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.

PIA/GATF Presidents' Conference 2007:
Culture, Passion & Sense of Humor

The strongest showing in seven years, nearly 300 including 68 first timers, gathered at the Wild Horse Pass Resort outside Phoenix for the annual PIA/GATF Presidents' Conference March 4-8. On the reservation and therefore owned by the Indians, the resort showcased Indian heritage in an educational and most entertaining manner.

This Indian lore and culture suggested an unexpected theme for this conference and print leaders of the future in two illustrations. In the mid-19th century the small dessert river was dammed up upstream of this reservation by settlers who wanted the water for themselves. In planning the resort only a few years ago, the architects wanted to resurrect parts of this Gila River, actually more like a creek, as part of their scenic streamside oasis in the dessert. Now actually manmade, this stream is bringing back the dormant dessert flora and fauna to its natural abundant state. Part of the entertainment for the gala dinner evening was native American Indians representing different tribes performing historic dances including a difficult hoop dance. The stories these performers relayed to the audience, while humorous, clearly demonstrated skill and a profound pride in their ancestral heritage and culture. An appropriate analogy would be "for printers to jump through hoops for their customers they need more than skill but also knowledge of and profound appreciation for their corporate culture accompanied by an engaging sense of humor." Ok, maybe that's a stretch.

PIA/GATF economist Dr. Ron Davis presented the print markets for 2006-2008. Last year was the fourth in a row for print growth and expansion at +2.5% while the GDP grew 3.3%. Ink on paper was up 1.5%, toner-digital print grew 4.5% and ancillary services climbed 3.5%. Profitability was up as printing price increases were up 2% and productivity accounted for another gain of 3%. The near future is expected to be a slowdown with the GDP up 1.5% in 2007 and +2.5% in 2008. The total print shipments in these two years should lag these projections and will be totally attributed to the digital print and ancillary services growth as ink-on-paper will be flat. Continued productivity gains and cost controls will be essential as these inflationary pressures are forecast; +4% wages, +5% paper, +7% health care and +7% energy.

In a later breakout presentation Davis used the Financial Ratio Studies results of the past decade to illustrate that the profit leaders, which are the top quartile, have averaged 9.6% before tax profits on sales while the industry as a whole has been only 2.6%. When the profit leaders' numbers are removed from the industry averages, the rest of the industry according to Davis become "profit challengers." Typically the leaders are 10 times the profits of the challengers except for the last two years, both solid recovery years, when the leaders delivered 45 times the profits of the rest of the industry. Or stated another way, for the last five years the profit leaders, or the top 25% of the printing industry, have generated all of the profits attributed to the industry! The haves are definitely outpacing the have-nots.

"Sixty new firms among the 200 contributors to PrintPAC in 2006 helped raise $102,000 for the industry federal lobbying efforts," noted PIA/GATF Vice President and head lobbyist Lizbeth Lyons. PrintPAC disbursed $155,000 to pro-print/pro-business House/Senate candidates in 29 states with an election success rate approaching 75% in the last election. PrintPAC hosted a silent auction FUN-draiser at the President's Conference, which netted $17,000 to support the industry political advocacy initiatives on Capital Hill. And just as importantly, according to Ms. Lyons, "It increased the base of contributors," who will be receiving PrintPAC's e-newsletter entitled IMPrint. Providing timely information on legislation being considered and voted upon, this is a quick and easy reminder to constituency so they can contact their legislators promptly voicing their own opinions on which way their elected officials should cast their ballots.

Noted printers formed a panel at a general session to present Crossroads Decisions that have proven critical to their futures. Marty Anson, President and owner of Baltimore's Bindagraphics, described a strategic acquisition his firm made in 2005. After 27 years of growth and profitability, Bindagraphics, the largest trade bindery in the Mid-Atlantic States "fell off the cliff in 2001," remarked Anson. Annual sales fell from $18 to 12 million from '01 to '03, which unfortunately happen to coincide with the firm taking on $5 million in debt for expansion in both equipment and building. The firm weathered this storm, returned to profitability and then received a call about an all or nothing bankruptcy sale of a specialty packaging printer in Buffalo, New York.

This firm, Colad, had sales of $27 million in the late 1990s when their largest client Walmart chose to buy these same book covers and back-to-school supplies from China. The firm was awash in red ink and lost sales and yet because Buffalo was such a depressed labor market, their employee base did not abandon ship. Anson bought the firm en toto at auction for $7 million despite the fact that he knew nothing about printing. During the due diligence process he contacted his key mid-Atlantic printer clients to assure that they would see no competitive threat in this specialty acquisition several hundred miles away.

His current bank insisted upon personal guarantees for this new debt load, as they were uncomfortable carrying Bindagraphics during the '01 cliffhanger. He switched banks for the entire corporation without a hitch.

Some of the post deal surprises that he had to deal with were postponed maintenance expenses of $80,000, unknown sales bonuses promised, and vendors who wanted to jack up prices to recover earlier losses. The bonuses came as the result of increased sales so he paid them. Rather than brow beat the western New York vendors, he called his Baltimore suppliers to begin shipping supplies to Buffalo. Free enterprise brought that issue back in line. A delightful surprise was the $2.3 million in financial incentives available from the New York state government over the first ten years of new ownership.

Mr. Anson acknowledged that he would never have made this strategic acquisition at his age if it had not been for having three sons in the business with him. They were ready and able to take on more challenges.

Rochester, New York's Cohber Press President Eric Cohber described his firm's crossroad decision. Celebrating its 75th year in business and third generation of family management, Cohber Press had been a successful technology driven business with the adage, "build it and they will come." This worked until the late 1990s when they installed digital printing and variable data capability and then realized they were on the bleeding edge of technology. A strategic planning process in 2003 changed the firm to one focused on "customer intimacy" and client data driven. They acknowledged the need to hire consultants along with key personnel from outside the printing industry, such as data management professionals. They now have a stronger management team with distinct profit and loss statements for each different key corporate division.

One of the premier strategic planning documents unique to the printing industry for the past 30 years has been the PIA/GATF Technology Forecast. Containing 64 articles contributed by 66 different experts, this 2007 publication was reviewed for the first time at this conference. PIA/GATF President Michael Makin and Research & Technology Vice President Dr. Mark Bohan highlighted many of the sections of the book while two leading printers offered their experiences and observations.

Management Information Systems are considered absolutely critical to achieving sustained profitability in this industry. The two consultants, Don Goldman and Bill Lamparter, who wrote that MIS section estimate that only 60% of the industry have properly installed MIS capability with only a third of those firms having the most current versions of the software offered by their chosen vendors. A full 40% of the industry utilizes little to no MIS capability.

Fulfillment Services are conservatively expected to grow to 13% of total print-related revenues by 2013. Mike Marcian, CEO of Landover Maryland's Corporate Press offered that his firm's fulfillment operation was the "flagship division in sales and profit growth" processing 8-10 thousand orders a day. While he has a single printing plant, he has chosen to establish a series of fulfillment warehouses all electronically networked together. The most recent was a vacant shoe factory he found in West Virginia, which was easily converted to a state of the art information fulfillment warehouse. He has not yet chosen to install digital printing in these networked warehouses as it is still difficult to get timely service for these state of the art print engines in remote locations.

Training is key to the future of the printing industry. A study by Heidelberg's Larry Kroll showed that profit leaders are spending twice as much on training (4.1%) as a percentage of sales as the profit challenged firms (2.0%). Mr. Makin said that PIA/GATF's webinars and subsequent registration had grown 20% over the previous year.

The Digital Printing Council's Director Julie Shaffer gave a state of the art presentation on the increasing variety (18 different niches!) of web2print applications. Designed to streamline production and increase efficiency, these client linkages add value for customers and provide predictable revenue streams to the printer. There are 28 different software vendors with more coming on line weekly plus a series of hosted solutions that allow the printer to have no hardware, software or IT expertise in their facility. Licensing fees vary from $20,000 to $100,000 for the on site packages plus customization costs. "The easiest way to get started," concluded Ms. Shaffer, "is set up a store front for a key client and grow it."

As the economy has stabilized and profits improved for the leaders, interest in merger and acquisition activities has picked up. A print business broker and private equity firm representative made a presentation on the opportunity offered by working with private equity. Mr. Peter Mogk, partner with Huron Capital, suggested the timing is ideal for larger privately held printers to seek private equity financial partners.

Mr. Mogk's deals require the following features;

1. Expectation of a 25-30% internal rate of return to the private equity firm,
2. A 5-7 year cash out time horizon,
3. A lending market allowing his firm to leverage their equity by five times,
4. His firm owns a minimum of 51%,
5. The remaining proven print management team would have equity stack of 20-30% of the business whose return could equal or exceed the initial pay out when this cash out time period has been reached,
6. Target printer has $15-100 million in revenues, and
7. Huron will be very active at the Board and strategic planning levels but not operations.

In response to audience query, Mr. Mogk responded that they shy away from any type of a contingent earn-out arrangement as this may be subject to lawsuits later on. Since their strategic plans might include using this firm as a platform company from which other niche firms might be added, each deal must be clean unto itself with no holdover contingencies.

The timing is particularly opportune for these financial partners as (1) its a buyer's market, (2) the realistic EBITDA multiples continue to be deflated at 4+X, and (3) interest rates are stabile with monies readily available. Regardless of a printer's debt level, most private equities would most likely refinance that debt as they can invariably acquire debt cheaper than most any printer.

Regardless of a printer's desire to sell out or agree to a financial partnership, it is smart to know what characteristics drive higher values. If the privately held firm is achieving this level of results, it should be satisfying to know that they are among the best of the best. Compass Capital, another advisor to M&A parties but not part of this presentation, offers this list of value enhancers; nonunion, up-to-date technology, 3-5 years of revenue growth and sustained EBITDA of 10+%, audited financial statements, 25-35% excess equipment capacity, 35-50% open plant capacity, plant not landlocked, good youthful management willing to stay, no account concentration beyond 20%, documented environmental compliance, no significant pending litigation, well engineered throughput, clean well maintained facilities, no major facility maintenance issues, revenues >$10 million, number one or two position in chosen market, 60+% value add, no salesperson concentration above 20+%, strong ethics, evidence of tenured, happy workforce.

PIA/GATF Director of Human Resources Jim Kyger led a breakout session on "Best Workplace Critical Issues," which concentrated on the trend in high deductible Health Savings Accounts (HSA), drug testing, recruitment on multiple shifts, and violence in the workplace. Ken Postema, President of Grand Rapids, Michigan's Color House Graphics, described their experience of making the transition to HSAs, which are really consumer driven health care programs. They needed three follow-on meetings with their 45 employees to reexplain how the company was paying the first year's high deductible contribution ($1,500 for individual and $3,000 for family) while the employee would be contributing as tax free payroll deduction in future years. A local bank provided free HSA accounts with credit card for processing payment to health service provider. The company did not save anything on the program the first year but realized a $50,000 second year savings and more in the future. The health premium increase in 2007 was 8%.

Arendall Corporation went through the same transition for their 750 employee unionized firm. Younger employees are actually making money on their HSA accounts since they have lower medical claims. They have also become involved successfully in wellness incentive programs as the employees buy into their role in controlling medical costs for themselves and their families.

Kyger advised printers to test for drugs beyond the conventional "Big Five" by contacting their local law enforcement to learn the names of the ten most popular drugs in their area. He also said that domestic violence was the most prevalent spill over into the work place. Security cameras over all doors and loading docks coupled with locked access was the best available deterrent, which most employees appreciate.

Several printers acknowledge the difficulty of recruiting electricians and mechanics for third shift work. Ken Postema added that his firm pays a 10% second and third shift wage premium. Kyger offered access to a free PIA/GATF human resource list serve to get feedback on any and all issues of interest. Contact him at jkyger @ piagatf.org or 202-730-7968.

Consultant Sid Chadwick offered a session on improving customer relationships. He advised that the company president should be writing a quarterly report of progress to all stakeholders including people participating in the "enlarged buying center" for their clients. In other words those individuals beyond the client's print buyer and marketing department should be included in this communiqué list.

Because of the turn over trend for print buyers, i.e., few are in their roles beyond three years, printers should be proactive in dealing with new print buyers rather than the "wait and see" reactive mode of most suppliers. This is achieved by providing the new buyer with a comprehensive information-laden notebook containing the historical overview of the working relationship between the two companies, list of all outstanding quotes, list of all work-in-process in the printing plant, copies of previous important correspondence, trade articles about the buyer's company, invitation to a plant tour, copies of educational materials and schedules of sessions offered by the printer, discussion of printer resources not yet being utilized by the buyer's company, and business cards of the sales rep and CSR showing email and website.

With the highest attendance in seven years and over 20% of the attendees being first timers at this PIA/GATF Presidents Conference the conclusion can certainly be drawn that the leaders in the printing industry are reaching out to learn new innovations and taking their organizations to the next level.

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.