Outlook for Book Publishing Papers

John Maine, VP World Graphic PaperBMI Management Conference

April, 2013

1

US Economy Gaining Some MomentumQuarterly Real GDP and Personal Consumption Growth, Annualized Percent Change

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

GDP

Consumption

GDP Annual

2011 1.8%

2012 2.2%

2013 2.2%

2014 3.2%

2011 2012 2013 2014 2015 2016 2017 2018

GDP, Bil. 2005 $ 13,300 13,594 13,887 14,338 14,832 15,250 15,372 15,827

Real % Ch 1.8 2.2 2.2 3.3 3.4 2.8 0.8 3.0

Consumption, Bil. 2005 $ 9,429 9,603 9,796 10,097 10,446 10,769 10,861 11,161

Real % Ch 2.5 1.8 2.0 3.1 3.5 3.1 0.8 2.8

Ind. Production, % Ch 4.1 3.8 3.1 4.7 4.8 3.5 0.7 3.5

Housing Starts, Mil. Units 0.61 0.76 0.94 1.24 1.48 1.47 1.28 1.42

Trade Account, Bil. $ -560 -540 -494 -491 -538 -597 -565 -530

Consumer Prices, % Ch 3.1 2.1 2.2 2.4 3.0 3.1 2.4 2.6

Producer Prices, % Ch 6.0 1.9 2.5 4.8 5.4 4.3 -0.5 3.6

West Texas Int. Oil Price, $/BBL 95 94 94 112 122 114 96 107

Natural Gas, Henry Hub, $/Mbtu 4.00 2.75 3.98 4.29 4.53 5.03 4.98 5.53

Fed. Funds Interest Rate, % 0.19 0.19 0.20 0.20 1.63 3.19 3.37 3.94

Prime Rate, % 3.19 3.19 3.20 3.20 4.63 6.19 6.37 6.94

10-Yr T-Bond Yield, % 2.78 1.81 1.97 2.78 3.81 4.79 4.92 5.33

U.S. Economic Outlook

Media Tablet Ownership Expanding Rapidly, Could Reach 40% of Adults by 2014Percent of Adults Who Own Tablet Computers and E-readers

Apr-09 Sep-09

May-10

Sep-10

Nov-10

May-11

Aug-11

Dec-11

Jan-12 Dec-12

Jan-130%

5%

10%

15%

20%

25%

30%

35%

2%3%

4%5%

6%

12%

9%10%

19%

24%26%

3%4%

5%

8%10% 10%

19%

29%31%e-Readers

Tablets

Source: pewinternet.org

4

Adult Trade Book Sales by FormatBillion US Dollars

Hardcover Softcover Mass-market Paperback

E-Book$0

$1

$2

$3

$4

$5

$6

2009 2010

2011 2012

Source: BISG and some RISI Estimates5

6

North American P&W Demand by GradeMillion Tonnes

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

5

10

15

20

25

30

35

Coated Woodfree

Uncoated Woodfree

Coated Mechanical

Uncoated Mechanical

Average Annual Growth 2013-2014CWF -2.9%UWF -3.2%Cmec -5.2%Umec -0.9%

Projected Change in North American P&W Demand by GradePercent

2013 2014-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

UWF

CWF

Cmec

Umec

P&W Total

7

Total Paper Usage in US Books Declining (000 tons)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Change in Book Paper Demand

2009 -20%2010 -14%2011 -6% -8%-17 -3 to -4% per year

Book Publishers Moving Toward Coated Freesheet (much of which is imported) and Uncoated Mechanical (substituting for more expensive uncoated freesheet)

CFS15%

Cmec18%

UFS45%

Umec23%

2000

9

CFS23%

Cmec18%

UFS25%

Umec34%

2012

US Consumption of Paper by Grade in Book Publishing (percentage)

Uncoated Mechanical Bulky Book Market Cut in Half by Decline of Mass-Market Paperback(N. American Shipments to all End-Uses,000 tonnes)

0

50

100

150

200

250

300

350

400

450

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Bulky Book

Source: PPPC

Combined North American Demand for Uncoated Freesheet Offset and Uncoated Mechanical Superbrite – Trends towards substitution of cheaper papers plateaus

2004 2005 2006 2007 2008 2009 2010 2011 20120

500100015002000250030003500400045005000

0%

5%

10%

15%

20%

25%

30%

35%

UFS Offset UGW SuperbrightSuperbright Share

Superbrite Share000 tonnes

North American Imports of Printed Books – Trending Down As Asia Loses its Appeal

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Asia Europe Other Total

Million Real 2012 Dollars

18

U.S. Imports of Printed Products from China – Printing Of Books in China Has Abated For Environmental and Economic Reasons

95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12$0

$200

$400

$600

$800

$1,000

$1,200

Books including Children's Greeting Cards all other

Million Real 2012 Dollars

18

North American Demand for Coated Woodfree Started Trending Down in 2007

78

80

82

84

86

88

90

92

94

96

98

0 2 4 6 8 10

12

14

0

1

2

3

4

5

6

7

Average Decline:

2007 to 2012 -6.2%2013 to 2014 -3.0%

Million Tonnes

14

15

US Market for Coated Woodfree Sheets versus Rolls

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Sheets

Rolls

US Demand, Thousand Short Tons

Includes coated bristols and imports of coated mechanical sheets

US Market Share for Coated Sheets by Source of Supply – Imports Are Critical

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

10%

20%

30%

40%

50%

60%

70%

North America

Europe

China/Indonesia

Other Asia

------Post Tariff Era------

Tariff applied to China and Indonesia in 2010

Note: Includes coated bristol sheets and coated mechanical sheet imports

16

US Market Share for Coated Rolls by Source of Supply – Imports Actually Lost Share

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

North America

Europe

China/Indonesia

Other Asia

Note: Includes coated bristol

17

18

Supply and Trade Trendsfor Printing & Writing Papers

Announced Net Capacity Changes for 2013-2014 vs RISI Forecast of Demand Growth for the Same Period

Europe N. America Asia Global-400

-200

0

200

400

600

800

1,000

1,200 Coated Woodfree

Capacity Growth

Demand Growth

Th

ou

sa

nd

To

nn

es

19

Coated Woodfree Operating RatesLack of announced capacity expansion to cause operating rates to improve in 2013-2014

2008 2009 2010 2011 2012 2013 201475%

77%

79%

81%

83%

85%

87%

89%

91%

93%

95%

N. America

W. Europe

Asia

20

Announced Net Capacity Changes for 2013-2014 vs RISI Forecast of Demand Growth for the Same Period

Europe N. America Asia Latin America Global-500

-400

-300

-200

-100

0

100

200

300

400Coated Mechanical

Capacity Growth

Demand Growth

Th

ou

sa

nd

To

nn

es

21

Coated Mechanical Operating RatesDecline in North America leads to weaker markets, Europe forecast assumes shuts

2008 2009 2010 2011 2012 2013 201475%

80%

85%

90%

95%

100%

N. Amer-ica

With ex-isting capacity

22

With assumed shuts

Announced Net Capacity Changes for 2013-2014 vs RISI Forecast of Demand Growth for the Same Period

Europe N. America Asia Latin America Global-1,000

-500

0

500

1,000

1,500

2,000

2,500 Uncoated Woodfree

Capacity Growth

Demand Growth

Th

ou

sa

nd

To

nn

es

23

Uncoated Woodfree Operating RatesMore shuts are likely to occur to balance global demand and supply over the next two years

2008 2009 2010 2011 2012 2013 20140.870000000000002

0.880000000000002

0.890000000000002

0.900000000000002

0.910000000000002

0.920000000000002

Global with Announced Capacity Changes Only

Global with Assumed Shuts Including Shuts of Old Capacity in China

24

Announced Net Capacity Changes for 2013-2014 vs. RISI Forecast of Demand Growth for the Same Period

Europe N. America Asia Latin America Global-700

-600

-500

-400

-300

-200

-100

0

100

200

300Uncoated Mechanical

Capacity Growth

Demand Growth

Th

ou

sa

nd

To

nn

es

25

Uncoated Mechanical Operating RatesMassive shuts in Europe cause global markets to tighten despite restarts in North America

2008 2009 2010 2011 2012 2013 201475%

80%

85%

90%

95%

100%

N. America

W. Europe

Global

26

27

Costs for Virgin and Recycled Fiber Will Likely Increase Over the Next Two Years

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$50

$150

$250

$350

$450

$550

$650

$750

$850

$950BHKP SOP#37 Hard Wht. Shv.#30

US$/ton

Data sources: RISI and Letsrecycle.com

28

• Demand and supply are seeing widely different growth rates and this will create upward pressure on high grades – Demand: fast-growing paper sectors, such as tissue, will

request more high grades of recovered paper– Supply: printing and writing paper, the major supply of

high grades, however, will see significant decline in consumption

• Costs are forecast to move upward through 2014 along with the strengthening virgin pulp market, after a weak year in 2012.

High Grade Recycled Paper in the US Market

Period of Relative Cost Stability to End as Costs Rise for Fiber, Energy, and TransportN. American Mill Delivered Cash Costs for Producing 34 lb. LWC

2008 2009 2010 2011 2012 2013 2014$700

$750

$800

$850

$900

$950

$1,000

$1,050

Integrated to Pulp

Not Integrated to Chemical Pulp

29

30

Historical Publishing Paper Prices ($US/cwt) …Trending down while the rest of the world is starting to increase

2005 2006 2007 2008 2009 2010 2011 2012 2013$30

$35

$40

$45

$50

$55

SC-A Ctd. No. 5 34 lbCtd. No. 3 60 lb. Unc. Offset 50 lb.

31

World Graphic Paper 5-Year Forecast

Global Newsprint Risk of Closure Studywww.risi.com/gnr

China’s Influence on WorldGraphic Paper Markets in theComing Decadewww.risi.com/chinagraphic

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