May 3, 2005

Outlook for Book Publishing PapersBMI Management Conference

Presented by:

John Maine, Vice President

2

RISI Growth Projections for 2004 Presented to BMI in May of 2004

Last Yr’s Fcst. ’04 Actual

U.S. GDP

Euro GDP

4.7%

1.9%

4.4%

1.9%

U.S.Inflation – CPI

Euro Inflation- CPI U.S./Euro Exchange

1.7%

1.7% 1.33

2.7%

2.1% 1.24

N.A. P&W Demand

Euro P&W Demand

3%

5%

4%

5%

3

Economic Outlook

4

GDP Outlook: U.S. Policy-Induced Growth Phase Nearing End Low Interest Rates, Massive Federal Spending, Tax Cuts, and

Weak $ Have Fueled the Economy, But are Now Reversing

Tighter Policy and High Energy Prices Threaten Expansion

Consumer Sector Is Vulnerable– Job Growth Disappointing; Debt Loads High

Declining Profits Will Dampen Investment

Expect Below-Trend Growth in 2nd Half of 2005

5

Are Households Prepared for Rising Interest Rates?

10%

11%

12%

13%

14%

15%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 40%

2%

4%

6%

8%

10%

12%

14%

Personal Savings Rate (right)

Household Debt Service as % of Disposable Income

6

The U.S. Recovery Will Fade in 2005

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

95 96 97 98 99 0 1 2 3 4 5 6 7

Potential GDP Growth

Real GDP Growth, Annualized Percent Change

7

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.9

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

CN$Euro

Canadian Dollar and Euro Rising to a Peak in 2005

US$ per CN$ US$ per Euro

8

U.S. Economy Near-Term Outlook

2003 2004 2005 2006 2007

Real GDP% Ch. 3.0 4.4 3.6 3.3 3.7

ConsumerPrices-% Ch. 2.3 2.7 2.8 2.4 2.5

Fed. FundsInt. Rate-% 1.1 1.3 3.1 3.9 4.2

9

End-Use Recovery In Magazines and Catalogs is Slowing, But Book

Publishers Remain Strong

10

U.S. Magazine Ad Pages Peaked in 2004 and Will Show Little Growth in 2005/2006

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

98 99 0 1 2 3 4 5 6 7

seasonally adjusted monthly ad pages Index 1982=1

Source: RISI Index created from PIB data

Feb, 2005

11

U.S. Catalog Circulation Drops in Response to Cost of Paper & Postage in 2006

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

97 98 99 0 1 2 3 4 5 6 7

Billions of Catalogs Mailed/quarter

Data: RISI

12

U.S. Shipments of Printing and Writing Paper to Book Publishers Remains High (000 tons per month, seasonally adjusted)

65

70

75

80

85

90

95

100

105

110

98 99 0 1 2 3 4 5

Source: AF&PA

13

U.S. Book Publishers Starting to See More Books Printed in Asia, Leading to Less Growth in Demand for Book Paper from U.S. Paper Mills

14

Asia Now Exports $1.2 Billion in Books to the U.S. Market Compared With $0.6 Bill. in 1995

$0 $500 $1,000 $1,500 $2,000 $2,500

1995

2004 Other

Canada

China

Hong K.

Sing.

Other Asia

Value of Books Imported into the U.S., Million $

15

China Becomes Dominant Exporter of Printed Books to the U.S.

050

100150200250300350400450

Canada China HongKong

UK Mexico Sing. S.Korea

1995 2004

U.S. imports of printed books, millions of books

16

U.S. Imports of Printed Products from China

$0

$100

$200

$300

$400

$500

$600

$700

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4

Books including Children's Greeting Cards all other

Million Real 2004 Dollars

17

Outlook for Paper Demand Shows Decelerating Trend from Robust 2004

18

Demand Growth Waning in 2005/2006

Slowing economy

Rising costs for paper

Postal rate hikes

Loss of market share to Internet

19

N.A. Demand for Printing and Writing Papers (million short tons)

31

32

32

33

33

34

34

35

35

99 0 1 2 3 4 5 6 7

20

Grade Trends

Uncoated Freesheet– Declining Trend Since 1999

Coated Freesheet– Competition from Hi-Bright Mechanical and Asian

Imported Sheets

Coated Mechanical– Good Demand Growth, Supply Shortage

Uncoated Mechanical– High Growth, SC Substituting for LWC and MF Hi-Bright

Substituting for Uncoated Freesheet Offset

21

N.A. P&W Demand by Grade(Thousand Tons, % Change)

2004 2005 2006 2007

Ctd. Free. 5,988 6,095 6,154 6,261 %ch 7% 2% 1% 2%

Ctd. Grwd. 6,561 6,580 6,580 6,616 %ch 7% 0% 0% 1%

Unc. Free. 14,203 14,284 14,288 14,587 %ch 1% 1% 0% 2%

Unc. Grwd. 6,675 6,913 6,959 7,121 %ch 7% 4% 1% 2%

Total 33,427 33,871 33,98034,585 %ch 4%1% 0% 2%

U.S.Gdp %ch 4.4% 3.6% 3.3% 3.7%

22

Prolonged Miramichi Strike to Keep Publishing Markets Incredibly Tight in 2005

23

Impact of Miramichi Strike

495,000 tons of Capacity Likely to be Idle for 6-9 Months– 8% of North American Ctd. Mech. Capacity– 56% of UPM North American Ctd. Mech. Capacity– 12% of UPM Overall Ctd. Mech. Capacity– 3% of Combined Capacity for all North American and

European Producers

24

How Will the Supply Shortage be Alleviated

Supply Shortage Measured at 350,000 tons – Assuming 9-month strike

More Imports From Europe– Shift supply to Rauma and others

Reduced Demand– Shift to other grades– Exacerbated by potentially higher prices

Temporary Supply Boost– Postpone downtime for maintenance/rebuilds– Shift swing machines from coated woodfree

25

U.S. Imports of LWC From Europe Surge in 2005 to Fill Supply Gap

(000 short tons)

400

500

600

700

800

900

1,000

1,100

99 0 1 2 3 4 5 6 7

Ctd. Mech. Unc. Mech.

U.S. Offshore Imports of Ctd. and Unct. Mechanical Paper

26

Major World Coated Mechanical Paper Capacity Changes in 2004-2007 (tonnes)

Leipa, Germany 300,000 July 2004

Taishan Paper, China 140,000 Q3 2003

Yueyang, Hunan China 125,000 est. (1) Q4 2003

Shandong Huatai, China 175,000 est. (1) Q4 2005

Chenming, Jiangxi China 200,000 est. (1) Q4 2004

(1) These are newsprint machines that will also make LWC. We have assumed 50/50 split

Figures are metric tonnes

27

85%

87%

89%

91%

93%

95%

97%

99 0 1 2 3 4 5 6 7

N. Amer.

Europe

Coated Mechanical Operating Rates (adjusted to exclude strike-idled capacity)

28

U.S. Imports of CFS From Asia About to Overtake Europe (000 short tons)

200250300350400450

500550600650700

99 0 1 2 3 4 5 6 7

Asia Europe

29

Major World Coated Freesheet Paper Capacity Changes in 2004-2007 (More Than 100,000 tonnes)

Lecta, Condat France 120,000 2003-2005

Stora Enso, Kimberly 186,000 2003-2005

Appleton, C. Locks 113,000 Late 2004

Burgo, Belgium 600,000 On hold

APP (Gold East) China UPM, Jiangsu China

700,000 150,000 est.

Early 2005 Q3 2005

Oji, Jiangsu China 400,000 2007

April, China Greenfield 225,000 est. 2007 APP, 4 Mills 260,000 est. Q4 2004

Figures are metric tonnes

30

77%

79%

81%

83%

85%

87%

89%

91%

93%

95%

99 0 1 2 3 4 5 6 7

N. Amer.

Europe

Coated Freesheet Operating Rates

31

Major World UFS Capacity Changes in 2004-2007 (More Than 100,000 Tonnes)

Sun Paper, Shandong China 160,000 Q3 2004

April Kerinci, Indonesia 450,000 Q3 2006

UPM, Jiangsu China Mondi, S. Africa

300,000 net 250,000

Q3 2005 Late 2005

Portucel, Portugal 500,000 2006

April, Guangdong China 225,000 est. 2006/2007

Hankuk, S. Korea 200,000 Q4 2005

Ballapur, India 250,000 End 2007

Note: Two large new PMs are under study in Brazil by IP and Ripassa/VCP

Figures are metric tonnes

32

83%

85%

87%

89%

91%

93%

95%

99 0 1 2 3 4 5 6 7

N. Amer.

Europe

Uncoated Freesheet Operating Rates

We continue to include 250,000 tons of temporarily idle capacity at IP in these numbers

33

Major World UGW Capacity Changes in 2004-2007 (More Than 90,000 Tonnes)

Abitibi, Alma, QC 227,000 May 2004

Fraser (Katahdin), Maine 163,000 May 2004

Bowater, Calhoun, TN 72,000 May 2004

UPM, Voikkaa, FN -100,000 April 2004 Irving, St. John, NB 130,000 Jan. 2005 StoraEnso, Wolfsheck, GY -155,000 Nov. 2005

StoraEnso, Maxau, GY 120,000 Q3 2004

StoraEnso, Kvarnsv., SW 420,000 Nov. 2005

Figures are metric tonnes

34

89%

91%

93%

95%

97%

99 0 1 2 3 4 5 6 7

N. Amer.

Europe

Uncoated Mechanical Operating Rates

35

Average Profitability for U.S. vs. European Printing and Writing Paper Mills

-5%

0%

5%

10%

15%

20%

25%

99 0 1 2 3 4 5 6 7

U.S.

W. Europe

Profitability defined as (price-cost)/cost. Costs are total costs including depreciation, interest, SG&A, and delivery

36

Summary

Paper Demand Growth is Decelerating– And will stagnate in 2006 due in part to the high cost

of paper and postage

Supply Shortage of Coated Mechanical in 2005– Will get worse if strike is prolonged into the heart of

the printing season– Imports from Europe will surge despite strong Euro

to fill supply gap