Supply Chain Impact

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SUPPLY CHAIN IMPACTS ON THE PRINT MARKET A distributor’s strategic guide for navigating price increases - Fall 2021

Buying raw materials to print and manufacture products requires a dependable and undisrupted supply chain. The scale of the pandemic’s impact eclipses anything most manufacturers have experienced before. It has taken creativity and careful analysis of the supply market and its forecasts in order to navigate the current disruptions. Our Strategic Sourcing team closely monitors a number of different markets to gauge the impact on our business as well as on our valued distributors. In this overview, you will find insights into the print markets, impacts to manufacturing, and mitigation steps we’re taking to minimize the impact. Last, we will also share specific steps you can take to reduce the impact to your business. Good to know: North America’s pulp and paper industry is experiencing a supply/demand imbalance that has raised prices, increased input costs and left some markets unable to produce enough product to keep pace with demand. As we enter Q4, all segments of manufacturing are impacted by record long raw material lead times.

What we’re watching

Seven core markets that impact our business:

• Paper Market • Label Market • Retail Signs & Graphics Market • Packaging Market • Promotional Market • Logistics Market • Labor Market

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WHAT WE’RE SEEING

PAPER MARKET Pricing

Coated paper has had five increases year-to-date, and another is expected by the end of the year. All other papers have announced multiple increases as well. Pulp is up 33% and thermal paper continues to be volatile. Transportation costs remain high due to container costs and the shortage of drivers. Hansol, Domtar and several other mills have implemented a 5% -10% price increase on all thermal paper products as of October 1, 2021, bringing year-to-date increases to a total of over 20%. Chemicals are still coming from China, but pricing will increase if China experiences another COVID-19 lockdown. The final phase of anti-dumping duty investigations was held on September 21, 2021. This affects thermal paper from Germany, Japan, Korea and Spain. The ITC/DOC will likely provide their findings in October. If tariffs are raised from the May benchmark, there will be another increase. Availability and Limitations Paper is in short supply. Coated paper is still on allocation and is expected to be well into 2022. Uncoated paper is technically not on allocation, however, most mills are on a reservation system. Coated and uncoated mills are still unable to back-fill inventories. Lead times are as follows: board is at 12 weeks, coated web at 6 weeks, coated sheets at 8 weeks, uncoated web at 6 weeks, and uncoated sheets are at 8 weeks. Most mills have suspended or discontinued slow moving items as well as some carton items, and are just making skids for now. Mills are only accepting orders that trim their machines or standard sizes. Domtar announced in July they will reopen their Ashdown, AK, facility, adding 185,000 tons of uncoated capacity back into the market. The timing is slated for January 2022. Both Sappi and Verso have announced maintenance shutdowns for Q4. Demand for pressure sensitive label materials is currently above historic levels and is projected to remain strong into next year. The U.S. economy grew at a 6.5% annualized pace in the second quarter. While that would have been strong prior to the pandemic, the gain was considerably less than the 8.4% Dow Jones estimate. Labels historically track similarly to GDP but have since grown faster since the pandemic began due to changing consumer habits, stimulus dollars, pent-up demand, and record e-commerce growth. Weather Impacts Hurricanes and tropical storms are continuously being monitored with potential supply impacts on film facestocks, adhesives, and silicones – many of which are recovering from Storm Uri in Texas earlier this year. Supply constraints continue for many key inputs (e.g. paper facestocks, adhesive components, liners, and select film facestocks) and logistics globally. Chemical supply chains have not been able to fully recover from the Texas winter storm in February. Hurricanes Ida and Nicholas extended the production recovery. Supply is expected to remain tight through Q1 next year. Prices have increased multiple times from all label suppliers. Lead times have been extending and vary by product. LABELS MARKET State of the Market

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WHAT WE’RE SEEING

LABELS MARKET, cont. Label & NarrowWeb Mid-Year Economic Report

The resilient label industry has responded to a host of challenges, ranging from the pandemic to natural disasters. While the immediate future looks bright, there are concerns to keep an eye on. Inflation, a new presidency, social unrest, natural disasters and, of course, the continued fallout from the pandemic will impact the label industry for years to come. The pandemic has created widespread and potentially permanent changes that will require the label industry to adapt. E-commerce acceleration continues to grow, hygiene and food safety remains important, and convenience, resealable and personalization features will remain key trends. The availability of qualified employees to handle spikes in production is another test for many industries. While manufacturers were already facing workforce shortages, that difficulty has been exacerbated during the pandemic. In addition, UL helps uphold standards in marking and labeling, the global safety science leader has launched new services to ensure labels comply to ANSI/CAN/UL969A. RETAIL SIGNS & GRAPHICS State of the Market Price increases are expected to continue throughout 2021 and beyond. Manufacturing schedules and the delivery windows for imported products are also expected to continue to experience delays. Industry Update According to the most telling business indicators such as confidence and quote activity, nearly 60% of companies expect business to improve during the months ahead, essentially doubling last quarter’s 30.7%, while 49.8% report quote activity is increasing, up from 33.9% three months ago. Both are the highest readings since the start of the pandemic. Throughout 2021 and beyond, it is expected that rising inflation will drive up prices. This has already begun for some printers. More than 35 percent saw an increase in substrate prices, and 27.1% saw an increase in consumable prices. Combined with those who had supply disruptions (47.7%) and shipping issues (43.7%), these increases will likely force printers to either pass these costs to their customers or will force them to depress their profit margins. Printers will also struggle to bring in qualified and/or experienced workers throughout the rest of the year, further increasing the number of printers facing employee shortages (28.1%). PACKAGING MARKET State of the Market 2021 has brought about some interesting trends within the packaging industry. Consumer habits changed significantly during the pandemic. Home delivery of food and consumer products increased demand for packaging containers and the cartons they are sold or shipped in. With e-commerce continuing to be a consumer preference, technological advancement and sustainability will remain a priority. The packaging industry has implemented and adapted to various industry trends worldwide. Reliance on e-commerce businesses has resulted in brands opting for more cost effective solutions in the wake of the pandemic. With brick and mortar stores seeing little to no foot traffic due to pandemic lockdowns, spending on high quality printing methods, like offset printing, have proven to be less effective.

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WHAT WE’RE SEEING

PACKAGING MARKET, cont. Packaging & Shipping

As the pandemic continues to affect the industry, a big change that has come about is the increased dependence on shipping. Rising shipping expenses have remained stubbornly in place for many businesses, making it difficult to manage finances efficiently. Businesses have been left with few choices as they deal with high shipping costs and contracts, in turn leading businesses to pass this expense on to the customer. Unfortunately this is not only true for their products, but their custom packaging too. The price for containers moving goods from China to the US and Europe has remained at a record high and is projected to increase over the coming years. As businesses continue to enter into contracts with higher than usual rates, it’s becoming apparent that higher freight costs may be here to stay. PROMOTIONAL MARKET State of the Market Promo supply chain challenges continue, which emphasize setting and meeting expectations through the end of the year. Rising prices are certainly an issue, but product shortages have been the greater concern. Domestic inventories are being depleted at record rates as suppliers are kept waiting for replenishment shipments to arrive, as international and domestic transport delays are not expected to improve until mid-year 2022. Higher prices on products, longer times for order production, eroding customer service levels, delays in delivery of finished orders and other headaches are some of the problems stemming from the pandemic. Many promo distributors are losing orders as buyers seek alternative solutions. Apparel decorators are dealing with ink shortages and rationing. Some of the raw materials typically used in the manufacture of both plastisol and water-based inks have been greatly constrained. Embroidery products are more readily available, but it can take longer than usual to get them. Labor Shortages Hiring difficulties continue, both for positions vacated due to layoffs at the start of the pandemic and for new positions necessary to meet surging demand. These issues are contributing to slower production times for suppliers already navigating supply chain disruptions and causing problems for distributors looking to regain their footing as the Reports of vendor qualification protocols being stretched, and products with less than rigorous testing regimens have found their way to end-users’ customers, as some distributors are found to be cutting corners on compliance and safety. Price Increases Price increases are expected to continue throughout 2021 as transportation and many raw material costs continue to rise. Product price in nearly every promotional product category has been impacted as pressures come amid exorbitant freight expenses, rising labor costs, and the declining value of the dollar against the yuan of China. Shipping surcharges may be coming. Proactive suppliers are trying to forge a path through importing, inventory and labor issues to keep business moving for the promo industry. economy rebounds. Compliance & Safety

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WHAT WE’RE SEEING

LOGISTICS MARKET State of the Market

As 2021 enters its final months, the transportation industry will see capacity remain tight, which will impact cost constraints and cost increases. Meeting demand will continue to be a challenge through Q3. Planning and communication with logistics carriers will be key moving into Q4. Small Package Outlook Parcel carriers’ recent investments in capacity will not be enough for peak season this year. During the 2021 holiday shopping season, delivery demand is expected to exceed capacity by 5 million pieces a day. Less Than Truckload (LTL) Freight Outlook Frequently, truckload capacity will correlate with the LTL market. When truckload capacity is tight, shippers will utilize LTL more frequently, particularly on larger shipments. Larger truckload shipments will likely be divided into two LTL shipments, which further congests LTL carriers. Due to LTL carriers currently being at or above capacity, many have embargoed certain areas, with some setting lower limits to weights or lineal feet they will pick up. The lack of supply, and no end in sight to the increasing demand has an obvious impact on pricing. LTL rates continue to rise faster than normal. National carrier rates are rising quickly and are at higher levels than regional carrier rates, as national carriers rely on longer line hauls and purchased transportation. Finally, these market conditions are impacting service levels. Shorter haul lanes tend to be faring better than longer haul lanes, where bottlenecks are more likely to delay shipments. Most carriers have suspended refunds on their guaranteed products, as they simply have too many As truckload volumes continued to climb through Q3, the industry faced several challenges including port congestion, a significant rise in inflation costs, and demand spikes. Retailers across the country are beginning to raise prices to offset shortages and shipping costs. Due to the added demand for volume, expect to see increasing rates through the end of the year. The truckload market continues to struggle with capacity and one of the many reasons is driver shortages. To help combat driver shortages, many trucking companies offer huge wage increases to attract drivers to the industry. However, other competitive job markets such as construction and warehousing are also struggling to fill positions. In addition, the e-commerce boom created an uptick in driver demand as several hundred thousand courier driver positions were filled, reducing the amount of CDL (Commercial Driver’s License) candidates. Fuel Prices Fuel increases have slowed during the second quarter, but steady increases are expected on fuel surcharges through the remainder of 2021. Hurricane Ida caused some disruption with oil production in the Gulf of Mexico and affected refineries in the Gulf region. This, along with high demand, has caused fuel pricing to rise in the past few weeks. shipments delivering after the standard service days. Full Truckload (TL) Freight Capacity Constraints

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WHAT WE’RE SEEING

LABOR MARKET Employee Scarcities

Worker shortages are severely impacting supply chains. As consumer demand surges back, businesses can’t find enough workers to meet that demand. Some workers are afraid of contracting COVID-19, some lack childcare, and others must stay home with their remote-learning children. Many workers are finding it difficult to work outside the home when only 60% of the 200 largest U.S. school districts were fully reopened by the end of April, and many childcare centers continue to operate at reduced capacity. Federal bonuses in unemployment benefits further dampen the rush for some people to return to work or take new jobs. According to the Labor Department, the average unemployment benefit recipient receives more than the equivalent of working full-time at $15 an hour. High Number of Vacancies Job openings hit a record high of 8.1 million in the first quarter of 2021. With fewer people in the labor force, labor supply is not bouncing back as swiftly as demand. While the overall economy gained 266K jobs in April, manufacturing lost 18K. The sector remains down 515K jobs since February 2020, a stark reminder that resilient supply chains are essential to growing jobs in the future. Demand for Higher Pay Workers are not accepting the low wages that they may have pre-pandemic, so companies are needing to adjust by either raising prices or cutting into profit margins. The Labor Department’s Employment Cost Index reports that wages and salaries for private-sector workers rose 3% in the first quarter compared to a year earlier, matching the growth rate at the end of 2019, when unemployment was near a 50-year low. Walmart gave raises to 425,000 employees in February, raising their average wage above $15 an hour. Projection As pandemic stimulus programs wind down, the current labor crunch could vanish, but that is unlikely. For years, social scientists have warned that because of declining birthrates, retiring baby boomers and severe immigration restrictions, the U.S. is approaching an era of labor scarcity. In manufacturing, sign-on bonuses and increased wages continue to be in effect. The past year has fundamentally changed the economy and what many Americans expect in their working life. This big reassessment — for companies and workers — is going to take a while to sort out and it could continue to pop up in surprising ways.

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MATERIALS INCREASE

Comments

Cost Category Q2 21 Costs

• Pulp continues to surge. Northern bleached softwood kraft pulp at highest price in 20 years. Trend continues into 2H. • Tight supply due to capacity reductions in prior years and robust demand. • PS grades seeing 15%+ inflation since the start of the year. • Polypropylene demand remains elevated. Pricing forecasted to increase above Feb. peak in June. May Consumer Demand Index up 12% from April. June estimated at $1.32 up another 10% from May. • Polyester (PET) film supply/demand imbalance - pricing rising 5-7% • Silicone pricing has climbed 15%+ since Q1. Tight supply and extremely strong demand. • Controlled release additive (CRA) industry-wide tightness has further deteriorated since early Q2 - resin shortage. • Platinum costs remain significantly above prior year. • Acrylic suppliers expected to remain on allocation into Q3 and likely through year end. • Rosin Ester and Styrenic Block Copolymers pricing are up 20%+ heading into Q3. RE & SIS short supply. • Oil (WTI) $72+ barrel, 30% + than pre-Covid. Calls for $100 oil this year. • AO, other components in extremely tight supply. • Corrugated prices are up 15%+ over prior year, projected up further. • Pallet prices are up over 15%+ over prior year. • Totes, Steel drum suppliers implemented double-digit increases. • Diesel fuel costs have increased 37%+ yoy. • TL rates have increased 8%+ ex fuel yoy; LTL inflation 7% with many carriers limiting shipments. • Tanker truck and specialized modes remain scarce. Load-to-truck ratio 5:1. • Monomers (CGP, BA & 2EHA) facing record demand and tight supply. • Major producers have increased price 20-25% in 2021.

Paper (liner/face)

Films (liner/face)

Silicone

Acrylic adhesives

Hot melt components

Packaging

Freight

Costs declining

Costs neutral

Costs up <5%

Costs up 5-9%

Costs up >10%

LEGEND:

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WHOLESALE PRICING IMPACTS

Manufacturing Price Increases by Major Category Overall material costs are forecasted to increase by 2.5-20% throughout 2021.

15-18%

8-12%

8-10%

7-8%

6-8%

6-7.5%

5-10%

5-8%

4-7%

Name Badges & Stamps Folders

Signs & Graphics

Forms Business Identity

Announcements & Invitations Promotional Items Envelopes

Labels

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MANUFACTURING MITIGATION

Taylor’s proactive investments in efficient equipment and improved technology will enable us to keep rate increases at a minimum - today and in the future.

PAPER 

Promoting our “house stock” as a first option.

Increasing our inventory on house sheet grades for primary sizes.



 Working with distributors to get forecasts on expected units of products to be sold.  Forecasting our paper needs with our suppliers so our distributors’ paper needs can be accumulated and added to our inventory orders. JIT (just-in-time) orders will be difficult during the current paper market challenges.

LABELS 

Obtaining production forecasts to share with suppliers. Seeking safety stock with customer commitments.



 Helping set expectations with distributors on current market conditions and lead times, and seek alternative materials when needed to provide more supply options.  Continuing weekly supplier performance meetings to effectively manage, elevate and prioritize orders. LOGISTICS  Continuing to engage our small package carriers to better manage our ability to keep our supply chain stable throughout 2021.  Shifting our small package strategy as we look to alternate and other regional carriers to be a bigger part of our plan. It is no longer advantageous for Taylor to rely so heavily on a single partner as our carrier of choice in the small package market.

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DISTRIBUTOR MITIGATION

Whether your focus is print, promotional products, office supplies or design services, there are a few things that you can do now to minimize the impact of this market volatility and forthcoming price increases. Start today.

AREAS OF VOLATILITY Give your customers a heads up! ⚠ Custom and specialty stocks are amazing, but supply is typically less predictable ✅ Try house stocks ⚠ Lamination materials come and go - order early if you’re looking for this finish ✅ Try washable stocks ⚠ We love foils and high-end finishes, but they take longer in production ✅ Switch to enhanced finishes ⚠ Metal and ebond materials for outdoor signage are having sporadic shortages ✅ Try vinyl and plastics ⚠ Dies are taking a week to produce vs. one day ✅ Build in extra time for orders requiring dies

TO YOUR CUSTOMERS Share market drivers and how they are going to cause price increases and potential delays. Set clear expectations and offer alternatives.

COST SAVINGS Communicate recommendations for cost- saving measures to your customers and within your organization. Pre-planning is essential.

IMPLEMENT RETAIL PRICING Across your website, price sheets, and menus of services, begin implementing retail price updates early to absorb cost increases.

COSTING UPDATES Plan ahead for manufacturing and cost increases to activate in 2022.

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