Upon looking at KBA's half-year results, it is becoming clear that 2013 is going to be another challenging year for equipment manufacturers.   While orders in the second quarter were up from a weak first quarter, the trailing four quarters add up to just under one billion Euros of new orders. 

The situation looks particularly serious for the web division which is faced by higher complexity costs than its competitors due to its more fragmented product portfolio. 

During strong cycles the division benefits from the higher margin securities press business, but the picture below illustrates that the Web segment has been living off backlog for the last 18 months - most likely higher margin multi-year specialty press orders -  generating sales north of my current break-even estimate of Euro 120 million per quarter. 

Assuming no immediate reversal of the trend an obvious question is how quickly the company can lower its breakeven point.   Sheetfed results have been negative for four out of the last five years and the above analysis suggests that the (relatively) good times for the web division are coming to an end.

With backlog down to just about 6 months of sales and twelve months trailing orders adding up to only 384 million Euros it is unlikely that the web division will stay above break-even in the coming quarters.

As management is working on its strategy to become more of a supplier to the packaging industry by acquiring Flextecnica (flexible packaging) and Kammann (container decorating) the coming downsizing discussions are an unwelcome distraction.

... but people still buy them.  Just in the last few days Jeff Bezos, the founder and CEO of Amazon bought the Washington Post for $250 million and Red Sox owner John Henry acquired the Boston Globe for $70 million from the New York Times which itself had paid $1.1 billion some 20 years ago.

While these two - not untypical for the kind of people investing in newspapers today - are very bright and successful individuals, the hope that they will quickly find the solution to stem the decline of the industry is unrealistic.  So is the rosy-colored view that these are just trophy (or charity) investments that do not need to make money anytime soon.

In contrast to Sam Zell's "acquisition" of the Tribune, which in retrospect looks more like a bad real estate bet on the Olympic Games coming to Chicago, I believe that the new owners of the Post and the Globe actually have plans to make these properties successful again.

Despite its label as a web based hi-tech company, Amazon is very much a bricks and mortar organization with warehouses and distribution centers all linked through a powerful, highly integrated system with a superb web based front-end for the customer. 

Mr. Bezos, being used to Amazon's automated 24/7 logistical systems, may ask his newspaper managers why their capital intensive printing and mailroom equipment is sitting idle except for a few hours a day, in many cases further hampered by an inflexible union environment.   Compare that just with the operation of a magazine or catalog printer and you can see the potential without even leaving the domain of printing. 

His deal also includes The Post and its Web site (washingtonpost.com), along with the Express newspaper, the Gazette Newspapers and Southern Maryland Newspapers in suburban Washington, the Fairfax County Times, the Spanish-language newspaper El Tiempo Latino, and the Robinson Terminal production plant in Springfield. Bezos will also purchase the Comprint printing operation in Gaithersburg, which produces several military publications.

That does not look like a trophy investment if you ask me.  Amazon already has about 30 distribution centers in the US, with six of them being in Delaware and Pennsylvania.   Maybe the real estate is of interest after all.  Another angle could be access to the newspaper industry's home delivery system as an alternative to USPS, UPS etc.

Let's also not forget where Amazon started. It changed book selling forever.  And today book printing is not dead (despite Amazon's Kindle) but digital inkjet is changing the production models.  Maybe the next time you order a book on Amazon, it is being printed on demand in an Amazon facility nearby and dropped off with your daily newspaper the next morning.

The first look at Q1-2013 confirms that the prevailing winds for printing equipment makers have not changed.   Below are the quarterly new orders for KBA and - despite the fact that KBA without doubt has weathered the crisis better than most - the picture is not pretty.  

Orders for web and specialty presses were very low at Euro 67 million.  The good news here, if any, is that the lack of new order announcements for newspaper and commercial presses suggests some new security press business where KBA enjoys an enviable market position.

The backlog for web and special presses is down 33% from its recent 2011 peak to Euro 450 million, or closer to only 9 months of average trailing 12 months sales.  In addition, the lower than average sales of the last two quarters have prevented the backlog from melting down even faster which raises some obvious questions in connection with an overall increase in inventory. 

On the sheetfed side, orders have been in decline for the last four quarters.  After a quick look at Heidelberg's latest press release it looks as if this trend is also in place for the market leader.

KBA's sheetfed quarterly sales were unusually low at Euro 98 million after a gang buster Euro 248 million in Q4-2012.  Despite the meager new orders, sheetfed backlog ended up some Euro 35 million.  While this Q4/Q1 swing is nothing new for the company, it appears to have become more extreme, usually not a good sign, especially when new orders continue to decline.  First quarter numbers for the other sheetfed suppliers and feedback from this week's Print China Exhibition will provide further insight soon.

Without even going into questions like margin trends, backlog quality or accounting effects on specific balance sheet items, it is clear that the situation - probably for all equipment suppliers - remains difficult.  KBA, as others, have been working on the right strategies to stem the decline of its traditional newspaper and commercial printing segments.  Right now the company probably has some strategic opportunities even in the traditional segments as it appears to be more market focused than some of its competitors.  However, with a shrinking profitable backlog for web and specialty presses (likely more specialty than web) and a potential slowdown of the important Chinese sheetfed market, the successful execution of its inkjet and web packaging strategy will be even more important.

The stock market - as always - has its own view, as the chart below illustrates.

Of course it is easy to read newspapers online these days, but some of us still like to get their paper in the morning.

If that wouldn't prove so damn difficult.

After my recent job change opened the possibility to enjoy The Wall Street Journal during breakfast at home, I jumped at subscribing when a direct mail offer arrived from the Journal.  Talk about effective marketing!

Subscribing online was easy and soon I received my first copy, unfortunately late afternoon, delivered by the US Postal Service.  Since I had previously received the paper via local delivery at my previous home on the same road I contacted Customer Service and a friendly customer representative told me she would take care of the issue, no problem.  

A week later without change I contacted Customer Service again, this time through their web site and was told that my information had been forwarded to the local delivery supervisor for review. The WSJ kept arriving via USPS in the afternoon. No satisfaction!

Never one to easily give up I attempted my third approach, again online pleading my case of successful past local delivery, both at home and at my office. I also get Barron's locally delivered every Sunday! It must be possible.

I received this answer and I quote: "Thank you for contacting The Wall Street Journal Customer Center regarding deliver service. 

We have checked our records and it says there is a carrier available and we are trying to assign one to you but it has not taken effect yet. We have replace the request to change to carrier service to attempt to force the change. The change should be resolved and in effect by August 1st, 2012.

If we can further assist you please contact us at the number listed below.

Best Regards,"

Aahh, what could possibly go wrong after such positive confirmation?  Well, it is August 3rd (over a month into my subscription) and my paper continues to arrive in the afternoon.

I am still not throwing in the towel!  Diligent surveillance revealed that my next door neighbor receives the Wall Street Journal via local delivery every morning.  After a few drinks he agreed to provide me with the carrier's contact info, so I can help the Journal figure out how they already get the paper to this part of the world.  

Let's hope that this will work!  I am not ready to invest into two tablet PC's for the breakfast table, just so my wife and I can share the joy of reading the Wall Street Journal. (The multi-section broadsheet newspaper is really a clever product, if you think of it.) 

On a more serious note - and I sincerely hope that my case is not typical - how can the national papers grow their reach outside the large metroplitan areas if they make it so hard for a willing subcriber to get the paper in the morning? 

Given the challenges faced by the Postal Service, newspapers could consider investing into their own existing delivery system and use it to provide additional services, allowing the post office to streamline without the customers seeing a decline in overall delivery service.  It could be a win-win.

P.S.

It all worked out eventually and, given that I have a bit more time on my hands than I should, I enjoy the Journal every morning, delivered right to my doorstep.

Plus, I saved the money for the two tablets....