Paper & Converting Machinery
Date November 2019
- Online media has resulted in a net decrease in stationery, letters, business forms, envelopes, and other paper products, which has reduced demand for paper mills, adversely affecting revenue. As a result, industry revenue is expected to decline at an annualized rate of -2.3 percent through 2024.
- Paper machines are very difficult to sell for removal under duress; appraised values tend to represent a small percentage of depreciated book value.
- While paper machines are increasingly difficult to sell in their entirety, mill support equipment continues to be frequently sold on a removal basis.
By the numbers
Industry in decline: The Pulp and Paper Mills industry has experienced mixed results in recent years, as the global increase in digital media and internet usage have reduced the demand for various traditional paper products such as newsprint. Through 2024, the industry will continue to contend with challenges, particularly as paper purchases by print publishing industries slow. Demand for industrial machinery and equipment typically corresponds to manufacturing activity. Despite changing demand in printing and papermaking, market share for new equipment has not changed since 2018, remaining at approximately 18 percent of U.S. machinery manufacturing, which includes printing, paper, food, textile, and various other operators in the machinery manufacturing space.
While demand for paper products may not change significantly, the expanding e-commerce trade may increase demand for packaging products. However, the increasing presence of digital office-communication platforms will remain a threat to industry revenue moving forward. On a global scale, as developing economies advance their own paper production capabilities, the market for industry exports is projected to decline. As a result of this competitive pressure, IBISWorld expects industry revenue to decline through 2024 at an annualized rate of -2.3 percent to $35.7 billion.
High installation costs, lower removal values: While paper machines are typically the biggest cost in a mill, they are very difficult to sell for removal under duress. Appraised values tend to represent a small percentage of depreciated book value. This is because a significant portion of the original cost is for special improvements including installation pits, poured concrete foundations, floor drains, erected steel infrastructure, extensive networks of process piping (i.e. steam, water, air), heavy electrical distribution systems, and air handling ductwork. While certain components of these systems, such as the head box, fourdrinier section, press sections, dryer can sections, size press, coaters, scanners, calender, reel, and winder can be removed and sold piecemeal, the majority of the installation improvements either cannot be removed or are not economically feasible to remove. The cost of those improvements is lost when the equipment is sold for removal. Knowledgeable buyers typically disregard any value associated with them and, in some cases, may even discount offers when significant de-installation and re-installation costs are present. There could be some scrap value for the wiring, piping, vats, and structural supports. However, it should not be assumed that these components have worth. Values for aluminum, stainless steel, and copper have plummeted in recent years, and remnants that once were viewed as “boot collateral” have become a burden. This potential liability should be discussed with an experienced appraiser.
Demand for support equipment and spares remains steady: While paper machines are increasingly difficult to sell in their entirety, mill support equipment continues to be frequently sold on a removal basis. Stock prep equipment, pumps, screens, agitators, lab equipment, rolling stock, rewinders, and roll wrap machines are examples of equipment that can add value. All paper manufacturers have this equipment in mills, regardless of the product being made, widening its marketability. These components are more readily dismantled and can be moved at a reasonable cost. Beyond that, most mills have a significant inventory of spare motors and parts to ensure paper machines can continue running around the clock. Because most mills operate older machines, many of these transactions are being conducted in the secondary market. While these items are not typically included in an appraisal, they could have noteworthy value in the event of liquidation.
Over six months needed to sell most machines: Adequate time is needed to market paper machines internationally. Buyers will need more time to conduct required due diligence and line up financing for a purchasing decision of this magnitude. In appraisal scenarios considering less than a six-month disposition period, it is likely that paper machines would sell only for the value of their better components, such as desirable press sections, some of the machine rolls, scanners, pressure-rated dryer cans, selected calenders, and reels.
Consider a Different Approach: It often surprises lenders and companies that most machines valued for removal are worth a fraction of their original value. That is why Gordon Brothers recommends an in-place appraisal with a business valuation overlay, in which machinery is valued to remain in place and in operation. This approach allows appraisers to consider income-generating and cash-flow aspects of the business that are not considered when estimating liquidation values for removal. This detailed business analysis attributes some portion of the overall enterprise value to the machinery. The valuation principles applied combine the knowledge of the productive capacity of the plants with the knowledge of the demand for and profitability of the products it produces in the current competitive environment.
By performing a business valuation simultaneous with the process of valuing the machinery and equipment, it is possible to determine the amount of value within the framework of the entire enterprise, as returns (deductions) are taken for other contributory asset categories (working capital, real estate, and identifiable intangibles). This value conclusion is representative of all physical depreciation and functional and economic obsolescence affecting the value of the equipment, quantified through the valuation of the business enterprise. While many lenders are wary of incurring the additional expense of a business valuation overlay, it can be a more accurate way of determining the true value of paper machines.
Beware of environmental Considerations: Regardless of the valuation scenario, lenders must take care to protect themselves from environmental liabilities. Manufacturing paper and pulp uses large amounts of wood fiber, water, steam, and chemicals. This process generates waste streams, which must be properly treated and disposed of into the air, municipal sewage, nearby waterways, or landfills. Over time environmental laws have evolved necessitating significant capital investments to improve the remediation of these environmentally sensitive waste streams.
Properties are often grandfathered with respect to preexisting environmental issues as long as their existence does not proliferate into adjoining properties or water systems. These preexisting liabilities may pass from owner to owner or be split into pre-sale or post-sale issues, which remain with prior owners. The variations on the magnitude or the assumption of these liabilities often manifest themselves into adjustments that impact the sale of the equipment and real property. This is especially true when operations are shut down and sold as a non-operating mill. Once operations cease, generally the equipment and real property are the only assets left to transfer, and any environmental issues negatively impact the value of those remaining assets. Lenders need to be particularly aware of how (or if) to take possession of these assets.