Mid-Year Economic Report

July 20, 2005

Both good times and bad times for narrow web converters make for no pattern during a tough economy.

One certainty about the performance of today's narrow web converting market is that there is no discernable pattern. Business is up, business is down, the first quarter was great, the first quarter was terrible.

Another certainty is that a sluggish economy and a mature industry with a fair degree of overcapacity has changed the rules of the game. In the words of Frank Gerace, president of Multi-Color Corporation in Cincinnati, "There is no such thing as being comfortable any more. You need to get comfortable being uncomfortable. That's what the new environment requires."

In May and June, the editors of Label & Narrow Web asked several converters to share their views about the economy, our industry, and the performance of their own businesses in this changed marketplace. Here is what they had to say.

Graham Lloyd, President & CEO
Convergent Label Technology
Tampa, FL

Company performance: Business has been very encouraging, and the pharmacy market has been strong. I'm optimistic about the last few months. We have won a significant amount of new business and we're thinking that we're going to be in the area of between eight and 12 percent higher than the prior year by the time our financial year ends.

Internal changes: We moved production to 24/7 about a year ago, which was a very different approach for us. Instead of running all of our machinery for part of the time, we looked at our machinery and decided to focus on the most productive machines and run them all the time. That's made a significant difference in terms of throughput on the machines, the productivity, and our ability to pass savings along to customers.

Industry health: It seems to be mixed. I've talked with colleagues who are quite bullish on the situation, and others who are saying it's very, very tough.

Terry Fulwiler, Co-CEO & Chairman
WS Packaging Group
Algoma, WI

Company performance: We were just as bad off a year ago as we are now.

How customers are doing: If it's this year, \'03 compared with \'02, they are probably doing equal or a little bit better. And I think everyone in \'02 was either equal or worse than \'01, and certainly worse than \'00 as the recession spiraled downward.

Market trend: I can't turn around and say that in the last month or two we've seen the dam break and everything has gotten a lot better, but again, you don't hear people talking about things being worse than last year.

Economic concerns: One of my biggest concerns is that with the overall economy down and pressure on profits, customers tend to turn and look at only price as an issue. You end up with your customers coming back to you and saying, "Hey, I just need something cheaper." They lose sight of the overall value of what they are trying to buy from us and focus only on price. It's hard to talk value to somebody who is trying to keep from going bankrupt, whereas when times are good and customers are making money, it's easier to talk to them about overall value.

Company spending: We're more cautious than we were before. We've tightened our belt a little bit. There are some projects that we had that got put on hold.

Beverly Chavez, President
Stixon Labels
Albuquerque, NM

Company performance: We are doing really well right now. Our customers are giving us nice, big orders. But the beginning of this year was really bad. We started picking up in March, but December, January and February were the slowest we've been since I can remember.

Price pressure: At the beginning of the year we felt the pressure. A lot of converters were giving things away to get new business, like printing plates, and I know we were doing that. Our presses were just so slow. But right now I can't say that I worry about that. And maybe that's because we are doing well right now.

Internal changes: We've cut back in a lot of different areas, small things, so that we don't have to cut back in equipment. We'd rather cut back in other areas than sacrifice the quality of our work or the capabilities we have. (Examples: The company cancelled its cleaning service, and the work is now done by employees; they changed the phone system, and cancelled the Yellow Pages ad.)

Frank Gerace, President
Multi-Color Corporation
Cincinnati, OH

Company performance: This year feels improved from last year, no question about it. We're seeing a little more activity from customers relative to new projects, whereas over the last two years we saw projects canceled, and in most cases none being initiated at all. There seems to be a slight improvement this year, with customers willing — in a gradual way — to move forward with more projects than we've seen in the past two years.

Market trends: It's still far from robust.We still have significant price pressures in the industry, in all areas. People continue to want to spend less, and pay less, for packaging. There is no let up in the drive to improve quality, but at the same time there is also a requirement to improve costs. That's not going to go away.

We are still seeing sensitivity to inventories, a lot of pressure to reduce and adjust inventories, which takes a lot of the cushion out of the supply chain. That also puts additional pressure on suppliers. We have to be much more responsive when the orders come in so we don't upset the supply chain.

We are in a very challenging space and time, and I don't see it changing back. Those days are gone, gone forever. There is no such thing as being comfortable any more. You need to get comfortable being uncomfortable. That's what the new environment requires.

Internal changes: All of our investments are looked at with a much higher degree of scrutiny: What is the return? How will it be utilized? We're looking at full utilization of assets. There's already too much capacity in the industry. That's number one.

Number two is that we are looking for people who have the skill sets and personality to manage in these types of environments. As the business conditions change, the skill sets required to manage that also change. Not always are people willing to change, to grow and develop to meet those requirements.

Industry health: I think the industry is healthy. It has been very resilient over the last two or three years. We have been able to sidestep a lot of the problems that other sectors of the economy have seen. We have to consider ourselves fortunate.

Our industry has fared much better than other segments. I would say that the large producers and those in the smaller range (under $10 million) have been able to fare better. The smaller guys are right on top of their businesses and are low cost producers; the large guys have economies of scale. Those in the middle probably are in the toughest spots.

By and large this industry supports consumer products. And consumer spending has been pretty good.

Michael Ritter, Vice President
Superior Business Associates
Greeneville, TN

Company performance: 2002 was a down year. This year is flat to this point. That is an improvement.

We're starting to see the signs of growth now. There's more activity, more test runs, more projects being quoted — which I consider different from just plain quote requests — and more samples being requested. I'm beginning to see a groundswell that usually occurs before activity picks up more significantly.

Company spending: We're not as willing to go out and buy equipment on a promise, whereas five or six years ago we would say, "Hey, we think we're going to get that business, so let's go and get that press. If we don't get the business, we can find something else to do with it." You've got to have better justification right now before you make a significant commitment."

Tom Spina, President & CEO
Luminer Converting Group
Lakewood, NJ

Company performance: Mixed. It depends on the market.

Industry concerns: (1) With the price of oil, all of our film suppliers have increased prices, but we've not been able to pass those price increases along to the customers, and that'll never change unless the industry consolidates. With the amount of label companies out there, it's almost impossible to pass along price increases.

(2) It's critical for the industry to consolidate and it's critical for label companies to concentrate on getting back to making profits, and that's tough to do. You've got to run lean, you've got to get your pricing up as high as you can, and you have to compete in markets where you can sell at a little higher price. It's easy to say, but it's tougher to do.

(3) My biggest concern is the fact that consumer products companies aren't spending what they were on advertising. So for instance, say you get a major bank or financial institution trying to promote credit cards. We all still get the same amount of junk mail, but what you don't find in that mail is the little sticker, or a little IRC, or some sort of promotional item to make it more fancy. Companies are still doing the mailings, but they are not spending as much money on the contents.

Economic trend: I remain pessimistic. But I don't know that it's not going to get any worse. I'm very concerned that right now the economy is being held up by consumer spending. The consumer is doing all the spending because of low interest rates. I think that can only go for so long.

Richard Phelps, Director of Marketing
Allen-Bailey Tag & Label Co.
Caledonia, NY

Company performance: It's been a challenge but we're holding steady with last year. Some areas are up, some are down. But overall, we're holding steady, and I think it's going to be getting better now I'm basing that [prediction] on the stock market. I see the stock market turning around.

Internal changes: We've been more proactive. I was lucky to the point where I didn't have to do outbound calling, especially in the distributor field Now, we're doing the outbound calling, trying to be pro-active and anticipating needs. We're also reducing our minimum order size, our minimum value, where appropriate.

Economic concerns: (1) There is still an awful lot of price pressure on everything. Price is so important. Quality, service are all taken for granted, they are all required, and you have to have the price there to meet them.

(2) People do not inventory as much as they used to. They only buy that which they need, when they need it, and you have to come through with the delivery. And some of them are buying smaller quantities.

Bob Nowak, National Sales Manager
Aladdin Label
Waukesha, WI

Company performance: "We're up, and I think it's because the promotional side of our business has started to increase. People are getting a little bit freer with their budgets, although it's still tight and we don't look for it to be in full swing until 2004.

It really started rebounding, at least the quotes, last November, and those quotes translated into sales in February and March.

Internal changes: We've become more focused on our niche markets. In particular, we have gone from eight trade shows to three focused shows a year, and our pay-back has been a lot better.

Jackie Abrams, President
Florida Marking Products
Longwood, FL

Company performance: We have had a wonderful first quarter and second quarter. Sales have grown. We're pumping it out back there in the shop as fast as we possibly can.

In our case we gave ourselves a shot in the arm by revamping the sales and marketing departments, and that is always a stimulus. We are regenerating current accounts, and adding new accounts. We just purchased a 10" 8-color press, and we are making sure that our customers know that we have a new press.

Market performance: We have a couple of big suntan lotion companies, and one has a big contract with the army, so that has helped. Some customers are off from previous years. And money has been coming in slower.

Overall we feel positive energy in the marketplace. People are out there trying to repackage their products and sell them in better ways — put a new face on, advertise and sell more to the public.

Nick Valestrino, President
LA Label
Commerce, CA

Company performance: This year started off relatively strong, but over the past month we have seen a general economic downturn. The reason we're slow isn't because of a customer. It seems to be a lot of our customers over a lot of different industries.

When I call customers, their response is just, "We're dead. There's nothing going on."

Economic concerns: There's a big fear of deflation, obviously. That's a factor. Competing overseas is a factor. And excess capacity in the industry is also a concern.

Industry growth: The first thing that comes to mind is consolidation — buying market share. Whether or not it's the right thing to do is a whole separate issue. But if you are looking to grow fast, and you are looking for immediate opportunities, that certainly is one option.

Five to 10 years ago, you could grow by showing up. Now you have to show up and be on top of your game, because the bar has been raised. Everyone out there is at the top of their game now.

Gautam Kothari, Managing Director
Interlabels Industries Ltd.
Thane, India

Company performance: Our business has been a little slow this year for various reasons. One is the overall slowdown in the economy. Another is competing technologies, like shrink labels, which has affected the growth of the self-adhesive market. This year we expect only marginal growth, more or less the same as last year.

There could be a slight improvement in the second half of 2003 if the economy gets slightly better.

Business concerns: India is a particularly price-conscious market. Return on investments in self-adhesive labels is very low due to high equipment costs, high import duties, and the high cost of finance. Interest rates here are 12 to 14 percent.

Industry growth: The growth we are seeing comes from customers shifting from sheeted self-adhesive labels to roll labels. Overall the narrow web industry is gaining ground in India.

Moritsune Sobue, President
Chu-o Seal Co.
Tokyo, Japan

Company performance: This year our business has slowed down, because of deflation in the Japanese economy. Business is down this year compared with the last two years. Sales are generally slower.

Industry concerns: Our biggest concern as a narrow web converter in Japan is the coming of digital printing technology. We are also searching for new ideas in the label markets, and for any growing markets.

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