President's Message

Strategy

Precision's business strategy is simple, and consists of four major elements. First, we currently conduct business in two broad product sectors - prime and non-prime Pressure-Sensitive labelling and packaging products for consumer packaging and secondary labels, tickets and tags primarily for Bar Code and inventory control purposes. Second, within each of these sectors, we select specific market segments or "focus markets." Third, while we fully expect to grow primarily internally, we actively seek acquisitions that fit our stringent criteria. The fourth element in our strategy is to decentralize our decision making as much as possible.

For you to evaluate Precision's prospects for the future, let us share our thinking regarding each of these four elements. As the first element in our strategy, we have positioned Precision as a strong competitor in these two major product sectors. We selected these based upon our criteria of market growth, substantial barriers to entry, defensible market/product niches; not vulnerable to weakness in any one industry customer, fragmented competition, and potential for sustainable above average returns.

In the prime and non-prime sector, we have established Precision as a producer of fine quality graphics with quick order turnaround. Looking into the future of prime label market specifically, we see an intensification of the trends that exist today: more prime labels that are designed as a sales tool rather than strictly informational, meaning more detailed graphics combined with the use of foils.

To enhance our position within this relatively high value sector, in we acquired in-line equipment with greater drying capability as well as multiple coating stations to compliment our existing central impression production equipment.

In the secondary Bar Code label and tag area, we believe Precision is one of the largest producers of speciality high value premium products in the Canadian market place. In the last five years, we achieved our leading position strictly by internal growth.

We also enhanced our position by adding specialized converting equipment to better serve our selected market niches. Press speeds at the factory have increased almost 30%, make ready time has decreased 22% and waste has gone down by as much as 16%. The quality of our work is better than ever, and payback on the equipment was achieved within six months. Our label operations have among the most diverse capabilities of any converting company in North America. Our technical expertise is unsurpassed.

The total market for prime/non-prime and secondary labelling products is projected to grow 6 - 8% this year, which is 2 - 3 times faster than the economy. Many factors are influencing this high level of growth; thermal labels are growing at 15% annually, digital labels at 30% annually, anti theft labels and tags are growing at 25% annually and filmic stocks continue to grow at 15% annually. It is certainly an exciting world for those with the right technologies and markets.

Our strategy is to grow rapidly, both internally and through acquisition, to be among the largest and best producers of labels and related packaging products generally. This, and a management philosophy focused on continuous improvement, has resulted in a sustainable and continuing program of investment for future growth.

The second major element for the overall business strategy is to select specific market niches or "focus markets" within each of our product sectors. We do not attempt to be "Labellers to the world", rather we select focus markets in which there are growth opportunities and we can be among the industry leaders or at least in the top quartile of suppliers. The focus markets we concentrate on are characterized by fragmented competitors allowing the opportunity for market share gains, faster market growth and higher returns.

Supplementing rapid internal growth with carefully selected acquisitions is a third part of our strategy. Areas we are considering for acquisition are:

1. UV Rotary letterpress printing, commonly found in pharmaceutical, health and beauty aids
2. Specialized slitting/die cutting/re-winding capability required for high speed, cost effective blank bar code labelling.
3. Packaging process printing, commonly found in the home meal replacement industry.

Decentralization is the fourth and critical element of our strategy. For us, decentralization means making decisions, close to the market place; organizing work efforts around small, motivated, self directed teams; and cutting bureaucracy. We continue to invest heavily in personnel selection and training to make decentralization efforts effective.

In 2004, we increased the responsibilities of our people taking care of the operational and sales sides of our business and altered our incentive compensation to increase potential rewards for superior performance. We firmly believe that decisions can best be made by the people as close to the customer as possible. We have made progress toward achieving this objective, but we want to move even further.

We are optimistic about the outlook for the company. The two product sectors we have selected will continue to grow and remain profitable. We have strong positions and expertise in several focus markets, and in our view, we have the best people in the industry.

We do see major challenges moving forward. We must accelerate our efforts to keep a step ahead of our competitors. A fully decentralized structure will result in better decision making, quicker response to the market place and a leaner more cost effective business. The success of this effort depends on our ability to develop our people at all levels. They must have superior skills and judgement to make the right decisions for our company because no bureaucracy is looking over their shoulders. We will reward success in a manner which ties together the economic interests of our employees and the ownership. Looking forward to 2006 and beyond, we think that we are in a good position. We have strength in the marketplace, and effective motivated employees.

While we expect the economy to maintain its present trend, price increases will be difficult. This situation puts pressure on all of us to accelerate productivity improvements, focus attention on higher margin products, and reduce overhead costs in order to achieve our profit objectives. We are cautiously optimistic that our efforts will be successful.

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