NAPL Biz Trends

On the Mend

The latest data provide glimmers of hope that the economy is finally gaining some traction. By most accounts, the holiday shopping season was a success. In addition, the Bureau of Labor Statistics (BLS) reports that the economy had a net gain of 200,000 jobs in December on nonfarm payrolls, with a gain of 212, 000 in the private sector. For all of 2011, there was a net increase of more than 1.6 million jobs—almost double the increase during 2010. The unemployment rate, which is based on a different survey, fell to 8.5% in December—its lowest level since February 2009. Weekly data on initial unemployment claims continue to trend lower. Other anecdotal evidence further suggests that the business climate has taken on a slightly better tone—we even may be seeing early signs that the housing market may be bottoming. In perspective, the numbers are not great. They may not even be good. But they clearly show that labor markets, as well as other aspects of the economy, are on the mend. We are not sliding back into recession anytime soon.

What’s this mean going forward? Unfortunately, it most likely means more of the same—an economy that’s mending, albeit quite slowly. The latest Blue Chip Economic Indicators consensus forecast shows GDP adjusted for inflation rising 2.2% this year—not great, but better than the 1.7% increase expected for 2011. However, at this stage of the recovery, the economy should be growing by closer to 4.0% or more.

What about printers? What will the business climate mean for them? The economy is getting better, but not to the extent that it’s going to solve everyone’s problems. The recovery is too tepid for that. Preliminary data from the NAPL Printing Business Panel show that the inconsistency that characterized business in 2011 is continuing. As one Panel member noted, “Business is very sporadic, nothing consistent from month to month.”

Furthermore, despite a pickup in sales, profitability remains a challenge. (See the “Profitability Remains a Challenge for Commercial Printers” post in the State of the Industry Analysis section of NAPL Performance Indicators.) And remember, even if the economic recovery becomes more robust than currently expected, many of our problems are related to structural changes—issues that go beyond what a cyclical bump up is going to fix.

So regardless of the strength of the recovery, we should all be asking ourselves what we are going to do to make 2012 a better year than 2011. In particular, what are we going to do to boost sales? And how are we going to protect and bolster the bottom line? As one NAPL State of the Industry participant says so well, “Hope is not a strategy.”

Andrew Paparozzi                   Joseph Vincenzino

 

Are Signals Ahead Flashing Yellow?

One of the bright spots of the ongoing economic recovery has been business investment in equipment and software—up an inflation-adjusted 15.3% in 2010, while overall gross domestic product (GDP) rose 2.9% for the year. Positive developments in the business sector were also reflected in a vastly improved bottom line. Corporate profits from current production jumped more than 29.0% in 2010, following three years of declines. For the year, profits as a percent of GDP rose to 11.1%—up from an average of 8.8% in the previous two years. However, in relation to the economy, profits are still below the 12.0% mark recorded in 2006. While much of the recent gains reflect profits in the financial sector, profits for this sector were more than 14.0% below 2006 levels. And despite a 72.0% jump in manufacturing profits in 2010, levels remain 14.7% below 2006. Although the economy has regained its previous peak, in terms of profits—we haven’t come all the way back. And there are indications that gaining ground from here will be getting more difficult. In other words: The low hanging fruit may have already been picked.

Among some of the signs pointing to potential difficulties going forward: Profits only grew at an annualized 9.6% clip in the final quarter of 2010, and the increase was entirely accounted for by a 78.9% surge among financial companies. Profits for nonfinancial companies actually declined at a 4.5% pace in the fourth quarter, and among nonfinancials, manufacturing slipped by 35.2%. Of course, one-quarter does not a trend make. But declines in profits among nonfinancials in general and manufacturing in particular for the second half of the year could be pointing to potential roadblocks ahead. Especially when one considers what’s happening to the cost of doing business. Cost inflation can be a problem and, when margins are tight and prospects of pricing power slim, it could be a serious problem. Commodity prices have been rising for some time and cost inflation should not be coming as a surprise to our readers, but it took a spike in gasoline prices to shine a spotlight on the issue. As reported in the May 2010 NAPL Printing Business Conditions, more than 80.0% of our research participants were concerned that cost inflation would squeeze already thin margins. Almost one-in-four were extremely concerned. Given that, if anything, cost inflation has intensified, we suspect that the concern has not abated.

Our inaugural issue of the NAPL Quick and Small Commercial Printers Trends Report shows that of the printers surveyed in this segment almost 40.0% expect costs to rise over the next six months, while less than 10.0% expect costs to decline. (For information on other trends and issues in this segment see the March 24 post in the State of the Industry section of Performance Indicators website.) Getting top-line growth to the bottom line can be challenging. In an industry that’s being redefined and at the same time experiencing aspects of commoditization, the challenge can be significantly more intense. Protecting the bottom line and what companies are doing to pass some of these cost increases along will be overarching themes of future research.

Andrew Paparozzi        Joseph Vincenzino

Profitability: Where is it Headed?

According to the latest data from the Bureau of Economics Analysis, corporate profits from current production in the third quarter were 28.7% above a year ago. Although the year-over-year increases have been trending lower, the gain still compares quite favorably to the 3.9% year-over-year decline recorded in the third quarter of 2009. Going forward, undoubtedly the gains will continue to trend lower. The question remains: At what point does the trend begin to stabilize? Of course, much will depend on the overall strength of the economy. And based on the latest data, the economy is showing signs improvement. But for individual industries, not to mention individual companies, much will also depend on industry/company specifics—costs, pricing power, profit margins, etc.

According to the latest Quarterly Financial Results (QFR), operating profits for manufacturing rose 32.1% in the third quarter of 2010 from a year ago. The increase resulted from a 12.2% gain in sales and a rise in the profit to sales ratio to 8.1%. In the third quarter of 2009, this ratio stood at 6.9%. No doubt, the increase in the ratio reflects the sector’s extensive cost cutting efforts and substantial productivity gains. As for printing and related support activities, the QFR showed that operating profits recorded a similar gain, up 32.3%. However, the increase resulted from a gain in sales of only 2.4%. The operating profits to sales ratio for the industry jumped from 5.8% in the third quarter of 2009 to a reading of 7.5% in the third quarter of this year. Data from the NAPL Printing Business Panel confirm the notion that profitability for the industry is improving, as 36.4% of the Panel in November indicted that profitability was increasing—above the 28.8% that reported decreasing profitability. In December of 2009, the percentages were quite different; increasing (16.8%), decreasing (57.2%).

Despite the onset of recovery, printing companies as represented by participants to the NAPL State of the Industry Survey are not overly bullish on 2011. See the “Commercial Printing Industry 2011: Realistic Expectations and Lessons Learned” post in the State of the Industry Analysis section of NAPL Performance Indicators. While almost 70.0% expect to grow in 2011, only 39.2% of participants indicated that hey expect profitability to increase in 2011. As participants indicated, a key factor restraining gains in profitability will be pricing power—only one in four (24.6%) participants expects to raise prices next year. Without further improvement in pricing power, additional sales gains will be needed to offset rising costs from energy, taxes, employee benefits, etc.

Andrew Paparozzi        Joseph Vincenzino        Kong Lue Wang

Prices and Costs and Profitability: Oh My!!

With much of the media focus on recently enacted health care reform legislation, pending financial reform, and the continuing large number of unemployed, the government’s inflation reports for the most part have been pushed to the backburner—not eliciting much attention when released. One reason for the muted reaction: Overall inflation has been relatively benign to non-existent. The latest government data on inflation from the Bureau of Labor Statistics (BLS) show that on a year-over-year basis prices at the producer level have begun to trend upward. In February, the index for finished goods was 4.4% above a year ago—the third monthly year-over-year increase in a row after 11 straight monthly declines. Granted, when food and energy are excluded, much of the increase disappears. The PPI for finished goods excluding food and energy was up 1.0% in February compared to a year ago. On a similar basis, the CPI was up 1.1% in March. These are not exactly the kind of inflation data that would generate deep concerns over an inflationary spiral.

Nonetheless, we can’t afford to be too complacent over inflation—especially given the competitive nature of our industry. Granted, data on prices and profitability from the NAPL Printing Business Panel are improving. As of February, fewer members of the Panel report prices are falling and the highest percentage in two years—46.2% report prices are steady. Reports of declining profitability—47.8%— still exceed reports of rising profitability by two to one, but the gap has narrowed from 10 to 1 last spring (73.7% to 6.9%). However, if history is any guide, pricing power will not be returning to our industry until the recovery is well established, if then—if you’re essentially in a commodity business it may not be returning.

Insert the likelihood of rising business costs (paper, ink, toner, energy, taxes, fees, etc.)—40.7% of the Panel report paper prices increased in February, up from just 6.9% last August and the highest reading since December 2008—and you’re staring at quite a challenging combination. Cost cutting and productivity gains remain essential in providing some relief from any negative pressures on profitability, but relief is not a cure. In many cases, the latter may require fundamental business model/value proposition changes in order to move away from the commodity aspects of print. And remember, just adding standalone services is far from being the answer—technology is quickly commoditizing the services printers have been diversifying into. For more discussion on avoiding commoditization and confronting the “changing rules of recovery,” see the upcoming NAPL Strategic Perspective 2010. A key rule—regardless of the state of the economy—is one of picking our value proposition carefully. For many, this will entail a move toward providing integrated solutions. That journey isn’t going to be easy and there’s no yellow brick road to follow, but for many companies that want to become leaders or remain leaders—the trip is a must.

Andrew Paparozzi        Joseph Vincenzino         Kong Lue Wang

Are Profits on the Mend?

The latest data from the Bureau of Economic Analysis (BEA) show that corporate profits rose in the second quarter of 2009 to $1,250 billion, almost $68 billion above the previous three months and 11.3% above the low point recorded in the final quarter of 2008. The recent increase is definitely a move in the right direction. But we need to keep the improvement in perspective— corporate profits remain almost 11.0% below a year ago and almost 25.0% lower than their peak in the third quarter of 2006.

Something else we need to keep in perspective: To a large extent, the increase in profits reflects gains achieved through cost cutting—companies slashing labor costs and other expenses. There is nothing wrong with boosting profits from the expense portion of the income statement—becoming leaner and more efficient is part of the healing process during and following a cyclical downturn. But, at some point, in order to see a sustained pickup in profits, the revenue end of the income statement will need to contribute. As is being reflected in the recent jump in nonfarm business productivity (output per labor hour) of 6.6% in the second quarter, companies are leaner and better positioned to take advantage of a pick up in sales. Once recovery establishes a firm foothold, look for profits to benefit significantly. But it’s not going to be across the board. There will be winners and losers—both among and within sectors. Market redistribution marches on.

What are you doing to be on the right side of market redistribution in the commercial printing industry? Based on the latest data from the NAPL Printing Business Panel, pre-tax profitability fell in August for 65.5% of the Panel, while rising for only 11.9%. Not great, but better than the previous month. With commercial printing industry sales down 16.0 % year-to-date, results of widespread lower profitability is not very surprising. And the road to repairing profitability will be slow and bumpy. But it would be a mistake to wait on a meaningful recovery in order to see improvement on the bottom line. How are we preparing for recovery? What steps are we taking to seize upon the numerous opportunities that will present themselves? These are questions we should already be asking ourselves. A “recovery preparedness checklist”—highlighted in the upcoming NAPL State of the Industry Report, Eight Edition—provides a good starting point. But, with most things in our industry, acting on the information—executing—remains key. We will not be the same industry coming out of the downturn as we were going in. Why? The answer clearly points to structural changes.

Andrew Paparozzi        Joseph Vincenzino        Kong Lue Wang

Another Encouraging Sign

The Bureau of Economic Analysis (BEA) revised its estimate of first-quarter GDP, which now shows a contraction of 5.7% for the period—slightly better than the initial estimate of a 6.1% decline. However, the more encouraging part of the report was not in the headline GDP data but rather in the estimate of corporate profits. For the January-March period, corporate profits from current production rose $42.6 billion from the previous three months—the first quarterly increase since the second quarter of 2007.

Granted, the increase pales in comparison to the $408 billion decline in profits that occurred during the intervening period. Furthermore, the uptick resulted entirely from a $116 billion increase among financial corporations—profits for nonfinancials continued to decline, albeit at a slower pace. But, as discussed in NAPL Printing Business Conditions: May 2009, “we may be seeing a bottom.” This represents just another sign that we are beginning to see some stabilization in the economic environment.

Something else we’ve been discussing: Don’t just focus on cyclical developments. Regardless of when economic recovery takes hold, not everyone is going to participate. A deciding characteristic: recognizing and acting on structural changes—and not just those within the commercial printing industry, but throughout the economy. According to April responses from the NAPL Printing Business Panel, profitability still was declining for over 70% of the Panel—just slightly better than the record level that reported declining profitability in the previous month. No doubt economic recovery will reduce this percentage further. But companies just counting on a better economy to right their ship at some point are likely to discover they are getting left behind, experiencing an uncomfortable return of choppy waters. For an explanation of structural change and the role it can play in determining industry leaders, see the soon to be released NAPL Strategic Perspective 2009.

Andrew Paparozzi        Joseph Vincenzino        Kong Lue Wang

Not All Productivity Changes Created Equal

According to the Bureau of Labor Statistics (BLS), productivity for the nonfarm business sector (defined as output per hour) was 1.8% higher in the first-quarter of 2009 than a year ago. Productivity gains are usually associated with helping to hold the line on unit labor costs by producing more for each hour of labor. But be careful, as we all know, on the surface statistics can be misleading. The first-quarter increase resulted because a drop in total hours (-5.8%) outpaced the drop in output (-4.1%). Data show that unit labor costs for the first quarter were 2.4% above a similar period a year ago—the highest year-over-year increase since the second quarter of 2007. The culprit: compensation per hour rose by 4.2%. No wonder maintaining profitability is such a significant challenge, especially when there’s an absence of pricing power. The components that go into determining productivity and unit labor costs make a difference—we shouldn’t just focus on the purely statistical calculation—not all productivity changes are created equal.

What about the manufacturing sector? BLS data show that results for productivity and unit labor costs were vastly more adverse for the overall manufacturing sector. Productivity fell 3.3% in the first quarter from its level of a year ago. A steep drop in output (-14.0%) outpaced the sizable drop recorded in hours (-11.1%). Unit labor costs skyrocketed 11.5%, as compensation per hour in manufacturing jumped 7.9%.

What about print? The BLS only publishes industry data annually, and the latest available for the printing industry is for 2006. Nonetheless, we know that production hours are being slashed. According to BLS data, total production hours in the commercial printing industry were down 14.2% in the first quarter from a year ago. Over 80.0% of the NAPL Printing Business Panel reported in April that their factory payroll hours were lower than a year ago—only 4% reported that hours increased. Despite the drop in hours, 41.5% of the Panel report that productivity is lower—a year ago the percent reporting lower productivity was 23.3%. A major reason for the deterioration, volume/output also was lower for almost 80.0% of the Panel. Judging from the plunge in commercial printing industry sales—almost 15.0% during the first quarter— it would appear that the overall drop in output is outpacing the decline in hours. In these difficult times for the printing industry, managing factory productivity and costs is especially critical, and being able to continuously monitor performance is vital. NAPL Performance Indicators can provide valuable assistance in this area.

Andrew Paparozzi        Joseph Vincenzino        Kong Lue Wang

Still Contracting

In our most recent posts, we’ve been discussing the appearance of some hopeful signs that the economy is starting to stabilize. Nonetheless, as the latest labor market data vividly highlight, the recession is still very much with us. The economy shed another 663,000 nonfarm payroll jobs in March, bringing the decline during the past six months to more than 3.7 million and 5.1 million since the recession began in December 2007. The unemployment rate jumped to 8.5% in March, the highest since November 1983.

Job losses were widespread among industry sectors, with only health care, social assistance, and the Federal government adding jobs. Print and related support activities shed close to 8,000 positions in March, bringing the drop during the past 12 months to 65,800 or close to 11.0%. This compares to a 3.6% decline for the economy as a whole and a 9.9% job loss for the manufacturing sector.

Data from the Bureau of Economic Analysis (BEA) show that pre-tax corporate profits from current production (profits with inventory valuation and capital consumption adjustments) in the final quarter of 2008 were down almost 22% from a year ago, and without the adjustments the decline approached 37%. The environment for profits remained quite challenging in the first quarter of 2009 as well. Although headlines have focused on large financial institutions and autos, the drop in profits has been widespread among industry sectors. With such deep erosion to the bottom line, is it any wonder that companies continue to slash employment as activity shrinks and the need to reign in costs intensifies? Print is definitely no exception. Almost three-quarters of the NAPL Printing Business Panel (a record level) reported in March that profitability was decreasing. But let’s remember, there’s more to improving performance than cutting employment and costs. For some guidance in this area, visit the Metric Tips section of NAPL's Performance Indicators site .

Andrew Paparozzi                        Joseph Vincenzino                        Kong Lue Wang