As the September print shipments failed to reach $8 Billion for the first time in over 20 years, it seemed appropriate to view the industry and ponder what will become of printers over the next decade. For an industry that had shipments of over $135 Billion in 1995, the slippery slope of relevance continues to point downward as social media and a host of other channels continue to eat away at prints profitable viability except for the very best managed companies in this segment. While I to embrace the wonders of the Internet, smart phones, WIFI, social media and the of course THE KINDLE, at times I do miss the peace and quiet of simpler times when places like a Facebook and 24 x 7 connectivity were really only found in science fiction novels.
As for the big seven in printing (RRD and the six dwarfs…Quad, World Color, Cenveo, Vertis, Consolidated Graphics & Brown), this post recession will not match the bounce back we saw in 1993-1999 or the most recent 2003-2007. Unlike the solid recovery in magazine ad pages, newspaper inserts, books, financial printing and direct mail that followed the 1991 and 2001 recessions, print will continue to lose share as part of any media mix to alternative channels. We all understood that the Kindle, loss of newsstand sales, magazine ad pages at record lows, newspapers continued free fall, postal increases, the carbon foot print and the “real time” nature of the electronic channel would continue to siphon media spend away from print. However, when one views the $40 Billion free fall since 1995 it really hits home. From the "high life" of $135 Billion in 1995, printing shipments may stay just above $90 Billion in 2010 and that is only if we have a good advertising year and some help in year over year growth in sales throughout the economy. We do need a good Christmas as well. Earnings from continued cost reductions by publishers and others does not contribute to print volume increases.
Is there any good news? Of course, there are the well managed companies who will make their EBITDA numbers (Cenveo, CGX, RRD, VistaPrint) and good suppliers who will continue to bring new technology and productivity go the print platform. Prices will continue to come down as technology makes print cheaper. The digital press and “customer of one’ campaigns will be the one bright spot throughout the industry. Kodak and its new Stream technology will compliment HP’s sheet and web fed Indigo presses while Xerox and others will continue to make some inroads into commercial print. Digital presses now can say it "Looks like Offset" and it does! Canon's recent purchase of Oce may just be the first of other roll-ups here as well.
While macro trends are ominous, the size and shape of the industry still enables those well-managed and well-capitalized printers to gain share of weak sisters and return solid returns to the various stakeholders. My bet remains on the superior performance of VistaPrint and its wonderful business model and I would expect RRDonnelley to continue to take share from any of the other players in the big six. Donnelley’s post Bill Davis management has been solid, free cash flow reflects past good use of capital, continued CapEx spend will keep them as a low cost producer, and long-term contracts load the press room best. Over time, leading publishers, advertisers and investors in the print channel will recognize that Quad, Brown and Vertis really have no viable earnings strategy except to somehow merge with RR Donnelley. World Color could potentially be a good fit for the other little “5” but unfortunately World has no extensive free cash flow for a deal. Can the new team at World convince the PE market that a bigger roll-up makes sense? I would bet that they can and if they do, major league equity and debt haircuts will rival those already taken at Vertis and others. Too much indirect cost and tired iron capacity does not bode well for any investor, company or industry. CGX proved the short run commercial market "roll-up" can be profitable and how they continue to invest and manage the 70 portfolio companies plus necessary additions will dictate its success or failure in 2010.
What maybe be more troubling for print? The fastest growth in social media at Facebook has been people in the 55-65-age bracket. These are the people who still really like books, newspapers, and magazines! Twitter that!
Monday, November 16, 2009
Tuesday, May 5, 2009
Too Much Steak...Not Enough Sizzle
May 5, 2009
It is interesting to note the lack of interest in the print channel ($100BB in 2008) and its related industries by the Wall Street analysts. We understand that ad pages are off over 20%, newsstand sales off similar amounts, and newspaper circulation is continuing its decline, why are most in the investment community shorting print? Is it their belief this is not cyclical, like 2001 & 2002? Do they believe that print may be on a permanent slippery slope to irrelevance. Analyst may be treating print like the Swine Flu while many in this segment believe print content has long legs, just not as long as before. There will be fewer players in 2010 and yet if they prove prudent risk takers, they should be good investments for any one.
For the past 5 years, I have had the pleasure of either educating novices about this segment or advising long time investors with regards to the changing print landscape for their debt or equity holdings. With more than 80 client companies as a solid barometer, the level of interest has moved from a Buy, to a Hold and seems to be now to moving towards “Who cares"? VistaPrint is the only example of a company that invests in print, marketing and technology that captures the imagination of those analysts that look for steak & sizzle in any investment. Yet this channel is still viable, even at $75-85BB in three years, if those leading simply change their thinking. While the steak of co-mailing and palletization is great, sizzle, imagination, and earnings along with technology innovators are keys to getting these folks interested again.
• When reading a recent summary of comments by four of the largest magazine printers at www:BoSacks.com, it is easy to see how little printing will impress any investor. RRD and Quad Graphics, the two largest magazine printers, did not even respond or maybe they were not asked to comment. If you read through the thoughts of these four leaders, comments were in part like those found the 80’s & 90’s, when print was booming. Nice manufacturing stuff, nothing like one finds in the VistaPrint prospectus! Fortunately in a separate press release, RRD recently introduced Apollo’s fully variable offset retro fit printing along with its 1200 dpi press. This is ample indication that it will keep its platform on the leading edge while offering customers better individualized content (at much lower prices) across a broader spectrum of print offerings. Quad often has new technology they create internally that is outside the normal press to bindery flow to benefit a publisher’s reader. VistaPrint is ahead of the curve with a print model that works wonders for the small business.
• In my work recently with one leading publisher, they understand press time and on-sale dates need to merge. Weekly pools that match press loads 24x7 will yield the necessary pressroom utilization to pass along lower prices to any single magazine or multiple title publishers. A $14MM 64 page Goss Sunday Press cannot exist on 5000 hours of absorption. It must yield close to 7000 billable hours (24x7x52= 8700 hours less MR/downtime) and acceptable maintenance to deliver the quality and price necessary to keep any print channel from magazine to FSI profitable. So publishers, quit fretting over when the magazine hits the newsstands, get a different schedule and both parties may prosper. The sell through rates at $5/copy will not work in the future. Newsstand helps the brand recognition while subscribers must bear the cost of content, not the random shopper at Walgreens.
• None interviewed in the article addressed the fact that consolidation must continue. As the consulting firm BCG drummed into me in the 90’s, becoming the lowest cost provider will yield good returns for the company, publisher, and investor. The post recession print market will not sustain 20,000 commercial printers or even the 8 major magazine printers. Tomorrow’s publishers do not need redundant corporate overhead costs rather than lean manufacturing companies with low SGA. A printer’s corporate structure should be limited to good acquisition teams along with solid R&D budgets or great alliances with niche companies researching e-ink, e-paper, and any other channel provider that competes for content.
• Speaking of consolidation and alliances, who was asleep at the switch when the leadership of FedEx decided to partner with VistaPrint? If you follow that stock and company as I do, when its market cap fell to reasonable levels, nobody thought about adding this great brand to its tired portfolio of divisions. Hence, FedEx gets a leg up on this great story since there was no leader in big print had the vision or the cash to acquire VistaPrint? By the way, its stock fell less than any print stock since the Fall of 2007 (around $32 down to $19) and now trades around $38, well ahead of its 2007 price. RRD went from around $34 down to $9; it now trades for around $13. Print is not dead, it just needs new visions for its next decade.
In summary, $75BB to $100BB of revenue still provides companies with the means to make investors happy. While print is certainly not a growth market, pages will return, catalogs will ship, books will be read, and other content e-tools will emerge. The print market will shrink some and yet the most reliable portal for tracking response (Our Mail Box) will remain viable and the older generation will still buy and enjoy case bound books. VistaPrint gets it, others just need to follow with their own better mousetrap in this changing market! More sizzle….Priceless!
It is interesting to note the lack of interest in the print channel ($100BB in 2008) and its related industries by the Wall Street analysts. We understand that ad pages are off over 20%, newsstand sales off similar amounts, and newspaper circulation is continuing its decline, why are most in the investment community shorting print? Is it their belief this is not cyclical, like 2001 & 2002? Do they believe that print may be on a permanent slippery slope to irrelevance. Analyst may be treating print like the Swine Flu while many in this segment believe print content has long legs, just not as long as before. There will be fewer players in 2010 and yet if they prove prudent risk takers, they should be good investments for any one.
For the past 5 years, I have had the pleasure of either educating novices about this segment or advising long time investors with regards to the changing print landscape for their debt or equity holdings. With more than 80 client companies as a solid barometer, the level of interest has moved from a Buy, to a Hold and seems to be now to moving towards “Who cares"? VistaPrint is the only example of a company that invests in print, marketing and technology that captures the imagination of those analysts that look for steak & sizzle in any investment. Yet this channel is still viable, even at $75-85BB in three years, if those leading simply change their thinking. While the steak of co-mailing and palletization is great, sizzle, imagination, and earnings along with technology innovators are keys to getting these folks interested again.
• When reading a recent summary of comments by four of the largest magazine printers at www:BoSacks.com, it is easy to see how little printing will impress any investor. RRD and Quad Graphics, the two largest magazine printers, did not even respond or maybe they were not asked to comment. If you read through the thoughts of these four leaders, comments were in part like those found the 80’s & 90’s, when print was booming. Nice manufacturing stuff, nothing like one finds in the VistaPrint prospectus! Fortunately in a separate press release, RRD recently introduced Apollo’s fully variable offset retro fit printing along with its 1200 dpi press. This is ample indication that it will keep its platform on the leading edge while offering customers better individualized content (at much lower prices) across a broader spectrum of print offerings. Quad often has new technology they create internally that is outside the normal press to bindery flow to benefit a publisher’s reader. VistaPrint is ahead of the curve with a print model that works wonders for the small business.
• In my work recently with one leading publisher, they understand press time and on-sale dates need to merge. Weekly pools that match press loads 24x7 will yield the necessary pressroom utilization to pass along lower prices to any single magazine or multiple title publishers. A $14MM 64 page Goss Sunday Press cannot exist on 5000 hours of absorption. It must yield close to 7000 billable hours (24x7x52= 8700 hours less MR/downtime) and acceptable maintenance to deliver the quality and price necessary to keep any print channel from magazine to FSI profitable. So publishers, quit fretting over when the magazine hits the newsstands, get a different schedule and both parties may prosper. The sell through rates at $5/copy will not work in the future. Newsstand helps the brand recognition while subscribers must bear the cost of content, not the random shopper at Walgreens.
• None interviewed in the article addressed the fact that consolidation must continue. As the consulting firm BCG drummed into me in the 90’s, becoming the lowest cost provider will yield good returns for the company, publisher, and investor. The post recession print market will not sustain 20,000 commercial printers or even the 8 major magazine printers. Tomorrow’s publishers do not need redundant corporate overhead costs rather than lean manufacturing companies with low SGA. A printer’s corporate structure should be limited to good acquisition teams along with solid R&D budgets or great alliances with niche companies researching e-ink, e-paper, and any other channel provider that competes for content.
• Speaking of consolidation and alliances, who was asleep at the switch when the leadership of FedEx decided to partner with VistaPrint? If you follow that stock and company as I do, when its market cap fell to reasonable levels, nobody thought about adding this great brand to its tired portfolio of divisions. Hence, FedEx gets a leg up on this great story since there was no leader in big print had the vision or the cash to acquire VistaPrint? By the way, its stock fell less than any print stock since the Fall of 2007 (around $32 down to $19) and now trades around $38, well ahead of its 2007 price. RRD went from around $34 down to $9; it now trades for around $13. Print is not dead, it just needs new visions for its next decade.
In summary, $75BB to $100BB of revenue still provides companies with the means to make investors happy. While print is certainly not a growth market, pages will return, catalogs will ship, books will be read, and other content e-tools will emerge. The print market will shrink some and yet the most reliable portal for tracking response (Our Mail Box) will remain viable and the older generation will still buy and enjoy case bound books. VistaPrint gets it, others just need to follow with their own better mousetrap in this changing market! More sizzle….Priceless!
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