Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

Print Outlook 2004:

2004 Strong for the Economy, Not Necessarily for Printers

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.

NAPL Chief Economist Andrew Paparozzi forecast similar GDP tracking growth for print in 2004, that is +3.2 to 4.1% for print versus +4.2% per the consensus Blue Chip Economic Indicators. He concentrated his presentation on his analysis of the success criteria gleaned from NAPL's long-term growth leaders. Despite a variety of sizes, niches, and regional markets, there are four keys points that these leaders pride themselves in; (1) "building an extensive knowledge base of their markets and specific client needs," (2) "molding that knowledge into an action plan," (3) "getting company wide commitment and then executing the plan," and (4) "benchmarking their performance against the plan."

The printer panel offered their views of the future and some observations concerning their own operations. Panelist Paul Reilly is CEO of Mail-Well, print conglomerate of more than 10,000 employees, 86 plants, and 2002 revenues of $1.7 billion. One of Mail-Well's most profitable client groups are print distributors, who actually resell Mail-Well's services to their own print-buying clients. Without surmising why this client grouping is among the most profitable, it is interesting that one of the largest, most sophisticated printers on the continent is both acknowledging the value of selling their services through the distributor channels and that these distributors understand the client value proposition for print better than Mail-Well's sales force. This clear conclusion is drawn from the fact that the ultimate client is paying Mail-Well's full price plus the distributor's mark-up. This observation is not in finding fault with Mail-Well's sale force, but rather to highlight the obvious value that the distributor is bringing in the eyes of the print buying market.

His second story was of an 8-unit heatset web press that his firm bought for $10 million to capture the insert market. Being outrageously successful Mail-Well bought a second press for $9 million. Shortly thereafter two competitors bought similar presses from the same manufacturer resulting in a price war that hurt all manufacturers. The implication was that the press manufacturer should not have sold the additional presses to Mail-Well competitors. That is interesting as $19 million for a pair of those presses was a very good deal for Mail-Well. And since there was no premium for the press manufacturer to offer any kind of exclusive, why should the press manufacturer not recover some of their development cost with additional sales?

It seems that Mail-Well's strategic alternative could have been to modify the press(es) to offer some proprietary capability. This has been one of Quad Graphics' strategic secrets since their beginning. They buy the same leading edge technology available to any other large printer. Then they put the genius of the QuadTech engineers to work at modifying the press for greater efficiencies or effectiveness. After a few years these modifications are then sold by QuadTech to their competitors creating another ROI bump for Quad's stockholders.

Barb Pellow, RIT Professor and Consultant, reviewed a recently published digital printing study on the role of marketing executives and advertising agencies in creating print demand. One of her conclusions was that both of these groups measure program success "haphazard(ly) at best." And yet both claim to do so. Tying in Paparozzi's success criteria it would seem to be pretty smart to set up the benchmarking criteria for success before the campaign begins. This ties the printer's efforts into his client's profitability from the get go.

The White House briefing was held at the Senate Office building with a discussion of the congressional expectations for the Presidential Postal Reform recommendations. The details of this report are available for download from treasury.gov/offices/domestic-finance/usps. The 35 recommendations were assigned as responsibilities to the Postal Service (16), Congress (13), or both parties (5). (One recommendation had no assignment.) No priorities were mentioned in the report among these common sense recommendations. The briefing panelists were comprised of Mr. Roger Kodat, Deputy Assistant Secretary of the Treasury for Government Financial Policy, Mr. John Kilvington, Legislative Assistant to Senator Tom Carper (D-DE) who is expected to sponsor Postal Reform legislation, Mr. Jack Callender, Counsel to the House Committee on Government Reform, and PIA's lobbyist, Ben Cooper.

While the group expressed optimism about getting a bill presented to the House in early winter so that it can get to the floor by next summer, they would not respond to any priorities either. Mr. Kodat was pleased that the USPS Pension Bill diverted the excess pension moneys to help pay down the $11 billion postal debt (to a little over $7 billion currently). While previous rate hikes were supposed to accomplish that, Postal fiscal priorities always seemed to shift the moneys to Postal Executive bonuses and other purposes leaving the debt to climb.

Mr. Cooper emphasized the need for the Printing Industry to speak with one voice so that there are no conflicting messages or priorities given to legislators. That is an interesting point because PIA has never voiced an effective concern about mailing issues in the past thirty years. However, the Mailing and Fulfillment Service Association. MFSA, an Alexandria, Virginia neighbor to PIA, has been a national trade association representing mailers and fulfillment houses for the past 80 years. Printers, who offer mailing and fulfillment services, comprise nearly half MFSA's membership. The point being, if PIA tries to drive this Postal change wagon, without the full involvement and concurrence of MFSA, DMA (Direct Marketing Association) and other vested printing/publishing groups, at the very least it will be another waste of time and money.

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.