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.
Tuesday, October 12, 2010
Thursday, February 4, 2010
Quad Graphics Acquires World Color
Will Quad become the VistaPrint of big print? As the industry continues to migrate from a majority of content via print to a significantly shared percentage with electronic, those printers nimble enough to invest properly will continue to grab customer’s share and Wall Street attention. We will cover prints continued decline later in this commentary yet VistaPrint’s $55 share price demonstrates that while content is shifting away from print to multiple channels, well run printing companies can truly evolve into multiple disciplines and succeed with print as its foundation. If Quad can overcome the many variables in this merger, it may pass RR Donnelley as the world’s best run publicly held printing company.
With the continuous need to reduce pricing to support publishers and other users of print, consolidation of underutilized platforms is vital to the long-term viability of print in content communication channels. Printers must eliminate redundancy in SG&A, eliminate under utilized capital-intensive assets (presses), and continue to invest in productivity gains that will permit margins to overcome continued price reductions to support their customer’s new business model.
While content will continue to share electronic and print for the next 10 years, the old publishing model of advertising pages supporting editorial is over and book printing will no longer be tied to the NY Times Best Seller list. The Quad/World Color merger is good for the industry utilization rates in “big print”, the shareholders of the Quad ESOP, and World Color stakeholders. The RRD bid last summer made more sense as World and RRD share more penetration than Quad in telephone, offset retail FSI, Direct Mail and book. Plus RRD has more experience in blending printing acquisitions into its platform.
The best thing about the Harry Quadracci legacy is their continued investment in technology and new presses. Quad is the lowest cost producer and this is reflected in its EBITDA to revenue % @ 17%, well above RRD and anybody else. World is only at 9% today after all the debt holders took a major haircut. If one were to revisit QW in prior years, it was always low single digits. Why? Quad constantly invested in new presses and technology to keep margins ahead of price erosion through productivity gains. World Color tried to play catch-up from 2005-2007 with an “$1Bn” in new presses and plant rationalization that was too little and way too late.
While they are the low cost producer, other than Mr. Angelson, no one at Quad has the type of integration experience found at RR Donnelley. The Quebecor/World Color debacle in Montreal over the last decade demonstrated little long-term talent to manage this merger at either the upper or middle management level. Joel Quadracci and his team are superb operators and demonstrated a keen awareness of asset utilization by merely shutting down one press per plant in 2009 rather than a complete division. It remains to be seen if Angelson can gain the $225MM in synergy gains similar to how he did when supported by a very strong leadership team that made Banta and other acquisitions a smooth transition during his tenure at Donnelley.
In addition to the right horses to deliver synergy dollar realization, a second key issue remains for this combined company: total market deterioration. From $135Bn in 1995 to a forecasted $82Bn in 2010, why is there any hope of revenue growth except through market share gains from other marginal printers? With regards to taking share growth, other than a weakening Cenveo and possibly acquiring Vertis (FSI and DM of $1.3Bn), RRD and Brown are solid players in these markets and customers will not be in any hurry to move to Quad as it rationalizes this platform. Hence, it comes down to synergy savings at $225MM and the cost to rationalize the platform. Can this new team execute so the deal can take advantage of Quads lowest cost operations all the while shutting down redundant plant locations and moving customers from World Color higher cost plants?
Lastly, I have not seen any discussion in the deck or releases on a slippage % from the $5Bn that may move on to RRD, Brown, and a host of $100MM printers who need work. QW had an extensive loss of customers as they attempted to rationalize their high cost platform through 2003-2008. Nor was there any mentioned of revenue erosion due to existing customer movement from offset to digital presses and electronic substitution. We need simply to look at the 18% loss of advertising pages in 2009 over a very weak 2008. Further, magazine newsstand declines had been getting worse -- progressing from a 6.3% slide in the first half of 2008, compared with the same period the year prior, to an 11.1% drop in the second half of 2008, and then to a 12.4% descent in the first half of 2009. We may now have hit a newsstand bottom but there is no going back up like we saw post 1991 and 2002 recession. Time Inc just reported a 15% decline in ad pages over a disappointing 2008 and a 6% decline in subscription circulation on top of the miserable 2009 in newsstand sales. Ad pages are never returning to pre-recession levels nor will the reduced newsstand and subscription circulation return to the good ole days of 2007. Direct Mail will not return to that wonderful growth period of 103BN pieces in 2007 down to only 82Bn pieces in 2009 (USPS Annual Report).
However, it still is an $82Bn market place and Quad has been a showcase since Harry started in from scratch in the 80’s. It has the culture to succeed, the investment strategy to succeed, and hopefully develops other marketing options similar to the VistaPrint story to gain Wall Street notice along with solid earnings improvements outside of print. The industry can certainly use another showcase company like RRD, VistaPrint, and Consolidated Graphics.
With the continuous need to reduce pricing to support publishers and other users of print, consolidation of underutilized platforms is vital to the long-term viability of print in content communication channels. Printers must eliminate redundancy in SG&A, eliminate under utilized capital-intensive assets (presses), and continue to invest in productivity gains that will permit margins to overcome continued price reductions to support their customer’s new business model.
While content will continue to share electronic and print for the next 10 years, the old publishing model of advertising pages supporting editorial is over and book printing will no longer be tied to the NY Times Best Seller list. The Quad/World Color merger is good for the industry utilization rates in “big print”, the shareholders of the Quad ESOP, and World Color stakeholders. The RRD bid last summer made more sense as World and RRD share more penetration than Quad in telephone, offset retail FSI, Direct Mail and book. Plus RRD has more experience in blending printing acquisitions into its platform.
The best thing about the Harry Quadracci legacy is their continued investment in technology and new presses. Quad is the lowest cost producer and this is reflected in its EBITDA to revenue % @ 17%, well above RRD and anybody else. World is only at 9% today after all the debt holders took a major haircut. If one were to revisit QW in prior years, it was always low single digits. Why? Quad constantly invested in new presses and technology to keep margins ahead of price erosion through productivity gains. World Color tried to play catch-up from 2005-2007 with an “$1Bn” in new presses and plant rationalization that was too little and way too late.
While they are the low cost producer, other than Mr. Angelson, no one at Quad has the type of integration experience found at RR Donnelley. The Quebecor/World Color debacle in Montreal over the last decade demonstrated little long-term talent to manage this merger at either the upper or middle management level. Joel Quadracci and his team are superb operators and demonstrated a keen awareness of asset utilization by merely shutting down one press per plant in 2009 rather than a complete division. It remains to be seen if Angelson can gain the $225MM in synergy gains similar to how he did when supported by a very strong leadership team that made Banta and other acquisitions a smooth transition during his tenure at Donnelley.
In addition to the right horses to deliver synergy dollar realization, a second key issue remains for this combined company: total market deterioration. From $135Bn in 1995 to a forecasted $82Bn in 2010, why is there any hope of revenue growth except through market share gains from other marginal printers? With regards to taking share growth, other than a weakening Cenveo and possibly acquiring Vertis (FSI and DM of $1.3Bn), RRD and Brown are solid players in these markets and customers will not be in any hurry to move to Quad as it rationalizes this platform. Hence, it comes down to synergy savings at $225MM and the cost to rationalize the platform. Can this new team execute so the deal can take advantage of Quads lowest cost operations all the while shutting down redundant plant locations and moving customers from World Color higher cost plants?
Lastly, I have not seen any discussion in the deck or releases on a slippage % from the $5Bn that may move on to RRD, Brown, and a host of $100MM printers who need work. QW had an extensive loss of customers as they attempted to rationalize their high cost platform through 2003-2008. Nor was there any mentioned of revenue erosion due to existing customer movement from offset to digital presses and electronic substitution. We need simply to look at the 18% loss of advertising pages in 2009 over a very weak 2008. Further, magazine newsstand declines had been getting worse -- progressing from a 6.3% slide in the first half of 2008, compared with the same period the year prior, to an 11.1% drop in the second half of 2008, and then to a 12.4% descent in the first half of 2009. We may now have hit a newsstand bottom but there is no going back up like we saw post 1991 and 2002 recession. Time Inc just reported a 15% decline in ad pages over a disappointing 2008 and a 6% decline in subscription circulation on top of the miserable 2009 in newsstand sales. Ad pages are never returning to pre-recession levels nor will the reduced newsstand and subscription circulation return to the good ole days of 2007. Direct Mail will not return to that wonderful growth period of 103BN pieces in 2007 down to only 82Bn pieces in 2009 (USPS Annual Report).
However, it still is an $82Bn market place and Quad has been a showcase since Harry started in from scratch in the 80’s. It has the culture to succeed, the investment strategy to succeed, and hopefully develops other marketing options similar to the VistaPrint story to gain Wall Street notice along with solid earnings improvements outside of print. The industry can certainly use another showcase company like RRD, VistaPrint, and Consolidated Graphics.
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