2007 Continues to be a Fine Year For Print

Print continues to demonstrate its staying power even with with the continued growth of the Internet. As 2006 was better than 2005, 2007 will be better than 2006 and will produce over $102BB in shipments. The amount of shipments is a far cry from forecasts just 24 months ago by industry economists calling for around $90BB this year. Direct mail, magazine ad pages, and the consistent use of the FSI in any big box media mix fueled the good year for printers. While 2008 looks somewhat fragile, the year should not contain any major surprises for the industry.

The remarkable acceptance of the digital printing platform with better web-to-print user interfaces has led to this growth. Long awaited, these short run customized applications for Fortune 500 companies to the four person small business launch has been the catalyst to the 2005-2007 good times. Thanks to the PDF, digital camera, digitalpress, and new work flows have made it so easy to create content. Merge content with a Kodak Digital NexPress in conjunction with a slick new 18,000 sheets per hour Heidelberg or 80,000 (64 page 4/C impression) per hour from a Goss web press, print is alive and well.

Equally important, consolidation of big print and little print continues to make this platform more cost efficient. RR Donnelley, Consolidated Graphics and Cenveo’s growth contrasts to the poor results of the leveraged companies, Vertis, American Color and QuebecorWorld. Understanding the need to constantly invest in P&E, the well capitalized and visionary printer continues to bring new press and bindery improvements to their shop floors. Printers now realize their competition is not just other printers; it is the Web as well. Web prices are going down and to stay relevant in the marketing mix, productivity gains are necessary to chase down print prices as well. The good news...productivity gains have been better than price reductions in the press room.

With October 2007 reporting shipments of $9.29 billion, this is $253 million or 2.8% ahead of last year. Now I know on an inflationary basis this is down 0.7% compared to last year, but I believe the growth of digital printing and productivity gains in the digital workflow enable smart printer profits to exceed price reductions. If we had total impressions on a comparable basis for these 20,000+ small commercial printers, I do believe the printers who “get it” are shipping more out the door, see better asset utilization, and improved profits.

The “get it” printers have invested heavily in software enhancements in the indirect area, new digital presses to support their heavy iron, and launched web to print front-ends. These printer web-sites are user friendly and bringing printing from customers well beyond the normal 50 miles from the shop room floor. For a company I have always liked, CGX now needs to get more aggressive with its cash and purchase digital presses rather than a stock buy back. With close to 80 plants at approximately $400,000 per press, that is $32 million for an iGen, Xeikon, NexPress, or Presstek DI just to mention some of the manufactures in this space.

InnerWorkings, VistaPrint, and a host of other providers are changing the way everybody buys print. The small printers who are embracing the web and double digit growth of digital printing are doing quite nicely. Those still slow to adapt will be gone or merged in the next five years. Same holds true for big print. As RRD, Quad, and Brown continue to invest in their P&E along with their digital work flow, the others will cry about price erosion and falling EBITDA. Those serving the debt monsters insatiable interest expense rather than purchasing a new Sunday press will continue their slow fade into obscurity. One must lament the quarterly calls where poorly capitalized companies complain about pricing. Reminds me of a rotary engine airline complaining about the predatory pricing of all those competitors now flying jets!!!

While QuebecorWorld finally invested over $1.2 billion in P&E and rationalizing its platform, it now must struggle with a balance sheet that should have been addressed at the same time they were finally catching up with the RRD and others. QW was very late to the game yet should begin to reap that huge investment in the 4th quarter 2007 and all of next year. Just do the math on price reductions vs. new presses.



32 page press running 50,000 4/C pages/hr = 50,000 32 pp Impressions
This will generate on a 5 day, 3 shift basis approximately 265,000,000 32's

64 page press running 80,000 4/C pages/hr = 160,000 32 pp Impressions
Here again, on a 5 day, 3 shift basis, the Goss will print 848,000,000 32's

In a perfect scenario, the printer can eliminate 5 tired presses with two new Goss Sunday or Mann Roland Presses thereby delivering better product with 45 fewer press crews (assuming the manning is 5 per press, 3 shifts, and we scrap 5 presses replaced by just two).

With regards to crew, if robotics are included in the takeaway, new presses may have a two person reduction for roughly 3.2 times the output of the 32 page signature. Even more important, printers are being paid at the same 32 page price per 1000 impressions before the press was installed. We did this at RRD in back in the dark ages of 1995 with 48 pages replacing 32 page catalog presses. Today there are both 48and 64 page presses throughout RRD, Quad and Brown. Those presses are finally being installed throughout all of QW and neither Vertis nor American Color have enough of them on the floor. Tired iron vs. new iron will lose in airlines and print.

In closing, please note there is no relationship between GDP and printing shipments. In 1993, printing shipments represented 1.25% of GDP while today it rests at a comfortable 0.73%. If print would have continued to track GDP like it did up through 1993, the industry today would be forecasting $147 billion rather than its $102 billion. While it is always smart to worry about a possible recession or much slower GDP growth, those printers with the superior marketing and manufacturing platforms should be able to take enough share to overcome any minor adjustments to the overall economy.

Printing Company Profits did follow 2006 Volume Gains

Paper, press manufactures, and printers all had banner profit years in 2006. A complete analyis of each segment will be forthcoming. First quarter results continue to bode well for print again in 2007. Ad pages are holding onto last years gains and while housing is soft, spending continues to be solid and printing is as well.

2006 A Very Good Year For Print

All the data for 2006 supports a one year rebound for print. This is the first time in 10 years that the LTM shipments for this important communication sector have been better than the previous year. The era of print as the offline media step child is over. Print, as a viable alternative channel for a balanced media communications, has settled into a well deserved niche in any plan. Whether building brand or store traffic, print in conjunction with the web, radio, newspaper, PR, commercial TV, and cable providethe marketing team with a host of ways to allocate the media spend.

The successful IPO of InnerWorkings, iwprint.com, is a testament to the strength of merging the web with conventional printing services. While still in its infancy, the ability to negotiate price on simple or complex printing jobs via a web browser and hosted site is a tremendous advantage for both the buyers and then the printers with underutilized capacity. I have used IWP and it works. Any print buyer can easily navigate the site, shop for price, and then purchase the printed piece. Delivery and quality are guaranteed by IWP. The only potential glitch in the process...does the printer deliver what is expected and if not, how much does this cost IWP to make the customer and printer happy. This is the real test of the models execution. It should work if the execution is consistent. Will it? This remains the question for investors and print buyers/printers as well. With over $90BB in commercial print, the potential for a big win is there.

Beware of printers who cry foul regarding the web versus those that embrace a multi media approach to supporting a customer. With the growth of iwprint.com and VistaPrint in this segment, we find two companies that have capitalized on the value of the web to bring some level of utilization competence to the unused capacity that plagues this industry.

Lastly, the RR Donnelley Banta merger is a win-win for the customers and supplier in this segment. The purchase of Perry Judd's and Von Hoffman is a good continuation of the revenue built by purchasing the smaller company in existing segments that will need the cash flow of Donnelley to support continued investment in capital equipment. RRD is a value added printer with a vision and strategy that merges print with all elements of any company's media or customer communication needs (including back office). Cenveo will continue to bring value to those acquired by Burton as they bring a superior cost reduction model to those public companies who do not understand their cost structure. Cenveo's strong management forced Banta to quickly change its business model and eventually led to its sale. Recent smaller acquisitions continue to fit into Burton's vision for share growth and market penetration. Lastly, the printing industry had a great year overall.

Total shipments for the year were $91.4 B versus last years $89.8 B. Much of the success has come from the digital world of affordable 4/c printing from any number of quality suppliers...Presstek, Kodak, Xerox, and HP to name a few. These print on demand solutions for short run and targeted pieces help reduce waste and improve campaigns for the big company and the one person start-up as well.

All in all, a very fine year! First quarter 2007 will tell us if we have hit a bottom for a period or 2006 was just an aberration in a continuing free fall of year over year results. When the NY Times wonders if it will be printing a complete newspaper in 5 years, one hopes they are just thinking out loud to warn shareholders regarding earnings. My estimate, they will still be printing, but a smaller size and more 4/C.