bath tissue, paper towels and napkins, are used primarily at-home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry and is ultimately used by our customers to make packaging for products ranging from liquids to pharmaceuticals to consumer goods packaging, all of which demand high quality construction and print surfaces for graphics. Our products primarily utilize pulp made from wood fiber. Other major cost categories include chemicals, transportation, energy, packaging, and costs associated with our manufacturing facilities.

Recent Developments

Consumer Products Expansion in Shelby, North Carolina

In 2010, we began construction of new tissue manufacturing and converting facilities in Shelby, North Carolina as part of our plans to expand our Consumer Products segment in the Eastern United States. This site will include a TAD paper machine and is currently expected to have up to seven converting lines capable of producing ultra grades of private label tissue products. The first two converting lines became operational during the second quarter of 2011. Two additional converting lines are expected to become operational late in the second half of 2012. The TAD paper machine is scheduled to start-up in the fourth quarter of 2012.

We estimate the project will cost between approximately $260 and $280 million, excluding estimated capitalized interest of $18.2 million. As of March 31, 2012, we have incurred a total of $148.9 million in project costs, of which $39.6 million was incurred during the first quarter of 2012. We expect substantially all remaining amounts to be spent during the remainder of 2012. We have also capitalized $6.3 million of interest related to the project, of which $2.1 million was incurred in the first quarter of 2012.

In August 2011, First Quality Tissue SE, LLC, filed a lawsuit against Metso Paper, the company we have contracted with to supply the TAD paper machine, seeking to enjoin Metso Paper from delivering the TAD paper machine to our North Carolina facilities based on First Quality's interpretation of the terms of an agreement between it and Metso Paper. See Item 1 of Part II of this Report for a description of this legal proceeding.

Integration of Cellu Tissue Holdings, Inc.

On December 27, 2010, we acquired Cellu Tissue, which owned nine tissue manufacturing facilities located in the Southern, Midwestern and Eastern United States and one facility in Eastern Canada. We believe the Cellu Tissue facilities allow us to better serve existing private label grocery customers by creating a national manufacturing footprint and provide us with the capability to expand into new private label channels. In the first quarter of 2012 we recognized approximately $5.3 million of cost savings from synergies relating to the acquisition. We expect to achieve total net cost savings from synergies of approximately $20 million in 2012, and by the end of 2012 to be on track to achieve $35 to $40 million annually in cost savings from synergies in future years.

Components and Trends in our Business

Net sales

Net sales consist of sales of consumer tissue, pulp and paperboard and wood products, net of discounts, returns and allowances and any sales taxes collected. Prices for our consumer tissue products primarily tend to be driven by the value of our products to our customers and are generally priced relative to the prices of branded tissue products. Demand and pricing for our pulp and paperboard products is largely determined by general global market conditions and the demand for high quality paperboard.

Operating costs

                                              Three Months Ended March 31,
 (Dollars in thousands)                 2012                               2011
                                           Percentage of                      Percentage of
                              Cost         Cost of Sales         Cost         Cost of Sales
 Purchased pulp             $  61,736                15.3 %    $  77,934                18.8 %
 Chemicals                     45,870                11.4         38,565                 9.3
 Transportation1               41,698                10.4         44,098                10.6
 Chips, sawdust and logs       40,348                10.0         43,366                10.5
 Maintenance and repairs2      35,149                 8.7         28,899                 7.0
 Energy                        27,007                 6.7         33,668                 8.1
 Packaging supplies            22,157                 5.5         22,998                 5.5

                            $ 273,965                68.0 %    $ 289,528                69.8 %

1 Includes internal and external transportation costs.

2 Excluding related labor costs.

Purchased pulp. We purchase a significant amount of the pulp needed to supply our consumer products manufacturing facilities from external suppliers. For the three months ended March 31, 2012, total purchased pulp costs were 15.3% of our cost of sales, representing a 3.5 percentage point decrease compared to the same period in 2011, due to lower average pulp prices.

Chemicals. We consume a significant amount of chemicals in the production of pulp and paperboard. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and specialty paper process chemicals. A large portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-based and are impacted by petroleum prices. However, many of our chemicals are purchased under long-term contracts, which provide more stability than open-market purchases. Our chemical costs increased $7.3 million, or 2.1 percentage points, for the three months ended March 31, 2012, compared to the three months ended March 31, 2011, primarily due to an increase in the price of caustic.

Transportation. Fuel prices are also a large part of our cost structure and therefore, high fuel prices result in increased transportation costs related to delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Rising fuel prices particularly affect our margins for consumer products because we supply customers throughout the United States, and we transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs remained relatively consistent as a percentage of cost of sales in the first three months of 2012, compared to the same period in 2011, as higher fuel costs were offset by less overall miles shipped due to synergy improvements.

Chips, sawdust and logs. We incur costs for the purchase of chips, sawdust and logs used in the manufacturing of pulp. We source our residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Overall costs for chips, sawdust and logs for the first quarter of 2012 decreased compared to the same period in 2011, both as a cost and as a percentage of cost of sales, due primarily to the sale of our former Lewiston, Idaho sawmill in November 2011, partially offset by higher costs for our pulp and paperboard operations resulting from supply limitations due to wet weather conditions.

Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.

Major equipment maintenance and repair in our Pulp and Paperboard segment also requires maintenance shutdowns annually at our Idaho facility and approximately every 18 months at our Arkansas facility, which increases costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. In the first quarter of 2012, we had 17 combined days of machine downtime for our two paperboard machines at our Idaho pulp and paperboard mill due to scheduled major maintenance costing approximately $15.5 million, excluding labor, compared to major maintenance costs of $11.4 million at the same mill in the first quarter of 2011. We expect to spend an additional $3.3 million for planned major maintenance at our Arkansas facility during the fourth quarter of 2012.

In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, to improve our safety and to comply with environmental laws. Excluding $39.6 million of expenditures for our North Carolina expansion, we spent $10.6 million on capital expenditures during the three months ended March 31, 2012. Capital expenditures for 2012 are expected to be between approximately $215 million and $220 million, which include an estimated $165 million to $170 million associated with our North Carolina expansion.

Energy. We use energy in the form of electricity, hog fuel, steam, natural gas and, to a much lesser extent, coal. Energy prices have fluctuated widely over the past decade. We have taken steps to reduce our exposure to volatile energy prices through conservation. In addition, cogeneration facilities that produce steam and electricity at our East Hartford, Connecticut, Lewiston, Idaho and Menominee, Michigan manufacturing sites help to lower our energy costs. To help mitigate our exposure to changes in natural gas prices, from time to time we have used firm-price contracts to supply a portion of our natural gas requirements. As of March 31, 2012, these contracts covered approximately 33% of our expected average monthly natural gas requirements for our manufacturing facilities for the remainder of 2012, plus lesser amounts for 2013. Energy costs for the three months ended March 31, 2012 were lower than the prior year period due to lower natural gas and electricity costs. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage.

Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under these agreements, we incur expenses related to the unique packaging of our products for direct retail sale to consumers. For the three months ended March 31, 2012, packaging costs were slightly lower than the same period in 2011 due primarily to improved contract pricing.

Other. Other costs not mentioned in the above table primarily consist of wage and benefit expenses and miscellaneous operating costs. Although period cut-offs and inventory levels can impact other cost of sales amounts, we would expect this amount to be relatively steady as a percentage of costs on a period-to-period basis.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consist of compensation and associated costs for sales and administrative personnel, as well as commission expenses related to sales of our products. Our first quarter selling, general and administrative costs were $29.1 million in 2012 compared to $27.4 million in 2011. The increase was primarily a result of the continued integration of Cellu Tissue administration, support functions and locations, as well as increased benefit rates and higher incentive compensation expense.

Interest expense

Interest expense is mostly comprised of interest on our $375.0 million aggregate principal amount 7.125% senior notes due 2018 issued in October 2010, which we refer to as the 2010 Notes, and our $150.0 million aggregate principal amount of 10.625% senior notes due 2016 issued in June 2009, which we refer to as the 2009 Notes. Interest expense also includes amortization of deferred finance costs associated with the 2009 Notes, 2010 Notes, and our revolving credit facility. Interest expense before reductions for capitalized interest in 2012 is expected to decrease slightly compared to 2011 as a result of the 2011 third quarter redemption of our industrial revenue bonds. Interest expense will also be partially offset by our continued capitalization of interest during the construction phase of our papermaking and converting facilities in North Carolina, which we estimate will be approximately $14.0 million in 2012 and $18.2 million over the construction phase of the project.

Income taxes

Income taxes are based on reported earnings and tax rates in the jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates. We generally expect our effective income tax rate, excluding discrete items, to remain fairly constant, but it could fluctuate due to changes in tax law.

We are registered with the Internal Revenue Service, or IRS, as both an alternative fuel mixer and a producer of cellulosic biofuel. During 2009 we received refundable tax credit payments in connection with our use of an alternative fuel to produce energy at our pulp mills. The amount of the refundable tax credit is equal to $0.50 per gallon of alternative fuel mixture used. The Alternative Fuel Mixture Tax Credit, or AFMTC, expired on December 31, 2009.

The Cellulosic Biofuel Producer Credit, or CBPC, enables us to claim $1.01 per gallon in regards to black liquor produced and used as a fuel by us at our pulp mills in 2009. During 2010, the IRS issued guidance clarifying the treatment of the CBPC and the AFMTC in regards to the production or use of black liquor at the same facility, in the same tax year. Under the guidance provided, both credits may be claimed in the same year as long as the credits are not claimed for the same gallons of fuel. Furthermore, the IRS guidance clarified the ability to convert previously claimed gallons from the AFMTC to the CBPC.

In the first quarter of 2012 Congress identified the elimination or modification of the CBPC in connection with black liquor as a possible revenue source. Such proposed legislative action, if enacted, could limit or eliminate our ability to convert AFMTC gallons to CBPC gallons and/or CBPC gallons to AFMTC gallons and, accordingly, limit or eliminate our ability to claim carry forward credits. Although provisions

relating to the CBPC and the AFMTC were removed from recently enacted legislation, the ultimate outcome of these provisions or future provisions could be adverse. As a result, we made the determination to convert all gallons relating to CBPC carryforwards back to the AFMTC, and as of March 31, 2012 we have no remaining CBPC carryforwards. Although under current federal tax law we have the ability to convert gallons claimed under the AFMTC to gallons claimed under the CBPC until 2013 we do not currently intend to do so. See Note 5 "Taxes" for further discussion.

There is relatively little guidance regarding the AFMTC and the law governing the issue is complex. Accordingly, there remains uncertainty as to our qualification to receive the tax credit in 2009, as well as to whether we will be entitled to retain the amounts we received upon further review by the IRS. In addition, while it is our position that payments received or credits taken in relation to the AFMTC should not be subject to corporate income tax, there can be no assurance as to whether or not the amounts we have received will be subject to taxation.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

The following table sets forth data included in our Condensed Consolidated
Statements of Operations as a percentage of net sales.



                                                              Three Months Ended March 31,
(Dollars in thousands)                                     2012                         2011
Net sales                                         $  457,798        100.0 %    $  465,830        100.0 %
Costs and expenses:
Cost of sales                                       (403,076 )       88.0        (414,920 )       89.1
Selling, general and administrative expenses         (29,074 )        6.4         (27,364 )        5.9

Total operating costs and expenses                  (432,150 )       94.4        (442,284 )       94.9

Income from operations                                25,648          5.6          23,546          5.1
Interest expense, net                                 (9,728 )        2.1         (11,333 )        2.4
Other, net                                                -            -             (476 )        0.1

Earnings before income taxes                          15,920          3.5          11,737          2.5
Income tax provision                                 (12,194 )        2.7          (6,133 )        1.3

Net earnings                                      $    3,726          0.8      $    5,604          1.2

Net sales-First quarter 2012 net sales decreased by $8.0 million, or 1.7%, compared to the first quarter of 2011, due primarily to a decrease in net sales resulting from the sale of our former sawmill in November 2011. In addition, our external pulp sales were reduced consistent with our strategy to use substantially all of our pulp internally.

Cost of sales-Cost of sales was 88.0% of net sales for the quarter ended March 31, 2012 and 89.1% of net sales for the same period in 2011. The favorable change in cost of sales was due primarily to lower purchased pulp and energy costs, partially offset by higher costs for chemicals and maintenance.

Selling, general and administrative expenses-Selling, general and administrative expenses increased slightly as a percentage of sales for the first quarter of 2012, compared to the same period in 2011. The $1.7 million increase in expense was a result of continued integration of the Cellu Tissue administration, support functions and locations, as well as increased benefit rates and higher incentive compensation expense.

Interest expense-Interest expense decreased $1.6 million in the first quarter of 2012 compared to the same period in 2011. The decrease was attributable to first quarter 2012 capitalized interest of $2.1 million associated with the construction of our North Carolina facilities, compared to $0.5 million of capitalized interest related to our North Carolina facilities for the first quarter of 2011. The increase in capitalized interest was due to a higher level of cumulative capital expenditures associated with the North Carolina facilities in the 2012 period.

Income tax expense-Our estimated annual effective tax rate for 2012 is 34.6%, compared with 35.8% for the comparable interim period in 2011. We recorded income tax expense of $12.2 million in the three months ended March 31, 2012 compared to $6.1 million in the three months ended March 31, 2011. The actual rate for the three months ended March 31, 2012 was 76.6%, compared to a rate of 52.2% for the same period of 2011, resulting from the net impact of reporting discrete items in each reporting period totaling net expense of approximately $6.7 million and $1.9 million, respectively. The net increase to our tax expense and effective tax rate in the first quarter of 2012 was primarily the result of net discrete expense of $5.5 million resulting from our decision to convert certain gallons of alternative fuel originally claimed in 2009 under the AFMTC, which had been converted by us in 2010 to the CBPC, back to gallons under the AFMTC. The $5.5 million is comprised of $2.5 million relating to the conversion back to the AFMTC and a resulting additional $3.0 million increase in our liabilities for uncertain tax positions.

BUSINESS SEGMENT DISCUSSION

Consumer Products



                                              Three Months Ended
                                                  March 31,
                  (Dollars in thousands)     2012           2011
                  Net sales                $ 277,830      $ 269,252
                  Operating income            26,271         13,815
                  Percent of net sales           9.5 %          5.1 %

Our Consumer Products segment reported an $8.6 million, or 3.2%, increase in net sales due primarily to a 3.8% increase in net selling prices. Operating income was $12.5 million higher in the first quarter of 2012 compared to the first quarter of 2011, due to the higher net sales and lower pulp costs.

Pulp and Paperboard



                                              Three Months Ended
                                                  March 31,
                  (Dollars in thousands)     2012           2011
                  Net sales                $ 179,968      $ 196,578
                  Operating income            11,658         15,648
                  Percent of net sales           6.5 %          8.0 %

Pulp and Paperboard net sales for the first quarter of 2012 declined $16.6 million, or 8.4%, compared to the first quarter of 2011. The decrease was due to a decrease in lumber sales resulting from the sale of our former sawmill in November 2011, lower pulp net sales due to increased usage of our pulp internally and slightly lower net selling prices of paperboard. These decreases were partially offset by a 6.2% increase in paperboard shipments. Operating income for the segment was $4.0 million lower in the first quarter of 2012 compared to the first quarter of 2011. The decrease was primarily due to major maintenance expense of $15.5 million in the first quarter of 2012, compared to $11.4 million in the first quarter of 2011.

EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION (EBITDA)

We use earnings before interest, tax, depreciation and amortization, or EBITDA, as a supplemental performance measure that is not required by, or presented in accordance with generally accepted accounting principles, or GAAP. EBITDA should not be considered as an alternative to net earnings, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities or a measure of our liquidity or profitability. In addition, our calculation of EBITDA may or may not be comparable to similarly titled measures of other companies.

We present EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use EBITDA: (i) as a factor in evaluating management's performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because our . . .