2005 Mid-Year Economic Report

September 7, 2005

Solid growth, cautious progress

Robust growth is a phrase that everyone in the narrow web industry expected to be using this year, and that term describes the performance of most of the converters and suppliers who share their thoughts in this annual mid-year economic review. Their opinions are tempered, however, by concerns about business trends on several fronts: the price of oil, consolidation, downward price pressures, globalization.

Converters and their suppliers are investing now. Some in the United States took advantage of tax incentives last year, while others are executing growth plans today that must be fulfilled in order to remain competitive. Rapid changes in both technology and the marketplace require investment in both machinery and people.

This year Label & Narrow Web invited five converters and four suppliers to offer their views about several aspects of the economic picture, including the performance and changes inside their operations, as well as their views on customer relations and a look at the near future.

The Converters

Scott Pillsbury, president,
Rose City Label Co., Portland, OR, USA
TLMI President 2004-2006

Performance: This year has not been as good as 2004, which was a record for us, but it is still shaping up to be a good year. Mostly we are seeing more customers who are growing their business, and this is keeping us busy. Last year, we had one large account that rolled out a new line of packaging, so that really made an impact on our year, but it won't be repeated in 2005.

Changes: We continue to look for ways to work smarter. We have been busier than every the past year and we have needed to keep the presses running with minimal downtime. Attending TLMI conferences and LabelExpo have been valuable for us as we move forward.

Customers: As the industry gets better and faster, we all raise the bar for each other. While we don't ever want our product to be a commodity, we do all continue to raise the bar - our customers' expectations continue to rise as a result.

Investment: We will probably not be adding square footage, but more equipment and people are certainly in the plans. We need to maximize our capacity and continue to respond quickly to customers.

Challenges: Competition is always the biggest thing. Buyers have mandates to cut costs, and relationships aren't as important as they used to be, unfortunately. We are working hard to stay close to the customers and show the value of long term partnerships.

Future: All of these things will have an effect. We aren't operating in a vacuum. We need to focus on what we do best, and leave the rest to someone else. Since most of us can't provide all the packaging needs of our customers, it is more important than ever to have contacts through TLMI and other trade groups so we can serve all of our customers' needs. This way, the small and mid-sized label company will still have a viable place in the industry, despite the growing size and presence of the "super players" being formed by M&A activity.

David J. Harrisson, multi-national sales director,
Skanem AS, Cheshire, England

Changes: Sales to Skanem are increasing, particularly in the multi-national customer segment. Our Oslo factory has doubled in size, and we have purchased a new modern factory for our Cardiff operation. Due to increasing price pressure, we have looked at staffing levels in all parts of our business and we now produce more with less people.

Customers: Customers need more regular deliveries, shorter printing runs, JIT, cost reductions despite increases in raw material costs.

Investment: Skanem has just announced the acquisition of Introl, with manufacturing plants in Poland and Russia. The next step is to move into southern Europe through further acquisition. Continuous additions and upgrading of printing equipment will continue in our existing operations.

Challenges: Our biggest challenges are to reduce costs in the supply chain and to provide innovations. Skanem believes that working closely with its suppliers offers the best opportunity to meet these challenges.

Future: Further consolidation, some printers going out of business, global partnerships, further downward pressure on label selling prices, alternative processes (eg. metallic inks to replace foil stamping).

Shane Lauterbach, president,
Lauterbach Group, Waukesha, WI, USA

Performance: Our sales are up 31 percent this year, and we have improved profitability and increased margins.

Changes: Our main focus continues to be building our national sales organization and expanding our product and process development. Our sales organization is divided and staffed in six regions. We are now dividing the regions into territories and hiring sales professionals. In addition to the outside sales professionals, we have organized our inside sales professionals, customer service and engineering personnel into six regional service teams to support our outside sales professionals.

We are not interested in being all things to all people. We want to bring defined solutions, to a defined market or industry, and deliver those solutions through a defined and talented sales organization. It is a key component to our strategic plan. Also, we will continue to invest heavily in equipment and people which support our define market and sales strategy.

Customers: I do not think customers' demands have increased as much as our own expectations to improve our group. We are trying to build a group (company) that brings value to our customer, to our group members (employees), and our community. Our group has to always think about how to improve the cores of our business, and we believe that if our foundation is strong, and we have the right group members, they will set our cores and be able to make decisions which improve our customers' ability to compete, develop solutions and be more successful. In many ways the restraints of the market are self-imposed, meaning that if we have a plan of action to the market that is definitive, staffed with the right group members, and bring focus to the objective, the restraints seem to be minimized or go away all together. When we do not bring this definitive focus on the market and our customers, we create all kinds of restraints.

Investment: We are adding in all areas. We are in the process of increasing the size and efficiency of our facility, we are investing about 10 percent of our revenue in capital equipment, including digital workflows, and we are expanding our sales organization, our goal is to add two sales professionals every six months.

Challenges: Again, I believe challenges just need a definitive focus to be overcome and that ability comes from a core group of employees that share common values and have the ambitions and ability to want to be successful. I think the macro issues that affect our industry are the same issues that affect many other industries, including health care, taxation - which makes it more difficult to invest in the future of the group and its members - and finally, a workforce that has the core skills available to make decisions in a changing and uncertain world, country and industry.

Future: I am sure that consolidation will continue, that digital printing and improved digital workflow will have an enormous impact, but I believe it will be something new in the next two to four years that will shape the industry. The items listed above are known issues and opportunities. The market is consistently digesting and implementing these opportunities. But something new will hit the scene, it may be technology driven, or regulation driven, or economic driven. I believe that the industry is currently working the technologies and issues stated above, and is prepared to successfully integrate the opportunities. The question before us now is, "What's next?"

Leslie Gurland, vice president,
Logotech, Fairfield, NJ, USA

Performance: Our company's sales have increased by 20 percent year-to-date. Our profitability is about the same. The factors that have contributed to this are twofold. First, we are more focused in our management of our packaging consultants, or sales team. Second, we are meeting the market challenges of highly complex jobs: We push our prepress and our presses past the limits we thought possible.

Changes: We increased personnel in operations and customer service. The short-term effect of this is that we're held to the same profitability after a 20 percent increase in sales. However, we believe that greater output capacity and a bigger operations and customer service team will pay long-term dividends.

We added a 10-color Gallus press, expanding our capacity and reaffirming our commitment to letterpress technology. The overall effect in the short term is labor cost in paying extra attention to making sure the press operates as efficiently as our other presses, and an increase in capital expenditures. The anticipated long-term effect is increased sales because we have more capabilities.

We added three Videojets on our rewinders because of customers' demands. The short-term effect was increased business from existing customers. I believe this will continue over the long-term as well.

Customers: We have two types of customer, and each handles orders in a different way.

Our boutique and start-up customers buy in smaller increments, and order more frequently. The number of labels we print for one of these customers per year remains the same, but the turnaround time is shorter. The reason is that the retailers are looking at consumer buying patterns in terms of what's hot, and looking for new, new, new. That puts our customers under pressure to be ready to change at little notice - and we feel that in the work we do for them.

Our larger customers are continuing to maintain larger orders for volume discounts. Some are demanding that we hold inventory for them.

I do not see a relaxation in economic constraints, so from that perspective, the demands are not changing. Customers remain risk adverse.

Investment: We plan on investing in new equipment for our prepress department; our goal is to fully implement a computer-to-plate workflow system. In this day and age, it is a must.

In order to continue to meet our customers' high demands for fast, high quality turnaround and frequent changes to their labels, we will add personnel in our prepress department. Also, as the number of jobs we produce increase, we must make sure our quality assurance (QA) and quality control (QC) procedures continue to lead us in ongoing improvements, and we will add personnel with QA/QC responsibilities. Finally, to pay for the increased capital expenditures and personnel in other departments, we must add packaging consultants to increase sales even more.

Challenges: I think the challenges are different for small, medium and large converters.

For the small and medium size converters, it is to maintain an innovative edge in order to compete with the bigger players. Also, we smaller companies face the challenge of utilizing our presses to their optimum capacity, allowing us to grow our business while maintaining profitability.

Future: Most medium-sized companies are likely to find themselves targets for mergers and acquisitions. That will become an increasing challenge to medium companies that want to maintain their independent stance.

Globalization is an important mechanism for smaller companies that can pull upon a wider set of resources. For example, at Logotech, we use our parent company for in-mold and blow-mold (IML/BML) labels, shrink sleeves, and extended content labels, which has allowed us to get into those markets without having to capitalize new equipment. Globalization is also about knowledge and experience - we draw upon our parent and sister companies around the world to see what is being done in other countries and apply their expertise as those solutions can be applied for our customers here in the US.

Already I see a backlash against e-commerce in our industry. Companies are choosing not to compete in e-bid situations. Our own company's philosophy is built around a team of packaging consultants to create interpersonal contact rather than e-bids. We are willing to walk away from e-bids and focus on giving our clients a chance to team up with real people who have expertise in their field and are dedicated to collaborating with the client to develop the right packaging solution for the job. That's something that you just don't get from an e-bid situation, and our clients know that.

Kevin Wise, chief information officer,
Wise Tag & Label, Pennsauken, NJ, USA

Performance: 2005 is a better year than 2004. Incoming orders are better and more consistent.

Changes: At the turn of the year we installed a new press with greater capability, which allows us to be more efficient. We also retired two presses. The new press, along with a press installed about 18 months ago, has made the flexo department more efficient, allowing for better turnarounds for our customers. The greater productivity also lets us to produce more labels with the same number of people, allowing us to hold costs. As the volume grows, we will continue to invest in newer press technology, allowing us to better serve our growing customer base.

Customers: Our customers are varied. Most of our packaging customers have increased the size of their orders. The majority of our label orders have increased in volume or remained the same. In our tag (letterpress) department, we have found a trend to smaller and more frequent orders.

Investment: We will most likely add another press. We will also be making additions to our prepress department. The press will allow for greater productivity. In our prepress area we will be looking at newer proofing equipment as well as plate making equipment.

Future: M&A will continue. Smaller converters will need to continue to grow to survive and compete effectively or will need to develop speciality niche markets where they can compete. Digital printing will continue to find inroads into the narrow web market place. It will not truly explode until there is real competition in the digital market place. In the case of HP Indigo - as long as there is only one supplier of ink and no competitive pricing, there will be steady but not explosive growth in our market place. With competing digital technologies becoming more viable, digital printing is on the verge of becoming a significant player in the narrow web marketplace. This is still a few years out, though.

Globalization will play a small role with printers. One key change is that prepress will be handled by one company. We are seeing an increasing number of national brands outsource their artwork needs to one company, who is then responsible for maintaining the integrity of the printed product. The printer then receives negatives or the digital file ripped for digital plates. This assures the national brand that their packaging will be consistent.

Large organizations with facilities in multiple countries may see an increase in some business with global companies. For products that are sold in multiple countries, some large companies feel more comfortable if a particular printer handles those needs. This is more common if the printer is converting multiple processes for the customer (cartons, shrink film and labels).

The electronic marketplace will continue to slowly grow. We are finding that more of our customers are interested in receiving order and shipping information electronically than to actually place their order electronically. A number of our customers log into a secure web server to gain access to order information. We are seeing a small increase in the number of electronic orders for generic/stock items. I believe that you need to make the technology available to your customers, yet at the same time, maintain those relationships so that you remain the focus of the customer not a cold technology that can easily be replaced.

The Suppliers

Aylwin Spendlow, VP operations,
AB Graphic International Inc. USA (ABGI), Anaheim, CA, USA

Performance: AB Graphic International's economic performance continues to increase in line with its past performances over the last four years. Our previous year (May 2004-2005) saw sales in the USA climb 17.5 percent despite unavoidable price increases due to adverse currency exchange rates. This increase is partly owed to an increasing industry awareness of our range of products. With an anticipated strengthening of the dollar combined with recent internal restructuring we expect this figure to rise further from the ability to reduce pricing from present levels.

Changes: 2004 saw the start of ABGI's permanent presence in the Midwest. A central location for sales, service and technical support has proved beneficial. Other recent restructuring has ended independent sales representation and marked the beginning of a dedicated company sales force. This change is directly aimed at providing higher quality service to the customer during pre-sale and especially post-sale contact. ABGI's most recent addition, Wes Harrington, formally of Comco, joined the team in February this year.

Customers: Purchasing patterns of our customers fall into three basic reactive categories:

  • Media reporting new technologies giving birth to innovative new products. A perfect example would be RFID converting technology, a customer's need to act or react, or even just prepare has seen an increase in new converting machine designs and sales and sparked a massive overall interest.
  • A new piece of business requiring additional investment or an upgrade to faster more efficient equipment ensures a steady stream of orders. Return business makes up approximately 75 percent of annual equipment sales as label printers constantly replace older less efficient equipment. This is a figure we are very proud of.
  • An investment to turn a previous loss leader into a profitable concern. Another example would be short run digital printing, the quality of print obtainable today coupled with job turnaround, in some cases just a matter of hours, not only makes this a smart move for any label printer but adds considerable strength to a company's portfolio, opening new avenues of opportunity for growth. ABGI's Digicon range of semi-rotary converters continues to satisfy this increasing demand and has made the Digicon a major part of our continued development program. Recent requests from customers always eager to exploit potential have seen the introduction of semi-rotary embossing to the list of achievements in this arena.

Investment: Yes, yes and yes. Our continued growth demands that we exceed our current requirements on all counts. Recently ABGI purchased a new, shortly to be completed facility in Elgin, IL, and has added a further 5,000 square feet of capacity. The new Midwest facility is designed to satisfy growing needs over the next five years and will house demonstration models, sales personnel including technical support, and a full compliment of service engineers. With continued growth comes the need for professional dedicated installation and service engineers, positions are currently available.

Challenges: In an industry that seems to be constantly giving birth to new entities or existing entities that seem to grow larger through acquisitions, the hardest challenge - not only to printers, but to suppliers to the industry - is constantly surpassing customer expectations. This might mean shaving prices while increasing quality and service. Technology, or rather advances in technology, meets this demand head on and rapidly changes the way all aspects of the industry work. ABGI recognizes this and within our arena constantly listens and develops tomorrow's technology, be it laser "die" cutting from e-mailed files or automatically turreting finished rolls in under seven seconds. Demand provokes necessity and necessity is the mother of invention; to satisfy our customer's need we must continue to invent.

Future: Predicting the future is not easy. Our vision of the future is guided by the customer, large or small and in turn their customers. Meetings at trade shows or clandestine discussions after hours in a bar with industry veterans help shape ideas of things to come. What is clear is that the digital age of printing, coming so far in such a relatively short period of time, is here to stay. Future developments in this area are closely guarded secrets, but we can expect to see much faster print engines at much cheaper prices accompanied by digital finishing solutions such as precise, fast laser cutters. Smart labels hold a large piece of the future action also; expectations from Wal-Mart amongst others have driven development of these products relentlessly on. Improvements in reliability and cost reductions through better and faster manufacturing processes will see widespread use in the coming years.

Calvin Frost, chairman, Channeled Resources Group, Marathon City, WI, USA

Performance: We had a very peculiar situation in 2004 which resulted in a difficult year. Further, we lost a very large relationship which has just begun to impact our bottom line in 2005.

In general we've had a better first half this year than last year. Our new facility is finally operating on all cylinders and the people issues that one deals with in any physical move have, for the most part, been solved.

I am worried about the balance of 2005 into 2006. We sense a slow down and are carefully monitoring a variety of indicators.

Changes: We consolidated four separate locations into one 200,000 square foot facility, which has resulted in better management, more control, and improved efficiencies. The physical move began in the spring of 2004 and was finished just before Thanksgiving. The changes were incredibly catastrophic. We had both people and machine problems. So the short-term effect was to cause strain and stress. The long-term effect has resulted in the above.

Customers: We are selling a better product at higher prices. We are just now beginning to analyze the units shipped in the first half of '04 versus units shipped during the same period in '05. Our customers want better quality and expect it. They will pay more but they demand more. At the same time they expect better delivery times which has forced us to develop our patterned RTS program. This is at our expense and definitely affects cash flow.

I do not think economic restraints have relaxed. If anything, the opposite. Interest rates have increased, automotive is slowing, and worst of all oil prices continue to rise. Most economists believe that if oil does not fall below the $50 per barrel level that we will have a recession in '06. Hold on to your hat, and job.

Challenges: I think all of us face increasing "commoditization" of PSA labels, label stock, and the like. We're no longer niche; we're no longer special; we're no longer too technical. Sure, there are a few new developments - RFID, security, etc. - but nothing in my mind that allows the smaller company to get a leg up.

Future: My vision for our industry is to develop and use technology that is available that makes the PSA product more environmentally friendly. PSA label stock generates enormous quantities of waste. During the next three to five years I believe the end user will focus more and more on processes and technologies that are clean and green. Their customers will demand it. We, all of us in our industry, must work at solving this issue or we will be looking from the outside in, not the other way.

Mark Vanover, director of marketing,
Esko-Graphics, Vandalia, OH, USA

Performance: In North America, Esko-Graphics has seen double digit growth through the first six months of the year. Worldwide, we see the same growth levels. We believe that our attention to the needs of our customers has greatly contributed to this growth. Listening goes a long way in developing the products of the future. From a market perspective, the tag and label and flexible packaging markets' growth rate is faster than other markets, so there has a been a concentration of efforts in those markets.

Changes: We have defined our opportunity for growth around our core strengths - packaging. In regard to that focus, we've spent more time finding opportunity via marketing efforts as opposed to having sales teams "dial for dollars." This goes a long way in having your valuable sales assets being in front of the real opportunity. Hence more sales. The effect short term is better utilization of a sales person's time. We expect that to be a long-term benefit too.

Customers: Over the last year, orders have increased significantly. Customers always demand more. We've become more business consultants in our sales campaigns as opposed to just sellers of technology. We see that customers are more willing to make capital investments now, but they are still looking for the best deal and value for their business overall.

Investment: At Esko-Graphics we're growing both our service and consulting business. This enables us to better serve our customers in the long term, ensuring growth for us and them.

Challenges: From a technology perspective, we continue to be a market leader in flexo digital imaging technology. This technology, packaged with our workflow solution, enables the narrow web printer to become more efficient and produce higher quality labels. And these are the two major initiatives that consumer goods companies are pushing today. From a training perspective, Esko-Graphics' continues to support education with recent donations to the Flexographic Trade School in Charlotte, NC, and at Cal Poly, San Luis Obispo. Education is key to the long-term viability of our industry.

Future: The narrow web markets will continue to grow for the coming future. This is indicated in a recent market research study conducted by NPES. M&A is bound to happen as consolidation is happening in all packaging market segments. Digital print will grow as labels become more boutique in nature; culturalization, cross promotion and test marketing are key opportunities for digital. And globalization is a given. There are no borders these days in business. As for the electronic marketplace having an effect on the narrow web market I see it as all good. Electronic commerce stimulates sales and unless someone figures out how to deliver your beverage over the Internet, there will always be the need for packaging.

Paul Brauss, president,
Mark Andy Inc., St. Louis, MO, USA

Performance: The first and second quarters of 2005 have been more robust than the same quarters in 2004. We believe that the strong fourth quarter of last year domestically was primarily driven by the tax incentives offered prior to year end. In the first quarter the shift in demand came primarily from a decline domestically and an increase in Eastern Europe and Asia. We see business shifts under way from major CPCs as they move to shop their needs with multiple converters. Price pressures are the main driver.

There is still a strong desire for converters to stay abreast of new technologies that may give them an edge in their competitive landscapes. When pushed for quick turnaround, capacity demands are often filled with proven technologies. Some larger converters are reassessing their current capacity, recognizing the aging fleet and the need to invest.

Changes: We have a very regimented strategic process. Our key is to focus on "Continual Improvement" of our processes. This helped us achieve shorter lead times on staple products while our engineering resources focused on next generation projects. We invested heavily in our new product development and technology enhancements to current designs. We have added to our ranks and see employment levels inching up to sustain the new demands. Like other manufacturers we also reviewed our equipment and invested heavily in new fabrication machines to gain productivity improvements.

These changes/improvements are no deviation from our strategy to continue to assess ourselves and learn from our customers. Agility is key to our plans and the customers will continue to shape the direction we take.

Customers: The purchasing patterns have changed for equipment buyers. Five years ago converters were looking to make equipment acquisitions in advance of orders. Today equipment orders are placed after the converter has a solid contract for production. This fundamental change puts the converter under extreme delivery demands and the need for equipment immediate.

Due to the competitive nature of the industry I would describe buyers as less patient with "unquality". I also believe this to be very healthy for the supplier of that customer. It provides a learning organization an opportunity to get to the root of issues and put in place improvements.

In some regards we are seeing more involvement from business owners. Capital equipment purchases are getting tighter and tighter scrutiny because it is not just about capacity. Converters quite frankly have to take costs out of their operation and can't rely on the same solutions put in place five years ago. The mentality is to look at suppliers that will provide more service and be available for much more than just supplying the equipment.

Investment: We plan to continue to invest in new equipment and to convert temporary employees that have proven themselves into full time employees. Our efforts will be in increasing inventory turns using time and quality as our driving measures. With this emphasis we do not see a need for new buildings. Our key is to equip the buildings with the right people and the right equipment to serve our customers.

Challenges: The narrow web converter sees the same issues any producer sees today. Our manufacturing base in the US has dropped to 15 percent of our GDP. So finding good people, and helping these people come together for a common set of goals, is the biggest issue. All companies have to position themselves to be "lean" thinkers and address the culture that prevents them from improvement.

Converters also must address their strategy regarding markets, process improvement and potential shifts. We believe that equipment purchases are a big piece of their assessment plans. Equipment in this industry is aging rapidly and we recognize that new equipment and advancing technology are part of the equation to remain competitive.

The best way to help converters is to listen to what they are up against in their markets. Taking this information and then formulating product designs that make sense is part of our plans to provide the best overall solutions. We currently have engineers out at customer locations conducting flow analysis, and various Lean Manufacturing diagnostics. We have utilized web based communication tools to help our customers easily participate in our product development process.

Our engineering forces have completed SMED training as well as Six Sigma training to equip them with an understanding of the impact of their design work. Through these efforts our goal is to provide better solutions for the converters as we understand the nature of competition all to well.

Future: I've been in manufacturing for over 25 years, so when I look at this industry I can relate to the problems and opportunities. I still see one of the most exciting and fundamentally fun industries to be in. Now some people might say I have a weird sense of the word fun, but lets face it: Of all the things in the world to do, this industry still has a lot of potential and opportunity to those people that want to put in the efforts.

I believe that the narrow web industry has opportunity to regain some of the lost profitability experienced by many converters over the past three or four difficult years. This opportunity comes by way of focused internal improvement initiatives and new equipment that will make these converters more competitive. The converter that embraces these opportunities will make strides over the rest. These two issues must be of primary focus for the next two years.

Looking five years out I'd say new technologies will put pressure on old technologies, and the old technologies will adjust. In a "lean" world there are some things that should be forced to simplicity before adding technology. Technologies that pave the way to improve information flow, elimination of process steps and add the elements of "simple to operate" will advance.

I was conducting some research recently and found an article that spoke of an average of 12-15 consolidations per year domestically in this market segment. So this sparked me to ask the questions about startups and I found through my network that their were about 12 new startups each year for the last three years. I think this is a healthy turnover and a market that still inspires the entrepreneurial spirit.

I've seen it written several times that we live in a global society. Globalization is a strategic issue all businesses must address. This relates to consumption factors. Our industry relies on consumption and those areas that consume need to be serviced. We are very active in efforts to support the developing markets including China, India, Eastern Europe and Russia. In these markets the entrepreneurial spirit is very high and we will continue to look for ways to provide solutions for these areas.

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