After Massive Cutbacks, Quad/Graphics Investing in 'Redefining Print'

Quad/Graphics has been The Incredible Shrinking Printing Company during the past year and a half, closing a dozen printing plants and laying off more than 6,000 employees. But trying to use capital investment to outflank the competition is still embedded in its DNA.

“In this increasingly multichannel marketplace, the Company believes that the printing industry will be driven to make capital investments in new technologies, such as those to deliver targeted and customized print solutions and to deploy multichannel marketing campaigns through the integration of new media,” the company said in its 2011 annual report, released today.

“Quad/Graphics has focused on integrating new media to redefine print for its customers" so that they can "connect with customers and subscribers across multiple channels including print, web, mobile, e-mail, e-book, tablet and in-store." Its non-print ventures include “digital imaging, video, photography, workflow solutions, interactive technology including mobile and social media, and response data analytics services.”

The investment strategy is a far cry from the go-go days of the 41-year-old company, when, according to a reliable source, Quad proposed building a huge new printing plant next door to a paper mill. (Remember when printers were building mega-plants instead of closing them down? You do? Has it occurred to you that you are, like, really old?)

The idea was to reduce logistics costs and cycle times with a complex that could receive logs at one end and output finished catalogs and magazines at the other. But the paper company declined, not wanting to offend its other printer clients.

Some of Quad’s $168 million in capital investment last year went into its remaining printing plants, but for robots and other labor-saving devices rather than lots of new presses and binders.

Quad’s bearish outlook on the traditional printing business explains its eagerness to be more than a printer:

“Competition in the highly fragmented printing industry remains intense. The industry has excess manufacturing capacity created by declines in industry volumes, which is causing the printing industry to face continued downward pricing pressures. In addition, the growth and adaptation of alternative marketing technologies . . . as well as alternative delivery of content has resulted in marketers and publishers allocating their marketing and advertising spend across a wide and expanding selection of non-print media options, which further exacerbates industry overcapacity.”

Wall Street had a “not as bad as we expected” reaction to Quad’s announcement late yesterday that its 4th Quarter sales were down 6% and its EBITDA (operating cash flow) was off 12% from the previous year. The company’s beleaguered stock price, which had dropped 73% in the 19 months since Quad went public, rose 15% today.

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A Glimmer of Hope for the Port Hawkesbury Mill

The potential purchaser of the idled Port Hawkesbury paper mill has almost worked out an electricity deal and has contacted the union to start labor negotiations, the bankruptcy monitor revealed today.

Extensive negotiations between Pacific West Commercial Corporation and Nova Scotia Power Inc. have been "constructive," and the companies "are working toward finalizing an agreement on the supply of energy to the Company," Ernst & Young said in a report today to a Canadian bankruptcy court. PWCC has said that obtaining favorable electricity rates was a major condition of it buying the mill and restarting its world-class supercalendered paper machine.

PWCC and Ernst & Young believe that the power negotiations "have reached a sufficient level that it is appropriate to seek the implementation of next steps in this proceeding." Those next steps include starting the formal process of identifying creditors, working out an agreement with the province for wood to supply the mill, and labor negotiations with the Communication, Energy, and Paperworkers Union.

When NewPage entered bankruptcy reorganization in August, it essentially set its only Canadian mill adrift and kept its U.S. mills running. The big U.S. paper maker said it was losing $4 million per month on Port Hawkesbury.

But PWCC's parent company, Stern Partners of Vancouver, British Columbia, is well known in the paper industry for taking over money-losing mills and running them profitably, as demonstrated by its success with West Linn Paper Company in Oregon. The CEP has already indicated it would accept pension reductions of at least 30% to help get the mill restarted, and the province is also providing major support.

Earlier today, the mayor of Port Hawkesbury was quoted as saying the community is frustrated with the slow pace and lack of information regarding restarting the mill. The monitor's report indicated it would be many months before the mill could crank up again even if all goes well.

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Greece Is the Word for USPS, Donahoe Says

The U.S. Postal Service’s financial situation is starting to “look like Greece,” the Postmaster General told mailers last week, because of resistance to changing the agency's obviously unsustainable cost structure.

If Congress doesn’t allow USPS to change, Postmaster General Pat Donahoe told the Mailers Technical Advisory Committee (MTAC), by 2016 it will have $60 billion in annual revenue but $90 billion worth of debt.

Donahoe was updating the mailers on his plan to reduce the agency’s cost structure through such measures as eliminating Saturday delivery, closing many post offices and distribution centers, slower deliveries, and ending the accounting games surrounding retiree health benefits and pensions.

“We have to act on this now. Putting a couple of pieces together and holding your breath is not the solution. We will be in an untenable position in 5 to 6 years,” one account of the meeting quoted Donahoe as saying.

“It is hard to get the message across. Everyone can’t have their cake and eat it too. When you look at our outlook and do nothing, we look like Greece,” he said, referring to the country that faces default on its debt and massive upheaval after years of obviously unsustainable budget deficits.

Postal executives told the mailers group that their long-term plan for turning USPS’s finances around has not changed significantly in the past two years, except that mail volume has dropped faster than they expected.

They said they are not seeking “exigent” (greater than inflation rate) price increases but cannot rule them out if some of their proposed cost-saving measures are blocked because otherwise USPS could run out of cash in a matter of months. An especially attractive method of raising an additional $1 billion in annual revenue would be increasing the price of a Forever Stamp from 45 cents to 50 cents, an official said, because price increases have usually had little impact on the demand for such stamps.

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Obama Proposes Postage Increase, End to Saturday Delivery

President Obama proposed today a special increase in postage rates and an end to Saturday delivery as part of a plan to right the U.S. Postal Service’s finances.

The Obama Administration’s Fiscal Year 2013 budget plan would also end the “pre-payments” for retiree health insurance and return the overpayments into a retirement fund, which have been the major sources of its recent budget deficits.

“USPS faces long-term, structural operating challenges that have been exacerbated by the precipitous drop in mail volume in the last few years due to the economic crisis and the continuing shift toward electronic communication,” the plan says. “Bold action is needed to ensure that USPS can continue to operate in the short-run and achieve viability in the long-run.”

One part of USPS’s short-run relief would be allowing it “to seek the balance of the modest one-time increase in postage rates it proposed in 2010.” Obama released a deficit-reduction plan in September that contained similar language.

Those 2010 rate increases, which were rejected by the Postal Regulatory Commission, would have instituted average rate hikes of about 5.8% for most classes of mail and even larger increases for the Periodicals class. They would have been on top of the usual inflation-based increases for such mail classes as First Class, Standard, and Periodicals.

The plan refers to giving “USPS the ability to better align the costs of postage with the costs of mail delivery while still operating within the current price cap.” But it does not address such specific cost-control issues as early retirements, layoffs, closing post offices and distribution centers, or relaxing service standards.

By providing relief on the pre-payment and pension issues and allowing for the special price increase, the plan would presumably put the Postal Service in a better position to offer early-retirement incentives to downsize its workforce in light of declining mail volumes.

Here is Obama’s five-point plan:

1) Restructure Retiree Health Benefit pre-funding in order to accelerate moving these Postal payments to an accruing cost basis and reduce near-year Postal payments;

2) Provide USPS with a refund over two years of the $10.9 billion positive credit balance in Postal contributions to the FERS program;

3) Reduce USPS operating costs by giving USPS authority, which it has said it will exercise, to reduce mail delivery from six days to five days starting in 2013;

4) Allow USPS to increase collaboration with State and local governments; and

5) Give USPS the ability to better align the costs of postage with the costs of mail delivery while still operating within the current price cap, and permit USPS to seek the balance of the modest one-time increase in postage rates it proposed in 2010.

Related articles:

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U.S. Paper Companies May Lose Son of Black Liquor Loophole

Senate Finance Committee Chairman Max Baucus is trying to close the Son of Black Liquor tax loophole that has already provided U.S. paper makers with a windfall of more than $1 billion.

The committee's staff estimates the move would save $2.786 billion over the next four years, which Baucus would use to help pay for highway construction and other infrastructure projects. The staff has not revealed the basis for its calculation, a tricky matter because it requires assumptions about the future taxable income of more than a dozen paper companies.

"Black liquor qualified for the alternative fuel mixture [AFM] tax credit and the cellulosic biofuels tax credit," a news release from the committee noted Friday. "Congress never intended for black liquor to qualify for these credits and, in 2010, prohibited the credit for black liquor sold or used on or after January 1, 2010. This provision would prohibit taxpayers from claiming the alternative mixture credit or the cellulosic biofuels credit on any new or amended returns made on or after February 3, 2012."

The committee is scheduled to discuss the Highway Investment, Job Creation and Economic Growth Act of 2012 tomorrow.

Such companies as Domtar, Weyerhaeuser, and Packaging Corp. of America have recorded or estimated they would record more than $200 million each in cellulosic biolfuel producer [Son of Black Liquor] credits for black liquor they burned in 2009. International Paper, the country's largest manufacturer of kraft pulp, could grab an even larger windfall if it returned some of its $2.1 billion in alternative fuel mixture tax credits so that it could claim the more lucrative Son of Black Liquor credits.

But the Baucus provision would close the door on any further payouts. The committee's news release noted that the process of burning black liquor, a pulp byproduct, to generate power "has been used for seventy years to manufacture paper" -- which means manufacturers would have done it anyway even if they hadn't been handed billions in eco-subsidies. In fact, most paper companies never dreamed in 2009 that the black liquor they were burning would qualify for the cellulosic biofuel credits.

“We oppose the retroactive tax increase being proposed to pay for a new highway bill," Donna Harman, President and CEO of the American Forest & Paper Association, said Monday. "The year has closed and companies’ tax returns are not due until March 15. Retroactive tax increases are bad tax policy and harm companies that are trying to make investments to get jobs and the economy going again.”

Baucus was an early critic of the original black liquor loophole, which provided well over $6 billion in AFM payments to paper companies. But the Montana Democrat went silent on the subject in the summer and fall of 2010, apparently to get Sen. Olympia Snowe (R-Maine) to vote yes on President Obama's healthcare legislation.

Democrats eventually blocked Son of Black Liquor credits for any of the pulp byproduct burned after Dec. 31, 2009 and used the $23.6 billion in "savings" to help pay for the healthcare bill.

Related reading:

• Son of Black Liquor Finally Enters the Limelight 
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FSS Is Increasing USPS's Costs, Expert Says

So far, the Flats Sequencing System seems to be increasing rather than decreasing the Postal Service’s sorting and delivery costs, according to a postal expert.

“The FSS has at times been seen as the technological fix that would reduce flats costs” and make the Periodicals class less of a money loser for the U.S. Postal Service, noted Halstein Stralberg in comments Time Inc. submitted Friday to the Postal Regulatory Commission. But based on USPS’s data for fiscal year 2011, “FSS processing was in fact very costly and most likely made Periodicals costs higher than they would have been without FSS.”

“In FY2011, far too many flats were rejected from the FSS, and some either disappeared or had unacceptable delays. Additionally, relative to the volumes sorted by the FSS, there must have been far too many manhours spent on a system that was supposed to be highly automated,” Stralberg wrote on behalf of Time Inc., which is challenging the way USPS calculates the Periodicals class’s costs.

“It appears most likely that the majority of the flats that were rejected in some way by the FSS during FY2011 were diverted to manual processing,” Stralberg concluded. “Considering that the majority of flats processed by FSS are flats that without FSS would have been carrier route presorted [making their handling costs low], the flats that are diverted to manual from FSS will experience higher delivery costs, as well as much higher processing costs, than they would had they simply remained as carrier route presorted flats going directly to the carriers.”


USPS’s $1.4 billion investment in FSS was supposed to revolutionize the labor-intensive process of delivering catalogs, magazines, newspapers, and other flat mail. The last of the 100 machines was fired up several months ago, but the system is still plagued by machine downtime, late deliveries, and other problems.

The efficiency problems Stralberg noted in FY 2011 continue in FY 2012.

“At a recent meeting with USPS management, we were informed that FSS is now finalizing for delivery approximately 50% of the available volume in the FSS zones,” wrote Jim O’Brien, Time’s Vice President of Distribution & Postal Affairs, in comments the big magazine publisher also filed with the PRC on Friday. “This means that the other 50% of the available volume is being manually cased. While specific cost and mail-processing data are unavailable, it makes intuitive sense that having two systems processing mail for the same zones will add cost.”

One problem Stralberg pointed out is that more than 1 out of 10 pieces fed into the FSS do not end up in delivery-point sequence. That can lead to a lot of manual work and delayed deliveries.

“If a piece is rejected, for whatever reason, in the [FSS's] second pass, it is already too late for it to be entered into Pass 1 for that particular zone on that day,” Stralberg noted. “In one case, a subscriber to three Time Inc. weeklies reported that none of them had arrived in a given week. The Postal Service could not explain, but when provided with the IMB [Intelligent Mail Barcode] codes for the three copies, they could confirm that all three had been read into the first FSS pass, but none had made it to the second pass.”

Stralberg found one piece of good news for USPS in the data: Overall, the proportion of flats that undergo expensive manual processing has dropped dramatically – probably by more than a third -- in the past two years.

Related articles:

• 7 Reasons the Jury Is Still Out on Flats Sequencing 
• Postal Service Inefficiency Drives Up Periodicals Costs 
• Don’t Blame ‘Overpaid Postal Workers' for Rising Periodicals Costs 

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