Dr. Jeff Rosensweig, Professor at Atlanta’s Emory University Business School, offered conference participants a long-term perspective on global growth. Based upon population shifts and energy consumption, Rosensweig forecasted a global impact from the emerging economies such as Brazil, India, Russia and China. On the contrary, the European Union and Japan will be facing a challenge as future demographics reveal an aging workforce and a generation of workers that had fewer children. This age demographic is the driving force behind the shift to move manufacturing to the younger, more populated nations, such as Bangladesh, China, and India.
Long-time NPES consulting economist Dr. Michael K. Evans offered a variety of economic tidbits for long-term planning. While GDP for 2004 will be stronger, 2005 will be weaker as the US economy is operating ‘on borrowed time.’ US federal deficits will continue to expand sharply over the next two years which will result in interest rates rising, the stock market declining and consumer borrowing against home equity diminishing. Significantly 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 average inflation of 2% in 2004.
Capital equipment suppliers will continue to suffer, because of a glut of ‘almost-new’ machinery in many industrial sectors. This is particularly severe in printing equipment and the overhang is likely to continue for several more years. Printing supplies growth has been on a downward spiral since 1998, and has been 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.
Continued demise of ink and paper
Moderator Frank Romano, from the Rochester Institute of Technology and an industry consultant, discussed five challenges facing the printing industry as a result from faster turn around demand:
- 30% of all communications between print buyers and producers involve job status;
- last minute jobs and tighter schedules are normal;
- work flows must enhance ‘virtual’ approvals by clients to save time;
- XML and electronic templates are squeezing the designer out of the production costs and possible time delays; and
- 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.
Industry consultant Charles Pesko suggested that the home and small office 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.
Harris DeWese, Principal of Compass Capital Partners, offered his firm’s perspective on the status of printing industry corporate consolidation. During 2000-03, his firm was involved in half of the almost 40 transactions completed each year. Many of these were distressed transactions selling for adjusted book value, not any multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
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 5.5 times EBITDA while Consolidated Graphics’ cost was 4.8 times. Peter Shaeffer, Compass Capital’s newly promoted COO, calculated the recent Moore/Wallace acquisition by RR Donnelley to be 8.1 – 8.3 times EBITDA solely because of the size of the deal and the public liquidity of the firm.
DeWese commented that there is much pent up demand and many motivated sellers. However, with current valuations for good companies at less than 3.5 times EBITDA the more attractive alternatives might be ESOP (Employee Stock Ownership Plan) or management buy out. Tuck-ins or asset/account transactions will continue to be on the rise for the smaller firms.
NAPL (National Association for Printing Leadership) Chief Economist, Andrew Paparozzi forecasts 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 focused 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:
- building an extensive knowledge base of their markets and specific client needs;
- developing that knowledge into an action plan;
- getting company wide commitment and then executing the plan; and
- benchmarking their performance against the plan.
Barb Pellow, a professor at the Rochester Institute of Technology, reviewed a recently published 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 haphazardly at best. Tying in Paparozzi’s success criteria, it would be 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 start.
Services through distributor
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 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 distributor channels and that these distributors understand the client value proposition for print better than the Mail-Well’s sales force. This conclusion is drawn from the fact that the 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 sales force, but rather to highlight the obvious value that the distributor is bringing in the eyes of the print buying market.
Reilly also related the experience 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.
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 modified presses are sold by QuadTech to their competitors, creating another ROI bump for Quad’s stockholders.