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.