American Reprographics Company ( ARC)

Q3 2011 Earnings Conference Call

November 2, 2011 5:00 PM ET

Executives

David Stickney – President, Corporate Communications

Suri Suriyakumar – Chairman, President and CEO

John Toth – CFO

Dilo Wijesuriya – COO

Analysts

Andrew Steinerman – JP Morgan

Scott Schneeberger – Oppenheimer & Co.

David Manthey [ph] – Robert W. Baird

Matthew Kempler – Sidoti & Company

Brandon Dobell – William Blair & Company

Presentation

Operator

Good afternoon. My name is Tonia and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC’s third quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. I would now like to turn the call over to Mr. David Stickney, Vice President of Corporate Communications. Sir you may begin.

David Stickney

Thank you, Tonia. I’d like to welcome everyone to our call today. Joining me are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our COO; John Toth, our CFO; and Jorge Avalos, our Chief Accounting Officer.

Our third quarter financial results were publicized earlier today in a press release. You can access the press release and the company’s other releases from the Investor Relations section of ARC’s website at www.e-arc.com. A taped replay of this call will be made available beginning about two hours after its conclusion. It will be accessible for seven days after the call. You can find the dial in number for this replay in today’s press release. We are webcasting our call today and the replay of the web cast will be available for 90 days on the company’s website.

This call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company including the company’s financial outlook. Bear in mind that such statements are only predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today, November 2, 2011 and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today’s press release and in our Form 8-K filing.

At this point, I’ll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Suri Suriyakumar

Thank you, David and good afternoon. As we stated in our release earlier today, macroeconomic conditions continue to remain sluggish at best. We saw it coming, and there were no surprises during the quarter. The AEC market remains flat despite some sporadic signs of activity relative to the first two quarters of the year.

That being said ARC continues to maintain its strong financial and operational performance. We delivered adjusted EPS of $0.02 at $17.6 million for the quarter, and $29.5 million year-to-date. Our cash flow from operation remains very strong. Despite a year-over-year sales decline of $4.6 million, we increased our gross margin from 32% to 32.4% for the same period, while making necessary investments in areas such as MPS, color and technology to reposition the company for growth as the economy recovers.

We were also very happy to pay down the outstanding balance of $8.9 million on our revolver at the end of October that is bringing our senior secured debt outstanding down to zero. Clearly this demonstrates our continuing ability to take quick and aggressive action to maintain the health of the company even in the face of a difficult economic condition.

From an operational perspective, our investment in new areas such as managed print services, or MPS as we call it and digital color imaging, are both beginning to pay dividends. Our growth in managed print services has been particularly gratifying during this continuing period of low activity in the AEC market. Had we not exclude the diversification of our business, our revenues would have been dramatically affected during times like this.

Instead, we have been substantial – we have seen substantial MPS growth in the quarter, primarily from our larger global solutions customers, which drove the 12.8% increase in our FM revenue category versus the same quarter last year. Additional revenue support has come from improved color sales from the non-AEC segment of the market. While our progress in these areas does not entirely offset the decline of our project related business, it is strongly validating our diversified sales strategy.

Concerning our cash flow performance noted earlier, I think it also proves that our business model can continue to generate the kind of cash we have come to expect from ARC even as market and sales categories continue to evolve. One of those new and evolving categories for us has to do with the increasing use of technology in the construction space. We are seeing a shift in the use of technology, especially as it relates to document management.

Sharing, distributing, and collaborating are all becoming easier with several new solutions now available in the market. In addition, customers have started using a variety of software solutions for project management, collaboration, bidding and other tasks. However, these solutions are disconnected and vital information is often locked up in different silos, where it cannot be leveraged by the entire organization.

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