2009 Mid-Year Economic Report

July 7, 2009

Resisting recession

A year ago on this page we were looking at entrenchment. Oil prices were stratospheric, food prices were escalating, credit markets were tottering, and the seams of the mortgage business were tearing apart. By October, the world was acknowledging that we had swooped into the deepest economic canyon since the 1930s. Giants in several industries began to crumble. Money availability tightened, as did the desire to borrow by the majority of consumers and business people. Manufacturers of many products cut back on production and inventories.

In an informal poll that the L&NW staff conducted in the fall of 2008, converters reported sales declines as deep as 30 percent and increases as high as 50 percent. Profits were down for most, but up for others. Printers vented strongly against price increases by materials suppliers. The majority of them said they were unable to pass along those increases to customers, instead focusing on internal changes to reduce operating costs.

The first quarter of 2009 revealed an equally patternless picture. Sales were down, sales were up. Some wondered where the recession was, while others were laying off personnel and bemoaning slack business. Those who print labels for the automobile industry felt the downturn strongly. Still, the tough times in the label converting industry did not appear to be as damaging as in others. Frank Gerace, chairman of the Tag & Label Manufacturers Institute and president of Multi-Color Corporation, had this to say back in March: "There is no question that the current downturn and recession is having an impact on everyone in one shape or form or another. 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."

Industry suppliers, it appears, have been particularly affected by the recession. For many, the tightening up by label converters has dampened sales of machinery and equipment in many areas of the business.

Some pundits say that the economy has stopped its descent, but that a recovery could take years. Layoffs continue in many industries, and a second wave of property foreclosures in the USA began to appear in June.

Yet the companies that buy labels still must buy labels, and they have been keeping our industry pumping along. Competition, by all accounts, is more fierce than ever, and the purchasing patterns of customers have altered from what they were in the past. Acquisitions have slowed, but inquiries are still being made and money is still available. This is one smart industry, and it is doing its best to resist the recession.

Once again we have invited converters to give their views on a specific range of topics: How their companies are performing, what changes they have experienced, what pressures or challenges their customers are experiencing, how they plan to invest this year, what they see as the great marketplace challenges, and what thoughts they have about the near future in our industry. This year we are pleased to offer contributions from Doug Kopp of Kopco Graphics, Alex Elezaj of Whitlam Label, Joel Carmany of Consolidated Label, Thomas Dahbura of Hub Labels, and Leslie Gurland from Logotech.

– Jack Kenny

Doug Kopp, Chairman
KOPCO Graphics, Fairfield, OH, USA
& Bradenton, FL, USA

Performance: While Kopco has experienced a 6 to 7 percent sales increase for 2009, we are also experiencing greater costs. Our first quarter was up significantly, though the second was down a little bit.

The costs that we are facing are primarily in healthcare, labor, price pressures, and the ongoing cost associated with our move to a new plant in Florida.

We ran into some extraordinary costs with that project. We bought a new 12,000 square foot building shell in a new industrial park, and we just had to put in offices and utilities. The electrician hired to do the wiring went bankrupt. After that it was one thing after another, and it took us over two years to get it done.

Changes: The greatest change that Kopco has made in the last 12 months is efficiency of operations, resulting in much greater throughput of orders. This has created a significant amount of additional capacity. We have also added a new salesperson in a new territory. Our challenge is to fill this additional capacity. The capacity increase was a goal, a planned effort to reduce setup and run times. Over a period of a few months everyone bought into it so well that it became extremely successful. At the end of six months we had created 180 extra hours of production capacity. We ran split shifts, ran the presses through breaks and lunch times. They never went down. Job changeovers were run like pit crew operations at a NASCAR race. Job No. 1 is to get that press running. We now bar code all jobs to track run times and setup times. By just meeting, measuring and monitoring, we have generated that much more capacity in our plant.

We have had a change of the guard at Kopco. Walt Zeek, our vice president of operations, is now the president and CEO. I have become the chairman. Walt was with WS Packaging for 24 years, and during the two years he has been with us he has been instrumental in bringing good ideas and management styles to the organization.

Customers: We have not noticed any significant change in purchasing by our customers. It's pretty much business as usual. We have received several new orders this year because we were able to meet rushed delivery demands. We had one customer who said they had to go out and get some bids, telling us that our price was too high. That's the first time that has happened to us.

Investment: We are planning to upgrade production equipment by replacing one press with a new, wider, more efficient one. We will also be purchasing new platemaking equipment. We increased square footage at our plant in Florida just this past December.

Challenges: There are some desperate converters out there. We are experiencing some pretty low pricing from competitive label converters who we feel are desperately trying to "buy" more business.
Our other great challenge is to fill the production capacity we have created, which is significant. Right now we are scheduling what we feel is at least 40 hours of work for each press. If the operator is able to finish this work earlier, he can go home when his scheduled work is complete. He will be paid for 40 hours. Guaranteed. It is amazing the efficiency we are experiencing with this policy. Obviously we want to fill this extra capacity with work, but right now it is working great. The idea is to keep our people challenged.

This process has improved our quality. With other factors in place, such as measuring and monitoring, it has gone up. Run speeds are up. It's amazing. This process had a lot to do with getting the bottom line numbers last year that brought the Eugene Singer Award to us.

Future: I feel that acquisitions will continue to shape our industry. We are not likely to see much of a change for 2009, which is a transition year. If things do ramp up a bit, we'll see more of that activity. I also feel that there will be some closings of plants that are no longer competitive. They just won't be able to compete any more.

The industry will see continued improvements in equipment and software, which will bring additional efficiencies. Digital printing will continue to expand its presence, but I don't see it taking away much of our main line business, at least not for the next couple of years. Digital has a real advantage for various markets and conditions, and as this market increases, competition is going to drive down its margins.

Joel Carmany, President
Consolidated Label
Longwood, FL, USA

Performance: We are operating about 5 percent ahead of 2008, year to date, which we attribute to the new product markets that we are in, as well as aggressive follow-up by our sales and customer service groups. We are primarily in food, beverage and household products, which have been a stable market area.

Changes: We installed more automation, including software changes, more efficient processing equipment and instituted Lean Manufacturing programs. These efforts have held our operations costs in check, while we have increased our staff by about 2 percent to meet our current demands.

Customers: Our customer orders are up in some areas and down in others, depending on their market. But, the common denominator is that all customers are looking for some kind of price concession, and our suppliers are looking for some kind of price increase. This dichotomy requires some very clever negotiation strategies on both sides of the business.

Investment: We plan to move into the shrink sleeve label market later this year. This will require significantly more capital equipment, development cost, promotional cost and a slight increase in support people in the customer service and graphics side of the business.

Challenges: We are all competing for the same business, and the companies that continued to invest in improved technology and personnel development are going to be in the best position to get their share of the business. Our strategy is to invest in internal growth and advanced technologies.

Future: We will see many changes. For example, digital printing should become stronger because of the reduced setup and changeover time required, as well as the advancements in the quality of digital printing. Digital is good for shorter runs, and many of our customers are not carrying inventory like they did in the past, and they are looking for a faster turn-around time to receive their labels.

Alex Elezaj, VP Sales & Marketing
Whitlam Label Company
Center Line, MI, USA

Performance: 2009 has certainly been a challenging year for the label industry and many others. Although certain segments of business experienced a decline, mainly in the automotive sector, we did experience gains with our government, promotion, and food and beverage customers. We expect the balance of the year to remain relatively flat, although we are expecting a small increase in orders going into the third quarter. Some of the key factors that contributed to our overall health were maintaining a positive environment for our team, staying in close contact with our customer and supply base, and being in a financial position that allows for continued investment.

Changes: One of the keys to our success was the commitment our team made to our various Lean activities and special projects. These initiatives were excellent for teambuilding, reducing costs, and ultimately improving the lead times to our customers. Strategically, we have also prepared ourselves to make the necessary financial investment into new equipment technologies, which will help fuel our growth and customer satisfaction initiatives. Additionally, we have increased our overall sales and marketing footprint and continue to look into strategic M&A opportunities.

Customers: It is very clear that the decline in our economy has affected many of our customers and their purchasing patterns. Our customers have moved toward more frequent, lower volume orders, compared with what we have experienced in the past. With the need to reduce inventories, delivery lead times, and ultimately manage cash more efficiently, our customers depend on us to give them the flexibility and solutions they need – the expectations are higher than ever.

Investment: Yes, we are planning to invest in new equipment. Our investment is being driven by our strategic initiatives to diversify into new markets and increase overall product offerings to our customers. From a personnel standpoint, we are strong believers that having the right people is the fundamental key to success. We continue to focus on the importance of our human capital with recruitment, training, and development programs to achieve these goals.

Challenges: In my opinion, the greatest challenge facing our industry is the weak condition of our overall economy and the numerous options our customers have available to them, especially with the power of the internet. It has never been more critical that we stay in continuous contact with our customers; providing them with the education, value solutions, and superior customer service that will enable us to maintain our leadership position and preferred vendor status.

Future: The narrow web industry continues to be very fragmented. We expect to see continued developments in the M&A arena, as some of the stronger organizations look to capitalize on this opportunistic time in order to achieve both revenue growth and profitability goals.

Thomas Dahbura, Vice President
Hub Labels
Hagerstown, MD, USA

Performance: Our financial health is a lot better overall. The bottom line is better than it was in 2008. Our top line isn't as healthy, but we are definitely in better shape. Sales this year are off about 16 percent, but June was a good month. We have a big book of business, but it isn't so much regular customers orders lately; we are having to bid on business quite a bit.

Changes: We have two parts to our business: the UV side and the water based side. On the water based side we now have only one third of the shop running. We have compressed our work to fewer presses. Shops run better when you pack work onto the presses. When you spread work out it doesn't run efficiently. That's Parkinson's Law: The work expands so as to fill the time available for completion. And we are hiring. I am looking for people who are employed as press operators now. This is a great time to hire.

Another thing that is saving us money is recycling. We found somebody to take all our pressure sensitive material, a company in Virginia that sells it directly to power companies. They drop off a 53-foot trailer, we fill it up and they drive it away.

We are also in the process of looking into TLMI's LIFE project to establish environmentally sound practices here.

Customers: The quantity of customer orders has decreased, but the frequency of the orders has increased. This is increasing our downtime, and that's why we are packing those presses to find a synergy.

You can take care of your bad customers only so long without having your good customers being affected by it. We are focusing more on our good customers so we don't jeopardize the business that they give us. Then you get a customer who comes in out of the blue with a big order, low margins, tight lead times, and your good customers lose their place in line. Sometimes it's not worth it.

Investment: We bought a new piece of equipment and have a major initiative under way now. It's a new process for the marketplace.

Challenges: The biggest threat right now is accounts receivable. We are being squeezed on all sides. Customers are not paying, and vendors are squeezing to get payments from us. Everybody is really edgy. One customer, who was buying from my supplier and from me, owed us a lot of money, and went banckrupt. They weren't on our radar because they were paying early, and paying a discount for that reason. So you have to watch both ends.

Future: The acquisition business is not dormant. It might be slow but it's still active. It's not unusual for us to get approached, at least once a month, by M&A people, or those who are trying to roll companies into a larger entity. There's a lot of money out there. The other people looking to buy want you for your presses or for your customers.

Leslie Gurland, President
Fairfield, NJ, USA

Performance: Our sales are 15 percent lower so far this year compared with 2008, but our profit is the same.

Changes: In order to keep our profits at the same level, we had to lower fixed expenses 20 percent and variable expenses by 15 percent. We did this via layoffs, working with suppliers on pricing, and looking at every single expense to see if it is necessary.

Customers: Our customers are ordering smaller runs more frequently; they do not want to hold inventory. Our customers' demands have increased. For example, they want longer payment terms. Our biggest customers also want us to manage their businesses for them in terms of inventory, planning, etc.

Investment: We just completed the installation of our new computer-to-plate system. We are meeting with rewind companies and will install a new high speed rewinder by the end of the year. We have no plans to increase our square footage.

Challenges: I believe that there are different challenges for small converters and large converters. The challenge for the small converters is to learn how to survive as a small company, which will continue to be difficult, or to grow or be acquired.

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