While the 2008 numbers simply verify what most in print already understood, this slowdown will be steep and should match the 2000-2002 results. While ad pages will continue to drop, direct mail shipments fall for the first time in years, and newspapers will continue to lose share and print readers to the Web, this decline will more closely parallel the huge drop in revenue from the $135BB in the mid 90's to the $100BB by 2001.
As one may recall, the double-digit annual declines early in the decade were a product of the Perfect Storm digital revolution coupled the with normal GDP cycle. As publishers and other buyers reduced print to manage the slowdown, print was in the final stages of the digital workflow revolution (Adobe’s PDF, digital photography, remote proofing) that all but killed $10 Billion pre-press industry. In addition, print was completing the shift of computer to plate in the press-room and printers were forced to keep tired iron purchased in the 90’s. These older presses were no longer competitive in meeting print buyer’s continued pressure on price reductions.
This time around, we have three major shifts...the magazine/newspaper model is broken, newsstand sales unsettled and a major revolutionary shift from the sheet fed short run market to digital presses. Here, the quality and price performance of the digital press will continue to bottom feed on the short run markets so long dominated by the small printer with one or two Heidelberg presses in their plant. While eating into the very short run 4/C offset market, the growth of customer-of-one digital offerings has more than made up for the sheet fed printers. Those smart enough to add digital presses in combination with traditional offset have seen growth even in these troubled times. The cannibalization of offset is already visible as Heidelberg, KBA, manroland and others report significant softness in their back orders while HP, Xerox and others continue to ship digital presses.
For the national publicly traded printers RR Donnelley, Consolidated Graphics, Cenveo, Transcontinental, Quebecor World, VistaPrint, Innerworkings and three large private companies, Quad Graphics, Brown and the newly merged Vertis-American Color, each company’s plant loading, their customers and their stock continue to take a severe beating. In addition to the beating they are taking in ad page reductions, postal data is even more revealing. While ad pages are down 15% YTD compared to a solid 2007, shipment of magazines and direct mail pieces/catalog has slipped each quarter in 2008.
Third Class +2.6% (-5.8%) (-9.5%)
Periodicals +. 9 % (-7.0%) (-8.8%)
Simply put, for each page of ads lost, a comparable page or two of edit is cut. Two pages of ads, 2 pages of edit, a 1,000,000-circulation magazine, that reduces press time for that one press by 6 hours on the 16 page cover Goss press. Compound that with a reduced copies in the mail and to the newsstand by just 5%, the new circulation is now 950,000 for the balance of the year. 50,000 copies of a 96-page magazine are approximately another 2 hours of press-work on the new 48-page Sunday Goss press. In other words, this plant lost on shift of work and a crew of 4-5 on this one small change. The Goss cover press costs $8MM and the 48 page press over $12MM and must be utilized 24x7 during the back half of the year will now be underutilized and costs under-absorbed. 2008 will be a very difficult year over year comparison.
For excellent data on postal shipments, the quarterly and annual reports by the US Post Office are excellent. For magazine ad page, the Magazine Publisher’s of America provides quarterly data on categories and pages to gain a better understanding of this important segments impact on the printer. Trends in catalogs and direct mail may be found at the Direct Marketing Associated web site.
Sunday, November 2, 2008
Thursday, May 29, 2008
Print Remains in Turmoil
MAY 29, 2008.. While the world of graphics is in Düsseldorf, Germany attending the Drupa trade show, back in the USA several big companies continue to struggle to regain lost footing. The intended merger of Vertis with American Color dominated the news along with the poor first quarter of the Chapter 11 QuebecorWorld (QW). Wall Street continues to look unfavorably on most companies in this space as RR Donnelley (RRD), Cenveo, and even favorites like VistaPrint and Consolidated Graphics have taken hits even while their business formula continues to provide solid numbers.
Reading the Vertis/ACG projections for earnings and revenue growth has more imagination that the last Harry Potter novel. Add the merger synergies and limited Capex, there is little in public documents to support this type of turnaround of two companies loaded with “tired iron” in a low to no growth free standing insert (FSI) segment. With RRD’s recent acquisition of Proline and capturing FSI work from QW that forced the shutdown of New Haven, growing inserts will be difficult at best. Taking on Donnelley or QW with its new iron with a Vertis merged footprint of vintage presses makes any projection suspect. Since cash will first go to interest expense and then what is left to CapEx, the $60MM annual plan will suffer from the projection shortfall. This has happened in the past and will continue to render the tired iron even less competitive than it is today. It is not clear what is for press replacements vs. shutdown rationalizing in the CapEx numbers as well.
Even with major expansion of press and downsizing, completing that in a frenzy will only mirror the horrible results when QW tried to do the same thing from 2004-2007. Adding high speed technology, shutting divisions, asking customers to move, and managing this is a huge endeavor for a company as solid in managerial talent and history at RRD or Quad Graphics. To date, neither Vertis nor ACG has demonstrated the ability to meet covenants and CapEx to remain competitive.
Regarding QW and its first quarter, when are they ever going to meet their numbers? How long will they keep Europe in the mix? The ship should be righted and good production speeds should have been forthcoming in all their divisions.
In closing, Drupa is all about the digital press and its explosive impact on printing and printers. Once the dust has settled and all the announcements analyzed, a separate summary will be forthcoming.
Ad pages continue to be down vs. 2007. Print shipments trail 2007 by 4% through April. It is not 1992 or 2001 but this year will be a difficult one for the poorly managed entities competing in big print with RRD and little print with CGX.
Reading the Vertis/ACG projections for earnings and revenue growth has more imagination that the last Harry Potter novel. Add the merger synergies and limited Capex, there is little in public documents to support this type of turnaround of two companies loaded with “tired iron” in a low to no growth free standing insert (FSI) segment. With RRD’s recent acquisition of Proline and capturing FSI work from QW that forced the shutdown of New Haven, growing inserts will be difficult at best. Taking on Donnelley or QW with its new iron with a Vertis merged footprint of vintage presses makes any projection suspect. Since cash will first go to interest expense and then what is left to CapEx, the $60MM annual plan will suffer from the projection shortfall. This has happened in the past and will continue to render the tired iron even less competitive than it is today. It is not clear what is for press replacements vs. shutdown rationalizing in the CapEx numbers as well.
Even with major expansion of press and downsizing, completing that in a frenzy will only mirror the horrible results when QW tried to do the same thing from 2004-2007. Adding high speed technology, shutting divisions, asking customers to move, and managing this is a huge endeavor for a company as solid in managerial talent and history at RRD or Quad Graphics. To date, neither Vertis nor ACG has demonstrated the ability to meet covenants and CapEx to remain competitive.
Regarding QW and its first quarter, when are they ever going to meet their numbers? How long will they keep Europe in the mix? The ship should be righted and good production speeds should have been forthcoming in all their divisions.
In closing, Drupa is all about the digital press and its explosive impact on printing and printers. Once the dust has settled and all the announcements analyzed, a separate summary will be forthcoming.
Ad pages continue to be down vs. 2007. Print shipments trail 2007 by 4% through April. It is not 1992 or 2001 but this year will be a difficult one for the poorly managed entities competing in big print with RRD and little print with CGX.
Monday, February 18, 2008
QuebecorWorld and Chapter 11
As the dust settles on life after Chapter 11, the one piece of good news is that the Canadian judge in this case will force the company to be completely candid with its results. In addition, the filing still permits management all the flexibility in negotiating with signing bonuses and other incentives to retain existing contracts or close new ones.
As we wait for the 4th Quarter EBITDA, it is important to understand the value of the World Color operations on this quarter vs. those of Europe (a fire sale waiting to happen) or the small contribution of South America (it should be sold quickly to raise cash). When KKR sold World Color to Pierre Karl in 1999, this was a finely tune machine under the superb leadership of Bob Burton. It can return to its position of prominence once it leaves the yoke of the Montreal leadership and the new CEO has a strong operating experience in printing.
The metrics of the investments in 64 page technology and the plant rationalization must be clearly understood by the bankers who will help World Color exit or the PE folks that will take this good company off the hands of Montreal. Part of the perception problem with the World Color recap was the lack of good data for the financial analysts to track its progress. Remember, as noted in an earlier analysis, the 64 page press is 3.2 times more productive with the same crew than a 32 page M 1000. The new press will generate approximately 848MM equivalent four color 32’s vs. the 265MM off the M1000. The blended cost reduction across the platforms enable any printer to pass along significant price reductions and still improve margins as long as they continue to take out the “tired iron.” Hence, the $125MM in capital expenditures will not be enough for World Color to keep up with RRD or Quad. How much more will be easy to compute once we know the age of the remaining presses and the number that must be retired?
When we see the 4th Quarter broken out by geographic territory, it should provide a better vision of the success of the 2005-2007 Mann Roland investments. We already saw the improvement in the 3rd Quarter book business based on its necessary and less costly investments in new presses. Once we have more news on 2007, I will update the forecast for QW performance in the slowdown year ahead.
In the meantime, sales management in the US will continue to a good job of keeping customers informed and the pressrooms will continue to do a good job of meeting contract demands. All that is needed now is a new World Color entity, a decent balance sheet, reasonable cash flow expectations, a line of credit to permit continued investment in the press room, and the right CEO to lead.
As we wait for the 4th Quarter EBITDA, it is important to understand the value of the World Color operations on this quarter vs. those of Europe (a fire sale waiting to happen) or the small contribution of South America (it should be sold quickly to raise cash). When KKR sold World Color to Pierre Karl in 1999, this was a finely tune machine under the superb leadership of Bob Burton. It can return to its position of prominence once it leaves the yoke of the Montreal leadership and the new CEO has a strong operating experience in printing.
The metrics of the investments in 64 page technology and the plant rationalization must be clearly understood by the bankers who will help World Color exit or the PE folks that will take this good company off the hands of Montreal. Part of the perception problem with the World Color recap was the lack of good data for the financial analysts to track its progress. Remember, as noted in an earlier analysis, the 64 page press is 3.2 times more productive with the same crew than a 32 page M 1000. The new press will generate approximately 848MM equivalent four color 32’s vs. the 265MM off the M1000. The blended cost reduction across the platforms enable any printer to pass along significant price reductions and still improve margins as long as they continue to take out the “tired iron.” Hence, the $125MM in capital expenditures will not be enough for World Color to keep up with RRD or Quad. How much more will be easy to compute once we know the age of the remaining presses and the number that must be retired?
When we see the 4th Quarter broken out by geographic territory, it should provide a better vision of the success of the 2005-2007 Mann Roland investments. We already saw the improvement in the 3rd Quarter book business based on its necessary and less costly investments in new presses. Once we have more news on 2007, I will update the forecast for QW performance in the slowdown year ahead.
In the meantime, sales management in the US will continue to a good job of keeping customers informed and the pressrooms will continue to do a good job of meeting contract demands. All that is needed now is a new World Color entity, a decent balance sheet, reasonable cash flow expectations, a line of credit to permit continued investment in the press room, and the right CEO to lead.
Tuesday, January 29, 2008
RR Donnelley and Interesting Book Data
As the world’s largest and best run printer, RR Donnelley just released a preview of its annual report and there is one piece of data that demonstrates the real difference between QW and RRD. While QW mentions a contract with Mann Roland in 2005 for 20 presses and the purchase of several gravure presses as well, since January 1, 2004, RRD has invested over $1.5 billion in capital expenditures and this does not include the costs of acquisitions. I am still unable to determine how much of the $1.2 billion invested by QW was for just capital expenditures. 25 presses at a average cost of $15 million would only amount to $375 million of the announced $1.2 billion. With over 347 heat set web and 91 gravure presses, the recent additions will require extensive additional capital expenditures over the next 5 years to keep up with this type of continuing investment by Donnelley. This business is all about the pressroom and related technology to continue to be a low cost producer. While QW is on the right track, it will quickly become a Vertis or American Color if it does not continue the capital expenditures even while going through this latest financial crisis.
While books are thought to be continually under pressure due to lack of reading or electronic substitutions (Amazon’s Kindle being the latest), book publishing will still bring in $15 billion in revenue this year and 408 million books will be bought and read. While the NY Times article noted that 27% of American had not read a book this year, happily 27% read 15 or more books per year. So to those who are devoted to their e-books, downloads, text messaging, other e-content and may tend to ignore the printed book, there is a very loyal following that will continue to drive this segment years longer than any LBO or financial models need to justify purchasing anything to do with print! Hence, QW may still find a good owner other than Pierre Karl!
While books are thought to be continually under pressure due to lack of reading or electronic substitutions (Amazon’s Kindle being the latest), book publishing will still bring in $15 billion in revenue this year and 408 million books will be bought and read. While the NY Times article noted that 27% of American had not read a book this year, happily 27% read 15 or more books per year. So to those who are devoted to their e-books, downloads, text messaging, other e-content and may tend to ignore the printed book, there is a very loyal following that will continue to drive this segment years longer than any LBO or financial models need to justify purchasing anything to do with print! Hence, QW may still find a good owner other than Pierre Karl!
Wednesday, January 9, 2008
A LOOK AT 2008 AND SOME COMMENTS ON QUEBECORWORLD
Trying to forecast 2008 “Big Print” revenue is tricky at best right now. "Big Print" includes RR Donnelley, QuebecorWorld, Cenveo, Quad Graphics, Brown Printing, Vertis, Valassis and a host of mid size printers similar to Continental Web, Publishers Press, and Lehigh Direct. Will print have a repeat of 1978 and 2001 or will it be a softer landing the industry faced in 1991-92?
Unfortunately, all the macro economic data on shipments and profits included “Little Print.” Little Print is the 20,000 commercial printers that make up the bulk of the $100B market. Shops from 5 to 100 have been the backbone of the industry and local markets for years. CGX is a good example of an 80 division roll-up of little print while VistaPrint is the best case example of a little print portal making a business card commodity into a winning formula.
There is nothing different in these markets today than what we have faced since the 1950's. There is always a capacity imbalance that permits one printer to aggressively go after incremental new business and prices have never been very stable. Management screaming about capacity issues, aggressive competitors, price erosion, yada yada yada should be ignored...it is like blaming the weather. The sun continues to come in the East! Those that made bad acqusitions instead of investing in pressroom and technology constantly refer to "yada yada yada". Even QW with its poor leadership and now bankruptcy invested in new presses. That $1.2B investment is not the reason QW was forced into bandruptcy. Chapter 11 for North America was the leadership or lack thereof from Pierre Karl and his management team since 2000. Basically, QW was simply late to invest to keep up with the changing nature of print since the 1950's. Same holds true for Vertis and American Color Graphics. Those two companies are running presses that were new in 1990 or earlier in some plants.
If this were an economy emerging from a slow period, newfound sales and productivity would be paying for the increases in commodity costs, as the print markets have been doing since mid-2003. However, when entering a slow period, there are no newfound sales. Ad pages have been down against 2006 for the last 5 months of 2007. The good news is that DM continues to be strong as pieces in the Post Office were 3% higher than 2006. The FSI market will be “iffy” as retailers look at media budgets for 2008 and a consumer pullback.
In a slowdown, there are no increases in productivity through extensive capital investments in pressroom and other software technology advances. We saw that in Big and Little Print from 2000 to 2005. When there is little to no revenue growth from existing contracts and incremental new volume is tougher to land, there is no help paying the higher variable costs in inks, paper, transportation, wages and utilities. Hence, sales at best may remain level or drop slightly in 2008 while profits will take a hit though not as drastically as we sawy in the 2000-2002time period. Incremental volume will be priced aggressively to fill open time and one shot buyers will do better price wise in 2008 than in the past three years.
It is an unfortunate fact of life that variable cost increases have not been recoverable in the past decade like we saw in the last century. Prices do not go up in this segment. Since the mid 1990's, COLA increases became extinct. Prices began to drop each year anywhere from 2-4% and that trend continued right through to 2007. At best, all printers strive to keep them in check year over year. Fortunately, press productivity has been better than price erosion for those printers who invested wisely. Hence, RR Donnelley and others who did invest are doing well. Vertis, America Color, and now QW sit in their ruins due to no investment or very late to the party.
Even if a few printers try to increase price, there is always the risk that customers will not be willing to pay. Media buyers will find another printer who will not be as pricey. Customers may change their buying patterns or will find alternative uses of the media communication dollars. This means that fewer impressions may be sold at existing prices and if a printer chases incremental volume, they will get new customers at lower prices. Hence, a printer’s total revenue may not change and it since it can not pass along the increased costs, profits are reduced.
Lastly, QuebecorWorld will continue to meet its customer's needs. While dealing with this is never easy, customers should remain loyal and committed to QW inspite of their short term financial issues. In reading through their filing, they have covered the need for exceptions to meet paper rebates, contract signing incentives, and renewal options that will permit sales to keep existing customers and add new ones. The other good news, QW did spend $1.2B of its debt on new high speed presses, techonology and rationalizing its platform by creating mega plants from a host of smaller ones. The bad news, it still has $1B in volume from Europe that contributes nothing to EBITDA and the financial markets or buyers certainly know this. When looking at its 4th Quarter, make sure you look at North America results and see its year over year improvements. Hopefully the European sale will come back on the radar screen as simply an exit with no cash gain. There was just one major investor that did not like QW retaining any equity upside in the spin off.
While I was shocked to see their cash burn in the last half of the year and the need to file, operationally the company is better today than it was in 2005. All the heavy lifting is done. Now they just need a good CEO to head up the World Color operation and get away from any association with Montreal.
Unfortunately, all the macro economic data on shipments and profits included “Little Print.” Little Print is the 20,000 commercial printers that make up the bulk of the $100B market. Shops from 5 to 100 have been the backbone of the industry and local markets for years. CGX is a good example of an 80 division roll-up of little print while VistaPrint is the best case example of a little print portal making a business card commodity into a winning formula.
There is nothing different in these markets today than what we have faced since the 1950's. There is always a capacity imbalance that permits one printer to aggressively go after incremental new business and prices have never been very stable. Management screaming about capacity issues, aggressive competitors, price erosion, yada yada yada should be ignored...it is like blaming the weather. The sun continues to come in the East! Those that made bad acqusitions instead of investing in pressroom and technology constantly refer to "yada yada yada". Even QW with its poor leadership and now bankruptcy invested in new presses. That $1.2B investment is not the reason QW was forced into bandruptcy. Chapter 11 for North America was the leadership or lack thereof from Pierre Karl and his management team since 2000. Basically, QW was simply late to invest to keep up with the changing nature of print since the 1950's. Same holds true for Vertis and American Color Graphics. Those two companies are running presses that were new in 1990 or earlier in some plants.
If this were an economy emerging from a slow period, newfound sales and productivity would be paying for the increases in commodity costs, as the print markets have been doing since mid-2003. However, when entering a slow period, there are no newfound sales. Ad pages have been down against 2006 for the last 5 months of 2007. The good news is that DM continues to be strong as pieces in the Post Office were 3% higher than 2006. The FSI market will be “iffy” as retailers look at media budgets for 2008 and a consumer pullback.
In a slowdown, there are no increases in productivity through extensive capital investments in pressroom and other software technology advances. We saw that in Big and Little Print from 2000 to 2005. When there is little to no revenue growth from existing contracts and incremental new volume is tougher to land, there is no help paying the higher variable costs in inks, paper, transportation, wages and utilities. Hence, sales at best may remain level or drop slightly in 2008 while profits will take a hit though not as drastically as we sawy in the 2000-2002time period. Incremental volume will be priced aggressively to fill open time and one shot buyers will do better price wise in 2008 than in the past three years.
It is an unfortunate fact of life that variable cost increases have not been recoverable in the past decade like we saw in the last century. Prices do not go up in this segment. Since the mid 1990's, COLA increases became extinct. Prices began to drop each year anywhere from 2-4% and that trend continued right through to 2007. At best, all printers strive to keep them in check year over year. Fortunately, press productivity has been better than price erosion for those printers who invested wisely. Hence, RR Donnelley and others who did invest are doing well. Vertis, America Color, and now QW sit in their ruins due to no investment or very late to the party.
Even if a few printers try to increase price, there is always the risk that customers will not be willing to pay. Media buyers will find another printer who will not be as pricey. Customers may change their buying patterns or will find alternative uses of the media communication dollars. This means that fewer impressions may be sold at existing prices and if a printer chases incremental volume, they will get new customers at lower prices. Hence, a printer’s total revenue may not change and it since it can not pass along the increased costs, profits are reduced.
Lastly, QuebecorWorld will continue to meet its customer's needs. While dealing with this is never easy, customers should remain loyal and committed to QW inspite of their short term financial issues. In reading through their filing, they have covered the need for exceptions to meet paper rebates, contract signing incentives, and renewal options that will permit sales to keep existing customers and add new ones. The other good news, QW did spend $1.2B of its debt on new high speed presses, techonology and rationalizing its platform by creating mega plants from a host of smaller ones. The bad news, it still has $1B in volume from Europe that contributes nothing to EBITDA and the financial markets or buyers certainly know this. When looking at its 4th Quarter, make sure you look at North America results and see its year over year improvements. Hopefully the European sale will come back on the radar screen as simply an exit with no cash gain. There was just one major investor that did not like QW retaining any equity upside in the spin off.
While I was shocked to see their cash burn in the last half of the year and the need to file, operationally the company is better today than it was in 2005. All the heavy lifting is done. Now they just need a good CEO to head up the World Color operation and get away from any association with Montreal.
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