The year in review: mergers and acquisitions, which have been scarce in recent years, dominated the news in 2005.
The acquisition spree began with Fujifilm's purchase of Sericol International, which had an estimated $275 million in sales in 2004, in March. More deals followed quickly, with Siegwerk Group acquiring SICPA's estimated $400 million packaging ink division in June. In September, Altana Chemie acquired Eckart GmbH for $600 million. In October, Huber Group acquired a majority stake in Micro Inks, which had $220 million in sales in 2004.
Of course, no deal was larger than CVC Capital Partners' purchase of Flint Ink in July. CVC, the venture capital company, had previously formed XSYS Print Solutions by acquiring BASF Drucksysteme and ANI Printing Inks in 2004.
This ranks as the largest deal ever made in the ink industry, as Flint Ink generated $1.5 billion in sales in 2004. Together, the two companies had combined sales of $2.6 billion last year. As of press time, the company's new name had yet to be announced.
Each of these deals had specific goals, whether it was branching out geographically, securing supply chains or adding to product portfolios. This much is clear: there has been plenty of changes, and the shock waves, whether in the form of rationalizing facilities and staff, leveraging suppliers and increasing competition, are being felt.
The other major news centered around the increasing raw material prices, particularly petrochemicals, as well as demand concerns. In response to these higher costs, ink manufacturers raised their own prices.
The questions for 2006 center around whether there will be more consolidation--which seems to be the consensus--and whether announced price increases will hold, which is less certain.
A Look at 2005
For ink manufacturers, 2005 was another difficult year, particularly due to higher costs.
"The year 2005 has been challenging for the ink industry both here in the U.S. and abroad," said Michael Griem, president, Sun Chemical North American Inks. "Many in the industry had hoped that the expanding economy would fuel continued recovery in the printing industry, but it seems to have withered somewhat this year after beginning strongly.
"The ink industry also had to face steadily increasing costs, raw material shortages and complications from natural disasters, especially in the U.S., but in other countries as well," he continued. "The impact of volatile prices for petroleum and its derivatives dramatically affected both manufacturing and transportation costs. In the face of such concerns, it was necessary to raise ink prices. Most printers accept that this move was necessary for ink makers, who had cost increases coming so fast and furious that there was no way for them to absorb the hikes and continue to meet the demands of customers unless prices were increased."
"Our sales volume has increased and we have raised prices; however, increases in material costs and energy-related costs have been greater than the amount of price increases we have realized from our customers," said Phil Lambert, president and CEO of Wikoff Color. "The net result is that profit continues to be squeezed."
"Unprecedented raw material cost and freight increases combined with continued demand for value added services made 2005 a very challenging year for maintaining margins," said Bryce Kristo, chief financial officer and senior vice president, general affairs for INX International Ink Company. "The unprecedented increases resulted in the first notable ink price increases in quite some time."
"2005 will provide sustained sales with declining profits that are directly related to the dramatic increase in our raw materials," said Charles Sagert, senior vice president, sales at INX International Ink Company.
The printing market was fairly flat, which showed in the printing ink market. According to the National Association of Printing Ink Manufacturers (NAPIM), ink volume year-to-date for the first nine months of 2005 rose 0.2 percent from 2004, and sales were up 1.1 percent compared to 2004.
"In general, volumes are down in the North American market and with continued rising raw material and energy costs, profitability continues to remain at the forefront of business concerns," said Kathy Marx, vice president and chief marketing officer for Flint Ink. "On a more positive note, a few customers have begun to recognize the impact of rising raw materials costs and have been more willing to accept the need for price increases, but this is a continuing issue that will need to be addressed into 2006."
"Volumes appear to be stable with slight growth due to general GDP growth," said Dan McDowell, president, Color Converting, Inc. "However, pricing was not able to keep up with the increase in material and operating costs, therefore continuing to challenge profitability throughout the year. The generic supply/demand curves appeared to be heading towards some relief during the summer months, but the hurricanes threw an already sick patient into cardiac arrest. This brought to light the fact that our cost situation was not a short term ordeal. Therefore, the ink industry appropriately announced price increases to begin the reclamation of profit loss."
"Some market segments were up, and some were down," said Jeff Koppelman, president of Gans Ink & Supply. "All in all, it was a very average year."
Consolidation and The Ink Industry
This has been a year that will be most remembered for the tremendous consolidation that has occurred, certainly with the Flint Ink and XSYS merger, Siegwerk's acquisition of SICPA's Packaging Ink Division and Huber Group's acquisition of a majority stake in Micro Inks foremost among them.
The impact of these mergers, and the other consolidations, will have on the U.S. and global ink and printing markets will be sizable.
"The ink industry has been ripe for consolidation, so the recent acquisitions and mergers are no surprise," Mr. Griem said. "As the printing industry has become more globalized, it's natural that companies are trying to establish a broad presence in international markets to position themselves to be able to compete. It's been said that the printing market is no longer a local market because printers anywhere can bid on virtually any job. They want consistency from ink suppliers and they want to improve their supply chain by buying products of known and uniform quality from fewer suppliers everywhere they do business.
"Sun Chemical has not been as active in the current round of buying because it saw many of its opportunities earlier in the game and had the resources to act on them," Mr. Griem said. "While the consolidation has created several large, international ink makers, Sun Chemical remains the largest and it expects to maintain its leadership."
Mr. Griem said Sun Chemical believes the new owners, many of whom are investors from outside the industry, will take a strong, economically driven approach to the business. They appear to understand that they are in the business to create value for their investors, and produce a steady stream of earnings over the longer term, despite weaker demand.
He also pointed out that the larger companies will probably have some economies of scale, which can put even greater pressure on smaller ink operators, who may increasingly turn to niche markets in order to prosper.
"Consolidation is good for any industry like ours with an overcapacity situation," said Rick Clendenning, CEO and president of INX International Ink Company. "The worldwide printing ink markets will definitely see some improvement from the significant consolidation resulting from this year's acquisitions and mergers. The extent of the improvement from these activities will depend on the leadership of those companies and our industry."
The newly-consolidated companies are now focusing their capabilities.
"The pressure will be on the global companies to act as a cohesive unit," Mr. Kristo said. "We recognized that trend some time ago and have been constantly improving our communication and cooperation on a global basis as part of the Sakata INX group. Our size lends itself to flexibility in this regard. We believe in those market segments that we are strong in and the competitive changes due not necessarily create any new barriers. In some segments we feel we may even benefit."
"With continued economic pressure brought about by a combination of globalization and overcapacity within the industry, consolidation will result in a stronger and more focused industry that will be better able to serve its customers," Ms. Marx said.
"Last year's consolidations will bring acceleration to the globalization of product technologies and services," Mr. McDowell said. "There will always be regional or continental differences in applications and technologies, but everything is becoming more transparent. Also, consolidation always heightens the need for profitability as new investors require return of, and return on, their capital invested. Hopefully, this will bring more focus on profit. Obviously, consolidation presents opportunities for cost reduction through reduction in facilities and staff. I would anticipate an acceleration rationalization process with the companies involved in the recent consolidation as well as the others. There is no room for waste."
"Most of the consolidations are being driven by the need to offset unreasonably low profit margins with much higher sales volume plus significant cost reductions achieved by plant closings and workforce reductions," Mr. Lambert said. "We hope the end result of this approach is an increased emphasis on improving profitability in the industry rather than a continued emphasis by the largest ink companies on cutting prices to gain market share at the sacrifice of a reasonable return on equity."
Wikoff Color made an acquisition of its own, acquiring Ontario, Canada-based Frontier Printing Inks in August.
"While we recognize the benefits of increased sales volume to help absorb costs, our acquisition of Frontier Printing Inks was driven by our businesses being so complementary both geographically and in terms of products offered," Mr. Lambert said. "Eliminating plants and jobs was not part of our strategy in making this acquisition. We believe that some of the acquisitions and subsequent layoffs have created a service and technical support void that represents an opportunity for highly-responsive, technically-driven and customer-focused ink manufacturers. We believe the acquisition of Frontier expanded our capabilities to respond to these increased opportunities."
Raw Materials and Supply In the Coming Year
When it comes to manufacturing ink, crude oil and natural gas are critical building blocks, and ink industry executives are coping with the rapidly increasing costs of these materials as well as other key ingredients.
"We continue to source globally searching for low cost high quality materials," Mr. Kristo said. "The increases have been at unprecedented our customers can lend relief. This situation is common knowledge in the graphic arts industry. There are rising petroleum costs driven by global dynamics. The entire industry in and within itself is much too small to have any offsetting impact on price and availability for some of the most basic raw materials."
"We see continuing problems with raw materials in terms of consistent quality, consistent supply and prices moving upward," Mr. Koppelman said. "It seems that a lot of our suppliers are not able to maintain their quality control tolerances as tightly as in the past. Maybe this is due to their own global supply issues."
Ink companies have implemented price increases to help make up for the rising costs they are facing.
"There is no doubt that raw material costs are rising and may continue to do so into early next year when the hopes are for stabilization," Mr. Clendenning said. "We are dealing with these challenges just as everyone else is by doing the best we can. Many of us have announced long needed industry wide price increases and we must make them stick. Again, it is up to the leadership of our industry as to how successful we really are."
"Raw materials will certainly be a big factor," said Harvey Brice, managing director of Superior Printing Ink. "Our industry relies on petrochemicals, and we don't know where petrochemical prices and availability are going to be. For example, certain solvents are more expensive than they have ever been. We're not, generally speaking, a profit-making industry right now, and we can't absorb these increases. We're going to be in for some tough times."
"There is some off-shoring of raw materials to contain costs in conjunction with the control of overall production costs," Mr. Lambert said. "We raised prices in early 2005 and are currently implementing another increase.
"We have not kept pace with the rate of increase in our raw material costs." "We have performed rationalization of costly product lines as well a "value engineering" throughout our product design phase," Mr. McDowell said. "There is no room for using a higher cost material when our customer does not see the value in it and therefore is not willing to pay for it. Our customers certainly understand the need for a price increase as they are also purchasers of resins, additives, solvents, etc. This does not imply that they are welcoming our price increase with open arms. However, this price increase must be pushed through the value system as the magnitude of the increases cannot be absorbed throughout the supply chain. The consumer must begin seeing these costs and if our industry is not committed to seeing through a price increase, we can never expect our customers to push through any increase on their part."
Like ink makers, many printers are operating with narrow margins, Mr. Griem said. Consequently, many have resisted price increases. However, the evidence of the rising raw material costs and the poor availability of many key ingredients is clear, and most printers are accepting the ink price increases which have spread across the industry.
For several years, Mr. Griem said, Sun Chemical has been working hard to mitigate the continual rise in costs. As shortages have arisen, Sun Chemical has been able to use its market power and its role as an integrated supplier to ensure a steady supply to its customers. Sun Chemical is using its R&D resources to find competitive alternatives for key ingredients in short supply due to rising costs or a shrinking supplier base.
The Role of Service
There seems to have been a renewed emphasis on service in the past year. For example, at Print '05, Superior Printing Ink, INX International Ink Co. and Van Son Holland Ink made it a point to invite printers to come to their booths to discuss problems.
"Adding value to a customer is typically done by exchanging knowledge and experience to help solve problems and improve processes," Mr. Kristo said. "INX actively opens its resources to our customer base. Easy access to the right mix of people adds the greatest value. We also continue to explore methods for dispensing special colors, on site inventory management, in-plants and other more prerequisite services."
"We will continue to refine and grow our 'Solutions' approach to the graphic arts market by providing training and technical support for our products," Mr. Sagert said.
Superior Printing Ink went so far as to set up color matching stations, which drew much attention from attendees.
"Service separates us from our competitors," Mr. Brice said. "You can't just offer lip service. Service is the secret to success. Service has to be a given, but a lot of ink companies don't have extensive programs. Our inplants take care of everything--our customers give us their daily requirements for what ink goes on what press, and we take care of them."
"Sun Chemical has always been a leader in supplying printers the value-added resources they need to be competitive. Our level of local technical service, timeliness and global perspective is unsurpassed in the industry," Mr. Griem said, adding that the company provides more in-plant ink operations than any competitor. Mr. Griem added that Sun Chemical continues to expand its color management services and is the only ink supplier with a broad array of other printing consumables, such as founts, blankets and washes, available from a single source.
By contrast, some companies have been cutting back on local operations. The key is for each company to find its right level.
"Everyone talks about the services they provide but we, in many cases, are seeing a reduction in overall true service levels provided by the largest ink companies in their efforts to lower costs," Mr. Lambert said. "In recent years, we have expanded the services offered in ink department design and management, process and color control, reduced inventories, as well as itemizing areas for continual process improvement and operating cost reductions."
"I cannot say that there is greater interest in providing more services for printers as we have always had services as one of our key offerings," said Mr. McDowell. "The key is to optimize the cost versus benefit as everyone realizes that these services are not free. If a customer is overwhelmed with service offerings, they are questioning how much this is costing them."
Outlook for 2006
Having witnessed all the changes that have occurred in 2005, one wonders what is in store for 2006. Will the major consolidations bring some sort of pricing stability to the market? Will there be more consolidations? The answers are uncertain, but this much is clear: ink companies have to be paid what they deserve, especially in the face of raw material price increases.
"Further consolidation will continue to remove overcapacity as globalization produces shifts in the competitive landscape," said Ms. Marx. "While there may be some easing of petroleum-based raw materials costs as storm-battered refineries begin operating again, the pressure is by no means off. It's going to be a very difficult year."
"We believe 2006 will be a year of relief for the industry due to price increase efforts by the major players," Mr. Kristo said. "Hopefully this experience will demonstrate to the industry that we certainly should earn more for the products and services we provide. In addition, circumstances that the industry is experiencing tends to spark creativity and innovation."
Raw material pricing will most likely remain a major concern in the coming year.
"The first half of 2006 should see continued pressures on supply and pricing for raw materials," Mr. McDowell said. "The good news in all of this is that our customers are struggling with the same raw material and operating expense pressures that we are. This means an even greater opportunity for selling value and more pressure for the ink companies to prove their value."
"Hopefully, we will see more rational product pricing which better reflects the true material and production costs, as well as resource commitments needed by the ink suppliers to service the growing demands of the customers," Mr. Lambert said. "We are concerned that we see some competitors reverting back to price cutting to gain new business at the same time they are trying to get prices up at their existing customers. We could see more industry consolidation among the small/mid-sized ink companies as market pressures continue."
There are too many "ifs" to make a forecast for the ink industry with a high level of confidence, Mr. Griem said. "Of course, a primary driver will be whether there is continued economic expansion in the major markets," he said. "Inflationary pressures and raw material availability will be major challenges. However, many industry analysts do predict slow growth for 2006, while consolidation is expected to continue."
"Next year, 2006, will continue to improve but will be difficult, especially if our industry does not stand tall and get the announced, documented price increases needed to cover our rising raw material costs," Mr. Clendenning concluded. "I really believe the 2005 acquisitions and mergers will help us all. I also believe the consolidations are not over. The industry will see more as we move into next year."
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For more on the year in review, including growth areas and new products introduced by ink manufacturers, see the online version of this story at www.inkworldmagazine.com.
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|Article Type:||Cover Story|
|Date:||Dec 1, 2005|
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