C. Clint Bolte & Associates

The 23rd annual NPES venue of economists discussing the national and global economy attracted 103 printing industry attendees December 4-5 to Washington DC. As much as Wall Street and the news media heralded positive quarterly growth figures, the mood expressed at the conference was cautious optimism at best. The traditional White House Briefing concentrated on hoped for 2004 legislation growing out of this summer's report from the Presidential Commission on Postal Reform.

Dr. Jeff Rosensweig, Professor at Atlanta's Emory University Business School, offered a longer-term perspective on global growth. Based upon population growth and energy consumption, Dr. Rosensweig forecasts future global economic impact potential from Brazil, India, Russia, and China. On the contrary, much of the European Union and Japan will be having problems in the future as demographics for the 2030 time frame are showing lots of retirees and no workers as this current generation of workers is having very few children. This age demographic is further evidence of why manufacturing will continue to shift globally to the younger more populace nations such as Bangladesh, China, and India.

Moderator Frank Romano, RIT Professor and Industry Consultant, suggested five challenges for the current printing industry emanating from faster turn around demand: (1) 30% of all communications between print buyers and producers involve job status, (2) last minute jobs and tighter schedules are normal, (3) work flows must enhance "virtual" approvals by clients to save time, (4) XML and electronic templates are squeezing the designer out of the production costs and possible time delays, and (5) the demand for instantaneous changes suggest zero make-readies. Printers, who can integrate even partial solutions to these issues into their workflows, will be perceived by the market to be offering increasing value.

Through a series of surveys and prognostications consultant Charles Pesko suggests that the office and home will be the predominant source for future print via electronic transmission rather than printing plants. This will result in the slow and steady demise of ink on paper for forms, newspapers, inserts, and reference publications.

Long time NPES consulting economist Dr. Michael K. Evans offered a plethora of rational economic tidbits for planning consideration. While GDP for 2004 will be stronger (up 5%), 2005 will be weaker (up 3%)as the US economy is operating "on borrowed time." Federal deficits will continue to expand sharply the next two years which will result in interest rates rising, the stock market declining, and consumer borrowing against home equity diminishing. Significant higher inflation is not expected as free trade agreements and cheap internationally traded goods will keep a lid on inflation.

Goods, which represent a third of consumption, will hold the line on price increases while services, representing two thirds of consumption will be up 3% resulting in the weighted average inflation of 2% in 2004. Among the following selective services, medical is expected to be up 13 to 15%, housing +8%, household repair +6%, education +5% (private education +10%), and property taxes +5%. However, Dr. Evans commented that the continuing rise in service prices are simply not being measured by the Federal Government (i.e., Bureau of Labor statistics or BEA) any longer as part of any formal cost of living index!

The reason that rising deficits have not adversely impacted inflation, according to Evans, is that foreign investors continue to pick up the tab by purchasing Federal Treasury Notes.

Capital equipment suppliers will continue to suffer, as there is a "glut of almost new machinery in many industrial sectors." This is particularly severe in printing equipment and the overhang (is) likely to occur for several more years." Printing supplies growth has been on a downward spiral since 1998 and actually negative every year since 1999. While there will be some modest pickup with the 2004 economy, the longer term growth will remain negative due to media shifts in technology.

Harris DeWese, Principal of Compass Capital Partners, offered his firm's oversight on the status of printing industry corporate consolidation. During the four-year period of 2000-2003 his firm was involved in half of the less than 40 deals a year. Many of these were distressed transactions going for adjusted book value not any multiples of EBITDA. The historic acquisition valuation (EBITDA multiples) ranges were 4 - 6 in 1996 through 1998, peaked at 5 - 7+ in 1999, and slipped to 2.5 - <4 in 2001 and 2002. During the expansionary period Mail-well reported their acquisitions cost an average of 5.5X EBITDA while Consolidated Graphics' cost was 4.8X. Peter Shaeffer, Compass Capital's newly promoted COO, calculated the recent Moore/Wallace acquisition by RR Donnelley to be 8.1 - 8.3X EBITDA solely because of the size of the deal and the public liquidity of the firm.

There is much pent up demand and many motivated sellers. However, with current valuations for quite good companies at less than 3.5 X EBITDA the more attractive alternatives might be ESOP or management buy out. Tuck-ins or asset/account transactions will continue to be on the rise for the smaller firms.