Exhibit 13.3  Managements Discussion and Analysis of Financial Position and Operating
Results    Transparency of financial
information is important to allow our
shareholders to measure the improvement of
our performances.  The
following is managements discussion and analysis (MD&A) of the operating
results and the financial position of Cascades Inc. (Cascades or the Company),
which should be read in conjunction with the Companys consolidated financial
statements and accompanying notes for the years ended December 31, 2004 and
2003. For additional information, readers are referred to the Companys Annual
Information Form (AIF), which is published separately. Information contained
herein includes any significant developments as at February 24, 2005, the date
of approval of the MD&A by the Companys Board of Directors.  MD&A
is intended to provide readers with the information that management believes is
required to gain an understanding of Cascades current results and to assess
the Companys future prospects. Accordingly, certain statements in this
MD&A, including statements regarding future results and performance, are
forward-looking statements within the meaning of securities legislation based
on current expectations. The accuracy of such statements is subject to a number
of risks, uncertainties and assumptions that may cause actual results to differ
materially from those projected, including, but not limited to, the effect of
general economic conditions, decreases in demand for the Companys products,
increases in the cost of raw materials, changes in the relative values of
certain currencies, fluctuations in selling prices and adverse changes in
general market and industry conditions.  The
financial information contained herein, including tabular amounts, is expressed
in Canadian dollars unless otherwise specified, and is prepared in accordance
with generally accepted accounting principles in Canada (Canadian GAAP). Unless
otherwise indicated or if required by the context, the terms we, our and us
refer to Cascades Inc. and all of its subsidiaries and joint ventures. The
financial information included in this analysis also contains certain data that
are not measures of performance under Canadian GAAP (non-GAAP measures). For
example, the Company uses operating income before depreciation and amortization
(OIBD) because it is the measure used by management to assess the operating
and financial performance of the Companys operating segments. Such information
is reconciled to the most directly comparable financial measures, as set forth
in the supplemental information on non-GAAP measures section.  16


Managements Discussion and Analysis of Financial Position and Operating
Results  The Company  Cascades
is a diversified producer of packaging products, tissue paper and fine papers
with operations in Canada, the United States and Europe. The Company has
leading market positions for many of its products in North America and is one
of the foremost producers of coated boxboard in Europe.  Although
the Company believes that its product, integration level, market and
geographical diversification help to mitigate the adverse effects of industry
conditions, the markets for some of its products are highly cyclical. These
markets are heavily influenced by changes in the North American and global
economies, industry capacity and inventory levels maintained by customers, all
of which affect selling prices and profitability. The Company is also affected
by the variation of the Canadian dollar against the U.S. dollar and the euro.  Assets hold for sale  During the fourth quarter of
2004, the Company initiated a divestiture plan for its distribution assets in
the Fine Papers and Tissue Papers segments. Consequently, the assets,
liabilities, results and cash flows of the distribution activities have been
reclassified for the current year and for all comparative periods as assets
held for sale. Financial information relating to these assets held for sale is
as follow:  (in millions of dollars, except
  amounts per share)
  
  2004
  
  2003
  
  2002Condensed
  balance sheetCurrent assets
  
  126
  
  126Long-term assets
  
  9
  
  12Current
  liabilities
  
  29
  
  31Condensed
  statement of earningsSales
  
  438
  
  454
  
  473Depreciation and
  amortization
  
  2
  
  2
  
  2Operating income
  
  7
  
  11
  
  7Interest expense
  
  3
  
  3
  
  3Provision for
  income taxes
  
  1
  
  4
  
  1Net earnings
  from assets held for sale
  
  3
  
  4
  
  3Net earnings per
  share from assets held for sale
  
  0.03
  
  0.05
  
  0.03Condensed
  statement of cash flowsCash flow from
  operating activities
  
  1
  
  14
  
  (5
  )Cash flow from
  investing activities
  
  (1
  )
  (1
  )
  (5
  )Cash flow from
  financing activities
  
  
  
  (13
  )
  10  With
regards to the manufacturing assets of the Fine Papers Group, the Company has
made no decision and is reviewing all possible strategic alternatives.  Overview  In 2004, sales increased by
9% and operating income was 16% lower than 2003. However, if we exclude certain
specific items (Note 1), operating income decreased by only 3%. Due to recent
business acquisitions and an improved economy, the Companys shipments and
pricing for its products were higher in most operating business sectors. This
was, however, more than offset by the 7.6% strengthening of the Canadian dollar
against the U.S. dollar, when compared with 2003.  
 Note 1: For definition of
specific items, refer to the supplemental information on non-GAAP measures  17


Managements Discussion and Analysis of Financial Position and Operating
Results  Selected Consolidated Information For the years ended December 31 (in millions of dollars, except amounts per
share)  As reported
  
  Excluding specific items(1)2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002Sales
  (amount net of eliminations)Packaging
  
  2,274
  
  2,040
  
  2,071Tissue Papers
  
  714
  
  684
  
  725Fine Papers
  
  704
  
  725
  
  795Assets held for
  sale
  
  (438
  )
  (454
  )
  (473
  )3,254
  
  2,995
  
  3,118Operating
  income before depreciation and amortization OIBDPackaging
  
  178
  
  174
  
  244
  
  190
  
  174
  
  248Tissue Papers
  
  76
  
  73
  
  136
  
  76
  
  73
  
  136Fine Papers
  
  (3
  )
  6
  
  37
  
  (3
  )
  6
  
  37Corporate
  
  (4
  )
  (3
  )
  3
  
  (4
  )
  (3
  )
  3Assets held for
  sale
  
  (9
  )
  (13
  )
  (9
  )
  (9
  )
  (13
  )
  (9
  )238
  
  237
  
  411
  
  250
  
  237
  
  415OIBD/sales
  
  7.3
  %
  7.9
  %
  13.2
  %
  7.7
  %
  7.9
  %
  13.3
  %Operating income
  
  79
  
  94
  
  274
  
  91
  
  94
  
  278Net earnings
  
  23
  
  55
  
  169
  
  16
  
  16
  
  153per common share
  
  $
  0.28
  
  $
  0.66
  
  $
  2.07
  
  $
  0.20
  
  $
  0.19
  
  $
  1.87Cash flow from
  operations(1)
  
  158
  
  158
  
  307per common share
  
  $
  1.93
  
  $
  1.93
  
  $
  3.77  
 (1)  See the
supplemental information on non-GAAP measures.  Other
Selected Information For the years ended December 31  2004
  
  2003
  
  2002Shipments
  (in thousands of short tons)ManufacturingPackaging
  products
  
  1,770
  
  1,767
  
  1,794Tissue Papers
  
  399
  
  368
  
  338Fine Papers
  
  289
  
  279
  
  3132,458
  
  2,414
  
  2,445Converted
  productsPackaging/Boxboard
  (in thousands of folding cartons)
  
  13,988
  
  4,402
  
  2,555Packaging/Containerboard
  (million square feet)
  
  6,802
  
  6,699
  
  6,378Tissue (in
  thousands of short tons)(2)
  
  244
  
  218
  
  208Currencyaverage
  rate$Can vs $U.S.
  
  $
  0.768
  
  $
  0.714
  
  $
  0.637$U.S. vs $Can
  
  $
  1.301
  
  $
  1.401
  
  $
  1.570Euro vs $Can
  
  $
  1.617
  
  $
  1.582
  
  $
  1.484  
 (2)Converted tissue products are also included in
manufacturing shipments.  18


Managements Discussion and Analysis of Financial Position and Operating
Results  The
following table shows the historical movement of average benchmark list prices
for some of our key products:  Benchmark product
  
  2004
  
  2003
  
  2002
  
  2001
  
  2000Packaging (US$/short
  ton)Recycled
  boxboard20-pt. clay coated
  
  686
  
  653
  
  584
  
  595
  
  598Linerboard-unbleached
  kraft, 42 lb.Eastern U.S.
  
  468
  
  421
  
  424
  
  444
  
  467Tissue papers
  (index 1999 = 1,000)
  
  1,189
  
  1,131
  
  1,140
  
  1,099
  
  1,064Fine papers (US$/short
  ton)Uncoated fine
  paperoffset, 50 lb. rolls
  
  676
  
  634
  
  692
  
  719
  
  756Coated fine
  paperNo. 3 grade, 60 lb. rolls
  
  808
  
  795
  
  767
  
  853
  
  958  Source: Cascades based on
industry sources. Tissue papers index represents a mix of primary and converted
products.  Recycled
and virgin fibres are the primary raw materials used in the manufacture of our
products and represent the highest production cost. List prices for these raw
materials fluctuate considerably and are heavily influenced by economic
conditions and foreign demand. The following table shows the historical
movement of average benchmark list prices, listed in U.S. dollars, for some of
the grades of recycled paper and virgin pulp used in the manufacturing process:  Benchmark product
  
  2004
  
  2003
  
  2002
  
  2001
  
  2000Recycled paper (US$/short
  ton)Old corrugated
  containers
  
  82
  
  60
  
  63
  
  34
  
  74Sorted office
  papers
  
  122
  
  110
  
  99
  
  78
  
  141Virgin pulp
  (US$/metric tonne)Northern
  bleached softwood kraftEastern U.S.
  
  640
  
  553
  
  491
  
  558
  
  685  Source: Cascades based on industry sources.  Year
ended December 31, 2004, compared with year ended December 31, 2003  SalesSales increased by $259 million, or 8.6%, to $3.3 billion for the year,
versus $3.0 billion for 2003.  Net
business acquisitions over the last 12 months contributed $276 million in sales
during the year. On October 1, 2003, the Company increased its participation in
Dopaco Inc. to 50%. Dopaco is a leading North-American provider of packaging
solutions for the quick-service restaurant industry. Prior to this increase in
participation, this investment was accounted for using the equity method. On
August 24, 2004, the Company further increased its participation to 100%.
Consequently, Dopacos results were consolidated proportionately between
October 1, 2003, and August 24, 2004, and have been fully consolidated since
that date. Given this treatment, the total contribution of Dopaco is $208
million of additional sales for 2004 compared with 2003. In addition, the
acquisition of Scierie P.H. Lemay Itée, completed in December 2003 and the
other businesses acquired in 2004 contributed an additional $68 million of
sales during the year.  19


Managements Discussion and Analysis of Financial Position and Operating
Results  Net
average realized selling prices were weaker in the Boxboard and Fine Papers
segments. This was a reflection of the 7.6% strengthening of the Canadian
dollar against the U.S. dollar in comparison with 2003, and also due to the
fact that North American Boxboard list prices only started their upward trend
in the second half of 2004 and that their implementation was not immediate due
to difficult market conditions. As for the European boxboard operations, their
average selling price declined approximately 30 euros per ton as compared to
2003. In the Fine Papers segment, the uncoated and coated average price
declined during the first six months of 2004 but then increased by more than
US$100 per ton by the end of 2004 which was offset in part by the stronger
Canadian dollar.  The
appreciation of the Canadian dollar has had a direct impact on export prices,
but has also contributed to reducing Canadian dollar prices in the domestic
market, as several of the Companys product lines are priced in U.S. dollars.
Overall, shipments were better compared with 2003, generally reflecting better
economic conditions, with the exception of the packaging segments
North-American boxboard mills due to difficult market conditions and lower
efficiencies in its recycled mills.  Sales
  
  Property, plant
  and equipment   Operating income before depreciation
and amortizationThe
Company generated operating income before depreciation and amortization of $238
million for the year, compared with $237 million for 2003. Operating income
before depreciation and amortization margin decreased to 7.3% for the year,
compared with 7.9% for the corresponding period in 2003. Operating income
before depreciation and amortization for 2004 includes a $4 million gain
related to the disposition of assets in the Speciality Products Group, a $2
million unrealized gain on derivative financial instruments of certain
commodity swap contracts entered into by a joint-venture Company and a $18
million impairment loss related to the property, plant and equipment of one of
the Companys de-inked pulp mills located in Cap-de-la-Madeleine, Québec, which was temporarily closed in
March 2003. The Company decided to permanently shut-down this facility.
Excluding these specific items, the operating income before depreciation and
amortization increased by 5% to $250 million from $237 million in 2003.  Business
acquisitions realized over the last 12 months contributed $32 million to this
increase. Despite higher volumes, selling prices and improvement in cost and
efficiencies, the higher cost of fibre negatively affected operating income
before depreciation and amortization margins. However, the most important
factor was the strengthening of the Canadian dollar combined with the pricing
of several of the Companys Canadian products in U.S. dollars which impacted
negatively on operating income before depreciation and amortization by
approximately $63 million.  In
general, our primary raw material prices increased, compared with 2003 but our
costs were positively offset, in part, by a stronger Canadian dollar. The
monthly average list price for old corrugated containers (OCC), mostly used by
our Containerboard Group, increased by approximately 37% when compared with
2003. The monthly average list price for sorted office papers (SOP), primarily
used by our Tissue Paper and Boxboard Groups, was 11% higher, while the price
of Northern Bleached Softwood Kraft Pulp (NBSK) mainly used by our Fine Papers
Group, increased by 16% during the same period.  As
for natural gas, the pricing reference decreased slightly by 3% in Canada and
increased by 13% in the United States when compared to 2003.  20


Managements Discussion and Analysis of Financial Position and Operating
Results  OIBD variance analysis (in millions of dollars)  Packaging
  
  Tissue Papers
  
  Fine Papers
  
  Corporate
  
  Assets held
  for sale
  
  ConsolidatedOIBD
  for the year ended December 31, 2003
  
  174
  
  73
  
  6
  
  (3
  )
  (13
  )
  237Positive
  (negative) impact from:Sales volume
  
  
  
  19
  
  
  
  
  
  
  
  19Selling price
  
  9
  
  8
  
  3
  
  (4
  )
  
  
  16Raw materials
  
  (8
  )
  (23
  )
  (15
  )
  
  
  
  
  (46
  )Variation of the
  Canadian dollar(1)
  
  (54
  )
  (10
  )
  (7
  )
  4
  
  4
  
  (63
  )Cost improvement
  and efficiencies
  
  37
  
  9
  
  10
  
  (1
  )
  
  
  55Business
  acquisitions
  
  32
  
  
  
  
  
  
  
  
  
  32OIBD excluding
  specific items
  
  190
  
  76
  
  (3
  )
  (4
  )
  (9
  )
  250Specific items
  
  (12
  )
  
  
  
  
  
  
  
  
  (12
  )OIBD
  for the year ended December 31, 2004
  
  178
  
  76
  
  (3
  )
  (4
  )
  (9
  )
  238  
 (1)Foreign exchange impact is based on the Companys national and export
sales less purchases that are impacted by the $Can/$US variation.  Segmented
analysis  Sales
  (in millions of dollars)
  
  OIBD
  (in millions of dollars)
  
  Shipments
  (in thousands)
  
  Average selling price (in dollars/unit)Packaging
  
  2004
  
  2003
  
  2004
  
  % sales
  
  2003
  
  % sales
  
  2004
  
  2003
  
  2004
  
  2003BoxboardManufacturingNorth
  America
  
  241
  
  272
  
  
  
  
  
  14
  
  5.1
  
  336
  st
  363
  st
  717
  
  749ManufacturingEurope
  
  464
  
  455
  
  19
  
  4.1
  
  23
  
  5.1
  
  521
  st
  493
  st
  889
  
  923Converting
  
  513
  
  292
  
  45
  
  8.8
  
  15
  
  5.1
  
  13,988
  carton
  4,402
  cartonOthers and
  eliminations
  
  13
  
  7
  
  3
  
  
  
  3
  
  1,231
  
  1,026
  
  67
  
  5.4
  
  55
  
  5.4Containerboard(1)Manufacturing
  
  344
  
  340
  
  25
  
  7.3
  
  18
  
  5.3
  
  718
  st
  721
  st
  479
  
  470Converting
  
  489
  
  480
  
  54
  
  11.0
  
  52
  
  10.8
  
  6,802
  msf
  6,699
  msf
  72
  
  72Others and
  eliminations
  
  (200
  )
  (191
  )
  8
  
  
  
  11
  
  633
  
  629
  
  87
  
  13.7
  
  81
  
  12.9Specialty
  products
  
  509
  
  484
  
  24
  
  4.7
  
  38
  
  7.9
  
  195
  st(2)
  190
  st(2)Eliminations
  
  (44
  )
  (38
  )
  
  
  
  
  
  
  2,329
  
  2,101
  
  178
  
  7.6
  
  174
  
  8.3
  
  1,770
  st
  l,767
  st  
 (1)The Companys containerboard business consists entirely of its 50% share
of the results of Norampac Inc., a joint venture. (2)Consists of the paper manufacturing shipments only.  21


Managements Discussion and Analysis of Financial Position and Operating
Results  Sales of the Packaging
Products segment increased by $228 million, or 11%, amounting to $2.3 billion
for the year, compared with $2.1 billion for the same period in 2003. The
additional contribution of new businesses acquired during the last 12 months
combined with price increases in the containerboard sector more than offset
lower realized prices in the boxboard sector and mitigated the impact on general
pricing caused by the appreciation of the Canadian dollar.  Sales for the Boxboard Group amounted to $1.2
billion for the year, compared with $1.0 billion for the same period in 2003.
Excluding Dopacos and Scierie P.H. Lemays additional contribution of $245
million, sales actually decreased by $40 million, or 4% due to lower selling
prices for our primary board mills and for our converting units. Over the
course of this period, shipments by primary mills decreased by approximately
7.4% in North America, due to difficult market conditions and lower
efficiencies in their recycled mills. Shipments increased by approximately 5.7%
in Europe due to lower downtime compared with 2003. In addition, net selling
prices were lower mainly due to the strengthening of the Canadian dollar and to
a 6% decrease in the European mills net realization price in euros, which was
due to difficult conditions in the European board market that prevailed at the
end of 2003 through the first quarter of 2004.  Sales for the Containerboard Group increased
$4 million amounting to $633 million for the year, compared with $629 million
for the same period in 2003, or a 1% increase. The combined impact of the
acquisition of the Thompson (Connecticut) converting plant in April 2004 and
the Lancaster (New York) converting plant in August 2004 contributed $12
million of additional sales in 2004. Sales were reduced by $15 million due to
the impact of a work stoppage at the Burnaby mill, which was resolved during
the fourth quarter of 2004. Containerboard shipments remained flat over the
period despite the Burnaby mill strike. Excluding this mill, the primary
capacity utilization rate was 96%, compared with 92% in 2003.  Shipments of corrugated products increased
slightly compared with 2003, due mainly to the additional volume generated by acquisitions.
Also, market conditions allowed for the gradual implementation throughout the
year of certain price increases that more than offset the negative impact of a
stronger Canadian dollar. This sectors North-American integration level,
reflecting the percentage of the containerboards mills production sold
internally to the Companys own box or sheet plants, increased to 64% in 2004,
compared with 61% in 2003. Increased integration improves profit by providing
more value-added products compared with unconverted board products.  Due to increased economic activity in terms of
volume and prices, sales for the Specialty Products Group increased by $25
million, or 5%, to $509 million for the year, compared with $484 million for
the same period in 2003. Within this Group, the paper mill packaging division
brought in an extra $15 million, while the paper recovery and de-inked pulp
division saw its contribution increase by $34 million. The Company completed the
acquisition of the remaining 50% of the Greenfield S.A.S. joint venture in
France during the second quarter of 2004, which resulted in an increase in the
Companys recycling operations in Europe. The sales increases observed in the
paper mill packaging and recovery and de-inked pulp divisions were offset by a
$13 million reduction in the sales of moulded pulp products.  22


Managements Discussion and Analysis of Financial Position and Operating
Results  Operating income before depreciation and
amortization for the Packaging Products segment was $178 million for the year,
compared with $174 million for the same period in 2003. Operating income before
depreciation and amortization includes a $4 million gain related to the
disposition of assets in the Speciality Products Group, a $2 million unrealized
gain on derivative financial instruments of certain commodity swap contracts
entered into by a Company joint-venture and a $18 million impairment loss
related to the property, plant and equipment of one of the Companys de-inked
pulp mills located in Cap-de-la-Madeleine, Québec, which was temporarily closed in March
2003. The Company decided to permanently shut down this facility. Excluding
these specific items, the operating income before depreciation and amortization
increased by 9% to $190 million from $174 million in 2003. The increase of $16
million is mainly due to price increases realized in the containerboard sector,
the proportionate consolidation of the results of Dopaco between October 1,
2003, and August 24, 2004, and its full consolidation since that date. This
improvement was also offset by approximately $54 million due to the
strengthening of the Canadian dollar. However, the North American boxboard operations
saw its contribution decrease by $14 million to zero for 2004 due to a decrease
in shipments and average selling prices.  Sales
  (in millions of dollars)
  
  OIBD
  (in millions of dollars)
  
  Shipments
  (in thousands)
  
  Average selling price (in dollars/unit)Tissue Papers
  
  2004
  
  2003
  
  2004
  
  % sales
  
  2003
  
  % sales
  
  2004
  
  2003
  
  2004
  
  2003Manufacturing
  & converting
  
  665
  
  620
  
  74
  
  11.1
  
  72
  
  11.6
  
  399
  st
  368
  st
  1,553
  
  1,590Distribution
  
  87
  
  89
  
  2
  
  2.3
  
  1
  
  1.1Eliminations
  
  (35
  )
  (23
  )
  
  
  
  
  
  
  717
  
  686
  
  76
  
  10.6
  
  73
  
  10.6  Sales of the Tissue Group
increased by $31 million, or 4.5%, to $717 million for the year, compared with
$686 million for the same period in 2003. Average net realized prices were
lower during the year, in comparison with the corresponding period in 2003, as
a result of the strong Canadian dollar. The gradual introduction of certain
price increases in the second half of 2004 in the U.S. retail and Canadian and
U.S. away-from-home markets, as well as in the parent rolls business, have
mitigated the negative impact of the currency. Shipments increased by 8% in
2004, reflecting increased sales efforts, an improving North-American economy
and the additional contribution from the assets acquired from American Tissue
in 2002. The integration rate (i.e, converted products sold vs. parent rolls)
increased from 59% at the end of 2003 to 66% at the end of 2004.  The
Tissue Group operating income before depreciation and amortization was $76
million for the year compared with $73 million last year. Higher volumes and
higher net realized selling prices more than compensated for higher average
waste paper costs and the negative impact on average selling prices resulting
from the strengthening of the Canadian dollar. This Canadian dollar impact
amounted to approximately $10 million for the year. Operating income before
depreciation and amortization was also negatively affected by approximately $6
million due to the start-up of the Memphis mill and converting plants in
Arizona and Calgary.  23


Managements Discussion and Analysis of Financial Position and Operating
Results  Sales
  (in millions of dollars)
  
  OIBD
  (in millions of dollars)
  
  Shipments
  (in thousands)
  
  Average selling price (in dollars/unit)Fine Papers
  
  2004
  
  2003
  
  2004
  
  % sales
  
  2003
  
  % sales
  
  2004
  
  2003
  
  2004
  
  2003Manufacturing
  
  373
  
  380
  
  (10
  )
  (2.7
  )
  (5
  )
  (1.3
  )
  289
  st
  279
  st
  1,140
  
  1,204Distribution
  
  409
  
  417
  
  7
  
  1.7
  
  11
  
  2.6Eliminations
  
  (68
  )
  (63
  )
  
  
  
  
  
  
  714
  
  734
  
  (3
  )
  (0.4
  )
  6
  
  0.8  Sales of the Fine Papers
Group decreased by $20 million, or 3%, to $714 million for the year, compared
with $734 million for the same period in 2003. Compared with 2003, the pricing
of our products increased in the second half of 2004 due to better market
conditions and higher operating levels in the coated and uncoated paper
markets. However, these price increases were affected by the strengthening of
the Canadian dollar against the U.S. dollar. Shipments increased 3.5% when
compared with 2003 as our production units took less downtime due to the better
pricing of our products. The distribution division, Cascades Resources, contributed
total sales of $409 million during the year, compared with $417 million in
2003. Cascades Resources shipments of paper products were 4.4% higher than last
year but resale price per ton showed a reduction of 8.3% as compared with the
same period in 2003.  Operating
income before depreciation and amortization for the Fine Papers Group was
negative by $3 million for the year, compared with a positive contribution of
$6 million for the same period in 2003. The manufacturing segment experienced
higher shipments, combined with price increases gradually implemented during
the third and fourth quarters of 2004. However, the strengthening of the
Canadian dollar negatively impacted profitability by approximately $7 million
during the past year compared with 2003.  Manufacturing sector operating income before
depreciation and amortization was also impacted by higher virgin fibre prices
which were, however, offset in part by a stronger Canadian dollar. The
distribution divisions profitability was affected by higher administrative
costs related to legal expenses, bad debts and severance costs in one of its
divisions.  Other
items analysis  Depreciation and amortizationDepreciation and amortization increased to $159 million in 2004, from
$143 million for the corresponding period of 2003, primarily as a result of
recent business acquisitions.  Operating incomeAs a result of the above, operating income for
the year decreased by 16% to $79 million, compared with $94 million for the
same period in 2003. Operating margins decreased from 3.1% in 2003 to 2.4% in
2004.  Excluding specific items, operating income for
the year stood at $91 million, compared with $94 million for the same period in
2003. Operating margins decreased from 3.1% in 2003 to 2.8% in 2004.  Interest
expenseInterest
expense decreased by $4 million, to $76 million for 2004, compared with $80
million for the same period in 2003. The strengthening of the Canadian dollar
contributed to reducing the interest expense on the Companys U.S.-denominated
debts.  24


Managements Discussion and Analysis of Financial Position and Operating
Results  Foreign
exchange gain on long-term debtIn
2004, the Company recorded a foreign exchange gain of $18 million on its own
and its joint venture U.S.-denominated debts, as the Canadian dollar went from
$0.774 against the US dollar as at December 31, 2003, to $0.831 as at December 31,
2004. This compares with a gain of $72 million in 2003. This gain had no impact
on the Companys liquidity.  Provision for income taxesThe income tax provision for the year ended December 31, 2004,
amounted to $2 million, representing an effective tax rate of 10%. Excluding
the impact of specific items, the tax rate would have been approximately 25%.  Net earningsAs a result of the foregoing factors, net
earnings decreased by $32 million to $23 million, or $0.28 per share for 2004,
versus net earnings of $55 million, or $0.66 per share, for the same period in
2003.  Net earnings excluding specific items for 2004, remained flat at $16
million, or $0.20 per share, compared with $16 million or $0.19 in 2003.  Liquidity
and capital resources  Cash flows from operatingCash flows from operating activities totalled $156 million for 2004,
compared with $126 million for the same period in 2003. In 2004, changes in
non-cash working capital components amounted to a use of funds of $2 million.
This compares to a use of funds of $32 million in 2003. This improvement comes
from a refund of prior years income taxes and improved management of working
capital.  Cash
flow from operating activities, excluding the change in non-cash working capital
components, amounted to $158 million in 2004 and 2003, or $1.93 per share. This
cash flow measure is important for the Company in order to pursue its capital
expenditures program and reduce its leverage to debt.  Investing activitiesIn 2004, investment activities required total cash resources of $244
million. The Company invested $129 million in property, plant and equipment. The major capital projects
realized in 2004 for each business segment are:  Boxboard:
  
  $13 million in the manufacturing sector to
  complete the rebuilding of the wet-end section of the Larochette,
  France, machine #3, started in 2003 and for the parent roll storage project
  at the Arnsberg, Germany mill;$8 million for capacity improvement at
  Dopaco;$2 million for the extension of the drying section at
  Scierie Lemay sawmill;Containerboard:
  
  $7 million in the manufacturing operations
  for waste water treatment (Mississauga mill), a bark boiler (Cabano mill) and
  for the completion of the steam reformer project (Trenton mill);$8.5 million in the converting operations
  for the relocation of its Concord plant to its Etobicoke site and for a six
  color press (Lithotech plant);Specialty products:
  
  $7 million mainly in the automation and
  building extension of the Kingsey Falls plastic unit, the start-up of a new
  honeycomb line in Drummondville and the start-up of a new recovery center in
  Gatineau as well as a building extension to the Lachine recovery center;Tissue Papers:
  
  $6 million for the start-up of the new
  Memphis paper machine as well as for the technological optimization of one of
  the Candiac paper machines;Fine Papers:
  
  $7 million to complete the sim-sizer press
  project that was initiated in 2002 and to invest in a bio-gas project to
  reduce energy costs at the St-Jérôme mill, which started operating at the
  beginning of 2005.  25


Managements Discussion and Analysis of Financial Position and Operating
Results  The Company also invested $120 million (net of
cash acquired) in new businesses during the year, as follows:  Boxboard:
  
  $82 million (US$63 million) paid to acquire
  the remaining 50% of the shares of Dopaco Inc. held by a private party;Containerboard:
  
  $10 million (US$8 million) paid by a
  joint-venture company to acquire a corrugated plant in Lancaster, New York;$8 million (US$5.9 million) paid by a joint-venture
  company to acquire a corrugated plant in Thompson, Connecticut;Specialty
  Products:
  
  $7 million paid to acquire a non-controlling
  interest in one of its division;$2 million paid to acquire the 50%
  participation from our partner in a pulp mill in France;Tissue
  Papers:
  
  $15 million (US$11.4 million) paid to
  acquire a Tissue mill located in Memphis, Tennessee.  During the second quarter of 2004, the Company sold the assets of two of
its fibreboard panel businesses in the Specialty Products Group for a total
consideration of $16 million, of which, $14 million was received at closing.
The balance of the selling price, in the amount of $2 million, is payable no
later than 2011.  Financing activitiesOn December 2, 2004, the Company completed
a private placement of US$125 million of 7.25% senior notes due in 2013, which
are treated as part of the same series of 7.25% senior notes due in 2013 that
were issued in February 2003. The issuance of these senior notes was
completed at a price of 105.50%, or an effective interest rate of 6.376%. The
net proceeds of $156 million of this financing were used to reduce indebtedness
under the Companys revolving credit facility.  During
the year, the Company repaid $49 million of its long-term debt consisting of
long-term debt of Dopaco acquired at the time of acquisition and long-term debt
that was not refinanced in 2003. It also redeemed 503,700 of its common shares
on the open market, pursuant to a normal course issuer bid for an amount of
$6.8 million.  Taking
into account these transactions and the $13 million in dividends paid out
during 2004, financing activities generated $93 million in liquidity.  Consolidated financial position as at December 31, 2004  The
Companys working capital stood at $502 million as at December 31, 2004, a
ratio of 1.82:1. At year-end 2003, working capital stood at $508 million  a ratio of 1.99:1.  Long-term debt, including the
current portion, increased to $1.226 billion as at December 31, 2004,
following the acquisition of Dopaco, compared with $1.110 billion as at December 31,
2003. The current portion of long-term debt increased by $40 million, mainly as
a result of the balance of purchase price owed for Dopaco, in the amount of $52
million. This amount is expected to be paid in the second quarter of 2005. The
Company had $334 million available under its $500 million revolving credit
facility at the end of the year in addition to $168 million available from its
joint ventures. The net funded debt to total capitalization ratio increased
from 45.5% as at December 31, 2003, to 47.3% as at December 31, 2004.  Including the net earnings generated during
the year and the dividend paid out, shareholders equity increased slightly to
$1.059 billion, or $13.02 per share, as at December 31, 2004.  During the first quarter of 2004, the
Companys lenders agreed to amendments to the revolving credit facility that
will provide greater flexibility relative to the interest coverage covenant.
These amendments will remain in force until the second quarter of 2005.  The liquidity available via the credit
facilities of the Company and its joint ventures, along with the cash flow
generated by the operating activities, will provide the Company sufficient
funds to meet its financial obligations and fulfill its capital expenditure
program, which budget estimates place at approximately $120 million for 2005
including our share of our joint venture, Norampac, estimated at $40 million.
This budgeted amount may be revised during the course of this year, depending
on the cash flow generated by operations.  26


Managements Discussion and Analysis of Financial Position and Operating
Results  Capital stock information  As at December 31,
2004, the capital stock issued and outstanding consisted of 81,361,580 common
shares (81,731,387 as at December 31, 2003). As at December 31, 2004,
1,756,986 stock options were issued and outstanding (1,494,942 as at December 31,
2003).  Contractual obligations and other commitments  The
Companys principal contractual obligations and commercial commitments relate
to outstanding debt, limited amortization requirements under existing credit
lines, operating leases, capital leases and purchase obligations for its normal
business operations. The following table summarizes these obligations as at December 31,
2004:  Contractual obligations  Payment
  due by period (in millions of dollars)
  
  Total
  
  Year 2005
  
  Years 2006 and 2007
  
  Years 2008 and 2009
  
  ThereafterLong-term
  debt
  
  1,221
  
  56
  
  166
  
  17
  
  982Capital
  lease
  
  6
  
  2
  
  3
  
  1
  
  Operating
  lease
  
  189
  
  42
  
  66
  
  40
  
  41Purchase
  obligations
  
  291
  
  97
  
  79
  
  39
  
  76Total contractual obligations
  
  1,707
  
  197
  
  314
  
  97
  
  1,099  Transactions with related parties  The Company has
also entered into various agreements with its joint ventures, significantly
influenced companies and entities controlled by one or more directors for the
supply of raw materials, including recycled paper, virgin pulp and energy,
supply of unconverted and converted products, sale and lease of equipment and
other agreements in the normal course of business. The aggregate amount of
sales from the Company to its joint ventures and other affiliates was $100
million and $61 million for 2003 and 2004, respectively. The aggregate amount
of sales from the joint ventures and other affiliates to the Company was $67
million and $69 million for 2003 and 2004, respectively. The aggregate amount
of sales from entities controlled by one or more of our directors to us was $7
million and $6 million for 2003 and 2004, respectively.  Off-balance sheet arrangements  In the normal
course of business, we finance certain of our activities off-balance sheet
through leases. We enter into operating leases for buildings and equipment.
Minimum future rental payments under these operating leases, determined as at December 31,
2004, are included in the contractual obligations table above.  Critical accounting policies  Some of the
Companys accounting policies require significant estimates and assumptions
about future events that affect the amounts reported in the financial
statements and the accompanying notes. Future events and their effects cannot
be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of managements judgment. Actual results could differ
from those estimates, and any such differences may be material to the Companys
financial statements.  27


Managements Discussion and Analysis of Financial Position and Operating
Results  Valuation of identifiable intangible assets and goodwill:Business acquisitions are accounted for under the purchase method of
accounting. The total cost of an acquisition is allocated to the underlying net
assets based on their respective estimated fair values. As part of this
allocation process, the Company must identify and attribute values and
estimated lives to the intangible assets acquired. While an expert may be
employed to assist the Company with these matters, these types of
determinations involve considerable judgment and often involve the use of
estimates and assumptions, including those with respect to future cash inflows
and outflows, discount rates and asset lives. These determinations affect the
amount of amortization expense recognized in future periods. The Company
reviews the carrying values of all identifiable intangible assets and goodwill
when certain conditions arise to determine whether any impairment has occurred.
Because the valuation of identifiable intangible assets and goodwill requires
significant estimates and judgment about future performance and fair value, our
future results could be affected if our current estimates of future performance
and fair value change.  Income taxes:The Company is required to estimate the income
taxes in each of the jurisdictions in which it operates. This includes
estimating a value for existing net operating losses based on the Companys
assessment of its ability to utilize them against future taxable income before
they expire. If the Companys assessment of its ability to use the net
operating losses proves inaccurate in the future, more or less of the net
operating losses might be recognized as assets, which would increase or decrease
the income tax expense, and consequently affect the Companys net earnings in
the relevant year.  Stock-based compensation:Stock options granted to employees after January 1, 2002, are
accounted for under the fair value method, which consists of recording expenses
to earnings when stock options are issued. The fair value of stock options is
calculated with a financial model involving the use of various assumptions such
as the risk-free interest rate, the expected volatility of the underlying
stock, the expected life of the stock options and the expected dividend yield.
The Company uses the Black-Scholes option-pricing model, which was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Option-pricing models require the
input of highly subjective assumptions, including the expected price
volatility.  The Company uses expected
volatility rates, which are based on historical volatility rates trended into
future years. Changes in the subjective input assumptions can materially affect
the fair value estimate, and therefore the existing models do not necessarily
provide a reliable single measure of the fair value of the stock options. A
change in the assumptions used by the Company could have an impact on the net
earnings.  Pension and post-retirement benefit costs:Pension and post-retirement benefit costs are developed from actuarial
valuations. Inherent in these valuations are key assumptions provided by the
Company to actuaries, including discount rates, expected returns on plan
assets, rates of compensation increases and medical cost inflation. In
selecting the rates and returns, the Company is required to consider current
market conditions, including changes in interest rates. Material changes in
pension and post-retirement benefit costs may occur in the future, resulting
from fluctuations in headcount in addition to changes in the assumptions.  28


Managements Discussion and Analysis of Financial Position and Operating
Results  Environmental cleanup costs:The Company expenses environmental expenditures related to existing
conditions caused by past or current operations and from which no future
benefit is discernible. The Companys estimated environmental remediation costs
are based upon an evaluation of currently available facts with respect to each
individual site, including the results of environmental studies and testing,
and considering existing technology, applicable laws and regulations, and prior
experience in remediation of contaminated sites. Expenditures that extend the
life of the related property, or mitigate or prevent future environmental
contamination, are capitalized. The Company determines its liability on a
site-by-site basis and records a liability at the time when it is probable and
can be reasonably estimated. The contingencies take into account the
anticipated participation of other potentially responsible parties in those
instances where it is probable that such parties are legally responsible and
financially capable of paying their respective shares of the relevant costs.
Actual costs to be incurred in future periods at the identified sites may vary
from the estimates, given the inherent uncertainties in evaluating
environmental exposures. Future information and developments may require the
Company to reassess the expected impact of these environmental matters.  Collectibility of accounts receivable:In order to record its accounts receivable at their net realizable
value, the Company must assess their collectibility. A considerable amount of
judgment is required in order to make this assessment, including a review of
the aging of its receivables and the current creditworthiness of each customer.
The Company has recorded allowances for receivables that it feels are
uncollectible. However, if the financial condition of the Companys customers
were to deteriorate, their ability to make required payments may become further
impaired, and increases in these allowances would be required.  Impairment of tangible assets:At least annually, we assess whether there has been a permanent
impairment in the value of assets. This is accomplished by determining whether
projected undiscounted future cash flows from operations exceed the net carrying
amount of the asset as of the assessment date. Estimates of future cash flows
and fair values require judgment and may change.  Introduction of new accounting policies in 2004  Hedging relationships:On January 1, 2004, the Company applied prospectively Accounting
Guideline 13 (AcG-l3) regarding hedge accounting. In compliance with the
criteria required by AcG-13, hedge accounting requires the Company to document
the risk management strategy used. Upon executing a hedging contract, management
documents the hedged item, namely asset, liability or anticipated transaction,
the characteristics of the hedging instrument used and the selected method of
assessing effectiveness. The current accounting policy will be maintained for
hedging relationships deemed to be effective at January 1, 2004.
Consequently, realized and unrealized gains and losses on hedges will continue
to be deferred until the hedged item is realized so as to allow matching of the
designations in the statement of earnings. Hedge accounting was applied as at January 1,
2004, for hedging relationships existing as at December 31, 2003, that
satisfied the conditions of AcG-13. Certain hedging relationships existing as
at December 31, 2003, did not meet the conditions of AcG-13 and
consequently were recorded at fair value as at January 1, 2004, resulting
in an increase in other assets of $3.7 million and in liabilities of $0.1
million. The related unrealized gain of $3.6 million was deferred and presented
under other liabilities on the balance sheet.  29


Managements Discussion and Analysis of Financial Position and Operating
Results  Asset retirement obligations:On January 1, 2004, the Company adopted retroactively without prior
period restatement the new recommendations of the CICA relating to asset
retirement obligations. This standard requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
application of this standard did not have any significant impact on the
financial position or results of operations of the Company.  Impairment of long-lived assets:Effective January 1, 2004, the Company adopted prospectively the
new Handbook Section 3063, Impairment of Long-Lived Assets, which
establishes standards for recognition, measurement and disclosure of the
impairment of non-monetary long-lived assets, including property, plant and
equipment and intangible assets with finite useful lives. Under the new
standard, impairment in a long-lived asset is recognized when the undiscounted
cash flows expected from the use and eventual disposition of the asset are less
than their carrying amount. In such situations, the asset is measured at its
fair value. The adoption of this new standard had no impact on the Companys
financial statements as of January 1, 2004.  Generally accepted accounting principles:On January 1, 2004, the Company adopted retroactively with prior
period restatement Section 1100 Generally Accepted Accounting
Principles, and Section 1400, General Standards for Financial Statement
Presentation, recently issued by the CICA. Section 1100 clarifies the
relative authority of various accounting pronouncements and other sources of
guidance within GAAP, whereas Section 1400 clarifies what constitutes a
fair presentation in accordance with GAAP. In addition, under Section 1100,
industry practice no longer plays a role in establishing GAAP. As a result, the
cost of delivery, which had been subtracted from sales in accordance with
industry practice, is no longer subtracted from sales, but rather is included
in cost of sales.  Employee future benefits:The CICA amended Section 3461 Employee Future Benefits to require
additional disclosures about the assets, cash flows and net periodic benefit
cost of defined benefit pension plans and other employee future benefit plans.
The new annual disclosures are included in the annual financial statements as at
December 31, 2004.  New accounting policies not yet adopted  Variable interest entities:In June 2003, the CICA issued Accounting
Guideline AcG-15, Consolidation of variable interest entities. The new
guideline requires companies to identify variable interest entities in which
they have an interest to determine whether they are the primary beneficiary of
such entities and, if so, to consolidate them. A variable interest entity is
defined as an entity in which the equity is not sufficient to permit that entity
to finance its activities without external support, or the equity investors
lack either voting control, and obligation to absorb future losses, or the
right to receive future returns. At the end of 2003, the CICA announced the
deferral of the effective date of AcG-15. Previously, AcG-15 was to be
effective for interim and annual periods starting on or after January 1,
2004. It is now effective for interim and annual periods beginning on or after November 1,
2004. Early adoption is still permitted. The application of this standard will
not have any material impact on the financial position or results of operations
of the Company.  30


Managements Discussion and Analysis of Financial Position and Operating
Results  Financial instruments, hedging, capital assets and
comprehensive income:In January 2005, the CICA publicized four
new chapters: chapter 1530 Comprehensive Income, chapter 3251 Capital
assets, chapter 3855 Financial Instruments accountability and evaluation,
chapter 3865 Hedging. These new standards about recognition, measurement of
financial instruments, hedging and comprehensive income have been elaborated in
respect with the generally accepted accounting policies already used in the
United States (U.S. GAAP). These new standards have to be adopted by the
Company at the latest for the period beginning January 1, 2007, but early
adoption is accepted. The Company is presently evaluating the impact of these
new standards.  Environmental issues  The Company is subject to environmental laws and regulations imposed by
the various governmental and regulatory authorities in all the countries where
it operates. The Company is also subject to the U.S. Federal Comprehensive Environmental Response, Compensation and
Liability Act,or CERCLA, as well as other applicable legislation in
the United States, Canada and Europe that hold companies accountable for the
investigation and remediation of hazardous substances.  The
Company is in compliance, in all material respects, with all applicable
environmental legislation or regulations. However, ongoing capital and
operating expenses are expected to be incurred to achieve and maintain
compliance with applicable environmental requirements.  Quantitative and qualitative disclosures regarding market risk  The
Company is exposed to certain market risks as part of its ongoing business
operations, including risks from changes in selling prices for its principal
products, costs of raw materials, interest rates and foreign currency exchange
rates, all of which impact the Companys financial condition, results of
operations and cash flows. The Company manages its exposure to these and other
market risks through regular operating and financing activities and, on a limited
basis, through the use of derivative financial instruments. The Company uses
these derivative financial instruments as risk management tools and not for
speculative investment purposes.  The following chart provides a quantitative illustration of the impact
on the Companys annual operating income before depreciation and amortization
from possible changes in the prices of its principal products, the cost of raw
materials and energy, and the exchange rate of the U.S. dollar. This is based
on 2004 shipments done or quantity used as adjusted for expected increases in
shipments as a result of recent acquisitions, assuming for each price change
that all other variables remain constant. To reduce the Companys vulnerability
to selling price fluctuations, some of our operations have implemented risk
management programs. The Company uses financial hedges on the selling prices of
certain finished products or on the purchase cost of certain raw materials to
cover part of the risk related to price fluctuations. Also, from time to time,
the Company negotiates term contracts to protect itself against increases in
energy prices, including natural gas, for periods of up to 24 months. In
addition, by selling marketable pulp in the open market, the Company is able to
limit its vulnerability to price fluctuations for this raw material.  31


Managements Discussion and Analysis of Financial Position and Operating
Results  Sensitivity analysis(1)
  
  
  
  Change
  
  OIBD Impact
  (in millions of dollars)Selling prices (manufacturing)Boxboard
  
  USD/ST
  
  $
  25
  
  27Containerboard(2)
  
  USD/ST
  
  $
  25
  
  22Specialty
  Products (paper only)
  
  USD/ST
  
  $
  25
  
  6Tissue
  Papers
  
  USD/ST
  
  $
  50
  
  25Fine
  Papers
  
  USD/ST
  
  $
  40
  
  14Input costRecycled
  papersBrown
  grades
  
  USD/ST
  
  $
  15
  
  (13
  )Groundwood
  grades
  
  USD/ST
  
  $
  15
  
  (8
  )White
  grades
  
  USD/ST
  
  $
  15
  
  (18
  )Commercial
  pulp
  
  USD/MT
  
  $
  30
  
  (5
  )Natural
  gas
  
  USD/MMBTU
  
  $
  0,10
  
  (2
  )Foreign exchangeChange
  of C$vs US$(3)
  
  C$
  
  $
  (0,01
  )Sales
  in US from Canada
  
  
  
  
  
  (3
  )Sales
  in Canada priced in USD
  
  
  
  
  
  (4
  )US
  subsidiaries translation
  
  
  
  
  
  (1
  )  
 (1)Current sensitivity calculated at 1.25 C$/USD,
excluding any hedging programs. (2)Include our 50% share of our joint venture
Norampac Inc. (3)As an example; from 1.25 C$/USD to 1.24
C$/USD.  Interest rate risk:The Companys principal interest rate risks
relate to outstanding debt obligations. As of December 31, 2004,
approximately 17% of its long-term debt accrued interest at floating rates. A
1% change in the interest rates applicable to its actual variable rate debt
would have a $2.1 million effect on interest expense.  In addition, a joint venture holds certain interest rate swap agreements
designated as hedges. These contracts have the objective of covering the
variation of the fair value for part of the promissory note from our joint
venture caused by the variation in interest rates. The 6.75% fixed interest
rate has been subsequently change to an average variable rate in 2004 of 3.96%
for a notional amount of $50 million maturing in 2013 (share of the Company is
$25 million).  Foreign currency risk:The Company is exposed to foreign currency risks that arise from normal
business operations. These risks include the translation of local currency
balances of our foreign subsidiaries, intercompany loans with foreign
subsidiaries and transactions denominated in foreign currencies. A significant
portion of the Companys debt is denominated in foreign currencies and so is
exposed to foreign currency risks related to interest on this debt and its
repayment. The Company is also exposed to exchange rate risks when its sales
are in foreign currencies and its costs are not. Fluctuations in exchange rates
may adversely affect its ability to compete with non-local producers as well as
to export its products. The Companys objective is to minimize its exposure to
these risks through its normal operating activities and, where appropriate,
through foreign currency forward contracts. Our policy is to negotiate forward
exchange contracts that can cover up to 50% of the net exposure to currency
fluctuations for periods of 12 to 18 months. In 2004, approximately 25% of the
Companys total sales from its Canadian operations were made in the United
States.  32


Managements Discussion and Analysis of Financial Position and Operating
Results  The
Company and a joint venture entered into contracts to sell forward U.S. dollars
in exchange for Canadian dollars. As at December 31, 2004, the Company and
a joint venture held foreign exchange forward contracts with a notional amount
of US$72 million maturing in 2005 and 2006, at a weighted average exchange rate
of 1.3479. As at December 31, 2004, the fair value of these instruments
represented an unrealized gain of $10.4 million. Furthermore, the Company was
engaged in forward selling contracts in euros maturing in 2005 for the notional
amount of 29 million at an average exchange rate of 1.6641. The fair value of
these instruments represents a non realized gain of $1.3 million as at December 31,
2004.  As
at December 31, 2004, the Company was engaged in forward purchase contracts
in U.S. dollars maturing in 2005 for the notional amount of US$44 million at an
average exchange rate of 1.1796. The fair value of these instruments represents
a non realized gain of $0.9 million at December 31, 2004.  The
European subsidiaries entered into foreign exchange forward contracts maturing
in less than a year to hedge their currency risks resulting from sales and
purchases in European currencies, U.S. dollars, British pounds and in Swedish
krona. As at December 31, 2004, the fair value of these instruments
represented an unrealized loss of $0.2 million on a notional amount of $23
million.  Furthermore,
one of our joint ventures entered into various currency options. The currency
options entered into by the joint venture are contracts whereby the joint
venture has the right, but not the obligation, to sell U.S. dollars at the
strike rate if the U.S. dollars trade below that rate. In addition, in
accordance with the contracts, the joint venture has the obligation to sell
U.S. dollars at the strike rate if the U.S. dollars trade above a specific
rate. As at December 31, 2004, the currency options entered into by the
joint venture for a nominal amount of US$16.8 million (the share of the Company
is US$8.4 million) had strike prices varying from 1.40 to 1.45 with maturities
up to 12 months. These instruments did not represent any unrealized loss or
gain as at December 31,2004.  Credit risks:The Company is exposed to credit risk on the
accounts receivable from its customers. In order to reduce this risk, the
Companys credit policies include an analysis of the financial position of its
customers and a regular review of their credit limits. The Company believes
there is no particular concentration of credit risks, due to the geographic
diversity of its customers and its procedures for the management of commercial
risks. Derivative financial instruments include an element of credit risk,
should the counterparty be unable to meet its obligations. The Company reduces
this risk by dealing with creditworthy financial institutions.  Commodity price risk:The Company and a joint venture has also
entered into cash-settled swap contracts with counterparties, maturing from
2005 to 2007, under which the Company sets the price on notional quantities of
sorted office papers, old corrugated containers, bleached softwood kraft pulp,
electricity, natural gas, 42-lb. kraft linerboard and 26-lb. semichemical
corrugating medium. Gains and losses arising from these contracts as of December 31,
2004, represented a net unrealized gain of $6.3 million of which $0.5 million
was recorded in earnings for contracts not designated as hedges. In addition,
an amount of $1.7 million was recorded in 2004 with respect to the amortization
of the transitional deferred unrealized gain under AcG-13.  33


Managements Discussion and Analysis of Financial Position and Operating
Results  Outlook  Within the Packaging segment, the Boxboard Group will continue to
optimize the Dopaco acquisition in order to further develop synergies with the
other business groups. Price increases announced in North America in the second
half of 2004 have been gradually implemented and should be reflected over the
next few quarters. The Boxboard Group will also benefit from the Dover
Industries Limited business acquisition announced at the beginning of 2005. The
Containerboard Group intends to continue focusing on increasing its
integration/converting rate and also maintaining the right balance between
production and inventory levels. No further price increases are anticipated
within this sector in the short term. The Containerboard sector should continue
to benefit from a relatively stable OCC market. Slight upward pressures have
been noticed in the export markets for this grade. Also, these markets have
seen very volatile demand. Generation levels and inventory management policy
have so far been sufficient to stabilize the price increase for our mills.  The
Tissue Group will continue to integrate the assets acquired in recent years and
optimize the recently acquired Memphis facility which began its operations at
the end of 2004 and the two converting facilities in Arizona and Calgary. It
also intends to further increase its integration/converted product rate to a
mid-term range of more than 70%. The fundamental demand for tissue remains
strong and the Company anticipates that market conditions will remain
favorable.  The Fine Papers Group should benefit from price increases announced for
its coated rolls during the fourth quarter of 2004 as larger customers had
price protection, thus deferring the implementation of previous price
increases. However, any further appreciation in the value of the Canadian
dollar will have a negative impact on the benefits derived from these increases.
On the uncoated paper side, further price increases in Canada are unlikely for
the short term. In the long term, the group will also benefit from new capital
investments at its Saint-Jérôme mill, completed at the beginning of 2005,
that will reduce costs and improve quality. The Thunder Bay mill should also
benefit from new value-added product that will be introduced in the first
quarter of 2005.  While
market conditions remain very challenging, general economic conditions remain
favourable, especially in North America. However, profitability will continue
to be sensitive to selling prices and the level of the Canadian dollar. Over
the course of 2005 our priorities will be to complete the divesture program of
our distribution activities and the integration of recently acquired businesses
while applying strict cash flow management in order to further deleverage our
balance sheet.  34


Managements Discussion and Analysis of Financial Position and Operating
Results  Quarterly results(1),(2)  (in
  million of dollars, except amounts per share)
  
  2004
  
  2003(unaudited)
  
  March 31
  
  June 30
  
  Sept. 30
  
  Dec. 31
  
  Total
  
  March 31
  
  June 30
  
  Sept. 30
  
  Dec. 31
  
  TotalSales
  
  763
  
  831
  
  854
  
  806
  
  3,254
  
  783
  
  758
  
  727
  
  727
  
  2,995OIBD
  
  54
  
  66
  
  74
  
  44
  
  238
  
  67
  
  60
  
  63
  
  47
  
  237Operating income
  
  15
  
  27
  
  34
  
  3
  
  79
  
  32
  
  25
  
  29
  
  8
  
  94Net earnings (loss)
  
  (6
  )
  (3
  )
  27
  
  5
  
  23
  
  16
  
  29
  
  4
  
  6
  
  55per share
  
  $
  (0.09
  )
  $
  (0.03
  )
  $
  0.31
  
  $
  0.06
  
  $
  0.25
  
  $
  0.17
  
  $
  0.34
  
  $
  0.04
  
  $
  0.06
  
  $
  0.61Cash flow from operations
  
  31
  
  42
  
  49
  
  36
  
  158
  
  42
  
  42
  
  36
  
  38
  
  158per share
  
  $
  0.38
  
  $
  0.51
  
  $
  0.60
  
  $
  0.44
  
  $
  1.93
  
  $
  0.52
  
  $
  0.52
  
  $
  0.43
  
  $
  0.46
  
  $
  1.93Excluding specific itemsOIBD
  
  49
  
  65
  
  78
  
  58
  
  250
  
  67
  
  60
  
  63
  
  47
  
  237Operating income
  
  10
  
  26
  
  38
  
  17
  
  91
  
  32
  
  25
  
  29
  
  8
  
  94Net earnings (loss)
  
  (5
  )
  5
  
  14
  
  2
  
  16
  
  11
  
  4
  
  4
  
  (3
  )
  16per share
  
  $
  (0.07
  )
  $
  0.07
  
  $
  0.17
  
  $
  0.03
  
  $
  0.20
  
  $
  0.13
  
  $
  0.05
  
  $
  0.04
  
  $
  (0.03
  )
  $
  0.19  
 (1)Restated to take into accont the
reclassification required for the assets held for sale. (2)The reconciliation items of the non-GAAP
measures in this table are the same as those of the annual results included in
the next section on pages 36, 37 and 38.  Comments on the results of the fourth quarter of 2004  Sales increased by 11%
during the fourth quarter of 2004, amounting to $806 million compared with $727
million for the same period last year. The increase was due mainly to business
acquisitions realized over the course of the year. Higher prices were mitigated
by higher energy and fibre costs and by the impact of an increase in the Canadian
dollar exchange rate. Operating income amounted to $3 million for the period
compared with $8 million achieved last year.  Net earnings for
the fourth quarter ended December 31, 2004, amounted to $5 million ($0.06
per share), or $2 million of net earnings excluding specific items ($0.03 per
share), compared to net earnings of $6 million ($0.07 per share) or a loss of
$3 million excluding specific items (loss of $0.03 per share), for the same
period in 2003. The month of December 2004 was particularly difficult as
downtime was extended to avoid building excess inventories.  During the fourth quarter
of 2004, we recorded an impairment charge of $18 million ($12 million after
tax) related to the property, plant and equipment of one of the Companys
de-inked pulp mills located in Cap-de-la-Madeleine, Québec, which was temporarily closed in March 2003.
The Company decided to permanently shut-down this facility.  35


Managements Discussion and Analysis of Financial Position and Operating
Results  Supplemental information on non-GAAP measures  Neither
operating income before depreciation and amortization, operating income, cash
flow from operations or cash flow from operations per share are measures of
performance under Canadian GAAP. The Company includes operating income before
depreciation and amortization, operating income, cash flow from operations and
cash flow from operations per share because they are the measures used by
management to assess the operating and financial performance of the Companys
operating segments. Moreover, the Company believes that these items provide
additional measures often used by investors to assess a companys operating
performance and its ability to meet debt service requirements. However, these
measures do not represent and should not be used as a substitute for net
earnings or cash flows from operating activities as determined in accordance
with Canadian GAAP, and they are not necessarily an indication of whether cash
flow will be sufficient to fund our cash requirements. In addition, our
definition of operating income before depreciation and amortization, operating
income, cash flow from operations and cash flow from operations per share may
differ from those of other companies. Cash flow from operations is defined as
cash flow from operating activities as determined in accordance with Canadian
GAAP excluding the change in working capital components, and cash flow from
operations per share is determined by dividing cash flow from operations by the
weighted average number of common shares of the period.  Operating
income before depreciation and amortization excluding specific items, operating
income excluding specific items, net earnings excluding specific items, and net
earnings per common share, excluding specific items are non-GAAP measures. The
Company believes that it is useful for investors to be aware of specific items
that adversely or positively affected its GAAP measures, and that the above
mentioned non-GAAP measures provide investors with a measure of performance to
compare its results between periods without regard to these specific items. The
Companys measures, excluding specific items have no standardized meaning
prescribed by GAAP and are not necessarily comparable to similar measures
presented by other companies and therefore should not be considered in
isolation.  Specific
items are defined as items such as charges for impairment of assets, charges
for facility or machine closures, debt restructuring charges, gain or loss on
sale of business units, unrealized gain or loss on derivative financial
instruments that do not qualify for hedge accounting, foreign exchange gain or
loss on long-term debt, and other significant items of an unusual or non-recurring
nature.  36


Managements Discussion and Analysis of Financial Position and Operating
Results  Net earnings, which is a performance measure defined by Canadian GAAP,
is reconciled below to operating income, operating income excluding specific
items, and operating income before depreciation and amortization excluding
specific items:  (in
  millions of dollars)
  
  2004
  
  2003
  
  2002Net earnings
  
  23
  
  55
  
  169Net
  earnings from assets held for sale
  
  (3
  )
  (4
  )
  (3
  )Share
  of earnings attributed to non-controlling interests
  
  
  
  
  
  1Share
  of results of significantly influenced companies
  
  (2
  )
  3
  
  (22
  )Provision
  for income taxes
  
  2
  
  10
  
  60Loss
  on long-term debt refinancing
  
  1
  
  22
  
  Foreign
  exchange gain on long-term debt
  
  (18
  )
  (72
  )
  Interest
  expense
  
  76
  
  80
  
  69Operating income
  
  79
  
  94
  
  274Specific
  items:Unusual
  losses (gains)
  
  (4
  )
  
  
  4Impairment
  loss of property, plant and equipment
  
  18
  
  
  
  Unrealized
  gain on financial derivative instruments
  
  (2
  )
  
  
  12
  
  
  
  4Operating income excluding specific items
  
  91
  
  94
  
  278Depreciation
  and amortization
  
  159
  
  143
  
  137Operating income before depreciation and
  amortization excluding specific items
  
  250
  
  237
  
  415  The
following table reconciles net earnings and net earnings per share to net
earnings excluding specific items and net earnings per share excluding specific
items:  Net earnings
  
  Net earnings per share(1)(in millions of dollars, except
  amounts per share)
  
  2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002As per GAAP
  
  23
  
  55
  
  169
  
  $
  0.28
  
  $
  0.66
  
  $
  2.07Specific
  items:Unusual
  losses (gains)
  
  (4
  )
  
  
  4
  
  $
  (0.03
  )
  
  
  $
  0.02Impairment
  loss of property, plant and equipment
  
  18
  
  
  
  
  
  $
  0.15
  
  
  
  Unrealized
  gain on financial derivative instruments
  
  (2
  )
  
  
  
  
  $
  (0.02
  )
  
  
  Foreign
  exchange gain on long-term debt
  
  (18
  )
  (72
  )
  
  
  $
  (0.19
  )
  $
  (0.77
  )
  Loss
  on long-term debt refinancing
  
  1
  
  22
  
  
  
  $
  0.01
  
  $
  0.18
  
  Share
  of results of significantly influenced companies
  
  
  
  4
  
  (22
  )
  
  
  $
  0.05
  
  $
  (0.22
  )Adjustment
  of statutory tax rate
  
  
  
  5
  
  
  
  
  
  $
  0.07
  
  Tax
  effect on specific items
  
  (2
  )
  2
  
  2
  
  
  
  
  
  (7
  )
  (39
  )
  (16
  )
  $
  (0.08
  )
  $
  (0.47
  )
  $
  (0.20
  )Excluding specific items
  
  16
  
  16
  
  153
  
  $
  0.20
  
  $
  0.19
  
  $
  1.87  
 (1)Specific amounts per share are calculated on
an after-tax basis:  37


Managements Discussion and Analysis of Financial Position and Operating
Results  The
following table reconciles the net cash provided by operating activities to
operating income and operating income before depreciation and amortization:  (in
  millions of dollars)
  
  2004
  
  2003
  
  2002Cash flow provided by operating activities
  
  156
  
  126
  
  330Changes
  in non-cash working capital components
  
  2
  
  32
  
  (23
  )Depreciation
  and amortization
  
  (159
  )
  (143
  )
  (137
  )Current
  income taxes
  
  22
  
  11
  
  47Interest
  expense (includes interest on long-term debt, other interest less interest
  income and capitalized interest)
  
  76
  
  80
  
  69Unusual
  (losses) gains
  
  4
  
  
  
  (4
  )Impairment
  loss of property, plant and equipment
  
  (18
  )
  
  
  Unrealized
  gain on financial derivative instruments
  
  2
  
  
  
  Other
  non-cash adjustments
  
  (6
  )
  (12
  )
  (8
  )Operating income
  
  79
  
  94
  
  274Depreciation
  and amortization
  
  159
  
  143
  
  137Operating income before depreciation and
  amortization
  
  238
  
  237
  
  411  Additional information  Additional
information relating to the Company, including the annual report and AIF, is
available on SEDAR at www.sedar.com.  38