Commentary by Steve Aranoff & Robert FitzPatrick, The EAGLE October 20, 2004 -- The EAGLE has recently read the news, and WhatTheyThink.com has reported, on the decision by Esko-Graphics to stop investing in a portion of its Commercial Computer to Plate business. Orders will continue to be filled and deliveries made, for the PlateDriver violet CtP, but no new investment will be made and the non-performing business will be closed down in an orderly fashion. In fact, employee separations began already at the end of the past week, but significant staff is being kept for support of new and existing customers. THE EAGLE has long been a proponent of understanding your key competencies and strengthening them in order to grow the company. Here, the same philosophy holds, that is, by eliminating those portions of the business that are not within those key competencies, the company can better concentrate on what it does well, mostly Packaging related. The Press Release indicates that over 60% of Esko-Graphics’ current revenues are from this area of competency. Esko-Graphics is not new to such hard decisions. In 2003, it also made the decision to move out of the newspaper CtP business where it was not a significant player in that market, in order that it could continue to concentrate in the overall commercial CtP business where it had done better. Agfa took over customer obligations eliminating one competitor in the newspaper realm. The PlateDriver commercial violet Platesetter line being eliminated had been developed at one of the companies, Eskofot, that was acquired prior to the current company being formed by the marriage of Barco Graphics and Purup-Eskofot. As part of the consolidation process after that marriage, various platesetters developed by Barco, except for the Barco Flexographic line, were eliminated in favor the Danish developed Purup-Eskofot line. Now, part of that line is being allowed to fade away. All told, this line has a relatively long history and was contributing 10 15% to EskoGraphics’ sales and utilized 10-15% of its employee base, we were told. Eskographics is now left with the Espresso 4-up (Computer to UV plate) Flexo CtP line sold through Pitman in the U.S., and the small format polyester CtP line, that used to be sold by A.B. Dick and is now being sold by XpedX, both of which are profitable. All told, the offerings to the commercial marketplace will still include Scope workflow and the DPX, PlateDriver Compact, DotMate CtF and Eskoscan product lines. There has long been speculation about how long a CtP manufacturer that did not have access to its own line of plates could survive. Although Esko-Graphics has been a major vendor in the pre-production marketplace, with its workflow and CAD software, it has been a bit of an anomaly in the overall Platesetter marketplace. Like Screen, Creo and ECRM, it did not sell consumables, especially plates. The others, though their actions have taken steps to bolster their business, but Esko-Graphics had not been seen as having faced the complete issues head on. After all; Screen made the transition from a direct sales company to an OEM manufacturer, outside of Japan, selling through KPG, Fuji and others as a way to concentrate on its development and manufacturing strengths, but to have sales made by distribution companies that also made their own plates. ECRM, like Creo, has established itself as an OEM player, building realistically priced units primarily for the commercial marketplace. Although not doing as well as previously, their low OEM prices have seemed to keep them alive, and out of the plate wars. Creo, The EAGLE recently noted, has learned that to protect its core product, it needed more control over the sales process, and has purchased two plate companies to help it weather the decline in traditional printing. In doing so, they have kept their losses to a minimum, as their capital equipment business has been mired in slipping gross margins, but have kept up overall sales better than most. But Esko-Graphics was the only one of the “non-consumable” platesetter companies that did not seem to have a plan for this commercial product line’s survival, and sufficient time had gone by since the merger, that the market expected something to have happened by now. Outside of this area, Eskographics clearly has other businesses that are doing if not quite well, much better. Their overall Flexographic platesetter business primarily for the packaging market and including their workflow products are doing well. The Kongsberg digital cutters also with a tailored CAD front end for packaging are also doing well. They have a new relationship for workflow and print color calibration with the HP/Indigo product line that shows promise. But, overall, the company has been losing money. Although privately owned, and apparently with deep pockets and investor support of management, no company can keep losing money indefinitely. Making the hard choices, one by one, even if some believe it might be a bit late, is a very positive sign that Esko-Graphics management understands and is methodically planning its way toward a long term profitable survival based upon strengths. The CtP lines they are keeping are doing well as part of a larger overall strategy and not so confined as the general violet CtP situation with its market pricing and plate issues. It is also important to note that the impact of the current reduction in the commercial CtP business will significantly hit employment in Denmark, the heart of the company, even though it is headquartered in Ghent, Belgium. The EAGLE has seen so little recognition of the facts and in graphic arts companies acting accordingly the last few years. Most companies have appeared to stick their heads in the ground and hope that better days are around the corner. Very few factories have been closed as the population of traditional printers has dwindled in favor of growth in the digital end. Therefore, we must give credit to Esko-Graphics’ CEO, Kim Graven-Nielsen, for a painful, but important decision to stop sending good money after bad, and making a decision that can only strengthen the balance of the company’s businesses. Graven-Nielsen was fortunate to have private owners. Unfortunately for others in the industry, the public market could never tolerate a reduction in sales, even if it resulted in an increase in net profits. This was one of the problems that hurt publicly traded Prime Source. It couldn’t get out from under the “rebate” games that caused it to sell for less than it earned but get some of it back from its manufacturers – as that would look like a reduction in sales volume. Now that Prime Source, the only major public distributor has been taken private, by being purchased by Fuji where it has been combined with other distributors into Enovation Graphic Systems, the whole rebate system has finally been blown out of the water and has mostly disappeared.