ARC Document Solutions, Inc.
Q4 2008 Earnings Call Transcript

Published: 24 Feb 2009

[Operator:]

Greetings ladies and gentlemen and welcome to the American Reprographics Company fourth quarter 2008 results conference call. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Stickney, Vice President of Corporate Communications for American Reprographics. Thank you Mr. Stickney. You may begin.

[David Stickney:]

Thank you [Manny] and thanks for joining us here on this Monday afternoon. We typically report our earnings results later in the week but we have an investor conference in Phoenix in a few days and we wanted to take advantage of the opportunity to talk to as many of our shareholders as we could during this time period. We hope to see some of you there. Joining me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; and Jonathan Mather, our Chief Financial Officer. The company’s release reporting financial results for the full year and fourth quarter ending December 31, 2008 was issued earlier today. This call will review and expand on the information contained in the press release, after which we will open the call to your questions. You can access the press release and the company’s other releases from the Investor Relations section of American Reprographics Company’s website at e-arc.com. A taped replay of this call will be made available beginning about an hour after its conclusion and you can access the call any time within seven days of today. You can find the dial-in number for the replay in our press release. As usual, we are webcasting our call and that webcast will also be available on our website after the call’s conclusion. The call today 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, February 23, 2009 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. With that, I’ll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri.

[Kumarakulasingam Suriyakumar:]

Thank you David and good afternoon everybody. During this unprecedented time of economic upheaval I’m pleased to report that American Reprographics Company continued to deliver strong and consistent performance. It comes from experience, planning ahead and being nimble enough to respond quickly to unexpected events such as the precipitous drop-off in construction activity we saw in the last months of the year. It also comes from our financial discipline and our strong and healthy cash flow, both of which we monitor very closely. For the full year, we reported sales of $701 million compared to $688.4 million in 2007, representing an annual increase of 1.8%. Our gross margin for the year was 40.7% compared to 41.7% for the 12 months ended December 31, 2007. The company’s EBITDA margin for 2008 was 24.1% compared to the 2007 EBITDA margin of 25.6%. Fully diluted earnings per share for 2008 were $1.30. While the gross margins and the EBITDA margin for 2008 were not as strong as they were in 2007, I must remind you that the construction market was weak at best throughout 2008 and had a precipitous fall in the last two months of the year. In light of these facts I consider our performance to be extraordinary. What is even more compelling is that we finished the year with $127 million in cash flow from operations, a record for the company during one of the worst markets during our lifetime. And our DSO was down to 45 days from 50 [quarterly], the lowest it has been since we became a public company in 2005. None of this of course came by accident. We took a hard look at what needed to be done and made the tough decisions to make it happen. This included a headcount reduction of nearly 20% of our workforce. During the last quarter, we also began a series of cost-cutting measures that will result in annualized savings of $6.5 million in production expenses; $2.5 million in G&A; and a reduction in sales expenses by $2.5 million. This is what you can expect from a well-seasoned management team; smooth and swift corrective action in times of crisis. Let me give you a quick snapshot of our fourth quarter so that you can see how quickly the market deteriorated in the latter part of the year. Our net revenue for the quarter was $154 million compared to $174 million in the fourth quarter 2007, a decrease of 11.6%. Company’s gross margin for the fourth quarter was 36.7% compared to 41.2% for the same period in 2007. Our EBITDA margin was 19.3%, down from 25.8% from the same period last year. That is what the quarter left us in December. In reviewing the numbers for the first six weeks of the year, it is very clear that there is no sign of recovery just yet. Given the current uncertainty of the construction market, attempting to forecast in any revenue range with any accuracy is likely to be futile. Rather than foregoing the exercise entirely, as many other companies have done, we have decided to offer a forecast based on earnings per share and cash flow from operations. These elements are critical during this period and our success in this area will insure that we meet all of our financial obligations. As such, we are offering an annual EPS forecast of $0.50 to $0.75 on a fully diluted basis, and we are projecting cash flow from operations in the range of $70 million to $90 million. So what does a company like ours do in times like this? This is where a solid and experienced management team comes into play. There is no panic or fear in our actions. We know exactly what to do and how to do it. And we are executing it every day. Allow me to tell you what we have accomplished since the first of the year. We have reduced the headcount further by 200 positions since the first of the year. We have closed our consolidated 20 locations across the nation. We have cut corporate executive wages by 5 to 10% and eliminated their bonuses for the year 2009. In the first quarter I expect to reduce our operating costs by at least $20 million on an annual basis in addition to what we have done already. However, should the market continue to deteriorate, we have already identified a group of 40 more locations for potential closure. And we are prepared to reduce our footprint even further if the circumstances warrant it. Construction is a mainstay of the U.S. and global economy. It’s only a matter of time before it comes back. What is critical for our ability to weather this period of uncertainty, calmly with confidence. That is exactly what we are doing right now. In the past, people have questioned the effectiveness of our de-centralized business model. In a difficult time like this, the de-centralized business model is a blessing in disguise. This is especially true when coupled with the technology advantages we have delivered for the past ten years. The combination allows us to right size quickly, without losing customers. What may surprise some of you is that we are gaining customers with our Premier Accounts Division. Premier Accounts was responsible for more than $40 million of new business last year. We expect to gain significant market share through this service because of the weakness in the marketplace. Large, nationwide customers are looking to improve efficiency and save money by working with single source suppliers. The U.S. government’s stimulus package is also another element that can help us from a sales perspective as the construction activity picks up in the public sector. In addition, being the largest and the dominant player in many of our markets, we are aggressively pushing sales by providing technology and service benefits for our customers that our local competition simply cannot. This aggressive effort to acquire new market share, combined with quick and efficient actions to re-size the company will allow us to operate successfully through these difficult times. With that, I will pass it on to Jonathan for a review of our financials. Jonathan.

[Jonathan R. Mather:]

Thank you Suri. I’ll spend the next few minutes reviewing our revenue numbers and I’ll address some of the cost-cutting measures in more detail. We will also do a short review of the balance sheet and address our expected goodwill impairment charge. Historically, the fourth quarter is our slowest period and this year was no different. In October the company performed well regarding overall sales but November was a short month with only 19 working days. This was also the first month in which we saw a dramatic decline in overall sales. Even factoring a few working days, we saw sales come in well below our expectations. At 22 days, December should have been better. Unfortunately, both Christmas and New Year’s fell on a Thursday. As a result, we lost the better part of both weeks. Many clients also kept their workforces at home during the entire week between Christmas and New Year’s. Finally, weather events in the Midwest and the Northwest showed things down in those regions. All in all, December revenue was significantly weaker than expected. Looking at the fourth quarter, 2008 with regard to product categories, reprographic services declined approximately 15.5% compared to Quarter 4 in 2007. Digital services which are included in our overall reprographic services grew 4% year-over-year and contributed 7.9% of total revenue in the fourth quarter compared to 6.7% over the same period last year. Facilities management was basically flat compared to Quarter 4 2007, as was equipment sales in the fourth quarter compared to the same period in 2007. While equipment sales domestically declined, the shortfall was made up by UDS sales in China. Revenue and revenue trend by geographical segment in this quarter was as follows, Southern California, $36.2 million, down 24.6%; Northern California, $20.2 million, down 16.9%; Pacific Northwest, $10.5 million, down 11.8%; South, $40.7 million, down 11.5%; Midwest, $21.1 million, down 7.5%; and finally, Northeast, $24.5 million, down 6.1%. Our international revenue comprised of UDS sales in China and the sales from our operation in London, England. This quarter we generated $4.4 million in international revenue. Revenue from acquisitions in the quarter was approximately 6.5%. Organic growth for the quarter was down at negative 18.1%. Our gross margin in the fourth quarter was 36.7%, a decline from 41.2% in the same period of 2007. The decline was driven largely by the decrease in revenue and some dilution from operations in China, which is currently driven by equipment and supply sales. UDS returned a gross margin this quarter of 22% on $4.1 million of sales. SG&A expense as a percentage of revenue came in at 24% during the fourth quarter of 2008. This compares to 22.8% in the fourth quarter of 2007. In the fourth quarter of 2008, bad debt expense increased by $1.2 million compared to prior year due to the recent liquidity issues experienced by some of our customers. The biggest factor for the year-over-year dollar increase was the $2.9 million gain from the Louis Frey settlement recorded in Quarter 4, 2007. Stock-based compensation is included in the SG&A expense. In Quarter 4, stock-based compensation was $1.1 million compared to $889 thousand in Quarter 4, 2007. In the fourth quarter of 2008, total depreciation, amortization and interest was $18.9 million. This figure is made up of depreciation at $9.9 million; amortization expense at $3 million; and interest expense at $6 million. This compares to Quarter 4, 2007 with $17.6 million with depreciation at $8.1 million; amortization at $2.5 million; and interest of $7 million. In reviewing the balance sheet, we ended the fourth quarter of 2008 with working capital of $30.4 million or approximately 4.3% of trailing four months revenue. This compares to $40.7 million for September of 2008 or approximately 5.6% of trailing 12 months revenue. Days sales outstanding or DSO was at 45 days in the fourth quarter of 2008. This compares to 50 days in the fourth quarter of 2007 and 50 days in the third quarter of 2008. Total debt including capital leases at the end of fourth quarter 2008 was $361 million, down from $364 million for the third quarter of 2008. The ratio of debt to trailing 12 months EBITDA at the end of the fourth quarter was 2.1 compared to 2 at the end of the third quarter of 2008. As Suri mentioned, cash flow from operations was $127.2 million in 2008 or $2.80 per fully diluted share. This compares to $101.4 million or $2.21 per fully diluted share in 2007. As we have previously stated throughout 2008, we had targeted roughly $100 million in cash flow from operations and obviously exceeded this internal target by more than 25%. As Suri also mentioned, this is a solid demonstration of our business model stability to generate cash in good times and bad. Two-thousand-and-eight cash payments for acquisitions and payments associated with acquisitions including amounts to sellers amounted to $23. 9 million. This compares to $132.7 million in the same period last year. As noted in our press release earlier today, our financial results for the fourth quarter and full year ended December 31, 2008 do not include a non-cash goodwill impairment charge that we have determined we will incur. We currently estimate the impairment charge to be within the range of $27.6 million to $40.5 million. Normally we test for this impairment in September of each year. However, during the fourth quarter when the market dropped so hard we performed an internal test for impairment, prompted by the decline in the company’s market capitalizations during the same time period. The impairment charge will be reflected in the company’s financial statement in the ARC 10-K for fiscal year 2008. Finally, we realized income tax credits in the amount of $900 thousand for the fourth quarter 2008 and $2.1 million for the year. These credits were granted for hiring employees and purchasing fixed assets in the areas of California considered disadvantaged. These are areas where the state government created incentives for investments and revitalization efforts. That concludes our financial discussion. At this point I will turn the call back to our CEO, Suri.

[Kumarakulasingam Suriyakumar:]

Thank you Jonathan and operator we’ll now take the questions.

[Operator:]

Thank you. (Operator Instructions) Your first question comes from Scott Schneeberger - Oppenheimer & Co.

[Scott Schneeberger:]

I guess first question, could you speak a little bit about the environment? Suri you mentioned that you’re looking for aggressive market share growth in this challenging environment. Could you just speak to the pricing environment?

[Kumarakulasingam Suriyakumar:]

Okay. You know basically the opportunities we are talking about especially is in the Premier Accounts area. Last year Premier Accounts brought in over $40 million in new business which is extremely encouraging. This primarily came from HDR and Boeing, which is all new business for us. And what we are doing is we are taking the same concept and we are going to the large, national accounts and being able to offer them a service as a single source provider across the nation. This aspect we believe this year will contribute also significantly. In addition to that, Scott, what we are doing is that we are taking the opportunity to drive sales even harder with all the new products we have, the color products and the technology products we have to drive sales. And we do have the pricing advantage. However, pricing hasn’t started playing a role as such because technology is taking a more important role because people are looking for efficiencies and improved costs.

[Scott Schneeberger:]

Can you speak a little bit about – I guess so you have the sales force focused on national accounts and I imagine on PlanWell and Digital. Could you just – are you focusing less on construction, more on construction, just kind of how you’re spreading around the sales force right now?

[Kumarakulasingam Suriyakumar:]

Okay, so there are two elements, two segments to our field strategy. One element is what we talk about, Scott, as the Premier Accounts strategy. We set up this division a few years ago to provide services as a single source supplier, as one company to large accounts. That is the division which we call Premier Accounts. And last year we did very well with Premier Accounts. So what we did this year – early this year is knowing the momentum we have behind this initiative, we literally tripled the number of salespeople and quadrupled the number of operations people backing this operation. In other words, we wanted to increase our sales and be ready for it when we sign up these accounts. That is the key. Because we talked about in the last calls. Customers such as Boeing and HDR, it takes a few months to sign them up. It takes three, four, five months to sign these accounts up. And once you sign the accounts up it takes several months to bring them on board. How do we fast track that? In order to do that, what we did is just tripled the number of salespeople so that we can have more presentations, more you know bids put in with those large national accounts, and be able to facilitate them when they come on board. So if you take those kinds of large accounts which does in excess of $8 to $10 million, if you are able to bring three, four, five accounts this year over the year that’ll be a substantial amount of brand new business for us. So that is one segment which is going after the national account. The second segment is to continue to focus on sales efforts using our traditional methodology. That has two segments to it, the easy construction side of it and the non-easy side of it. On the construction side of it, you know we have more technology tools now with PlanWell, MetaPrint, Abacus, and [I Ship Docs] which is actually a shipping tool to improve efficiencies. So we are selling those new tools. We also released PlanWell 5.5 which is a new version of PlanWell which is much more efficient in terms of how the contractors and general contractors can use that. So we are driving that aspect of it. On the color side, we have added new several color output devices. A significant one is called [GD 250]. We have ordered 20 of those machines in the last three to four months. Dilo, would you say that? I have our Chief of Operations here. And we will install them in large locations, driving large format color sales. So that’s exactly what we are doing right now.

[Scott Schneeberger:]

The DSO number, lowest ever, that’s pretty impressive in this environment. Is that sustainable? Could you talk a little bit about how you’re managing that?

[Kumarakulasingam Suriyakumar:]

Absolutely. Scott what we did is this is not an effort that just happened overnight. We had started identifying, Jonathan and I, early last year that we need to continually improve our daily sales outstanding. And we have been working towards it. And what happened was as the economy started showing signs of weakness we stepped it up. And we really aggressively went after collections. Because it’s only natural and as evidenced by not just in our business but in any business across the nation, you find bad debts popping up because less and less people are able to meet their financial obligations. So what we did is we told all of our controllers to be proactive and then start, you know, working towards collecting the money on a timely basis. And that paid off handsomely. We did write off some amounts, which is again being proactive in an aggressive, financial economic condition like this. But we have been able to do a record number to bring it down to 45 days in the last quarter, but I think it’s sustainable. Whether 45 will be sustainable is yet to be seen, but it’ll certainly be under 50 days. Fifty days is what we aim for, but because of the extraordinary efforts we were able to push it down to 45. Do you agree with me, Jonathan?

[Jonathan R. Mather:]

I agree with everything you said.

[Operator:]

Your next question comes from Andrew Steinerman - J.P. Morgan.

[Andrew Steinerman:]

Could you give us any of the assumptions that you used to establish your 2009 EPS guidance?

[Kumarakulasingam Suriyakumar:]

Yes, Andrew. Yes we can. So you know one of the things we’ve been thinking about is the guidance for 2009. It has been a very popular and a very controversial subject across most public companies, deciding how to approach it. So our focus, Andrew, has been on cash because the whole idea is we understand the market has been truly challenged and we have had some precipitous fall-off in the revenues, especially in the last two months of last year. So what do we focus on? So we’ve said it in the last quarter, so our key focus has been on the generation of cash. And that is evidenced by the $137 million we did last year. So we continue to focus the year 2009 on cash. That’s why what we did is we focused on EPS and the cash generation. So the general assumption for us to be able to be within that range is about $540 to $580 million. That’s what we are assuming. But remember, that’s a fluid number. Our ideology is to say, “Look, we are able to right size the business as we go on. If the market turns down, then we can continue to right size the business.” The benefit we have is we are in 300 locations. We also grew as a company over the last several years. We’ve been there at $100 million, $150 million, $200 million, $250 million. So we’ve gone through all these stages. In fact when we went public, the year we went public in 2005 we were $494 million and still generated a substantial amount of cash. If I recall it was $56 million. So our concept is to make sure that we focus on generating that $50 to $70 million in cash. And that’s based on $540 to $580, but it also really is depending on how hard we attack the costs.

[Andrew Steinerman:]

So in that scenario, $540 to $580 are you assuming that gross margins deteriorate further from fourth quarter levels or do you think gross margins could level off from where they achieved the fourth quarter of ’08?

[Kumarakulasingam Suriyakumar:]

It will to some extent level off. I will let Jonathan answer that question. Here is the focus, Andrew. What we are looking at it and saying at $540 we will generate $50 million in what do you call, $0.50 to $0.75 and $75 to $90 million in cash. So the key is to generate that $75 million in cash. I might have misspoke earlier. So it’s $0.50 to $0.75 is the guidance and based on $0.50 we want to generate at least $75 million in cash. So that is the focus we have. And if for some reason $540 starts showing signs of slippage – we don’t think that will happen, but if that starts showing signs of slippage then we will continue to reduce the number of branches, locations and headcount to make sure that we will still arrive at those gross margins so that we can deliver $75 million in cash.

[Andrew Steinerman:]

Jonathan, did you want to say anything about gross margins?

[Jonathan R. Mather:]

Yes. So let me add to what Suri said is with respect to the gross margin, Quarter 4, 36.7% and this was before you know some initial cost reductions that Suri talked of earlier, right? We think the EPS that we have shared with you, the guidance, assumes gross margin in that range as the cost cutting that we have done takes into effect fully, we will see slight improvements. But expect it to be in the fourth quarter range.

[Andrew Steinerman:]

Maybe what would be helpful for us is just to go back to the fourth quarter and describe the changes and the drivers to gross margins year-over-year.

[Jonathan R. Mather:]

Say that again, please? Fourth quarter gross margin –

[Andrew Steinerman:]

Fourth quarter ’08 what drove the change in gross margins year-over-year?

[Jonathan R. Mather:]

From the prior year to down? The reason for the decline in fourth quarter 2008 compared to 2007 on a high level it is absorption of expenses – the revenue declined. The absorption of expenses even including labor and overhead, right? That’s the two main components coming from absorbing. Then the to an extent, you know, talk about 40 basis points coming from the China sales which is lower gross margin and the absorption we have taken action to reduce it. For example, the headcount reduction that Suri talked of earlier and for the reduction in headcount in the first six weeks of this year. Too, the location reductions and corresponding, you know, facilities costs; equipment costs; etc. that go along with it. So the absorption being your main cost factor that was detrimental in 2008 compared to 2007.

[Operator:]

Your next question comes from David Manthey - Robert W. Baird & Co., Inc.

[David Manthey:]

With the 18% organic growth in the fourth quarter, not to slice this too thin but could you talk about the trends October, November, December in terms of the trajectory there? I mean, was October positive or something? I mean, just to give us an idea of how the fall-off went.

[Kumarakulasingam Suriyakumar:]

Okay. So Jonathan.

[Jonathan R. Mather:]

Yes. Eighteen percent was not growth in organic, it was negative organic.

[Kumarakulasingam Suriyakumar:]

Right. Okay. Great David. So Jonathan was just chipping in to just highlight that. So if you’re talking October, November, December the October was very much in line with what the rest of the year 2008 performed, David. So the October sales was pretty much in line with 2008 sales. However, when it came to November, though, the fall was precipitous. So we went from – I’m just speaking off the cuff here, from about $60 million down to $47 million in November and then we were around $46 plus million in December. So we basically – that is the precipitous drop we talked about. But once we dropped in November, December there it continued to stay like that and it has continued to maintain that same pace during January and the early parts of February.

[David Manthey:]

Could you tell us what the run rate of acquisitions that you made in the third quarter and the fourth quarter were? And then maybe if you could talk about the contribution from new acquisitions in each of those quarters as well, just for our model.

[Kumarakulasingam Suriyakumar:]

Sure David. I will pass on to give the details to Jonathan but just so that you know, in 2008 we had already started slowing down the acquisitions. We did some in third and pretty much hit the brakes on fourth. The concept being especially when the market started falling precipitously, we basically slowed the – you know, pretty much put a halt on acquisitions. Otherwise unless something shows on the radar screen and we buy a customer list or something like that, at an extraordinarily good price, the concept being to put a hold on acquisitions because obviously these are very unpredictable times and it would not be advantageous for us to look at acquisitions. Jonathan, would you like to?

[Jonathan R. Mather:]

Sure. Sir, to answer your question on acquisitions, impacting those two quarters, Quarter 4 the acquisitions that we did we benefited in revenue of $2 million. So against the $154 million just the acquisition done in the fourth quarter had a positive effect of $2 million. In the prior quarter, third quarter there was a $2.7 million. Similarly if you recollect we did an acquisition in New Jersey that was a large one and two other smaller acquisitions. We had a $2.7 million that was acquisition related in the third quarter of ’08.

[David Manthey:]

And just to close the loop on that, could you tell us what the run rate of those acquisitions were in each of the third and fourth quarter? The annual run rate of the total acquisitions?

[Jonathan R. Mather:]

For the year 2008, our total revenue that we acquired on an annualized basis was $38 million, round numbers. Follow me?

[David Manthey:]

Yes. I was wondering if you had the corresponding revenue run rates for the third and fourth quarter.

[Kumarakulasingam Suriyakumar:]

We can actually look at that and get back to you, David. I don’t think – do we have that off the cuff?

[Jonathan R. Mather:]

No I don’t have that.

[Kumarakulasingam Suriyakumar:]

Because that might actually really depending on when we did the acquisitions but we know there was only one major one which was in New Jersey, but what we can do is we can work the exact number to show you the impact on – third and fourth quarter you said, David?

[David Manthey:]

Yes.

[Kumarakulasingam Suriyakumar:]

Absolutely. We can get back to you on that.

[Operator:]

Your next question comes from Franco Turrinelli - William Blair & Company, LLC

[Franco Turrinelli:]

Suri, what was the number of branches at the end of the quarter before you cut the additional 20?

[Kumarakulasingam Suriyakumar:]

End of the quarter? Two-hundred-ninety-seven.

[Franco Turrinelli:]

So the 20 is a little bit less than 8% or so of branches. And obviously when times were better your branch density was certainly a factor in terms of convenience for customers and obviously as I’m sure you’re cutting back the least – you know, the low volume or least productive branches. But are you able to hold onto customers if they need to travel a few more miles to get to the remaining branches in the area?

[Kumarakulasingam Suriyakumar:]

Absolutely. There are two elements to that. You said it very nicely. There are two elements to this, Franco. One being that you know not all the branches are the same size. Obviously we have the hubs and spokes concept, so we have several spokes spread across a main branch almost in every city, the idea being exactly what you said. When there’s a lot of work, density is higher, we actually try to remain closer to the customer and extract that work. With the work [pinning] off, we are able to identify those branches and consolidate some of them. In some instances we have two companies operating in the same region so we might actually ask one company to hold onto the branch and the other company to shut the branch down. So there are things like that we did. In addition to that, what has been happening especially in 2008 is more and more customers are using technology. The technology adoption is higher. So we are able to move jobs around without really having to physically move the jobs around which we used to do in the past. So our ability to operate from slightly further away locations are greater now. So for example if you take the Bay area, the amount of large jobs we can actually do in San Francisco and deliver, i.e. in Oakland or in Milpitas or in the San Jose area is much greater than what it used to be in the past because most originals come to us, you know, [inaudible] and in digital format and then we are able to process all the documents and drop them off in a timely manner. So a combination of the fact that there is less pinning of work so we can consolidate the branches and the impact of technology is allowing us to actually serve the customers efficiently with less branches. And I will say we have very little impact on the service we are providing to the customers.

[Franco Turrinelli:]

What happens to the equipment in those branches? Is it generally relocated or put into storage or is it somehow scrapped or if it’s on lease –

[Kumarakulasingam Suriyakumar:]

That’s a good question again. Because of our size and scope, think about it, we have 5,600 FMs, Franco. And then we also had 300 plus locations or nearly 300 locations. So in our company, you know, buying 20, 30, 50 output devices a month is pretty standard operating procedure in the company. Because we regularly buy our devices from oh, say, from Cannon and from Xerox and all kinds of manufacturers. What we have been able to do is in the last three, four months we’ve been able to put a freeze on acquisition of output devices because we do know the output devices we have inside the system are being under utilized because of capacity issues because of the lack of work. So we have been very aggressively repositioning equipment. So again we use the technology to get the best out of it. So we have a forum in which we consistently have all of the overflow equipment, all of the excess equipment listed. And as and when people require equipment, it is immediately identified, “Okay, we have this particular piece of [inaudible] in the system.” We ship it out then get it installed. So this is what has happened is we have been able to substantially reduce our equipment costs in the last three, four months. And I expect this to continue because we are constantly looking for output devices which are under performing and we are replacing them with smaller output devices. And the nice part is because we have thousands of output devices spread all over we can move them around very efficiently. If you recall, last year we did a program which we called Search and Destroy Deadwood. In other words, we identified all output devices were under performing or the leases have come up or where the equipment capacity is too much. And in doing that exercise, we found hundreds of output devices being taken away from the system. And we put all of them in a pool and we are redeploying them. So that’s really helping us during this time.

[Franco Turrinelli:]

One other question and this is probably as much for Jonathan as for you. I’m kind of interested – I mean obviously the cash flow performance is very strong and you have a good, healthy cash position on the balance sheet. And as Jonathan pointed out your debt service lever is real comfortable. So what now is the priority for cash flow in 2009 and into 2010? You’ve talked about not wanting to do acquisitions in this environment. And I understand the reason for that. On the other hand, if you’re hurting we know that your competitors are hurting even more. And you know maybe acquisitions would be a good way of strategic positioning for the future. So can you just talk us back through the cash uses and acquisition strategy?

[Kumarakulasingam Suriyakumar:]

Absolutely. Now if we do have excess cash that would be a good problem to have. I certainly hope that’s where we will be. Of course we are always very confident of our cash flow and clearly evidenced by the performance last year. We expected the cash flow certainly to be in excess of $100 million but by aggressively pursuing that strategy we were able to maximize it at $127 million. Now that of course is given the fact that we had $700 million in revenue. Now of course, based on the run rate we have we are looking probably $550 to $600 million kind of range. I mean, I’m just giving a range. Nobody can with certainty predict the revenues, unfortunately. And we are not confident enough to say given what we experienced in the market that this revenue will hold good. We only know that for the last three months it has stabilized and staying around the $550 range. If we have that revenue, then we’ll comfortably generate enough cash to meet our debt service – you know, our financial obligations and meet our accountants. That is the nice spot. Now if the sales do go up and we certainly expect it to happen, if the market doesn’t slide any further with our Premier Accounts effort and our sales effort, our sales will be in $600 plus million range. In which case we will comfortably have that much more cash, and should we have that position, Franco, we’ll certainly look at acquisitions. There is no downside in not looking at that. What we don’t want to do is that if days that market the ocean, we don’t want to be acquiring companies in an environment where the market is really going down. So to answer your question, if the sales stabilize and actually our revenues go up to $600 plus million, that’s an indication the market is coming back and that’s an indication we will have extra cash and it will be good to buy because that is the right decision to do. However, if the revenues don’t improve and we struggle with the construction status and the stimulus doesn’t do what it’s supposed to do and the market – the credit doesn’t [inaudible] and if it gets stuck, then of course we would be doing, you know, $550 million say for example. And therefore we probably won’t be doing acquisitions because there won’t be a whole lot of cash floating around anyway.

[Operator:]

Your next question comes from [Joel Ritchie] – Goldman Sachs.

[Joel Ritchie:]

You mentioned that the fourth quarter you saw a precipitous decline over the last few months. Based on I guess the information you gave us November sounded like it was down about 22 to 23% from an organic revenue standpoint. Does that sound about right?

[Kumarakulasingam Suriyakumar:]

Yes. I think it’s more than that. It’s 25% plus and December slipped to 26% nearly. I’m just speaking off the cuff, Joel, but I know that that is the level of drop that we had in the revenues. Yes.

[Joel Ritchie:]

So organic revenue declines 25 to 26% and you’ve said that that trend has kind of continued in the earlier part of this year. Have you guys ever in your history experienced a decline of this magnitude?

[Kumarakulasingam Suriyakumar:]

Two things. One is you know that is just revenue trends, month over month. Just so you know it’s not fuel organic. We can split it out, because there was some acquisition revenues in that. But month over month this is what we had. Generally November, December – October, November, December are softer months. But to answer your question specifically that is something that we talked about. In the history of our company we have never experienced drop like we experienced in November and December.

[Joel Ritchie:]

And then on the cost side, you mentioned that in 2009 that you were going to eliminate bonuses? Can you give us a rough number for what bonuses were in 2008?

[Kumarakulasingam Suriyakumar:]

Two-thousand-eight? Jonathan, do you have that number?

[Jonathan R. Mather:]

Yes. The bonuses that – there are two elements to bonuses. The first question to answer is when corporate executive bonuses was over $2 million. And then we have a divisional level bonuses which again it’s over approximately $6 plus million.

[David Stickney:]

Sixteen million.

[Jonathan R. Mather:]

The $16 is all including the labor incentives, etc., and I think what we will see in what has been eliminated is right now the $2 million for corporate and part of the production floor bonuses.

[Kumarakulasingam Suriyakumar:]

So fundamentally what we have done, Joel, is from a corporate perspective we have across the board said, “All corporate executives in the corporate offices, in Walnut Creek, Glendale and Fremont we’ve said we’ve eliminated bonuses.” With regard to the divisional heads, these are divisional presidents and CEOs. You know, we have not made a statement like that. But their compensation packages are structured in such a manner that it’s very unlikely given the revenue numbers we have they’ll be able to make their bonuses.

[Joel Ritchie:]

And I don’t know if I missed this earlier in your detailed comments about your business, but did you mention how many FM contracts you currently had at the end of the quarter?

[Kumarakulasingam Suriyakumar:]

Yes, I think we didn’t quite mention that but I think we have 5,600 is the number.

[Joel Ritchie:]

So you actually grew that sequentially and pretty significant growth year-over-year.

[Kumarakulasingam Suriyakumar:]

Yes, year-over-year it’s pretty significant growth. I think the last month we went up or the last quarter we went up by 200, Joel, and we can continue. That is something that we continue to expect to grow. Of course what happens is the volume in the FM customers offices would drop, given the fact that they are doing less work. But we certainly see the FM opportunity to continue to be growing.

[Operator:]

Your next question comes from [Michael Graves – Damar Merchant Services].

[Michael Graves:]

I’m in the Southern California area here and you have a couple of big shops out here. Can you tell me what you’re – you said you were closing some plants depending on the economy here. What does it look like down here in Southern California? Are you looking to shut a bunch of plants down or can you tell me more about your Southern California?

[Kumarakulasingam Suriyakumar:]

Sure. It very much depends on the revenues in the regions and their construction activity in the region and the business activity in general in the region. For example, if you take our Southern California area we have a total of 22 branches in that area. This is including, you know, Los Angeles and Orange County area. And in a place like that, we have four different companies operating. We have [Full Graphics], we have Reliable Graphics and we have Bear Graphics and we have OCB and in fact we have five. We have Consolidated Reprographics. So we have five companies operating in that region. Now without Orange County, we would have at least 22 locations in Southern California. If you really take the Orange County area we have probably up to almost 40 locations. Now in an area like that, we will selectively identify any branches which are overlapping. And if the work in that area is starting to drop, we can pick and choose as to which branches we are closing. We might close a location in Full Graphics and then we might close one in Bear Graphics. And then we might close one in Reliable Graphics. So because our density is pretty high there, selectively we close. Right now we are not planning to close any. We have adequate business for all of those branches. But we have some idea as to which branches we may actually close down if indeed the business continues to deteriorate. In the Bay area we have 24 locations with five companies in that region. There again we might close five or six branches. So in this first round of cuts, if indeed the business continues to deteriorate we might close five or six locations in the Northern California area and five or six locations in the Southern California area. But we pretty much watch the revenue and then take those decisions. So what we are doing is in the past we would look at quarterly revenues and performance and we would then look at monthly revenues. What we are doing now is we are watching daily revenues to see how the market is performing, so something that we are closely watching.

[Operator:]

Thank you. We have no further questions in the queue at this time. I’d like to turn the floor back over to management for any closing comments.

[David Stickney:]

Thanks Manny and thank you ladies and gentlemen for your attention this evening and your continued interest in American Reprographics Company. At this time we’ll wrap up the call and look forward to speaking with you again in our first quarter call for 2009. Have a great evening. Bye bye.

[Operator:]

Thank you ladies and gentlemen. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.