COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Printing Equipment INDUSTRY Updated March 31, 2020
- Market Dynamics: The market for printing equipment was weak before the COVID-19 pandemic evolved; it likely will take a further hit from faltering economic conditions, especially as in the short term, printing volume will likely materially decline in the second quarter of 2020.
- COVID-19 Impacts: Although considered an essential industry, early reports from March 2020 indicate that first-class mail and postal shipping volumes are down, which is likely a bad sign for the industry. The Sinclair Printing plant in Los Angeles, California, was closed by its parent CJK Group in mid-March, laying off most of the staff, finishing work-in-process, and transferring the remaining materials to other CJK Group plants. Management noted that the decision to reopen the plant was to be evaluated “when or if, it is beneficial to continue the Sinclair Printing Operation.” In February 2020, Gordon Brothers’ equipment dealer contacts reported “business as usual” including steady depreciation to large printing presses, with some concern around reports of the coronavirus emanating from China. Until COVID-19 hit, domestic equipment dealers were hoping for an uptick in printing leading up to the 2020 election.
- Valuation Outlook: Once the immediate impact of COVID-19 has 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.
Date November 2019
- The printing industry has experienced steady decline over the past decade. Industry experts expect this trend to continue as digital substitutes continue to replace paper-based media.
- Despite declining demand for printed magazines, newspapers, books, and advertising materials, 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 over the next five years.
- Industry participants expect a slight uptick in printed media in 2020 because of the U.S. presidential election.
By the numbers
Digital takeover: Digital is the industry’s fastest evolving sector. The digital industry is highly fragmented with no industry operator accounting for more than 5.0 percent of total industry revenue. Typically, these industry operators cater to small- and medium-sized businesses on a local level. Digital printers can produce cost-effective smaller runs, handle a wide variety of paper sizes, and print in increasingly higher resolution. Additionally, 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 to 50 percent in value the first year and an additional 25 to 50 percent the following year. This is a key consideration when thinking about loan terms. 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, and these 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 in order to protect their products.
Challenges continue 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 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. Looking ahead however, there are some signs that printed materials are preferred by some consumer segments. According to Expert Editor, a professional editing and proofreading provider, millennials prefer printed books – 92 percent of college students prefer reading print books to e-books, and 56 percent of millennials purchase most of the books they read. Additionally, a white paper from trade publication Printing Impressions indicates that 93 percent of professional printers believe expansion is happening in their industry. The publication notes some emerging trends such as a move toward artificial intelligence for smart printers, including voice recognition capabilities, cloud-based managed print services that would eliminate the need for on-premises servers, and 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 the 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. Today, most buyers are looking for machines capable of printing at least 24 pages at a time.
Standard machines are widely marketable. However, narrower web machines (8 to 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. That 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 relatively few new machines coming online anymore, there remains an active used market.
Lithographic sheet-fed printing remains stable: While sheet-fed presses are slower than web-offset machines, they offer more flexibility, as a large number of sheet sizes and format sizes can run through the same press. Six-color, 28-by-40-inch machines are an industry staple and are widely transacted on the secondary market. During the past 12 months, 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.
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, rather they are typically sold 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.
It should be noted that 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 that equipment listings detail these important specifications.
Consumer spending boosts flexographic printing: 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.
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 ten- , eight- , and six-color or less. Research has indicated that the market for ten-color presses is currently strong. 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 create 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 eight-color flexographic presses can be considered average to good. These presses are still in use by all segments of the market and should prove salable. The market for six-color, or less, flexographic presses is weak. The buyer pool for these presses will most likely be smaller, niche-type companies.