Reprographics 101

On March 1, 2010, SP issued a press release to say that SP has hired a new “Group Managing Director.” (see below). The name of the new guy is “Tony” Foley.

When I checked Service Point’s corporate (Spain) web-site and hit the tab for the “management team” and the tab for the “board of directors”, I found no mention of Rafael Lopez-Aparicio Areilza.

When I checked Service Points’ UK web-site and hit the tab for board of directors (of the SP UK operation), I found Rafael listed there …. And it says this about Rafael:

“Rafael López-Aparicio Areilza – Global Operations Director since 2001 
Service Point Solutions, S.A.”

But, it may well be that the SP UK web-site has not been “updated” for the change in management. (Or, maybe, Rafael is still on the board of the SP UK operation.)

Note that on Hoovers.com, Rafael is (still today) listed as the “CEO” of SP.

The “$64,000 questions” are …. is Rafael gone “completely” from SP, or is he still with SP, but simply, because of an oversight, no longer mentioned as a member of the management team or board?

If Rafael is gone from SP, let me be one of the first to congratulate him on his retirement from SP and on his terrific accomplishments as the former CEO of the 2nd largest reprographics enterprise in the world. He’s a good guy.

HERE’S PART OF THE PRESS RELEASE SP ISSUED:

1 March 2010.- Service Point Solutions, S.A (ticker: SPS.MC) announces the hire of Anthony, or Tony, Foley, as the company’s Group Managing Director. In this newly created position, Tony will be responsible for the day-to-day management of Service Point’s business with primary focus on the development of the unified sales, marketing, service and customer policy put in place by the company in 2009 which prioritises the AEC, corporate, finance, education and public sector segments.

Before coming to work at Service Point, Tony was Senior Vice President of International Sales and Worldwide Operations at Quest Software, a company he joined in 2000. Under his leadership, the software maker’s international business jumped from $13mn to $320mn.

Before working at Quest, Tony headed up the Southern European business of Computer Associates between 1995 and 2000, where he coordinated sales and marketing policy, with a stint before that in General Electric in corporate and business development at GE Capital.

At Service Point Tony’s main mission is to boost the company’s multilocal strategy while speeding up development of the group’s integrated approach to customer, service and operational strategy.

Mirroring Service Point’s international footprint and the fact that of 90% of revenue is generated outside Spain, Tony will be based in London.

– – – – – – – – –

Joel’s added note about Tony: I think I read somewhere that Tony previously worked for HP’s large-format business. If that’s true, then he does have at least some exposure to the reprographics industry.

CORRECTION: Rafael pointed out to me, in an e-mail on March 26th, that Tony (to the best of Rafael’s knowledge) did not previously work for HP. Hmmm, I guess that means that Tony does not have any reprographics industry experience. In addition, Rafael’s e-mail pointed out that Tony was brought in to lead SP’s Sales effort. (I seriously hope someone gives Tony the short-course in reprographics; how the industry works, how businesses make money, blah, blah, blah.)

I just noticed, this morning, that Service Point, I guess very recently, issued a press release covering its 2009 full-year sales and earnings…..

You can find that press release at this web address:

http://www.servicepoint.net/es/press/docs/PR-SPS%20Results2009.pdf

The lack of transparency in Spain-based, public-company-reporting continues to be very interesting.

SP’s press release does not mention anything specifically about Q4 2009 Sales (or Q4 2009 vs. Q4 2008 Sales), but, when you do the math to extrapolate what their Q4 2009 Sales were, you can see that Q4 2009 sales came in at 12.8% less than Q4 2008 Sales.

Considering the fact that Q3 2009 Sales came in at 18.3% less than Q3 2008 Sales, SP’s sales performance for Q4, comparatively speaking (Q4 vs. Q3) was not all that bad, trend-wise.

Q3 2009 Sales versus Q3 2008 Sales – off 18.3%
Q4 2009 Sales versus Q4 2008 Sales – off “only” 12.8%

Does this mean that SP has seen the worst of the current recession?

For the “full-year” 2009, SP reported:
Sales of 216.5 million Euro
Normalized Profit of .6 million Euro

For the first 9 months of 2009, SP previously reported:
Sales of 162.1 million Euro
Normalized Profit of 1.6 million Euro

Comparing the two sets of numbers above, it looks to me like SP lost 1.0 million Euro in Q4 2009.

Let’s do an ARC vs. SP comparison:

ARC’s numbers:
Sales decline: 2009 vs. 2008 – Sales decline was 28.4%
ARC Full-year 2009 Sales- $501.5 million Dollars
ARC Full-year 2009 Net Profit – $22.4** million Dollars
Net Profit as a Percentage of Sales – 4.5%**
(** Does not take into account charges for Goodwill Impairment or write-down of intangible assets, but does, I think, include the one-time charge ARC took for the credit restructuring completed in the Fall.)

Service Point’s numbers:
Sales decline: 2009 vs. 2008 – Sales decline was 8.9%
SP Full-year 2009 Sales – 215.5 million Euro
SP Full-year 2009 Net Profit – .6* million Euro
Net Profit as a Percentage of Sales – 0.3%*
[* Does not take into account any charges SP may have taken in 2009 (or for 2009) for Goodwill Impairment.]

Hmmmm, Economists estimated that sales of new single family homes would rise 3.8% in January. But, sales did not rise, they declined. And, at -11.2%, the decline was significant. So much for our so-called expert economists. (Where is my crystal ball?; I think I should loan it out.)

As reported in the Wall Street Journal today (February 24, 2010)……

U.S. New-Home Sales Drop 11.2%
By JEFF BATER And DARRELL A. HUGHES

WASHINGTON—U.S. new-home sales unexpectedly fell in January, setting a record low and erasing all gains made in the market during the past year as the economy recovers from recession.

Demand for single-family homes fell 11.2% from the previous month to a seasonally adjusted annual rate of 309,000, the Commerce Department said Wednesday.

Economists surveyed by Dow Jones Newswires had estimated sales would rise 3.8%, to 355,000.

It was the third drop in a row. Sales in December fell 3.9%, revised from an originally reported 7.6% decline. The new-home sales report is volatile because it is based on a particularly small sample. The government said it was 90% confident that the true change in new-home sales in January was between minus 25.2% and plus 2.8%.

The 11.2% decrease carried sales to their lowest level since records began in 1963. Sales fell below the level of 329,000 in January 2009 that analysts had considered the bottom for the market. Over the past year, sales had climbed, albeit slowly and unevenly, because of low prices, low mortgage rates, and tax incentives. But Wednesday’s report wiped out the advance and showed, year over year, sales were 6.1% down from January 2009.

While the report Wednesday was depressing for the housing sector and cast serious doubt about the housing recovery, the government last week released data containing promise for future demand. It reported single-family home construction permits inched higher in January after two solid gains. The third straight increase suggested builders might be stocking up on permits in anticipation of demand from the extension of the home buyer’s tax credit. The $8,000 incentive for first-time buyers was renewed through April.

Wednesday’s new-home sales data showed inventories picking up slightly. There were an estimated 234,000 homes for sale at the end of January, up from 233,000 in December. The months’ supply at the current sales rate rose, to 9.1 from 8 in December.

The median price for a new home fell, year over year, in January by 2.4%, to $203,500 from $208,600 in January 2009.

Regionally, January new-home sales dropped 35.1% in the Northeast, 11.9% in the West, and 9.5% in the South. Sales rose 2.1% in the Midwest.

Regarding the previous post …..

I just went to http://www.pleaseactaccordingly.com and saw that they, in a post on their site in late January, hit both nails right on the head. Amazing.

They estimated that ARC’s Q42009 sales would come in at $111.7 million. And, that’s what ARC’s sales came in at.

They estimated that ARC’s Q4 2009 EPS would come in at $.01 per share. And, that’s what ARC’s EPS came in at.

Congratulations, Brad! (But, I still don’t think you are going to win your bet about the ABI Index getting over 50 in Q1 2010.)

Okay, ARC released its Q4 2009 and Full Year 2009 results this afternoon (Feb 23, 2010.)

Let’s see how my estimates compared to “reality” (even though reality is something I never claim to be aware of).

In the post I did in late January, I estimated that ARC’s Q4 2009 Sales would come in at $113.0 million.
In the earnings release ARC published today (Feb 23rd), ARC’s Q4 2009 actual Sales came in at $111.7 million.

In the post I did in late January, I estimated that ARC’s EPS for Q4 2009 would come in at $.03 per share.
In the earnings release ARC published today (Feb 23rd), ARC’s Q4 2009 actual EPS came in at $.01 per share.

Not bad for a complete amateur “guestimator”, huh?

It’s my understanding that most of the financial analysts who follow ARC, estimated that ARC’s Q4 EPS would be a loss.
Well, surprise, surprise to them; ARC managed to earn a profit in Q4, as I suspected would be the case.

Overall comment: In spite of the most challenging year (2009) the U.S. reprographics industry has faced since the Great Depression, which pulled down ARC’s sales 28.5% from 2008, ARC managed to earn a profit in 2009 (adjusted net income of $17.2 million, EPS $.38). That’s unbelievable performance, considering the times.

From Reed Construction Data
January’s Construction Starts Rise Led by Commercial Projects
February 22, 2010 – Jim Haughey

The value of construction starts increased 4% in January after a weak December in spite of continuing unseasonably poor construction weather. Starts were 25% higher than in the previous January. Job-site construction spending fell 10% since last January. Interpret the divergence this way. The sharp decline in starts in early 2009 cut starts below completions leading to the year-long fall in construction spending. Starts plunged nearly 50% from August 2008 to June 2009. Since then, starts have rebounded nearly 50% so the pipeline of work is again expanding and will lead to resumed increases in monthly construction spending in a few months, with progressively larger gains through 2011.

Residential, heavy and institutional building starts were all about the same in January as in December. The major change was a 47% jump in commercial building starts, which reversed a similar drop in the previous month. Hence, this is not a signal that the commercial starts trend has abruptly improved. Still, there is a hint that improvement is coming soon.

The credit access problems that have plagued developers for a year-and-a-half are changing. Since late 2008, loan denials have come with one or more of three reasons. Lender has no money to lend. Lender is reducing real estate loan exposure. Or lender does not think developer can earn enough on the completed building to repay the loan.

Compared to a year ago, the no-money-to-lend problem has lessened and will lessen more, but remains a serious restraint on construction. The withdrawal-from-real-estate lending problem has worsened and will worsen a little more into the spring. Bank examiners are forcing lenders to be more cautious in real estate lending. But emergency loans from the Federal Reserve Board will keep this problem from getting significantly worse.

Loan denials due to unacceptable cash flow projections are becoming less frequent with significant improvement ahead. A year ago, a speculative building would have been completed in a depressed market that was expected to get worse, sharply dropping asset values. Today, the same speculative building will be completed in a market that will be slightly more depressed but is on the upswing, with asset values expected to rise for three or more years.

Here’s the internet address of the most recent article (Jan 29, 2010) authored by Kermit Baker about (depressing) conditions in the U.S. Architecture industry:

http://www.aia.org/practicing/AIAB082184

Okay, it’s “SWAEG” time –for ARC’s Q4 2009 results!
(“SWAEG” stands for “silly-wild-ass-EDUCATED-guess.”)

In November, when I posted my “guess” at ARC’s Q3 2009 Sales and EPS;

– I guessed that ARC’s Q3 2009 Sales would be $118.0 million.
And, ARC’s actual reported Q3 2009 Sales ended up being $119.4 million.

– and, in spite of the fact that the First Call” consensus estimate was for $.01 EPS, I guessed that ARC’s Q3 2009 EPS would be $.06.
And, ARC’s actual reported Q3 2009 EPS was $.06 (so I was “spot on” with that particular guess.)

In that same November post, I also guessed what ARC’s Sales and EPS would be for Q4 2009;

– I guessed that ARC’s Q4 2009 Sales would be $110.9 million.

– and, in spite of the fact that the First Call consensus EPS estimate, at that time, was that ARC’s Q4 2009 EPS would be a loss (if I’m recalling this correctly, of around -$.03, I guessed that ARC’s Q4 2009 EPS would be $.00.

ARC will not report its actual Sales and EPS for Q4 2009 until February 25, 2010 (after market-close), but ARC did, on January 27th, issue revised guidance for FY 2009 (courtesy of Reuters.com, that revised guidance appears immediately below):

American Reprographics Company Raises FY 2009 EPS Guidance
Wednesday, 27 Jan 2010 04:45pm EST
American Reprographics Company announced that it expects to exceed its previously announced annual earnings per share (EPS) forecast for fiscal 2009. The Company now anticipates EPS (on a fully-diluted basis) to be in the range of $0.35 to $0.38, excluding previously announced one-time charges. The Company said that its EPS performance was the result of a lesser decline in fourth quarter revenues. The Company’s previously announced EPS forecast was in the range of $0.27 to $0.33. According to Reuters Estimates, analysts were expecting the Company to report EPS of $0.30 for fiscal 2009.

Now, since the analysts get to revise their estimates, it is only fair that I get to do that as well! My revised estimates – for Q4 2009 – are based partly on what ARC’s revised-FY 2009 guidance said, based partly on two recent reprographics industry surveys I’ve read, and based partly on discussions I’ve had with industry friends, and based partly on the fact that Q4 is traditionally the worst Q in the reprographics business in the U.S.

My revised estimates for ARC’s Q4 2009 results:

– Q4 2009 Sales – $113.0 million
– Q4 2009 EPS – $.03 **
(** excluding Goodwill impairment charges and any other non-recurring, one-time charges.)

ARC’s revised FY 2009 EPS guidance:
– FY 2009 EPS will be from $.35 to $.38
(excluding Goodwill impairment charges and any other non-recurring, one-time charges, such as the debt-restructuring charges ARC took for Q3)

My revised FY 2009 EPS estimate:
– FY 2009 EPS will be $.40 **
(** excluding Goodwill impairment charges and any other non-recurring, one-time charges, such as the debt-restructuring charges ARC took for Q3)

So, what I’m guessing is that there will be another small “earnings surprise” when ARC releases its actual numbers on Feb 25th.

Another (different) blog visitor posted a comment under a post I did on January 27th, and, in addition to making comments, he asked a few questions. Since his questions were thought provoking, I’m going to respond to the questions he asked. Since I don’t work for ARC, the responses I’m going to give, below, are, with one exception, “general to the reprographics industry.” In several places below, within his commentary, you will see “Joel’s response.”

“Joel,”

“I really appreciate the blog (there’s not much out there with an insider’s view on the repro industry). Like the previous questioner, I’ve been following ARC for some time with a view to investing.”

“There have been quite a few “roll ups” that have failed for the reasons you responded to above (ie the owner/manager who was the business driver gets bought out and leaves) and this is usually offset by the argument about size, efficiency and national scale. Along these lines, what are the key factors for a customer in deciding which repro firm they will use? How much of it is service vs. cost? Does having a national footprint really matter given most of the actual work is for local jobs? What competitive advantage would ARC bring to the table that another large local firm could not?”

Joel’s response:
As to the first two question, “Along these lines, what are the key factors for a customer in deciding which repro firm they will use? How much of it is service vs. cost?” ….. Inasmuch as I gave a 2 hour presentation in Europe on January 22nd on “The Issue of Price in the Sales Process”, the opinion I’m going to state is very fresh in my mind (the latter, a feat for someone who is nearly 63 years old!). During the presentation, we required the audience (Sales Managers from various places) to call-out the factors that they felt customers and prospects consider when trying to determine which reprographics vendor to give their business to. While I’m not going to list the factors in this post (since I am a consultant, there are issues that I won’t cover in great detail in my posts), we ended up with a list of approximately 20 different factors, price being one of those. Let me repeat, “price” being “only” one of those. There are certainly customers and prospects who consider price to be the most important factor, but, based on nearly 40 years experience in the reprographics industry, there are many, many, many customers who don’t consider price to be “the” most important factor. My opinion about this is that there is a difference, buyer mind-set-wise, between “product-based” businesses and “service-based” businesses. Price is more likely to be more of a factor in a “product-based” business, but, to the opposite, less likely to be the most important factor in a “service-based” business. The reprographics business is, most certainly, a “service-based” business. One other factor that makes “price” less of an issue, at least in the U.S., is something I’ve mentioned in a (or several) previous articles I’ve posted on my blog …. That “something” being this key word, “reimbursable”. In the U.S., many A&E firms are “reimbursed” (by Project Owners) for printing expenses they incur on projects. That, alone, makes “price” less of an issue rather than more of an issue. In addition, Architecture firms are very demanding customers; rightly so. They operate under tight deadline pressures. Their final “deliverables”, after sometimes months and months of hard, tedious work, are the “plans and specifications” they produce. I have yet to deal with an Architecture firm that would sacrifice (let us say “risk”) quality, correctness, and turnaround just for the sake of “low” price. In addition, there are some customers who work on a “cost-plus” basis with their clients. If you reduce the “cost”, then you reduce their “plus.” You also asked these questions, “Does having a national footprint really matter given most of the actual work is for local jobs? What competitive advantage would ARC bring to the table that another large local firm could not?”, so let me now respond to those two ….. a) even though “projects” are “local”, there are many large “regional” customers and quite a number of large “national” customers who find it highly appealing “to strike one deal that applies everywhere they operate”, b) more and more, A/E/C customers are moving away from “print, then distribute” and adopting “distribute, then print”; this, because time-is-always-of-the-essence and because of transportation costs. (E.G. Perkins & Will Architects designed a beautiful hi-rise condo near my office in downtown St Petersburg, FL, but Perkins & Will does not have an office in the Tampa Bay (St Pete) market area. A lot of the printing for that project was done in downtown St Petersburg.) Anyway, my opinion is that reprographics firms who have either “regional” footprints or “national” footprints have an advantage over reprographics firms who do not, especially for “larger” projects, where some of the project participants do not maintain offices where projects are actually located. Offset-printing enterprises, who’ve done roll-ups, do not, I believe, benefit from their geographic footprints as much as reprographics firms (who’ve done roll-ups) do. They are completely different businesses, and geo-scope is more important for reprographers than it is for offset printers.

“From an outsiders view I can’t figure out what all these acquisitions bring to the table other than immediate size and scale. The cost saving/efficiency argument is usually more than offset by the loss of the driving force for that business (they bought out owner). Unfortunately, ARC doesn’t disclose the multiples they are paying for businesses or how they perform post acquisition to prove out the strategy.”

Joel’s response:
I don’t agree with the conclusion you’ve drawn. For reasons I stated in an earlier post (my response to another blog-visitor’s questions), I do not feel that the loss of a retiring owner, if transition-planning from the former owner to a new “local” boss is done with all due care, attention, training, mentoring and support, is going to cause much harm to the business that was acquired. (Unless, of course, the acquiring company is totally stupid about “who” is selected to run lead a local operation.) And, don’t underestimate the cost-savings-power derived from size and scale (economies of scale); these (cost savings, due to size and scale) are very, very significant in the reprographics industry. As to your question about the multiples ARC pays for acquisitions, ….. even though I could provide you the numbers for some of the acquisitions ARC has completed ….. I am not going to provide any information about that. (There are a couple of reasons why I won’t do that, but I’m not going to explain those reasons.) ARC is a publicly-traded company, as you know, and publicly-traded companies have to follow “disclosure rules” regarding significant, and not-significant, acquisition transactions. If I’m recalling this correctly, ARC’s acquisition of Ridgway’s was a “significant” acquisition transaction; meaning that if you want to do the homework to figure out “the multiple” that ARC paid for Ridgway’s, you could probably figure what the multiple was, if you are willing to do the research and math. I’m not saying that ARC paid the same multiple for every company it has acquired, but, at the very least, that would give you an answer that you may not have.

Joel’s further comments:
I am, as you might be able to tell from the responses I gave, an advocate of the “roll-up” methodology.

“Thanks for your thoughts on this. It’s great to be able to get honest, unbiased views from an insider.”

There are few sources for meaningful or up-to-date information about the reprographics industry; two that come readily to mind are http://www.irga.com and http://www.wide-formatimaging.com

As to IRGA publications, if you are involved in the reprographics industry – especially the A/E/C services part of the industry, you should be an IRGA member, as that would give you the opportunity to read all of the IRGA’s publications.

As to Wide-Format Imaging, which, if I’m recalling this correctly, grew out of prior publications, “Modern Reprographics”, and, before that, “Plan & Print”; when it was “Plan & Print”, Plan & Print was mostly devoted to the A/E/C reprographics industry, but, later on, it morphed into a publication that covers other imaging/graphics sub-industries, including the Screen Printing Industry (that’s the industry that prints our T-shirts and Sweatshirts and other cool things!) If you’re in the reprographics business, you should be a subscriber to Wide-Format Imaging.

This afternoon, I got an automatic e-mail from Wide-Format Imaging to tell me that a new article had been posted about a recent economic survey conducted by “FESPA.” Even though reprographers may be concerned about issues that are different from the issues that “other printing industries” are concerned about, the article does speak to issues that even reprographers should think about.

FESPA = the Federation of Screen and Digital Printers Associations; and FESPA is an association of screen and digital printers in 26 European countries.

The title of the article……

Second FESPA Economy Survey Shows 70% of Printers Innovating out of Recession

Posted (on Wide-Format Imaging’s web-site) January 21st, 2010 09:31 AM


FESPA’s second Economy Survey shows that the wide-format printing community is moving on from the defensive survival tactics of 2009, using innovative and proactive sales and operational strategies to improve its business fortunes moving into 2010. 70.2 percent of respondents had used new products or processes in their operations to help them through the economic downturn, with 61.5 percent adding products to their portfolio, and 60.6 percent entering new markets.

The second Economy Survey was conducted by FESPA in the fourth quarter of 2009, in partnership with InfoTrends. It shows that the community’s outlook entering 2010 is broadly optimistic. More than a fifth of the respondents questioned at the end of 2009 thought the market was already recovering, and more than half expect recovery to previous levels by the end of 2010. Conversely, the Survey clearly summarizes the impact of the downturn in the wide-format market. Of the 217 respondents, 93.1 percent agree that there has been an economic downturn in the industry, with 56.4 percent viewing 2009 as the worst year they have ever seen.

The mean level of business decline reported is 15 percent; however, the community is polarized, with 20 percent experiencing no loss in business activity and another 20 percent showing a decline of 25 percent or more. Manufacturers and resellers report the same average decline as print service providers (PSPs), underscoring the industry’s tightly connected supply chain.

The competitive landscape is in a state of flux, with 60 percent of those surveyed reporting that competitors had consolidated or gone out of business, 43.1 percent indicating that competitors are moving into other markets or offering new services, 33 percent experiencing new competition from other segments of the printing industry, and 22 percent seeing customers take some wide-format work in house. Price pressure is also unrelenting, with 60.6 percent being price compared more frequently by new and existing customers. This may be reflected in the fact that 33 percent have themselves been aggressive with financing and payment terms, and 23 percent have more aggressively used rebates and price promotions. Strain on the supply chain is not restricted to price, with three quarters of respondents citing intensified pressure on production speeds or turnaround times.

“The FESPA Economy Survey, first undertaken in Spring 2009, sets out to measure the impact of the economic downturn on the wide-format community, and to understand how PSPs are responding to the challenging trading conditions. These latest findings stress the need for printers to offer services that stand apart from commoditized print offerings. As our FESPA 2010 ‘Catch the Wave of Innovation’ campaign highlights, in tough economic times innovation can be a key competitive advantage and survival skill. Cutting prices to match the shop across town is not the answer. Printers will thrive when they offer services and solutions that help customers execute their marketing and retail campaigns more effectively,” said Marcus Timson, FESPA.

Along with service and market expansion and new sales strategies, the survey points to a gradual refocus on developing and retaining ‘human capital’. 22.9 percent of respondents have expanded their sales force, and talent retention would seem to be a priority in anticipation of an eventual upturn, with respondents preferring to cut staff hours or reduce pay rather than resorting to losing valued individuals.

While survival mode has diluted the industry’s environmental focus, with 59.6 percent stating that environmentally sustainable production was less important as a result of the economic downturn, a remarkable 40.4 percent of respondents reported that the economic backdrop has not made ‘planet-friendly’ printing any less important. A fifth of respondents use sustainability as a point of competitive differentiation, suggesting that there are opportunities to innovate in this area, which more PSPs may seize as the economic outlook continues to improve.

“The economic downturn has accelerated demand for higher service levels, so it’s important for PSPs to be flexible in responding to profitable opportunities. While the requirement for faster and more capable equipment has become a given in the wide-format market, the research tells us that new markets and new application areas are what most respondents are looking for during this economic downturn,” said Tim Greene, director, Wide-Format, InfoTrends. “This industry is essentially symbiotic. Innovation from suppliers can help PSPs to develop proactive growth strategies and achieve success, which in turn leads to improved business for those suppliers. In this way, innovation can create a virtuous circle, making focused events such as FESPA 2010 a vital catalyst to future growth.”