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 2005 Conference

Mantra of Basic Marketing & Specialization

The annual NPES sponsored Print Outlook Conference held in Washington DC drew a little over 100 suppliers, journalists, and consultants. This was down somewhat from earlier years perhaps due to lack luster expectations for the near term economy; no White House briefing being included in the agenda as the Executive Branch is getting reorganized following the election; or as Conference Chairman Frank Romano opined, "Management attention is on improvement not innovation." This was one of several trends which he observed in his consulting and speaking engagements with printers throughout the world and pertains to all conferences not just Print Outlook.

Keynoter Joe Cappo, retired publisher with Crain Communications and Past President of the International Advertising Association spoke on "Print's Future in Publishing and Marketing." To highlight how advertising agencies are under tremendous costing pressure he stated that four major global ad agencies control 50% of the ad media in the world and 80% of the domestic market share. And this consolidation occurred only in the last 15 years.

The future business model for ad agencies is comparable to that of travel agencies and stock/bond brokerage businesses according to Cappo. Huge volumes of these later two service businesses have vacated to Internet purchasing and trading. In the old days ad agencies could charge 15% commission override on their media purchases. Today their revenues are limited to an hourly rate for their creative work provided and 2-4% override commission on media being bought unless they can convince smaller vendors to give them some type of "favored vendor" rebate. Cappo feels the overwhelming reason for this deterioration is "clients are demanding accountability." This is difficult to ascertain when the ad agencies emphasis television which is difficult to measure from an advertising return on investment perspective. As a result Cappo concludes, "The average agency-client relationship is now only five years."

He feels that direct marketing media will continue to grow "because it is accountable." He added, "Sales promotion will grow even faster with more integration between various media." Niche magazines will tie in with the Internet. For example, both Travelocity and Amazon now have their own magazines.

Cappo remarked that brand awareness is moving from the manufacturer to the retail chain. For example, the largest selling dog food, Old Roy, is Walmart's private label and receives no advertising support at all. Another example is the mega car dealer that now dictates terms to General Motors and Ford.

Postal Reform Postage Rate Increase Impact on Print Volume

PIA's Vice President and head lobbyist Ben Cooper described his efforts at building a coalition of more than 170 associations and organizations which are directly impacted by the USPS and the federal government's considerations for Postal Reform. A significant contingent within this coalition are financial services whose mail represent 25% of USPS' cash cow, i.e., first class mail. Without Postal Reform the average expected postage rate increase to go into effective in early 2006 will be about 15%. Mr. Cooper says this increase represents a cost to Capital ONE, for example, of $300 million, which they have stated they don't expect to absorb. The alternative is that this custom transaction information is expected to continue to migrate to the Internet.

PIA's economist Dr. Ronnie Davis forecasts a negative multiplier of about .5 for each percent of postage rate increase. If there is no postal reform and there is a 15% rate hike in 2006, then the printing industry could conceivably see print volume for the year that is mailed to be down about 7.5%. Since about 45% of all print volume is mailed, this 7.5% hit on this volume could reflect about 3.5% overall drop in volume. With postal reform Davis says the experts still expect there to be a rate increase of as much as "9% (which) translates to about a 2% reduction in total annual print shipments." This would negate the normal print sales growth expected to be 2-3% resulting in a stagnated year of growth for 2006.

Ms. Rita Cohen, Senior Vice President of Legislative and Regulatory Policy for the Magazine Publishers of America (MPA) is actively involved in enacting postal reform legislation. She expects the 2006 rate hike for periodicals to be 2-3 points above the overall average. This premium reflects the increased labor content needed to handle these "flats" products.

Mr. Bruce Biegel, Managing Director of the direct mail consultants Winterberry Group LLC, presents a different hypothetical impact of postage rate increases as he expects direct mail to continue to grow at over 5% for the next couple of years. When a postal rate increase is announced, there is a flurry of project activity to beat the increase and then a brief hiatus immediately following the increase. The net result has historically been no volume decrease due to rate increases. He sees the same scenario effectively being repeated in 2006.

Print Merger Activity To Pick Up Pace

Harris DeWese, Chairman & CEO of Compass Capital Partners in Radnor, Pennsylvania, presented the status of the mergers and acquisitions activity in the printing industry. This consolidation activity was up 25% in 2004 with $5 billion dollars of sales revenues changing hands. Of the ten transactions, which Compass Capital closed this year, seven were specialty companies who demonstrated superior margins when compared to the typical general commercial printer. This resulted in a full point of premium multiple when applied to their EBITDA for valuation purposes. EBITDA refers to the selling firm's earnings before interest, taxes, depreciation, and amortization.

The historic valuation range of EBITDA multiples improved by better than 50% in 2004. The EBITDA low point range of 2.5-4.0 was experienced in 2001-2002. This year it was up to 4.0-6.0 for privately held printing companies. Mr. DeWese concluded, "The future for general commercial printers is more liquidations and bankruptcies. They must specialize (to survive and thrive)."

While mega deals among publicly held firms are expected to continue for the rest of the decade, DeWese expects there to be increasing activity in small company rollups as owners seek exit strategies. He states that there is pent up demand to sell even at reduced valuations.

National Economy To Be Weak in 2005 and Weaker in 2006

Longtime consulting economist for NPES, Dr. Michael Evans, expects economic growth to be 4% this year, 3% in 2005, and 2% in 2006. Inflation will remain in the 2-3% range. As deficits keep rising and they are expected to do so, fed interest rates will follow suit.

Consumers have spent more than they have made the past three years. Part of this was the tax cut but most of the source was the increased monetization of home equity. Values of home are only expected to follow inflation in the near future. With no more tax cuts and no more stimulants, consumer spending is expected to be flat.

Productivity growth is expected to continue about 2% a year. When the economy grows at 4%, that means employment rose 2%. If it slows to 3% that means employment growth will be 1%. A 2% economic rise will forecast no employment growth since that growth will all be attributed to productivity gains.

The next "growth gorilla", according to Evans, is expected to be India. Their per capital income is one quarter that of China's when adjusted for currency valuation. India's infrastructure problems are beginning to be addressed, restrictive labor laws are easing, English is spoken, a strong educational base exists, and foreign investment is coming in. India is expected to make continued inroads in world trade over the next decade.

The US manufacturing sector continues to lag. There were no gains in manufacturing jobs during the boom years of 1996-2000 and the manufacturing job losses between 2001-2003 were almost three times the losses of the 1989-92 time period. While manufacturing employment has stabilized this year, it is expected to continue to decline the next two years. And the printing industry's employment figures have actually fallen behind the manufacturing sector.

The current overall capacity utilization in the nation is 78%. Until that rate reaches 85% there won't be much capital investment according to Evans. Net exports will continue to decline in spite of the weak US dollar. In anticipation of the upcoming Central American Free Trade Agreement (CAFTA) Dr. Evans reminded, "The benefits of NAFTA were oversold. While there were cheaper imports (into the US), Mexico dragged their feet in allowing American exports into their country."

The last time there was a prolonged cheap dollar the Japanese auto industry set up shop in the USA, which was extremely beneficial. The current low dollar valuation might result in some high tech pick up in the states but it will take several years.

The traditional printer panel was comprised of successful entrepreneurs that have been concentrating so effectively on fulfilling their clients' distinct needs that they have leap-frogged the lack luster economy. Suttle-Straus in Waunakee, Wisconsin, removed printing from their name several years ago according to President John Berthelsen. Their web site highlights their web-enabled services, print and distribution capabilities.

Beginning as a newspaper publisher 137 years ago, Kutztown Publishing is now a fourth generation family-owned specialized printer that has divested itself of all publishing products. They now concentrate on their full service capabilities on the not-for-profit sector and the vanity publishing community remarked President Stephen J. Esser.

Corporate Press, headquartered in Landover, Maryland has generated 25% of its revenues from non-ink on paper products, such as fulfillment, mailing, and call center services, that did not exist three years ago according to their President Michael Marcian. All of these ancillary services drive print volume. For example, they have developed such a strong reputation for their technical and regulatory expertise in the mailing area that prospective clients come seeking only mailing services. They are told that Corporate Press only mails what they also print. Corporate entered this business by buying a mailing company. There are now 80 full time employees involved with their six day a week mailing services operation that generates a 55% gross profit. Mr. Marcian expects to add a marketing support services company to Corporate Press' portfolio of services next year.

The Print Outlook Conference has historically helped the printing industry to consider the overall national economy in conjunction with the federal government's expected policy directions. These macro perspectives are useful in preparing for negotiations with print buyer clients as well as suppliers.

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.