Print Overview and Recent Transactions

The consolidation within commercial print continues as both RR Donnelley and Quad make significant acquisitions. Multiples for smaller deals tend to be trending above 5X for those companies with solid management and consistent earnings. Several mid-cap deals were a little over 6X when one PE firm exits and another takes a position in commercial print. A sale to a strategic buyer tends to be a bit lower.

With money awash and LTM print shipments 3% ahead of last year and reversing a 15 year LTM slide, it is a good time to be a seller. Those companies with EBITDA over $10MM or a percentage to sales above 10% may see the 5.5-6.5 multiple we saw in the 1990’s.

While print and EBITDA growth is important, it is the expansion of the value proposition that adds to a small to mid-cap valuation. The graphics company should include wide format, content management, digital variable printing, creative services, analytics, and fulfillment along with a great portal. A web to print portal that is as robust and it is customizable will enable the mid-size printer to better serve its customer and its investor.

The Success of Print and Digital Signage 

The two-year absence from the blog was dictated by a return to active management and my "last rodeo" as a full time turnaround executive. When asked by the investor to leave the comfort of the Coloredge board and assume the CEO position, I was cautiously delighted and a bit stunned. However I accepted and immediately looked forward to building a team to better lead this "niche" company with its national footprint in consumer brands in-store signage and packaging. 

Coloredge is the largest provider of high-end visual brand imaging solutions utilizing both digital press wide format signage and digital screen advertising display solutions. We enhance brand for upscale retailers, consumer products, museums, events, and sports arenas. As the company was severely hampered by the great recession, a new team was necessary to build on the 10-year foundation of this roll-up of companies in the early part of the last decade. 

About the time we determined the best strategy to improve the company and look for new opportunities, Hurricane Sandy took out our NJ operation in the middle of our biggest volume months in late 2012. Fortunately with the help of supportive customers, industry equipment suppliers, our insurance carrier, bank, and several fellow competitors in the region who provided us with equipment time or outsourcing, we salvage the biggest season for the company. With the insurance money in place, we replaced all the damaged equipment, the building repaired, and by end of January 2013, CE was ready to complete the next stage of its evolution.

What is unique about the current retail environment is the absence of clear metrics as to what a store should do each season to improve foot traffic, website purchases, increased sales per square foot and what role social media or emerging channels should play in the marketing plan. As a printer, it became evident early on that while working daily to improve the productivity of the CE shop floor and customer experience was always a priority, the key to a niche company's future was moving beyond just improved print and brand management execution. As my good friend Dr. Joe Webb often mentioned to me, go where you customer is going and beat them there. Simultaneously, our investor and board shared that same mindset.

With that in mind, we began in 2013 identifying various strategic options. What were the best approaches to counsel our retail customers in designing the methodology and metrics around the "Retail Store of the Future”?  When identified, what role could we play?

Equally important, we began a search to find new talent to lead this initiative and will shortly hire the right executive from the retail field to build the consultative business plan and staff to bring that expertise to new and existing retail customers. With the benefit of working for years with upscale retailers in the diverse segments of jewelry, technology, entertainment, apparel, beverages, cosmetics, and sports marketing, we determined the best way to improve the Coloredge revenue stream was to help them determine ways to improve theirs.

While building new revenue streams, the team continues to invest in new digital press technology, workflows, and customer satisfaction surveys. The base business of ink on substrate remains an important part of the CE value proposition. Adding the consultative services around the Retail Store of the Future will keep the company linked to new channels and ways to monetize the revenue potential. We are now expanding our search for the other segments we serve and finding the right people in those segments to bring into the company.

Turnarounds are demanding and when they work, the pride in the team’s effort is without peer. As I move up to Chairman, the team we put in place is well ahead of the curve and its competitors in this niche space.

First Four Months of 2012

The Premature Death of Print

While the first four months of 2012 have not been good to print (FAICS Shipments off about 3.8% from the same period last year), some magazines out there are generating close to a billion dollars for their printed version. The publisher, catalog company, and agency are now faced with multiple channels to reach the reader. While smaller now than the good ole days of the late 1990’s, print still has a role with over $81.5 Billion in shipments forecast for 2012.

For the printer that greets the day with “It is competition, Stupid” they will survive and prosper. Drupa demonstrated the new digital print technologies that will continue to make print more cost efficient, targeted, and relevant even as the pie gets smaller. 

The following is an excerpt from Bo Sachs. His daily updates on trends in publishing and print is a good read for anyone in this space.

“Not too long ago there were basically three ways to communicate. Print, Radio and TV.  Now there are dozens of ways and variations of each to reach out to readers, and businesses.  So when some of us declare that print is dead it implies that we just don't like competition and wish we were back in the days of wine, roses, and no competition.

The modern printer has no doubt what-so-ever, as to what he will be doing five, ten and even twenty years from now.  The modern printer will be printing.  The publisher on the other hand is filled with self-doubt, consternation, and fear of death.  The modern printer will continue to print, while increasingly becoming more efficient, with greater quality controls and perhaps lower or at least stable pricing structures. The publisher on the other hand has a basic business model and strategic choices about how and where his revenue will come from in this new age of multiple forms of competition. The revenue could come from print or in conjunction with some other venue. The modern printer is solely focused on doing what they do better, faster and sometimes cheaper.

The bottom line here is that the printer will always have clients, where some publishers should, but may not.  The publishing community must stop whining about the death of print, which isn't actually happening, and get back to producing products that are valuable on any substrate.  There are too many examples to mention of the successful reinvention of the magazine model. These titles are very busy emerging from the doldrums and creating relevant content on any and all substrates that their audiences wish.  And they are getting paid for their stellar performance.  If your once successful magazine isn't doing well now, where have your readers gone to and why did they leave your establishment?  If your magazine (TAT adds catalog or book) is dying please, don't blame it on the death of print - print has nothing to do with it.”

In closing, if you think print has challenges, try being in the paper making business!

Same Store Sales for Printers Continues to Shrink

Third Quarter results seem to indicate that a consolidation play must continue through all segments of print if there is to be any revenue or margin gain! Quad was down, Cenveo and RR Donnelley up only due to acquisitions, and print shipments overall were basically flat to 2010. Shrinking tide sinks some boats will be prevalent over the next five years as any printer's existing customer base will seldom exceed the previous years print spend. Unless new customers exceed lost customers, LTM comparisons will offer little to stakeholders and force those marginal companies into low EBITDA multiples to their cross town or cross country rivals.

Meanwhile at VistaPrint, they continue to be the poster child for a well-run print and marketing communications company. Their acquisitions here and in Europe continue to expand its value proposition to the micro business. Average orders continue to migrate up and 20% revenue growth in the recent quarter confirms their growth strategy in spite of Wall Street discounting their plan to reach $2Bn. InnerWorkings continues to grow yet the stock is not getting the attention it deserves. This fixed asset light arbitrage brokerage model is ideally positioned for those mid-cap and Fortune 500 companies where print is just a Cost of Goods Sold line on the P&L.

Meanwhile, Kodak continues to bring good products to the market and fails to capitalize on the Prosper brand. Heidelberg orders shrink along with offset as a growth engine for any supplier or printer. Digital presses are now the rage and as the industry rushes to install a press daily, the industry will once again add an installed base far in excess of demand. Until the consolidation takes place in print similar to what we have seen in paper, this imbalance dance between demand and supply will continue and prices will fall to fill the open time on both offset and now digital presses.

In closing, Quad stock reached a new low today near 12 &3/4. Quiet a fall from its $42 IPO just a year ago. At the $13 share price, the current Quad multiple would be around 4x EBITDA if it were a private company in play. Meanwhile, RRD stays around the $16 per share price (why they ever borrowed $500MM to buyback their stock when it was near $20 still baffles). Cenveo continues to struggle around $3 and so levered that it will be a long time back to $15.

VistaPrint Wins Again in Reporting versus RRD and Quad

Neither Quad nor RR Donnelley did much to convince equity markets that good times are returning soon. Only Consolidated Graphics seemed to have a good first quarter on “same store sales” as the smaller printer market did much better throughout 2010 and early 2011 than big print. VistaPrint just continues to shine.

RRD is shopping $500 Million of debt to repurchase shares trading at $20 rather than invest in new markets or grow share through acquisition. While it first quarter demonstrated no growth domestically in much of its business model, it would be interesting to understand why management feels its enterprise value may improve to $30 per share and this buyback is a good use of debt to purchase cheap equity!

While the only bright spot remains internationally in Latin America and Asia, if the stock trades at $15 come December 31, this will look rather silly. Betting share price will move to $25-$30 when there has been no real good news in any of its domestic end markets is a risky bet.

Meanwhile, Quad continues to relocate its customers off the old World Color “tired iron” to the better asset base of all the existing Quad plants. If one were to recall, in 2005 QuebecorWorld was about a $6 billion company with a plan to upgrade facilities by investing in $1 billion of new equipment. Quad was private and posted revenues near $2 billion at that time. Annualized, both companies were close to RR Donnelley’s $8 billion. Quad’s first quarter 2011 was about $1 billion (maybe close to $5 billion if we annualize) and RRD has been stuck on $10 billion annualized for the past 3 years even with all its acquisitions. Both companies just keep marching in place as content shifts.

As print content continues to loose share, the only real revenue growth for RRD & Quad is internationally and through acquisition. Their base business will continue to shrink as e-content and print share the reader’s habits. While well managed, both companies need the VistaPrint model to engage equity investors. Each one has tried to add services to capture more of their clients supply chain, only VistaPrint has really succeeded.

A Commercial Printing Update

With the release of the February print shipments data, we have now experienced a string of eleven consecutive months of positive comparisons to the prior year. While January & February were up about 4% over the previous year, these solid monthly gains had more to do with the dreadful 2009 but it remains good news. As we await the first quarter results of 2011, it seems the printing and graphic arts community has settled into a relatively good year.

2010 stopped the bleeding of the “great recession” and those double-digit declines in revenue are in the past for now. However it is obvious the industry has reached its inflection point on capacity, the digital press revolution, and the demand/supply imbalance that has plagued commercial printing for the past 50 plus years.

Is there a CEO left who has not opened their quarterly report with a note about price competition fed by too many presses? When one views commercial print from 30,000 feet, the only significant economic indicator that has changed since 1995 is that print demand no longer follows GDP growth. Yet before 1995 and since, we have always had an imbalance of print supply and demand and still we continue to listen to CEO’s quarterly lament price erosion as they whine to the analysts through the magic of Quick Time Player and the Power Point slides hosted by Adobe.

For those clients new to my firm and new to the industry, this price lament seems to make good sense. They come to me with the belief that when Quad buys World Color, RRD buys Bowne, or CGX makes another targeted acquisition, price parity will be reached and EBITDA to revenue margins will quickly improve. Wrong! We are not even close to some form of demand supply relationship.

When the industry recapitalize during 2003-2007, it was during the last golden age of printing shipments. Commercial shipments held steady during those years near $105Bn. Cash flows and earnings were solid and new offset and digital presses replaced the 1990's older press installations. Unfortunately when these new presses replaced tired iron, in many cases it was a one for one replacement. Replacing a 1500 fpm 32 page press with a new Sunday 48 page 3000 fpm press simply added capacity if the printer did not remove two presses from the floor. Still, productivity gains on the press were greater than most price reductions and margins were pretty stable during that period for the well managed public or private companies.

When all those presses hit 2008-2009 and print shipments leveled off at $87.5 Bn last year, that $18Bn is not coming back in 2011 as it did in the 1991 and 2001 normal business recessions. The demand supply imbalance is even worse than 2007. eContent, the iPad, and changes in the allocation of advertising dollars from print to other media produced the perfect storm of reducing the new top for commercial printing shipments to be in the neighborhood of $88 Billion for 2011. This will continue to erode at 3-5% over the next several years. We see print shipments at $70-$75Bn by 2014.

Specifically, magazine circulation and ad pages will never return to the 2007 levels. The economic model of ad pages carrying editorial and cheap subscriptions is dead. Newsstand draws will continue to be reduced as well. Try to find Golf Digest, the Economist, GQ or any special interest magazine if one is not in an airport, commuter train station, library or newsstand in Manhattan. The days of $12 a year for the $4.00 newsstand magazine are long gone as well. Publishers are focused on Apple and the iPad subscription model and how to blend the print version with the tablet version for those of us who still like both.

Direct Mail still uses the best tacking portal in the world to deliver its message, the USPS mail slot or mailbox. The inroads the digital printing are making in both in-line operations on web offset presses and the new digital web fed press from leaders like HP and Creo/Canon will keep this segment relevant and part of any media budget. We may actually see solid year over year growth in this segment. Books and Free Standing Ad Inserts will suffer less than magazines. The El-Hi market will not face eContent until the price point on the tablet can be afforded by everyone. Trade will suffer a little more each year as Kindle and others take its share. The FSI remains a great store driver on sales and the key retail dates around holidays. Vertis will eventually be acquired by RRD or Quad and it should!

While print is still viable and will continue to blend with eContent for the foreseeable future, unfortunately print pricing will not stabilize. There remains too much supply as plant closures have not reduced industry capacity nearly enough (in spite of the plants Quad has closed since its acquisition of World). If one may recall, Quad shut down one Sunday press or equivalent in each of its locations in 2009. Those were not old presses either. Some of the World Color volume from closed tired iron is loading that equipment today. Remember, this is an $87Bn industry with less than 20% controlled by RRD and Quad. Add Cenveo, Brown. Vertis and CGX, one can raise that bar to a +20%. Still, there is ample open time across the industry to keep price pressure on everyone.

Print productivity continues to drive down the cost of a 32-page 4/C form while paper and ink add to any publisher or catalogers burden with price increases. Print buyers rely on the printer in their supply chain to negotiate price reductions. Paper companies took out machines almost monthly in the last decade so supply and demand is in better shape throughout that industry, newsprint being the exception. Add postal increases and ink recently as well, media buyers will continue to look at options other than print. BTW, eContent pricing per unit tends to go down over time. Still another reason why we will not return to the $100Bn of print shipments we saw in 2007.

So in addition to those is the supply chain raising prices, printers who added both offset and digital additions in the last five years are chasing incremental fill for all that open time. Weekly we see two printers in the same geography merging to take the volume of two and better utilize one plant. The next five years will see those announcements almost daily as bank financing, continued print shrinkage, and price pressures force the consolidation from 20,000 printers to 7500 by 2015.

Yet for those public companies in this segment, Wall Street still likes many of them. CGX, VistaPrint, RRD, and Quad are well respected and many see these companies as the potential winners by 2015. Mr. Burton still struggles to convince the street that his portfolio of companies will return to revenue gains from same store sales as he deals with a debt load that may not permit him to add more to his well run roll-up. He remains my hero as the executive who can manage cost through good times and bad.

In closing, recent transactions seem to be fetching a 2-4X EBITDA versus the old 5-6X multiples. Coming off the poor LTM’s of 2009 and 2010 along with a lack of firms shopping or participating in any auction also contribute to the poor multiples. However, for those really well run companies who invested properly and saw EBITDA return to an acceptable percentage of revenue (north of 10%), deals are being consummated.

Is The iPad A New Perfect Storm?

It is always a good time to update our thinking after all the excitement surrounding the annual printing exposition in Chicago each year. Much of the talk this year at Graph Expo was the “digital press explosion” and the fact that the industry has settled into a relatively good year.

Sales for the past five months have compared favorably to the same period last year. As we reach the critical 4th quarter of 2010, there is some optimism that the print channel shrinkage has stopped its double-digit decline and reached a new bottom of around $85-87 in print shipments for 2010. August commercial printing shipments were $7.3 billion, up $235 million (+3.3%) compared to 2009. Ad pages were up to 40,387, a gain of 3.6% when compared to 2009 and the second quarter in a row to record ad page growth. It is not 2006 and the industry understands that those good times will not return as they have in previous post recession upticks.

The free fall in print always leads any recession and it began in mid 2007 as the industry was posting it last big year at over $100Bn in print shipments. Reflecting on the good news in print shipment and ad pages, we see an industry trying to re-invent itself in several ways:

1. Digital presses are now bigger, faster, and produce quality closer to offset than ever before. Any printer must include new digital presses along with the less than enthusiastic replacement of “tired iron” in the sheet fed or web offset pressroom. The recent trade show, Graph Expo, did not have either Heidelberg or Komori at the show while manroland and KBA attended without any presses.
2. The consolidation of large printers (Quad acquires World Color and Donnelley acquires Bowne) reduces that landscape still further. Will some company please acquire Vertis! In the small regional print markets, the “tuck in" trend continues unabated where two printers in the same geographic area combine print volume into one operation while shuttering the unprofitable one. One estimate has the industry shrinking at about 1500 a year or close to 4000 printers exiting the market place since 2007.
3. Even with the reduction in capacity following these roll-ups, there is little to stop the continued price reductions chasing the smaller print pie as other content channels see price reductions each year in delivering content to the reader.
4. Smart printers continue to improve revenue and margins by moving deeper into the supply chain of marketing and logistics for their customers. Web-to-print models, asset management, and any number of other value added services take the printer into areas other than just ink on paper.
5. If the iPad truly sells 40,000,000 units in 2011 as recently forecasted, the impact on all print media may be truly revolutionary. While the Kindle was a simple threat to books, as the iPad evolves it may become more common than the smart phone. This new iPad technology will mirror the 1995-2000 perfect storms of Adobe, the Internet, and the Digital Camera on traditional print and pre-press services.

While most of the publically traded printers have recovered from their 2008 lows, only VistaPrint and its recent hiccup in Europe caused investors to panic and sell off the stock. Trading today in the high 30’s, it remains a solid company with excellent growth potential in Europe, the US, and now Australia. Its management is solid and takes prudent risks on expansion and the tentative move into TV. While TV did not pan out, the expansions domestically, in Europe and Australia were will planned and the operating issues of the most recent quarter are most likely a one-time issue.

Many following the Quad IPO still feel the stock is undervalued at $45 and see its well managed merger with World Color as offering huge upside synergy savings over the next two years. RR Donnelley led the pack when it rescued Banta from the unfriendly Cenveo proxy offers to Banta shareholders. Those unfriendly offering letters forced Banta to prepare for major cost savings well before the RRD rescue. The World Color bankruptcy provided management with much of the same incentives before the Quad offer. In addition, combine that with closing some very tired iron plants, this should work out well for Quad, its customers, and the shareholders who may see the stock go to $60.

Cenveo remains limited to acquisition opportunities. The failure of the NEC management to recognize that Burton’s offer of $140MM is just one of many for that great old NEC. It was their last great ability to monetize a shrinking envelope market. Cenveo consistently merges like companies into its well-managed platform and wrings even more redundant costs out of the combined entity. Bob Burton remains the best operating CEO in our industry.

As of this date, Vertis continues its nearly six-month saga of trying to refinance its Balance Sheet and long-term debt. While other printers continue to build 1MM square foot mega plants, Vertis is mired in the past. RRD and Quad’s mega plants maximize supervision over a larger platform of inventory, press, bindery, and postal/wholesaler freight distribution economies of scale. Vertis remain mired in the ACG acquisition and the old Treasure Chest footprint of many small plants scattered around the country, most filled with 10-20 year old presses, many with the wrong cut-off as well. These two factors along with the continued slide of FSI revenue and share hurt the still robust Direct Mail portion of Vertis.

While printers face the continued move to digital content and the growth of the iPad, well-managed companies like RRD, Quad, and Cenveo will still deliver solid performance to their shareholders. It will be a struggle yet they are still likely to emerge, along with VistaPrint, as solid companies. Management should continue hitting their earnings numbers, as the consolidation of the market continues and the big four continue to gain a bigger share of the smaller printing pie.