2005 COMMERCIAL PRINTING outlook -- A Win-Lose Proposition

BY MARK SMITH

Technology Editor

Business is looking up for the commercial printing sector; too bad it has so much ground to make up. Even as the industry's recovery takes hold and grows, it's clear that challenges remain and there have been permanent changes in the competitive landscape.

Putting aside personal political views, the re-election of President George W. Bush and the strengthening of a Republican majority in Congress sets clear expectations for the direction of business-related developments in the coming year.

"It does take away some uncertainty," agrees Ronnie H. Davis, Ph.D., and chief economist at Printing Industries of America (PIA) in Alexandria, VA. President Bush's re-election "will have a positive impact on the economy in general and, hopefully, on advertising, which will help printing," he adds.

The PIA economist expects 2005 to ring in an economic growth rate of around 3.5 percent, with low inflation and low interest rates. As a result, the unemployment rate should continue to trend downward, he says.

Davis expects 2005 to be a good year for printing on the whole, but he does see some potential for rising paper prices and, heading into 2006, postal rate increases to impact the industry's performance. Global printing competition, particularly from China, is also a growing concern, the PIA economist notes.

With the economy continuing to grow in the 3 percent to 4 percent range, printing shipments should expand by 3 percent next year, Davis estimates. Toner-based digital printing and ancillary services each should grow in excess of 4 percent.

According to the most recent PIA/GATF Quarterly Print Market Survey, overall print sales for the first nine months of 2004 were up 4.2 percent compared to the same period of 2003. Toner-based digital printing and ancillary services grew even faster, at 6 percent and 4.9 percent, respectively.

Survey respondents were even more upbeat than Davis in their predictions for 2005 sales. They expect overall sales to increase 6.3 percent, on average, led by toner-based digital printing at 7.2 percent.

Sales Jump Predicted

Andrew Paparozzi, vice president and chief economist at the National Association for Printing Leadership (NAPL) in Paramus, NJ, has a similar outlook for 2005. "This year (2004), we estimate that print sales will grow approximately 4.1 to 4.3 percent," Paparozzi says. "In 2005, we expect industry sales to grow by as much as 5 to 5.5 percent as the recovery strengthens and broadens."

The economy as a whole should finish this year up about 4.5 percent and is predicted to grow about 3.5 to 3.7 percent in 2005, the NAPL economist reports. Some moderation is to be expected when an economy has been growing at a robust rate for a period of time, he says. One reason is that the Fed will turn its intention toward keeping inflation in check, which means that more interest rate increases are likely.

"Companies have a lot of pricing they want to make up. Eighteen months ago we were talking about deflation," Paparozzi points out. "The good news: the economy is creating jobs again. That's what makes a recovery self-sustaining. This recovery has broadened beyond the consumer and housing to exports and capital investment.

"There are a couple of points we make to put all of that good news in perspective," Paparozzi cautions. "But it really is good news."

One of the reality checks the economist says should be put on this good news is that the growth projections for printing are in relation to very depressed business levels. The improvement in sales, pricing stability, profitability, etc., are welcome, long overdue steps in the right direction, but they are just first steps.

"We don't expect the industry to regain pre-recession sales volumes until late 2005 or early 2006," Paparozzi says. "That is total sales volume, not just lithographic printing volume. The lithographic component of industry sales is definitely declining."

The second thing to keep in mind is that the current recovery is real, which means if an individual company has yet to start seeing at least some modest business improvement, then management should take that as a warning sign.

"We're not talking about going from bust to boom, but if you're not seeing improvement you're in danger of being left behind," the NAPL economist contends. "It used to be all you had to do was hang on until the economy and ad spending rebounded. Our industry is being redefined and companies now have to prepare for growth."

As a third qualifier, Paparozzi notes that what's good news on one front can be bad news on another. For example, paper companies are also taking part in the recovery, which means printers' material costs are rising. Other costs of doing business also on the rise include energy, medical benefits and interest rates.

The challenge for printers is to make sure gains in the top line make it through to the bottom line, Paparozzi adds. "They've got to offset price increases by boosting productivity and efficiency even farther. That is going to be at least as important during recovery as it was during the recession," he advises. "Our industry is getting more competitive despite consolidation."

Not every company is going to participate in the business upturn, the economist observes. To participate fully in the recovery and be enduringly successful, all printing companies—regardless of size or markets served—have to be ready to answer three questions:

1) "Are we positioned to grow at the expense of others?"

2) "What are we doing to get out of and stay out of the commodity market?"

3) "What, if anything, are we doing to ensure that the changes redefining this industry become opportunities and not threats, because they definitely can be either?"

According to Paparozzi, "the companies best able to address those questions—find the best answers given their unique resources, capabilities and goals—are the firms that will participate fully in the upturn. Companies that ignore those issues, no matter how big and well established, are jeopardizing their existence."

Short of a major terrorist attack, Paparozzi doesn't see any development likely to throw the economy and printing industry off the growth track in the near term. To dispel the notion that recent strong gains could be a seasonal aberration or elections effect, he points out that the industry has been undergoing a gradual, but consistent, healing process since July of 2003.

"Rising oil prices could slow the economy, but not derail it. The economy is now fundamentally too healthy," Paparozzi contends. "Recessions, for the most part, are caused by events external to the economy—an energy embargo, a 9/11 or a major policy error. I don't see any of that happening in 2005."

Still, printers need to stay aggressive because this isn't an industry that can easily pass costs on to customers. "Printers have to be prepared to offset cost increases, whatever the cause. They have to continue increasing their productivity and efficiency," he says.

PIA's Davis agrees that printers need to be proactive in running their businesses, particularly when it comes to reducing costs. He notes that the association's aforementioned quarterly market survey already found an average paper price increase of 5 percent over three months. Yet, printing prices remained relatively flat, with current prices up an average of just 0.3 percent from year-ago levels.

Part of this effort should be to push for postal reform, Davis adds. PIA/GATF estimates that about 45 percent of the dollar volume of printing ends up in the mail stream.

"Without postal reform, current projections are for postage rates to increase around 15 to 18 percent in 2006. That would translate into a possible 7.5 to 9 percent reduction in advertising and transaction-related mail," the PIA economist explains. "With postal reform, rates will still increase, but by a lesser amount—perhaps around 9 percent. A 9 percent postal increase would translate into a 4.5 percent decrease in advertising and transaction-related mail."

David Branch looks at the industry from the dual perspectives of chairman and president of Branch-Smith Printing and current chairman of NAPL. He agrees with the assessments of the two association economists.

"I look for the economy to provide better general support (for print sales), but pricing is still very challenging," Branch says. "We all will have to stay very focused on our particular strengths and market niches, while continuing to work very hard on the manufacturing side of our operations to get rid of any slack."

Branch also see the need for improving productivity to make up for cost increases in paper and ink, in particular. To those concerns he adds that the job market has improved sufficiently to dry up the available labor pool, so employee training and retention are more important than ever.

Emboldened by the accuracy of his recent multi-year projections, PIA's Davis has also taken a stab at making a longer term forecast for industry sales. Assuming overall U.S. economic growth averages 3 to 3.5 percent per year over the next five years (2005-2010), total printing shipments should grow around 2 to 3 percent per year, he says. Both numbers are adjusted for inflation.

Like Paparozzi, Davis says it's important to keep in mind that those numbers pertain to printers' total sales revenues, including whatever products and services they are able to sell. Increasingly, industry sales are composed of toner-based printing and ancillary services, he reiterates.