I was interviewed today by Cary Sherburne at Whattheythink.com on the state of the printing industry generally and Consolidated Graphics specifically. To see the full interview text, please click: http://members.whattheythink.com/articles/article.cfm?id=41207.

Consolidated Graphics’ Jim Cohen on the State of the Industry and CGX

By Cary Sherburne on November 30, 2009

Mergers and Acquisitions Chief has positive outlook, shares advice
As this recession drags on, WhatTheyThink is reaching out to various companies to see how they are doing, and what they are doing to survive and thrive. We had the pleasure of speaking recently with Jim Cohen, Executive Vice President of Mergers and Acquisitions at Consolidated Graphics. He had some very interesting insights to share.

WTT: Jim, how has CGX weathered the current economic storm and what steps has the company taken to prepare for a different future?

JHC: We’ve been beaten up just like everyone else, but because of our strong balance sheet we are weathering the storm and will be well positioned when the economy begins to improve. On a relative basis, we are doing better than a lot of folks in the industry. For example, last quarter revenues were down 15% from the same quarter a year ago. But many of the companies I am looking at today have revenues that are down 25-50%. So on a relative basis I shouldn’t complain too much. Our cash flow is still strong, but many of the companies in our industry today are experiencing negative cash flow. The environment out there is brutal.

WTT: What have you been primarily focused on as a company over the last year or so?

JHC: We always focus on the cost side of the business but even more so over the past year.
Our Presidents have been making sure that labor is under control. Most of us in the company have taken salary cuts, and there have been headcount reductions as well.

WTT: Does that mean you are not investing in the company at this time?

JHC: No. We continue to make significant investments in the company, and we are spending a lot of money on technology and on training. Also, we are making acquisitions and hiring more college graduates than ever into our Leadership Development Program, which is three full years of training. I believe, we have done everything a company can do to weather the storm and be well positioned when it turns around.

WTT: What about the market as a whole?

JHC: If you looked at the number of traditional commercial print companies in 2001 before 9/11, not including companies printing phone books, newspapers or magazines, there were 50,000 printing companies. Then after 9/11, that whittled down to about 35,000 commercial printing companies by 2003. I am hearing that when this recession corrects itself, we will go down to about 20,000 companies. I am not sure where the data came from or whether it is right, but from what we see here, most of the companies we are looking at today probably won’t be around a year from now if we or someone else doesn’t buy them. The other interesting thing is the lag that exists in any recovery. What I mean by that is that we will see printing companies continue to fail even a few years after the recovery begins.

WTT: What does the funding situation look like for these companies with their banks? One would think with all that small business stimulus money out there, there might be some short-term help for them.

JHC: At this point, just with printing companies we look at, most are in default under their credit agreements, not necessarily behind in payments, but in violation of their covenants. This gives the bank the ability to foreclose, but they are not as quick to foreclose as they were early in the downturn. Now they are slower because they are so overwhelmed with defaulting clients that they don’t have the resources to foreclose as quickly, and they know that they won’t get any value out of the collateral. I have heard horror stories about presses that are basically going for the price of pulling them out of the plant. One printing company owner I spoke to recently told me that his bank is trying to hire 30 new workout officers, so you know there is a backlog. This means that any forbearance being experienced by printers today is likely to be short-lived. Regarding short term stimulus money, I haven’t seen any printing companies benefit from it.

WTT: So what effect do you think all of this has on new equipment purchases?

JHC: It’s pretty simple, I’m afraid. Vendors and banks just are not lending money to printing companies. Fortunately, Consolidated Graphics can still buy equipment because we have lines of credit and ample cash flow. But the smaller companies that have to get financing from their banks have a serious problem. Most banks are not financing new equipment because even new equipment has very little collateral value from an equity standpoint. The silver lining to this, of course, is that I don’t know any small printing company owners that are all that interested in buying new equipment in the current environment.

WTT: Looking ahead, what do you see in your crystal ball for the future of the printing industry?

JHC: The future will be different in the sense that there will be fewer companies. It will be a good environment for those that survive, but the way printing occurs and the demand for print will be quite different. We are seeing big opportunities on the digital side. We have been told by Kodak that we have the best digital printing platform in the world (and we have more Indigos than NexPresses, so Kodak didn’t have to say that). A year ago, we spent $82 million on equipment and now have 220 state-of-the-art digital presses in 66 of our 70 companies. That includes about 70 indigos, 30 NexPresses, 25 iGens, many roll fed Xeikons, and the new HP digital web inkjet which we are using to print customized text books. We also have the InfoPrint 5000 in that same facility. This is an example of the future of what we can bring to our customers. We can now make high quality, affordable customized textbooks, printed on demand. And of course, we are also the world leader in printing photo books on demand.

WTT: I notice that you have a facility in Prague. What is going on there?

JHC: We actually have two facilities in Prague. One of them we built from scratch about a year ago, our first ever greenfield facility. Before that we had a joint venture with an existing printer. We put five NexPresses in his plant and trained his people, and then we decided we needed more capacity to cover distribution in Europe for a couple of customers. There are about 15 digital presses in the new facility, and we still have our own presses in the joint venture facility as well. We print a lot of digital photo books there. We didn’t go to Europe because we thought it would be a nice place to grow our business; we went there because a customer wanted faster distribution in Europe. This is another example of the kind of things we can do with our financial structure. We put a toe in the water with the joint venture and then built the facility. Needless to say, our customers are thrilled with this level of service and commitment to their businesses.

WTT: You have talked about digital printing as a big part of the future. What other aspects of “digital” do you think are important?

JHC: Digital in general is a big part of the future, including cross media, personalized URLs, Twitter, blogs (heck, even I have a blog at http://printingindustrymergers.blogspot.com), data management, data analytics … We are getting into data analytics in a big way. A number of our plants are getting certified for SAS 70, the gold standard for data security. At one facility, a casino customer had a disk delivered in an armored truck, and we loaded pallets in an armored car to return the printed materials. Of course, loading pallets in an armored vehicle is not your everyday occurrence, but this is a good example of how some customers are taking security very seriously. Data is important in terms of new ways to bring value to customers. Our biggest sales opportunities today are not to print buyers but instead to marketing departments where we can show that we are a valued consultant who can increase a customer’s sales by managing effective print campaigns for them. Digital and print on demand has a lot to do with this. It is very effective in terms of lowering the total cost of ownership for the customer.

WTT: What about talent? These types of services require a different type of talent than most printing companies are used to hiring.

JHC: We have had a Leadership Development Program in place for over 15 years. It is a three-year training program and we continue to hire more newly minted college graduates into this program than ever before, probably as many as 150 in the fall and spring combined. We invest three years in their training, but after they get out of training, we invest another six months with them on sales training if that is what they are interested in. In addition, if any of the trainees want additional training in digital and our CGX Solutions technology, we move them to Houston for three months and pay for their housing while they learn firsthand about all that we are doing with online solutions and digital. We also offer our LDPs the opportunity to live temporarily near one of our five digital supercenters for several months to help out with the busy season and learn digital printing first hand (our five digital supercenters house about 20 digital presses or more each and are in Prague, Czech Republic; Medford, Oregon; St. Louis, MO; Minneapolis, MN; and Memphis, TN). Out of our 70 companies, about 20 are being run by graduates of that program. It is a good pipeline of talent. They also become some of our best sales people. Not surprisingly, they also are some of the most sophisticated technologically and so they readily embrace all of our digital initiatives. We also make these employees available to customers on a regular basis to help them onsite, sometimes for years at a time.

WTT: Is CGX still looking to acquire companies? What qualifiers do you look for in a good acquisition?

JHC: Absolutely. We did one last month, and in many cases we don’t issue press releases so you wouldn’t necessarily know. Last month’s acquisition was a company that was doing about $15 million per year in sales, but was probably doing about $10 million at the time of the acquisition. We actually bought certain assets from the bank directly. We combined it with Nies/Artcraft. We are looking at hundreds of opportunities, certainly more distressed companies today because that is what is out there mostly, but we are also still looking for the best companies we can find. That being said, if a company isn’t doing well today (most are not), there are still ways we can get deals done that are mutually beneficial. A lot of times, if people have their back against the wall, we can help them. They should call me.

WTT: What is different about CGX that allows you to compete with other megaprinters and startups such as Roy Grossman’s MSP, Fermata Capital’s planned 10-site clean-sheet design and printers to the trade such as 4/Over?

JHC: On the one hand, nobody can do better than we can in terms of the technology and the equipment we have. We invest heavily in our businesses. When HP comes out with a new digital inkjet web, we are the ones that get it, for example. We can invest when our customers ask us to (for example, not many printing companies can open a facility overseas like we did in a matter of months simply because a customer asks them to). We have a very strong balance sheet, so we don’t need bank approval to do these things. We can do what makes sense from an ROI standpoint. We look like a large company on the outside, but we are really 70 companies that are fundamentally entrepreneurial and have a local presence with a big company infrastructure behind them. When we need to, we can do a lot of things smaller startups can’t do, like distribute and print worldwide. Early in our digital expansion, we did one job which was a state test that required us to print color, customized score reports for each child in the state. The job had to be completed in a week, and each report was unique. No one else in the country had the ability to do it. We were able to run our presses 24/7 and get it done. We built technology that links our digital presses together so if we print a photo book in Memphis, it will be the same in Prague or anywhere else for that matter. We have spent tens of millions of dollars developing our proprietary technology solutions, so no one is more advanced than we are in this area. We continue to have the cash flow and the financing in place to continue to grow.. That is very hard for anyone to compete with particularly in a down economy.

WTT: What is the infrastructure that connects and unifies your plants, in terms of MIS, workflow, storefronts, that kind of thing?

JHC: We have 30 programmers that design our online storefronts. We also outsource to experts where necessary in terms of our own demand. We also have just hired a new head of IT from a larger public company, and he will head up both our IT departments and our CGX Solutions departments from a technology development standpoint. We are a leader in the printing industry in technology, but our goal is to have a world class IT department, not just when compared to the rest of the printing industry, and I’m confident Paul Garner (our new EVP and CIO) will get us there. We have been doing online storefronts for the last 10 years, and back then, we had to write the code ourselves. Over the last two years, we have rolled out Version 2.0. It is a highly customized solution, and we think is better than anything offered in the market. We have spent over $20 million developing it. so it had better be. We have also designed workflow software internally that ensures compatibility with anything we distribute and print. We have between 400 and 500 active electronic storefronts, each customized for a specific customer. From an MIS standpoint, most of our companies use EFI’s PSI for estimating and accounting. Some use Hagen, and some use legacy systems, but we typically switch people over to PSI. We will probably have to switch to something else in the future, but fortunately that is not my area!

WTT: There is a great deal of talk about how this recession is different and that the industry will be facing “new market realities” when we exit the downturn. What do you think that means for the industry in general and specifically for CGX?

JHC: When we talk about cross media, and being involved in marketing, blogs, Twitter, text messaging, personalized URLs, it was happening anyway even before the economy got bad. The way we will make money is by offering solutions (not just price quotes) that lower the total cost of ownership for our customers while maximizing their sales and results. The mantra we have emphasized to our sales people is to be a consultant and provide meaningful advice. For example, print on demand might cost you more per piece, but it will save you in fulfillment or get you better response rates. Print on demand is big. Also, as we discussed before, data analytics is huge; our solution is homegrown. Casinos especially love the data analytics. A lot of this alternative media work leads to print, too.

WTT: If you could give three pieces of solid advice to today’s small to mid-sized printer, what would those be?

JHC: In the short term, I would say manage your costs, especially labor costs or you will jeopardize your survival. It can be very difficult in a tough environment for family-owned or privately-held businesses to cut back on employees because they are like family. In the end, private companies do the right thing but ultimately when they make the tough calls it is already too late, and the company can’t recover. You have to be nimble and quick to anticipate the need to reduce labor costs through headcount reductions and wage cuts.
The best advice for a printer is to invest in new technology and to sell solutions. Don’t just be a job shop quoting on job after job. Offer web to print and digital printing, for example. Provide solutions to customer problems. Be a consultant and a trusted advisor. Bring value in terms of state-of-the-art information and technology to your customers. If you can’t make the investment in new technology, you are not going to survive—not just equipment, but the software as well. The verdict is also out on how quickly you will need to reinvest, but so far digital presses seem to be like laptops that need to be replaced every couple of years due to upgrades in technology. Even on sheetfed presses, makereadies get faster every year. Prepress also requires a tremendous commitment of capital these days just to stay state of the art.
They should develop a diversified customer base so they are not all in real estate or auto books, for example. See what happened to the shops that had too much concentration in these areas during this downturn? Don’t have any one customer or industry represent more than a small percentage of your sales. Do credit checks on all customers, and I mean serious credit checks. With a public company, track stock price. If stock starts trading below a dollar, that should be a red flag. That is one way we have saved a lot of money in a bad economy, even with historically good companies. Your best customer a year ago may be your biggest credit risk today. The world is shifting, so you need to pay attention.

WTT: Is there anything else you would like to add before we close?

JHC: We are certainly sympathetic with what everyone is feeling out there because we are feeling it too. We are fortunate to be well positioned, and that is why we are still actively looking for acquisitions. We are optimistic about the future, and I would encourage printers reading this to call me if they would like to be a part of that future together.

Last month we completed the acquisition of the business of Kohler & Sons in St. Louis. This was an interesting transaction because the business was not performing at historical levels. This is a great example of the kinds of acquisitions we are making in this very difficult economic environment for printers. Historically, Kohler & Sons had revenues in excess of $15 million. Today, that number is probably closer to $10 million. We completed this transaction with extraordinary speed and efficiency, and on the very same day that Kohler shut its doors, we began servicing Kohler's customers out of our Nies facility in St. Louis. All work in process was completed without any issue. Because of our expertise in executing transactions such as this, Kohler's customers did not miss a beat when the Kohler facility ceased operations. All three Kohler brothers are currently working at Nies.

Banks Licking their Wounds and Being More Patient

One interesting trend I'm noticing is that at the front end of the downturn, banks were very quick to shut down printers who were in financial distress and had violated financial covenants in their loan agreements. Today, some banks are actually being a little more patient because they realize that if they foreclose on their liens there may be even less realizable value to them. For example, the used equipment market is a disaster and selling used equipment isn't going to get a bank any meaningful recovery.

Gross margin deterioration

Seeing a lot of companies with significant gross margin deterioration. Explains why the competition among printers is so heated - folks are giving away print just to keep the cylinders running. This is bad news short term for printers who are still trying to make money, but good news long term since selling under cost is not a viable long term strategy and those companies practicing it will drive themselves out of business in fairly short order.

Couple of Interesting Articles on Strategy

Click on this link (www.cgx.com) and go to the two articles I wrote last year on CGX's M&A strategy (scroll to bottom of page). All still true although we are being even more creative in this environment.

Observations from the Front Line

This is officially my first post on this blog. The purpose of this blog will be to share information on the state of the printing industry and to stay in touch with printing company owners and others who are involved in merger and acquisition activity in our industry. Right now, our industry is going through a tremendous shakeout. In 2001 there were 50,000 printing companies in the United States. By 2003 after the 9/11 shakeout, there were 35,000. What I'm hearing today is that when the dust settles after this recession there may be 20,000 or fewer printing companies left standing. It is brutal out there. We are feeling it just like everyone else (just look at our recent 10-Q...not pretty). We are still actively acquiring printing companies and being very creative with deal structures due to the challenges being felt by virutally every company fortunate enough to still be competing in today's environment.