Economic update: Converters tackle the recession

By Jack Kenny | March 6, 2009

Narrow web printers face aching customers, sales, profits, and difficult internal choices.

It is, of course, the elephant in the room, but this time everyone's talking about it. It's the economy, the recession, the bad or uncertain news from customers, the cutting back of hours in production, the painful choices. Narrow web converters are willing to talk about how the recession is affecting them, though they prefer anonymity, and sometimes their comments are unprintable.

Nobody can discern a pattern in their own companies' sales performance over the past three or four months, so forecasting is out the window. Some are asking, "What recession?", while others are suffering through the pain of layoffs and slack business. Converters do have a general consensus on two subjects, however: The economy will not take an upward turn in 2009, but the label converting industry most likely will not suffer the downturn as drastically as others will.

"There is no question that the current downturn and recession is having an impact on everyone in one shape or form or another," says Frank Gerace, chairman of the Tag & Label Manufacturers Institute (TLMI) and the president of Multi-Color Corporation. "When you look at it relative to what is happening in other industries, we should feel pretty good about where we are as an industry. I think that everyone here is very confident that coming out of this we will be stronger and better, and continue to create a lot of value for our customers. So although in our current state people are not feeling great, I still detect a tremendous amount of confidence and optimism about how things will come out. I don't see anyone running scared. Nobody feels like the world's coming to an end. It's an adjustment that we have to go through."

Gerace attributes the relative health of label companies to the fact that "most in this industry support the consumer products segment of the economy: food, beverage, household products, personal care products. And consumer spending is two thirds of the economy. We happen to be attached to the consumer side of the marketplace."


Here's what converters are saying about sales over the past two to four months:

"Things are very quiet. We are optimistic about the future, but the present isn't too great."

"We are experiencing same sales as last year. I feel good for one breath and not so good the next. With no backlog, what are we doing the day after tomorrow?"

"Down 7.5 percent versus last year. Inbound orders are still slow."

"Our 4th quarter 2008 was very strong, and beat the previous year on sales and profits. October 2008, for no discernible reason, was our best month ever for sales and profit. January 2009 was very soft, but February is improving and will definitely be better than January (almost never the case in normal years), but still weaker than last year."

"We are still busy with repeat business and some new sales."

"It is really incredible. We had a record fourth quarter and the bottom dropped out in late January. We do not see sales picking up until April. Customers are just not going to order until they know their inventories are down."

"We are doing fine, busier than ever. I'm afraid to mention it to anybody."

"January was a great month! February sales, however, were way down. Overall, sales down 5 percent compared with 2008."

"Our sales were up 3.5 percent in 2008 from 2007. We had a solid January 2009, but February orders were a little lean."

"It is really incredible. We had a record fourth quarter and the bottom dropped out in late January. We do no see sales picking up until April. Customers are just not going to order until they know their inventories are down."

Impact on profits

"Due to the slowdown late last November and all of December, we had a 17 percent reduction year-on-year pretax, along with non re-occurring costs associated with a plant expansion."

"Our profit margins were strong in 2008, but less than 2007 by several percentage points. It's way too early to tell how 2009 will shape up, but I'd bet on it being much weaker than 2008 unless the economy turns around fast."

"Big hit. Profits down 40 percent."

"The impact is not good. We already run pretty lean so there is not a lot of fat to trim in operations. We expect to break even or have even a slight loss in the next several months, resuming profitability in the midle of the second quarter. Like Warren Buffett says, when the tide goes out, you can see who is swimming naked. We all have Speedos on, and that is not pretty, but it's not as bad as being naked."

No pattern

"What and where is the new bottom?"

"I have been unable to read a pattern into the tea leaves. "

"Consistently less of a pattern each day. We are running at about break even with last year's sales volume or a bit less."

"No pattern. December down, January up, February down."

"We actually showed a loss for last year. Raw materials are up, prices down. It is extremely difficult."

Unfortunately, we see no trend. We believe that our largest customers simply overbought at the end of 2008, and then sales slowed, inventories built, and we just need things to equalize."

Rescue efforts

What measures are converters taking to maintain their relative financial health these days?

"We've gone from two shifts to one. We haven't had layoffs, but there are people standing around with not much to do."

"We have cut hours and totally eliminated overtime. We stopped our 401k match, and have looked very closely at all expenses."

"We got out every cost cutting book, novel and theory and put them into practice. We called and are working with any state agency that can help us be a better company. We have not eliminated jobs, but there are a lot of people taking days off. We met as a company and I explained that it is not my plan to eliminate jobs. If there is no work tomorrow, do not come in. My team is on board and willing to do what it takes to make it through this together."

"No raises. Hiring freeze. No overtime unless tied to a specific contract performance requirement. A very enthusiastic cost reduction team in place. Ongoing talks with suppliers about price roll backs on more volume based materials. We have not reduced the work force."

"We are using this recession as an opportunity to revisit every expense we have, and we are very open with all of our suppliers of all types about our drive to cut expenses. We are seeking the best value. We are evaluating head count at this moment and have cut overtime significantly. Many people are on incentive compensation and this will ratchet down automatically if our profits decline."

"We have never laid an employee off for lack of work. Not for the last 85 years. We are working more efficiently and are developing some new products."

"We have reduced our work force. During January we met with our suppliers to ask for reduced pricing. Now that gas is down, some are considering it."

We are going to reduce our workforce by trimming hours. We do not like to cut people, but it is time to evaluate underperforming assets."

What are converters' customers saying?

"Customers are slow, too. We haven't really lost anyone, and nobody is really squeezing us on price. They are just ordering less."

"Our second largest customer went bankrupt this week. They are also concerned about their viability. We can meet their needs as long as they continue to pay. If they continue to order we will maintain our integrity."

"We have been standing by and absorbing the price increases on our big customers. They have not asked us for anything yet. I'm not sure what I'll say to them except show them my children's pictures and see if they will let them move in."

"They have no better visibility into their business potential than we do. They have revised their own forecasts two or three times in the last 90 days. That's normally unheard of in most cases."

"The overwhelming sentiment from our customers is bewilderment about the future. Nobody seems to know what's going to happen near-term in their industry. Getting our price has been much easier than getting more and bigger orders."

"Our customers have become more demanding of quality and delivery. We purchased a new press to meet their demands and are attempting to improve service to them."

"You can maintain your fiscal integrity only if you had integrity to start with.We have a strong balance sheet so we will continue to explore investments. Like all bubbles, the pendulum has now swung too far the wrong way. I suspect customers will be screaming for rush deliveries in April and May. They have said as much."

What's happening with vendor prices?

"Nothing. Roll stock prices rose dramatically as oil climbed to $140 per barrel, but are not coming down much now that we are at $35 per barrel. One supplier, to its credit, did a nice job of sending around a Powerpoint explaining all the reasons why the PS supply chain is all screwed up and nothing is their fault. I actually used it with a customer, which was nice because it does help people feel more 'in the know' about why things are the way they are in our industry."

"Interestingly enough, it seems that they are willing to take back one of the latest rounds ofprice increases and parts of others."

"We are still awaiting some reasonable response to cost reductions on select items to allow us some balance in 'sharing the pain' � mostly driven by reduced volume impact and the client's entrenched unwillingness to take price increases as their volumes drop off."

"Vendors seem to be getting more agreeable all the time."

" It's a mixed bag. Some vendors are raising prices; most are not."

"Stable at the moment. They had better not even think of raising prices!"

"Some vendors are lowering prices – by 3 to 5 percent."

"Funny how prices went up real fast, but they are coming back down very slowly, if at all. We are putting pressure on them and evaluating alternative sources. The large sophisticated buyers are demanding price reductions."

'Behaviors have changed'

"Customers are saying 'We don't know what the consumers are going to do'," says TLMI Chairman Frank Gerace. "The buying patterns, the consumer behaviors have changed, and our customers are unsure and unclear about what the consumers are going to do. And because of that it is very difficult for them to plan, to forecast. They are reducing inventories, conserving cash, delaying new launches, delaying product development projects, looking for ways to reduce spending.

"This situation is pervasive. There isn't anything that it hasn't touched."

One of the speakers at the recent TLMI Converter Meeting was Clint Swindall, author of books about corporate leadership. He ventured the opinion that the recession could be viewed as a blessing when seen from a different perspective.

"It's hard to say this, because it's a very difficult thing to swallow," says Gerace, referring to Swindall's observation. "But it can be looked at in a positive light, because when times are good we tend to overlook the waste and the mediocrity. So there is a silver lining in this, in that it tends to cause us to focus on what is important, and to deal with the tough decisions now in a perfect context, to do some of the things we probably should have done months ago with respect to waste, recessionary spending, and the other challenges we have to meet."