Paper & Packaging PACKAGING, TISSUE LEAD INDUSTRY VOLUME. Inventory and Equipment E-COMMERCE BOOMS NEWS GOES DIGITAL PAPER STRUGGLES

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1 SEPTEMBER 2017 Paper & Packaging Inventory and Equipment VOLUME 252 PACKAGING, TISSUE LEAD INDUSTRY E-COMMERCE BOOMS E-commerce spurs demand for corrugated packaging products. NEWS GOES DIGITAL Newspapers continue to cut staff and eliminate newsprint editions. PAPER STRUGGLES Printing/writing paper sees 11th straight monthly shipment decline in June 2017.

2 In This Issue MONITOR PAPER & PACKAGING GREATAMERICAN.COM SEPTEMBER GREAT VOLUME Trend Tracker 11 Paper & Packaging Equipment 05 Overview 12 Experience 06 Paper 13 Appraisal & Valuation Team 08 Packaging 13 Monitor Information 10 Pulp 14 About Great American Group Deals are a moving target. A constantly shifting mix of people, numbers, and timing. We re here to simplify this process for you. Our experts are dedicated to tracking down and flushing out the values you need, even on the most complex deals. So when the time comes to take your shot with Great American, you re always right on the money Great American Group, LLC. All Rights Reserved.

3 Trend Tracker INVENTORY (Versus March 2017) Paper Packaging NOLVs: Paper and packaging NOLVs have been mixed, with no major industry changes over the past several months. NOLVs Mixed Mixed Sales Trends Decreasing Increasing Gross Margin Decreasing Increasing Inventory Increasing Decreasing Sales Trend: Paper sales trends have decreased slightly as demand continues to decline due to competition from digital technology. Packaging producers have experienced rising sales on the back of E-commerce sales. (Versus March 2017) Paper Packaging Softwood Pulp Hardwood Pulp Market Prices Decreasing Increasing Increasing Increasing Gross Margin: Paper gross margins have decreased due to rising pulp prices. Packaging gross margins are consistent as demand remains strong in the marketplace. Inventory: Paper mill inventories have increased due to weak demand; however, packaging inventory levels have decreased due to strong demand. Pricing: Overall pricing has decreased for printing and writing grades; however, some coated grades have experienced slight increases recently. Packaging producers increased prices in the spring, with some major producers implementing slight increases since then. Pulp pricing has increased across all grades due to low supplies. 3 MONITOR PAPER & PACKAGING SEPTEMBER 2017

4 Trend Tracker EQUIPMENT Paper/Printing/Bindery Used Pricing Consistent /Decreasing Used Trade Movement Decreasing OEM Pricing Consistent Used Pricing: Overall prices remain mixed, with less-aged packaging equipment experiencing solid demand. Meanwhile, demand for aged equipment and printing/writing paper equipment has declined. Used Trade Movement: Equipment continues to see reduced trade movement, especially older equipment, due to a relatively strong U.S. dollar, which makes goods more expensive for foreign buyers. Technology Advancement Auction Activity Consistent Increasing OEM Pricing: Pricing for new machines remains consistent. However, insiders say the potential remains for OEMs to attract end-users away from the used equipment market. Technology Advancement: Technological advancement in the industry has been consistent, with little to no technological improvements announced publicly. Auction Activity: Auction activity has increased slightly, particularly in the printing/bindery sector, due to digital media s ongoing negative impact on paper demand. 4 MONITOR PAPER & PACKAGING SEPTEMBER 2017

5 Overview Printing and writing paper demand continued its slump into the spring of 2017 due to competition from digital technologies. Major printing and writing paper grades registered the 11th consecutive year-over-year monthly shipment decline in July By May, however, the rate of decline had slowed, particularly for coated freesheet ( CFS ) and coated mechanical ( CM ) paper. Newsprint continues to suffer the most due to falling demand from newspaper as a result of consumers shunning physical newspapers in favor of digital media. In August 2017, citing unprecedented demand decline for newsprint, paper manufacturer Resolute Forest products permanently closed two machines that produce newsprint at its facility in Calhoun, Tennessee. Newsprint has experienced a 12% decrease in the first six months of 2017 and a 66% decline in the past 10 years. Pulp, which is used to produce a variety of paper and packaging, has performed strongly over the past six months as a result of steady demand for packaging and sanitary paper products, which more than offset demand declines for printing and writing paper. Technology s impact on packaging does not mirror its impact on paper. Digital technology has actually facilitated demand for corrugated board and other packaging types. This is due largely to E-tail giant Amazon.com, Inc. ( Amazon ), which is popular among consumers who desire the convenience of shopping from home. The most promising segment for the paper and packaging industry is tissue and other sanitary paper goods, including female hygiene products, diapers, and adult incontinence products. Consumers in developed nations such as the U.S. continue to utilize such goods due to their convenience. However, a large portion of the ongoing demand increase is coming via China and other parts of Asia due to the growth of the middle class there. 5 MONITOR PAPER & PACKAGING SEPTEMBER 2017

6 Paper OVERVIEW By July 2017, printing and writing paper shipments decreased for 11 straight months as consumers continued to eschew paper in favor of digital technology. The proliferation of applications, or apps, enables consumers to perform a wide variety of paperless tasks using their smartphones, such as buy and display movie, airplane, and concert tickets. As a result, demand for paper continues to decline. Printing and writing papers maintain a variety of uses. They are available in mechanical or freesheet form, which can be coated or uncoated. According to the American Forest & Paper Association ( AF&PA ), mechanical paper is made from pulp in which the wood fibers are separated from logs or chips mechanically, while freesheet paper is made by isolating wood fiber through heat, pressure and chemicals. The freesheet process results in a paper that is brighter and more durable and longer lasting versus mechanical paper. To improve the appearance and printing surface of printing papers, coatings, often made of clay and other additives, are added to mechanical and freesheet paper. The four major grades of printing and writing paper include: uncoated freesheet ( UFS ), uncoated mechanical ( UM ), CFS, and CM. UFS represents the largest category of printing and writing papers. UFS papers include copy paper, textbook paper, envelopes, and business form paper. UM papers include newsprint and newspaper inserts, directories, and paperback book paper. CFS papers are generally used to produce illustrated books, glossy posters, and magazines. Common uses for CM paper include magazines, catalogs, and coupons. Since the prior Paper & Packaging Monitor, published in March 2017, all four major grades of printing and writing paper have struggled. However, CM and CFS grades have performed better than other grades, with shipments declining since March but at a lesser rate versus the other grades. Paper producers have been increasingly focused on specialty, value-added products, such as stationary and gift wrapping, in order to enhance profitability. Such paper products continue to maintain strong demand among consumers. Paper producers continue to shift operations to higher-margin products such as tissue, paper towels, and diapers. Newsprint continues to experience the largest declines among papers. A number of recent events illustrate newsprint s decline, according to News & Tech. Among them are: After laying off 2% of its staff in late 2016, Gannett Company announced further staffing cuts in August The company owns 110 media organizations across the U.S., including USA Today. In order to cut costs and focus on digital media, The Wall Street Journal plans to reduce its print operations in Europe and Asia in the coming months. As a step toward this goal, the paper will cease distribution of its print edition in Hong Kong starting October 7, News Corp., the paper s parent company, reported a loss of $429 million in the fourth quarter of The Fort Wayne News Sentinel plans to end its afternoon print edition in the coming months in order to focus on its digital edition. At the end of September 2017, MediaCorp will cease the print edition of TODAY, Singapore s largest English-language newspaper. The newspaper will still be available online. New York s The Village Voice, a 62-year-old weekly newspaper, is planning to end its print publication. No date has been officially announced for this move. Now Media Group plans to eliminate its Milwaukee, Wisconsin area suburban offices in late September Suburban news will be covered from the Milwaukee Journal Sentinel s downtown office. 6 MONITOR PAPER & PACKAGING SEPTEMBER 2017

7 Paper Newsprint demand continues to be strongest in less-developed regions in Asia, including parts of China and India. PRICING TRENDS In May 2017, UFS prices declined $5 to $10 per ton versus the prior month. Since December, UFS prices have decreased $25 to $30 per ton. Nonetheless, three of the largest paper producers in North America Domtar Corporation, Packaging Corporation of America, and International Paper Company announced $40-per-ton price increases for UFS paper effective this fall. If the increases are accepted without significant buyer pushback, other producers are expected to follow the pricing precedent. Industry analysts note that tight pulp stocks have placed upward pricing pressure on UFS paper. In addition, in June 2017, a number of North American coated paper manufacturers, including Verso Corporation, announced price increases. The increase, effective July 1, 2017, totaled $40 per ton for CFS and CM. 7 MONITOR PAPER & PACKAGING SEPTEMBER 2017

8 Packaging OVERVIEW As most consumer goods are shipped in corrugated packaging at some point in their transportation cycle, packaging demand, particularly for boxes, is highly correlated with the strength of the economy. As a result of packaging s ubiquity, packaging is largely immune from the proliferation of digital technology, unlike paper. U.S. packaging producers have benefited from a robust economy so far in The U.S. s gross domestic product ( GDP ), the value of all goods and services, expanded at a 3.0% rate in the second quarter of The growth was buoyed by solid consumer spending and a boom in business investments. These factors more than offset decreasing governmental spending during the quarter. The latest GDP figure represents the best second-quarter growth rate since U.S. box shipments increased 0.8% in 2016 versus 2015 to a record $30.8 billion, according to the Fibre Box Association. That positive trend increased into 2017 due in large part to the rising popularity of E-tail. The convenience of oneclick shopping through online retailers, such as Amazon, is facilitating retail sales. Despite corrugated packaging s strong performance in 2017, its pace of growth is slower than some analysts expect considering the rapid growth of E-commerce. A report from Quartz surmises that manufacturers and distributors are becoming more efficient in their use of corrugated packaging and are utilizing competing packaging products, such as replacing full-wraparound corrugated cases with plastic shrink-wrap. Paper-based food and beverage packaging represents another segment that has performed strongly in 2017 and is expected to see further growth in the coming years. Demand is expected to improve further due to the perceived harmful side effects of plastic-based packaging, which will prompt consumers to opt for foods contained in natural paper packaging. As the outlook for paper-based packaging is promising due to strong demand, producers continue to convert printing and writing paper operations to the production of packaging. Amazon offers free and fast shipping via its Amazon Prime program, which boasts 80 million members, or 64% of U.S. households, according to a report from Forbes. Industry research firm The Freedonia Group, Inc. predicts that E-commerce packaging demand will grow from $2.5 billion in 2015 to $3.7 billion in 2020 and $5.4 billion by For perspective, E-commerce packaging demand totaled just $1.5 billion in Corrugated boxes, commonly called cardboard boxes, represent the largest E-commerce packaging segment, a trend that is expected to continue to MONITOR PAPER & PACKAGING SEPTEMBER 2017

9 Packaging PRICING TRENDS Reflecting increasing demand, large U.S. containerboard producers announced price increases of $50 per ton for containerboard in mid-march The increases stuck, as buyers accepted the increases, unlike a proposed containerboard price increase in 2016, which was met with buyer pushback. In addition, several industry players announced price increases for corrugated medium, ranging from $20 to $30 per ton, according to information from Vertical Research Partners. Containerboard is a type of paperboard used in the production of corrugated board, which is used to manufacture boxes. The term includes both linerboard and corrugated medium, which are the two types of paper that comprise corrugated board. 9 MONITOR PAPER & PACKAGING SEPTEMBER 2017

10 Pulp OVERVIEW Pulp is commodity in nature and used to make a variety of wood-based goods such as paper, containerboard, and paperboard. The most common pulp grades include bleached softwood and hardwood kraft and bleached eucalyptus kraft. Wood pulp consumption is highly correlated with overall economic trends, with consumers purchasing more goods when the economy is strong. Global pulp demand increased 4% in 2016, with rising consumption of tissue and packaging fueling pulp use and offsetting demand declines for printing and writing paper. As a result of the strong economy in the U.S. in 2017, including the 3.0% growth rate in the second quarter, pulp demand has been solid. Demand for hardwood pulp is expected to grow faster than for softwood, because tissue products, the largest overall end-use segment for market pulp, are predominantly made from hardwood pulp, according to the Pulp and Paper Products Council. Global pulp production is projected to be at an all-time high by the end of 2017, with Asia Pulp & Paper recently commencing production through its new mill in Oki, Indonesia, with a total annual capacity of 2.8 million metric tons per year of hardwood pulp. In comparison, the largest paper mill in Canada produces 650,000 tons per year of pulp. PRICING TRENDS Solid demand for pulp across Asia, coupled with falling supply levels in the U.S., has resulted in pulp prices largely increasing across all pulp categories through the first half of Prices for northern bleached softwood kraft, northern and southern mixed, and bleached eucalyptus kraft pulp reached two-year price highs in June Earlier this year, some analysts predicted pulp prices would continue to rise; however, prices began to level off by August. Asia Pulp & Paper s new pulp plant could place downward pricing pressure on pulp due to increased supplies. 10 MONITOR PAPER & PACKAGING SEPTEMBER 2017

11 Paper & Packaging Equipment Tissue mills are expanding and experiencing increased investor interest, with some operators converting less-profitable printing and writing paper operations to the production of tissue, which is experiencing high demand. One recent notable addition since the publication of the prior Paper & Packaging Monitor is a new tissue operation that was recently installed at Orchids Paper in Barnwell, South Carolina. The new operation, which went into service at the facility this summer, has the ability to produce approximately 35,000 tons of ultra-premium and premium tissue paper per year. Consistent with the prior monitor, equipment related to paper production in general has not performed well at auctions compared to packaging machinery. This lackluster performance is indicative of the weakened state of the paper industry, which is experiencing production declines of approximately 4% per year. Due to large declines related to newsprint, printer paper, and publication-grade papers, demand for machinery related to these goods has been particularly negatively impacted. Wide-format web-printing equipment continues to decline in value due to weakness in the newspaper industry, as consumers increasingly consume online media. There continues to be a large amount of support, auxiliary, and bindery equipment available in the marketplace, as such goods are experiencing dampened sales. Packaging and tissue equipment continues to perform strongly at auctions, as paperboard and corrugated packaging for the retail packaging and shipping market continue to outperform other paper and packaging sectors. Such goods are largely resistant to the technological changes that have negatively impacted writing paper and newsprint. Rotogravure and flexographic printing presses, die cutters, and carton printing machinery continue to see strong marketplace activity and higher selling prices. In addition, web-printing and die-cutting equipment, specifically for the label industry, continues to perform well. Late-model machines in good condition that are just under 10 years old continue to experience higher demand and higher pricing. Meanwhile, equipment that is obsolete or is available in sizes that are no longer competitive in North America continues to either be transported to developing countries or scrapped. Online auctions are gaining in popularity, as they enable people to participate in auctions throughout the world without having to travel. Even six-figure online auction purchases are becoming more common. This trend is expected to increase as the world becomes more connected through the internet, as technology improves, and as consumers become more comfortable with online purchases. 11 MONITOR PAPER & PACKAGING SEPTEMBER 2017

12 Experience LIQUIDATIONS GA was involved in the liquidations of assets for paper and packaging companies, including the following transactions: Printcrafters, Inc.: Formerly a commercial printing company with a large paper inventory in various styles. Colfax Envelope Corporation: Formerly a manufacturer and distributor of custom lithographed/offset envelopes for financial services and direct mail companies. Solar Graphics, Inc.: A printer and supplier of graphic signs including banners, window display films, and screen-printed products. WWF Paper: Formerly a manufacturer and distributor of printing and writing papers, with more than 100 U.S. and international paper mills. Tye-Sil: Formerly a leading Canadian provider of gift wrap and accessories. Royal Plastics: A manufacturer of a variety of custom plastic products. Kemco Plastics, Inc.: A manufacturer of custommolded plastic products, serving the packaging industry in addition to the military, aerospace, consumer goods, medical, furniture, automotive, and industrial sectors. Others including Usdan Paper Company, Pandick Press, Target Graphics, Unicover Corp., Wicklander Printing Corp., Office Max, and MMP Printing Group. APPRAISALS In addition, GA has worked with and appraised numerous manufacturers and distributors within the paper and packaging industry. While our clients remain confidential, they range in scale from smaller, more specialized regional businesses to major global and national industry leaders, and include the following sampling of companies: Leading manufacturers and regional distributors of premium, writing, text, cover, and specialty papers in a variety of colors, weights and finishes; durable, saturated, and coated base papers for a variety of applications; pulp; and other wood products, including a major global forest products company. Manufacturers, distributors, and brokers of book publication papers, coated and uncoated freesheet, supercalendared and coated groundwood papers, newsprint, and other fine paper purchased by U.S. book, magazine, and advertising publishers, including companies with more than $400 million in sales. Distributors and printers of sheet-fed paper products such as pressure-sensitive paper and film used in a variety of applications, including inserts, magazines, direct mail, and other print mediums, such as a major North American commercial printer with annual revenues in excess of $3 billion. A leading U.S. manufacturer of printed and unprinted envelopes in various sizes and styles for the merchant/ wholesale market, large envelope consumers, and wholesalers, with annual sales over $500 million. Manufacturers and distributors of corrugated containers, containerboard, retail packaging, and packaging products such as point-of-purchase displays, protective packaging materials, and pressure-sensitive labels for a variety of industries, including a global company with annual sales exceeding $5 billion. Manufacturers of flexible packaging products such as specialty bags, sheets, wraps, wrappers, sleeves, and other packaging products for snack food and candy manufacturers, quick-service restaurants, food-service companies, and grocery stores, including manufacturers with annual sales greater than $300 million. 12 MONITOR PAPER & PACKAGING SEPTEMBER 2017

13 Appraisal & Valuation Team BUSINESS DEVELOPMENT Ryan Mulcunry Executive Vice President, Northeast Region, Canada & Europe (857) David Seiden Executive Vice President, Southeast Region (404) Jennie Kim Vice President, Western Region (818) Drew Jakubek Managing Director, Southwest Region (214) Bill Soncini Senior Vice President, Midwest Region (773) Daniel J. Williams Managing Director, New York Region (908) OPERATIONS ASSET DISPOSITION TEAM Michael Petruski Executive VP, General Manager (818) Bill O Brien Managing Director (781) bobrien@greatamerican.com Ryan Lutz Senior Project Manager (781) rlutz@greatamerican.com Scott Carpenter President, GA Retail Solutions (818) scarpenter@greatamerican.com Chad P. Yutka, ASA Managing Director, CAVS Group Head (312) cyutka@greatamerican.com Kristi Faherty Managing Director (781) kfaherty@greatamerican.com Adam Alexander President, GA Global Partners (818) aalexander@greatamerican.com Monitor Information The Paper & Packaging Monitor relates information covering a variety of paper and packaging products, including industry trends and their relation to the valuation process. Should you need any further information or wish to discuss recovery ranges for a particular segment, please feel free to contact your GA Business Development Officer. The information contained herein is based on a composite of GA s industry expertise, contact with industry personnel, liquidation and appraisal experience, and data compiled from a variety of well-respected sources believed to be reliable. GA does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained in this issue. Neither GA nor any of its representatives shall be liable for use of any of the information in this issue or any errors therein or omissions therefrom. 13 MONITOR PAPER & PACKAGING SEPTEMBER 2017

14 About Great American Group Great American Group is a leading provider of asset disposition solutions and valuation and appraisal services to a wide range of retail, wholesale, and industrial clients, as well as lenders, capital providers, private equity investors, and professional services firms. In addition to the Paper & Packaging Monitor, GA also provides clients with industry expertise in the form of monitors for the automotive, metals, chemicals and plastics, and building products sectors, among many others. For more information, please visit Capital Management, LLC, an SEC registered Investment Advisor, which includes B. Riley Asset Management, a provider of investment products to institutional and high net worth investors, and B. Riley Wealth Management (formerly MK Capital Advisors), a multi-family office practice and wealth management firm focused on the needs of ultrahigh net worth individuals and families; and Great American Capital Partners, a provider of senior secured loans and second lien secured loan facilities to middle market public and private U.S. companies. Great American Group, LLC is a wholly owned subsidiary of B. Riley Financial, Inc. (NASDAQ: RILY), a diversified provider of collaborative financial and business advisory services through several subsidiaries, including: B. Riley & Co. LLC, a leading investment bank and a FINRA & SIPC member, which provides corporate finance, research, and sales & trading to corporate, institutional, and high net worth individual clients; Great American Group, LLC; B. Riley B. Riley Financial, Inc. is headquartered in Los Angeles with offices in major financial markets throughout the United States and Europe. For more information on B. Riley Financial, Inc., please visit MONITOR PAPER & PACKAGING GREATAMERICAN.COM SEPTEMBER GREAT VOLUME 252 LOS ANGELES (HQ) Burbank Blvd. Suite 400 Woodland Hills, CA T F NEW YORK Graybar Building 420 Lexington Ave. Suite 3001 New York, NY T ATLANTA 1200 Abernathy Rd. Suite 1700 Atlanta, GA T BOSTON 300 First Ave. Suite 201 Needham, MA T F CHICAGO 10 South LaSalle St. Suite 2170 Chicago, IL T F DALLAS Preston Rd. Suite 720 Dallas, TX T F CHARLOTTE, NC Brixham Hill Ave. Suite 300 Charlotte, NC T F MILWAUKEE West Park Pl. Suite 970 Milwaukee, WI T WILTON, CT 73 Old Ridgefield Rd. Suite 6 Wilton, CT T GERMANY Prinzregentenstr 18 Fifth Floor Munchen, Germany AUSTRALIA Level 29, Chifley Tower 2 Chifley Square Sydney, NSW 2000 Australia 2017 Great American Group, LLC. All Rights Reserved. 14 MONITOR PAPER & PACKAGING SEPTEMBER 2017