printing

Printing Equipment

Industry Insight

COVID-19 INDUSTRY BRIEF

EFFECTS OF THE CORONAVIRUS ON THE Printing Equipment INDUSTRY Updated November 10, 2020

  • Market Dynamics: The market for printing equipment was weak before the COVID-19 pandemic evolved and has taken a further hit from faltering economic conditions. A May survey revealed sales dropped by more than 50 percent on average between the middle of March and the middle of April 2020. The COVID-19 Printing Business Indicators Research Survey, conducted by media company NAPCO and printing and graphic arts trade organization Specialty Graphic Imaging Association, included responses from more than 500 printing companies from the U.S. and Canada including commercial printers, graphic and sign producers, apparel decorators, functional printers, and package printers and converters.
  • COVID-19 Impacts: Although considered an essential industry, early reports from March 2020 indicated that first-class mail and postal shipping volumes were down, which is likely a bad sign for the industry. U.S. commercial printing shipments also declined sharply in spring 2020 but rebounded in June and July. Volume declined somewhat in August but remained down approximately 5 percent over August 2019.
  • Increase in Digital Book Sales: Digital book sales have increased across the board in 2020 because of the COVID-19 pandemic. Major book publishers reported increased e-book sales for the early months of 2020 including Simon & Schuster, Hachette and McGraw-Hill, which reported that its digital textbook and e-book sales were up 18 percent for the first quarter. Year to date through June, U.S. e-book sales were up 12.7 percent, with children’s and young adult categories outperforming other categories. A 2019 publication by Printing Impressions magazine described emerging industry trends such as a move toward artificial intelligence for smart printers, including voice recognition capabilities and cloud-based managed print services, which would eliminate the need for on-premises servers, as well as other technologies allowing for quicker and more secure printing.
  • Valuation Outlook: The impact on equipment assets in the space will depend on how the recovery from COVID-19 plays out over the next six months given increased spikes in global infection rates heading into the winter. Prior to the pandemic, there was already surplus equipment in the printing marketplace, and it is unlikely the disruption will positively impact the marketplace. Once the immediate impact of COVID-19 passed, the amount of excess production capacity in the marketplace will drive additional volume to the secondary market, and the level of surplus equipment on the market will need to be reassessed at that time.
COVID-19: Industry Brief Meter - Printing

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Date November 2020

Printing Projected Values meter

 

Current Trends

  • The COVID-19 pandemic has dramatically affected the printing industry. While certain sectors have seen sales plummet, others capitalized on opportunities created to mitigate the decline.
  • The printing industry has been in steady decline over the past decade. Industry experts expect this trend to continue as digital substitutes are replacing paper-based media.
  • Despite declining demand for printed materials, the industry has remained resilient by diversifying into digital services and value-added business lines. In many cases, these additional services are expected to increase due to the pandemic.
  • Industry participants expect a slight uptick in printed media in 2020 because of the U.S. presidential election, while post-election demand is expected be further reduced.

By the numbers

Synopsis

COVID-19 Impact: The market for printing equipment was weak before the COVID-19 pandemic evolved and has taken a further hit from faltering economic conditions. A May survey revealed sales dropped by more than 50 percent on average between the middle of March and the middle of April 2020. The COVID-19 Printing Business Indicators Research Survey, conducted by media company NAPCO and printing and graphic arts trade organization Specialty Graphic Imaging Association, included responses from more than 500 printing companies from the U.S. and Canada including commercial printers, graphic and sign producers, apparel decorators, functional printers, and package printers and converters.
 

Although considered an essential industry, early reports from March 2020 indicated that first-class mail and postal shipping volumes were down, which is likely a bad sign for the industry. U.S. commercial printing shipments also declined sharply in spring 2020 but rebounded in June and July. Volume declined somewhat in August but remained down approximately 5 percent over August 2019.
 

Once the immediate impact of COVID-19 passed, the amount of excess production capacity in the marketplace will drive additional volume to the secondary market, and the level of surplus equipment on the market will need to be reassessed at that time.
 

Digital Takeover Continues: The fastest evolving printing sector is digital. While demand for printed magazines, newspapers, books and advertising materials has declined, the industry has remained resilient by diversifying into digital services and value-added business lines; however, growth in these areas is unlikely to overcome declines in printing revenues through 2025. In many cases, these additional services came as a result of consolidation within the industry and are expected to increase due to the pandemic. Some industry professionals are predicting the pandemic could further accelerate the transformation to digital print, as print customers may demand shorter print runs and more customization of print.
 

The digital industry is highly fragmented with no industry operator accounting for more than 5 percent of total industry revenue. Typically, these industry operators cater to small and medium sized businesses on a local level. Digital printers can cost effectively produce smaller runs, handle a wide variety of paper sizes and print in increasingly higher resolution. Another key feature is that variable data can be printed as opposed to fixed data on other types of printers. But rapid technological advancements are also what make it riskier collateral for lenders. Traditional web-offset and sheet-fed presses may have a 15- to 20-year useful life, but digital machines depreciate faster and may have a useful life as short as five to eight years. Value falls steepest during the first year; a new digital piece of equipment could drop 35 percent to 50 percent the first year and an additional 25 percent to 50 percent the following year. This is a key consideration when thinking about the loan term. Equipment that may look very valuable at the onset can quickly become obsolete, which is why many digital printing machines are leased.
 

Another key consideration are the contracts that accompany the machines. Digital presses are sold with software agreements and often contracts for maintenance and consumables, which can be difficult to transfer when the machine is sold. In most instances, buyers of used equipment have to set up new agreements and may have to pay additional fees to license software. These additional costs can be significant and create an incentive for buyers to purchase new. While there are no consistent rules for whether contracts can be sold with a used machine, the bottom line is that the manufacturer, not the seller, controls what is or is not transferable. Often, the manufacturer sets these prices much higher than the market is willing to pay to protect their products.
 

Challenges Persist for Lithographic Web-Offset Printing: In web-offset printing, a continuous roll of paper is fed through the printing press, the paper roll is printed and then the roll is cut to size at high speed. These machines are commonly used to produce high-volume publications such as books, magazines, newspapers, catalogs and advertising inserts. While this type of printing once dominated the industry, consumer trends towards digital media have devastated the segment along with equipment values. Additionally, print advertising expenditures are forecast to decrease, which will further exacerbate the print sector market. Expenditures on print advertising are expected to decrease at an annualized rate of 12 percent through 2025, while total U.S. advertising is expected to increase during the same period, according to research firm IBISWorld.
 

Digital book sales have increased across the board in 2020 because of the COVID-19 pandemic. Major book publishers reported increased e-book sales for the early months of 2020 including Simon & Schuster, Hachette and McGraw-Hill, which reported that its digital textbook and e-book sales were up 18 percent for the first quarter. Year to date through June, U.S. e-book sales were up 12.7 percent, with children’s and young adult categories outperforming other categories. A 2019 publication by Printing Impressions magazine described emerging industry trends such as a move toward artificial intelligence for smart printers, including voice recognition capabilities and cloud-based managed print services, which would eliminate the need for on-premises servers, as well as other technologies allowing for quicker and more secure printing.
 

The initial investment in web-offset machines is high and can exceed a million dollars. There are two major classes of machines: coldset and heatset, which refer to how ink is dried. In coldset printing, aqueous ink dries through evaporation and absorption, but it can leave residue on the paper that rubs off on readers’ hands. In heatset printing, paper is run through machines with dryer systems that evaporate oil-based solvents in ink. The paper then passes through chilling rollers, where waxes and resins set. This is the process used for all coated papers and results in a more upscale product, but the additional equipment means these machines are also more expensive.
 

In addition to the number of impressions a machine has run, its cutoff, width and age are all value drivers. The length of the circumference of a blanket cylinder is called the cutoff. This measurement determines the number of pages that can fit onto each imprint, and, accordingly, the amount of paper waste. Because paper means money, the cutoff is crucial to calculating the profitability of producing different projects. Most buyers prefer machines capable of printing at least 24 pages at a time.
 

Standard machines are widely marketable; however, narrower web machines, 8to 24 inches, used in niche markets, such as business forms and labels, have a smaller pool of buyers. Some machines can handle rolls up to 50 inches wide. These large-format machines are very specialized and have narrow marketability. Regardless of the size of the machine, removal and re-installation costs of web-offset presses are typically substantial, which is why machines are often sold in place to strategic buyers. Bankers who lend against this equipment may wish to consider appraising machines on an installed basis. In this scenario, values may be higher and more reflective of the value of the equipment if sold as a going concern.
 

The typical useful life for web-offset presses is 15 to 20 years, after which point there is little value. Rebuilds may help a machine maintain its value, but they typically do not increase it. While there are currently few new machines coming online, an active used market remains.
 

Lithographic Sheet-Fed Printing Remains Stable: While sheet-fed presses are slower than web-offset machines, they offer more flexibility, as many sheet sizes and format sizes can run through the same press. Six-color, 28-by-40-inch machines are an industry staple and widely transacted on the secondary market. In the 12 months leading up to November 2020, values for these machines have remained stable. While demand has fallen less than for web-offset machines, the market remains soft. However, certain sectors are faring better than others. For example, equipment used in the packaging market has been selling well. However, it is expected print advertising spending will decrease going forward and the market will likely remain soft for this machinery.
 

Wider-format machines have niche applications such as printing point-of-purchase advertisements or signage. Because of their narrow marketability, values on even very new machines can be expected to fall as much as 50 percent during the first two years of operation even though the useful life of the machines may be 15 to 20 years. Wide-format machines also take longer to sell and are almost never auctioned but typically sell via private party. The appropriate timeframe for an orderly liquidation value should be discussed with an experienced appraiser to ensure the most realistic exit strategy.
 

Componentry can add value. A perfecting press, which enables a machine to print on both sides of the paper at the same time, is desirable and an expectation of most buyers today. Coaters and drying systems, which can improve the quality of products and turnaround times, are other key options. It is beneficial to ensure equipment listings detail these important specifications.
 

Flexographic Printing Least Affected by Pandemic: Flexographic printing uses a printing plate made of a flexible material such as rubber or plastic. Fast-drying ink is applied to the flexible plate, which transfers the image to the substrate. Flexographic printing is the preferred method used on packaging materials such as plastic bags, labels, foils and wrappers. Demand for packaging material has been relatively stable over the past five years compared with other printing segments that are heavily dependent on advertising or printed media. The direct mailing market, which also typically utilizes this type of press, has softened because of declined marketing spending due to the pandemic. However, the flexible packaging and label side of this sector is active based on demand from e-commerce, grocery and other active sectors.
 

Flexographic printing can be applied by both sheet fed and web presses, but web presses are the dominate choice. The market for this type of equipment is segmented and can generally be divided into 10- , eight-, and six-color or less. Research has indicated the market for eight- and 10-color presses is average to good. New machinery sales are reported to be sporadic while the used market is active. Press manufacturers such as Winkler+Dünnebier are reporting increased sales, which can be attributed to companies moving to wider presses with more color options in response to customer demand for higher quality products. This, coupled with decreasing profit margins, creates an atmosphere where manufacturers need to produce a higher volume of quality products at lower costs. To achieve this, the market has shifted towards presses with additional color capacity, gearless drives and web widths of 65 inches and up. Technology, such as in-machine sleeve change capability that reduces changeover time from job to job, is highly desirable. The market for six-color or less flexographic presses is weak. The buyer pool for these presses will most likely be smaller, niche companies.