ARC Document Solutions, Inc.
Q2 2010 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon. My name is Tiara, and I will be your conference operator today. At this time, I would like to welcome everyone to the American Reprographics second quarter 2010 earnings 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. Mr. Stickney, you may begin your conference.
  • David Stickney:
    Thank you, Tiara; and welcome everyone to the call. On the phone with me today are Suri Suriyakumar, our Chairman, President, and Chief Executive Officer; and Jonathan Mather, our Chief Financial Officer. Today's call will cover our operational and financial performance for the second quarter of 2010, the financial results of which 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 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. It will be accessible for the next seven days. You can find the dial-in number for this replay in today's press release. As usual, we are webcasting today. A replay of the webcast will be available for 90 days from today 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, August 3, 2010 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 will turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?
  • Suri Suriyakumar:
    Thank you, David; and good afternoon, everyone. As we have stressed in our press release today, we continued to manage our business aggressively, knowing that market conditions are not likely to improve during the last half of the year. Our first quarter prediction that 2010 would test our mettle has proven accurate, but I am pleased with the way we are meeting that challenge. Throughout the first half of the year, we have refused to be intimated by the economy. Instead, we have focused on identifying opportunities to improve our business. We are refining our management practices, and improving our cost structure by eliminating overhead and non-essential spending. We are refreshing our sales priorities and using our excess capacity to focus on color, management services, and the refinement of our new digital tools. And we remain mindful that it is now is when we can best solidify our market share, and prepare for the market expansion when the economy improves. No other company in our space has so many resources to weather these extraordinary times. We have a strong capital structure, significant cash reserves, a broad geographic footprint, a technology-enabled workflow, and a sales force that can cover the nation. So, how are we fairing? How are we managing these unique resources? During the second quarter, we saw our revenues continue to stabilize quarter over quarter. We delivered $0.04 in earnings per share, and saw our cash generation return to more robust levels, as we left the timing issues of the first quarter behind us. We generated $18.3 million in cash flow from operations, and have cash reserves in the bank totaling $33.7 million. And our gross margins improved from the first quarter from 32.9% to 34.3% in the second quarter. This performance leads me to reaffirm our annual forecast for EPS to be in the range of $0.15 to $0.30, and cash from operations to be in the range of $65 million to $80 million. Given my earlier commentary, we are likely to perform at the lower end of our forecast. We continue to believe that the AEC industry will lack the recovery of the general economy by a factor of nine to 12 months. The difficulty, of late, has been determining whether the general economy has recovered in any meaningful way, and if it has, to what degree. We have yet to put a stake in the ground to stay, this is when we should start the clock for our own recovery. While we may plant that stake in late 2010, I would not be surprised if it turns out to be later in 2011. Once again, we refuse to be hamstrung by these uncertainties. We can wait, or we can act. So, we have chosen to act. We expect to realize more than $10 million in cost reductions in 2010 through our ongoing stated plan. These reductions are primarily in the areas of workforce reductions, salary adjustments for our higher-paid employees, reduction or elimination of building leases, decreases in rental, and repair costs, and more. We have avoided significant reductions in our footprint, given the coverage and strength it provides to our sales force. That said, we know where we can tighten up our network of shops, and are prepared to close locations, should it become necessary. In keeping with our original plans, we have not stopped investing in sales or in technology. We are training our people on new products and services, and helping them address a broader non-AEC customer base through newly hired in-house expertise. We are producing updated sales collaterals and commissioning market studies to help target our efforts. And of course, we are expanding our base of technology services. In fact, I am very pleased to announce that we are launching our first collaboration tool, called PlanWell Collaborate in September. It is aimed squarely at the middle of the construction market, a segment we have identified as the most in need of a simple, straightforward tool to help capture, recur, and track project information. We have also released the second version of our digital shipping tool, iShip Docs. In less than two years, this has become a critical tool for moving our customers' large files across the country and around the world. While the revenue from iShip Docs may not rival our core product lines, it clearly reflects our thinking, and demonstrates that we are focused on improving our customers' efficiency, and reducing their costs. On the color front, we have opened seven of our RIOT Super centers, with three more to be opened by the end of this year. This new color production network, which has been created primarily by the reconfiguring existing resources, has provided us with a powerful operational infrastructure at very little cost. From assisting with the national upgrade of Adobe's best-known software, and the creation of pop-up retail stores to the servicing of national restaurant chains, our RIOT creative imaging brand is steadily gaining recognition and capturing sales with our non-AEC customers. Our Managed Print Services initiative is also beginning to show its potential. Two of our largest national clients have committed to MPS conversions in all of their offices, which will add up to $4 million of new revenues over the next four to five quarters. We will be managing nearly 700 additional devices in our fleet, with the conversion of just two clients. We have also captured a few MPS engagements in our local markets, and dozens more are in proposal stages. MPS is typically a longer sales cycle, but we have partnered with some excellent service providers to help us facilitate and close proposals quickly. I am excited to see the sales to continue to move MPS into the marketplace throughout the remainder of the year. The only initiative that remains in hibernation during this period is our M&A activity in the U.S. Until we have a clear indicator that we have reached the bottom of the market, we will remain extraordinarily selective about any potential purchases. Outside of the U.S., especially in China or in India, we may be more liberal in our consideration of acquisitions, but discretion is still the order of the day. As you can probably tell, I am confident about ARC's prospects for the future. I have told the management team time and again that we are running a marathon, and what separates the runners in such a long race is how well they are prepared, how hard they have trained, and how deep their commitment is to winning the race. I believe ARC is running those last few miles now as the economy struggles to regain its momentum. And as far as I can see, no one has prepared like we have; no one has trained like we have, and no one has made the commitments to succeed as we have. So, with that background, for the rest of the call, I will turn the presentation over to Jonathan for some insight into our financial position in the second quarter. Jonathan?
  • Jonathan Mather:
    Thank you, Suri. As Suri pointed out, our quarterly revenue trends are starting to level out. By way of an example, revenue from large format black and white printing saw a sequential decline of less than 1% in both quarter one and quarter two, whereas the same product line in 2009 experienced double-digit declines in each of the four quarters. We also saw sales from color printing in the second quarter increase by 10.6% from the first quarter. Such performance suggests that we may be seeing the return to seasonality in our AEC business. Fluctuations are still very possible, obviously, depending on the performance of the overall economy in the coming quarters. Our customer mix, as a percentage of our total revenue, remained stable. Non-AEC revenue was up over quarter one by 140 basis points at 24.6%. Non-residential construction delivered 69.6% of our revenue, and 5.8% of our business came from residential construction. Revenue performance was helped once again this quarter by our Chinese joint venture company, UDS. UDS followed their strong performance in quarter one with increasing sales of equipment and supplies in quarter two as well. 12.1% of our total revenue came from equipment and supplies in the second quarter of 2010. (inaudible) management made up 19.7% of our revenues. And digital services again delivered 9% of our sales. The remaining 59.2% came from our traditional base of reprographic services. There were 64 working days in the second quarter of 2010, as opposed to 63 working days in quarter one of this year. There were 64 days in quarter two of last year. On a regional basis, our year-over-year revenue performance was down for the quarter, but significantly improved from the first quarter of 2010. For the second quarter, Southern California was down 16.5%. Northern California was down 12.5%. The Pacific Northwest was down 4.1%. Our southern region was down 11.9%. Midwest was down 12.8%, and the northeast was down 20.4%. Once again, we saw average daily sales for the quarter increase sequentially over quarter one in all but two regions. Our international operations, excluding Canada, were up 42.2% year over year. Our gross margin of 34.3% is being driven primarily by leveraging our fixed costs and reduced operating costs against better revenue performance. Interest expense year over year was flat in the second quarter. Moving to the balance sheet, we ended the second quarter of 2010 with a cash balance of $33.7 million. It is also worthy of note that our $50 million revolver remains untouched. Year-to-date, we have made scheduled debt payments of $21.7 million. Days sales outstanding, or DSO, were 46 days in the second quarter of 2010, as compared to 48 days in quarter two of 2009 and 47 days in quarter one of 2010. Several of our investors were curious to know if we could bring our DSO in line with our previous levels in this difficult environment. I think this performance is another excellent example how closely we are managing our business, especially our collections. Total debt, including capital leases, at the end of second quarter 2010 was $256.7 million. This is down from $264 million for the first quarter of 2010, and from $273.8 million from the end of 2009. The ratio of net debt to trailing 12-month EBITDA at the end of first quarter was 2.6, excluding the intangible impairments and stock-based compensation. Cash flow from operations in the second quarter was $18.3 million, as noted in the press release earlier today; as compared to $9.5 million in quarter one, when we were affected by some timing issues with tax credits and payables. Our year-to-date operating cash comes to $0.61 per diluted share for the year-to-date. Finally, we should mention that the company is operating very comfortably within the confines of its current debt covenants. I think that covers the fundamentals for the moment. So at this point, I will turn the call back to our CEO, Suri.
  • Suri Suriyakumar:
    Thank you, Jonathan. Operator, at this time, we are available to take our callers' questions.
  • Operator:
    (Operator Instructions). Our first question comes from David Manthey with Robert W. Baird.
  • David Manthey:
    Hi, guys. Good afternoon.
  • Suri Suriyakumar:
    Good afternoon.
  • David Manthey:
    When you are talking about scrutinizing your infrastructure and overhead, a few quarters ago, it seemed like you had already cut to a level that you felt like you couldn't go much further. So I am just interested in hearing some of the things that you are working on, and then, as it relates to the $10 million that you referred to, is that the impact of – sort of a cumulative impact in the current year, or is that all incremental from where you stand at the second quarter?
  • Suri Suriyakumar:
    David, so to start with regard to the infrastructure, you know, maybe you have misread what we have said in the past. I have always maintained that we have made adequate changes to make sure we are generating enough cash and profits to maintain our financial obligations. And I have always maintained, that if necessary, we will actually make more cuts, because we were capable of doing that. However, why we said we don't want to cut any further, simply to improve profits, is because we don't want to, you know, forget the fact when the market recovers and the economy rebounds, we want to be on a growth pattern and capture market share. So we have always maintained that we have cut to the extent that we have to, but if we need to cut more, we can, and even as today, that is the position. So just to clarify that, if indeed for any un-forcing reason, if the economy turns very bad again, I think we are still capable, given the fact that we are spread across the nation, and we have nearly 300 locations, we can still, you know, consolidate and bring about savings. Those savings may not be immediate, but in the quarters to follow, it will come. And with regard to the $10 million, Jonathan, would you like to take that?
  • Jonathan Mather:
    So with respect to the $10 million, you know, as we stated right along, we look for efficiencies in the company, and these are new initiatives or cost-reduction actions taken in 2010, which will be realized in 2010 financials. And the examples, there are some examples of cost reductions relating to some back office consolidations, bringing a few divisions, their back offices together; I am using one example. So there are many like that efficiencies, another one was we did medical benefits at the beginning of the year. Of course, labor reduction, if we see efficiencies in our headcount with respect to direct labor as an example, et cetera, we continue to do work on those that are not necessarily structural major reductions that Suri talked of earlier, but improvements in the business.
  • David Manthey:
    Okay, thanks. And Jonathan, when you think about that $10 million, what type of run rate were you on in the second quarter specifically, have you already captured a full run rate of that, or is there incremental benefit we will see in the third quarter that we haven't quite realized yet on that $10 million run rate?
  • Jonathan Mather:
    I would venture to say that the larger part of that $10 million will be realized in the second half of 2010, because we saw reductions initiated sometime during the year and what we are referring to as $10 million is to be realized. Annualized amount is much greater, and it will be programs are actions taken as of today. The savings, a higher percentage of it is in the second half.
  • David Manthey:
    Okay, so more than half, and you said a higher percentage, okay. Then, in terms of the seasonality of the business, historically, the second quarter would usually represent a revenue peek. Was the third quarter sometimes flattening out, sometimes a little bit up or down, and then the fourth quarter would be a little bit lower. Any reason to think that this year should be any different than that normal seasonality?
  • Suri Suriyakumar:
    You know, last year, we had cyclicality, or call it a seasonality. In other words, we had sequentially the quarter revenue, you know, if you take the whole year's revenue and break it down, you know, a lower percentage came from the last quarter and in the quarter over quarter, and you always get the lower percentage in the last quarter, but quarter over quarter, it was eroding in this year. We don't expect it to be like that, but it is you know the usual all though you know, the second quarter is the best quarter, and then the last quarter is the weakest quarter, relatively speaking. In terms of revenue, we pretty much are in the same ballpark range, around 25%, plus or minus. But, in the year 2009, we kind of went from 28% to 27% to 23% to 22%. So, this year, we kind of expect the same thing, but as Jonathan said, we have started for the first time noticing the stabilizing trend in our revenues. So, we might just hold flat for the second half.
  • David Manthey:
    Okay, thanks. And just final question for Jonathan on the tax rate. Coming in a little above 42 here for the first half. Is that a good number to use for the full year, or would it be expected to come down.
  • Jonathan Mather:
    I would expect it to be in the 42% rate.
  • David Manthey:
    Okay, thank you.
  • Operator:
    Your next question comes from Scott Schneeberger with Oppenheimer.
  • Scott Schneeberger:
    Thanks. Good evening, guys.
  • Suri Suriyakumar:
    Good evening, Scott.
  • Scott Schneeberger:
    Suri, what are you looking for outside of what you are seeing on the street level, and I would love to get comments on that, but what are you looking for more on a macro level for improvement. You made the comment on the call, you know, that second half of 2010 could be pushed as much as second half of 2011. Did I hear that correctly, and it is a pretty darn good outlook, what are you watching out there and what are you seeing?
  • Suri Suriyakumar:
    In terms of you are saying the economic trends?
  • Scott Schneeberger:
    Yes.
  • Suri Suriyakumar:
    What we are basically saying in 2010 is as we said, Scott, in the early, meeting in the last quarter, we kind of expected this to be a challenging year, but we wrapped so many new initiatives in place, we have been talking about it, and most of them have been put in place in the first quarter. So we were hoping a lot of those with kick in, and be additive to our business, you know, as we go along into this year. What we have found is actually expected, which is predicted by FMI and McGraw Hill that the non-residential, especially in the non-residential, or in the commercial segment, things like commercial aspects of it and the office space would be deeply affected, and that we are experiencing in 2010. So as a result, although there has been several other initiatives that we have implemented and they are starting to show up results, we don't see, you know, that is not felt, because of the challenging circumstances in the AEC market place. And I pretty much expect that trend to continue. There are no signs of any other large projects coming in line just yet. Credit is still an issue, and there is a lot of money on the sidelines, a lot of projects in hand. We have worked on a lot of design development, a lot of the projections, and the design documents, but nobody has said we are going to kick off that project. So we are getting new customers with regard to our new initiatives success such as MPS, our FMs on the global solutions, but if all those customers have new projects going, then the revenue generation would be pretty substantial. So I pretty much expect, based on everything what we know right now, 2010 to continue to remain flat.
  • Scott Schneeberger:
    Okay, thanks. And then you mentioned those two new customers. Could you just take us a little bit deeper? I think you said a $4 million or $5 million opportunity in 2010. Did I hear that right? And could you just talk a little bit more about what it is, the work that you are doing? Thanks.
  • Suri Suriyakumar:
    I think we said to four or five, you know, over the next four or five quarters about that number in terms of the new revenues we can generate. So these are basically large national level customers, who have agreed and signed on for MPS, that is managed print services with our global solutions division. So what it would mean it is a large number of output devices will come onto our networks, and these will be starting to service those output devices for these customers. Previously, we would only do the in-house large-format work related to construction, and then all the off-site work related to construction. Now what we are doing is, we are extending those services to their office copiers, printers, multifunction printer, the whole works. In other words, any and every output device inside their offices. So that said, but fundamentally is now referred to as managed print services, MPS. And that effort of ours has started to, you know, we have kicked in, so there are two elements of business. One is, existing customers can give us MPS business in addition to their FM business, and we can get new customers. So these are two new customers we got at the global solutions level, which is bringing us the benefit.
  • Scott Schneeberger:
    Thanks, and you know, SG&A, a little higher than I expected, but a great job on the gross margin. Could you speak a little bit to these initiative you are having on the SG&A line?
  • Suri Suriyakumar:
    Fundamentally, I will let Jonathan go into a little bit more detail. In areas we are needed to bring in expertise, outside expertise, to enhance our sales and operations, we have hired people. This is what I talked about a new initiatives that we are investing in technology and sales. So we have invested in marketing, so that we can produce better marketing collateral, better marketing programs. And we have also hired sales professionals. Jonathan, would like to add a little color to that?
  • Jonathan Mather:
    So to your question about the quarter two SG&A expense, a couple of things. One is, we have, you know, trade shows like RGA in quarter two, so the selling and marketing expenses traditionally is a little higher in quarter two than other quarters. Secondly, we also, as Suri pointed out, we have been investing in the sales organization. The sales staff et cetera focusing on the new initiative. Third one is in administration, we retained a consulting organization to validate our strategic direction of the new initiatives, where the technology, driven et cetera, MPS et cetera, and that study cost us approximately $400,000. It is a onetime charge, and that is in this quarter.
  • Scott Schneeberger:
    Yes, thanks. I more if I could. You mentioned some slight pricing pressures in the first quarter that the EFA it would have passed through. Could you just speak a little bit to the pricing environment and how you are feeing there?
  • Suri Suriyakumar:
    That is pretty much still there. It will continue to be there I think, because obviously, like we described, in our earnings call, like I always said to my teams, you know, we are on our last lap, so as the pressure increases, and the revenues drop and the markets gets challenged, smaller competitors can increase the pricing pressure. So we certainly have experience pricing pressure greater than what we had last year, and I expect it to be there. It hasn’t got worse, I wouldn’t say that it has got, but it is certainly there.
  • Scott Schneeberger:
    All right, great. Thanks, guys.
  • Suri Suriyakumar:
    You are welcome.
  • Operator:
    Your next question comes from Andrew Steinerman with JP Morgan.
  • Andrew Steinerman:
    Hey, Jonathan. Could you just go over SG&A dollars from (inaudible). You mentioned you had some, of course, you had some seasonality. And as you look at the third quarter, will SG&A dollars go up or down from the second quarter?
  • Jonathan Mather:
    Just a second, okay. I don't expect it to go up, unless of course, revenue comes out much stronger because of sales incentives. But if, let us say, apples and apples, if it is reasonably flat with respect to revenue, the SG&A expense should be slightly lower than quarter two, and because of that one-time costs and the IRGA cost, and in the recruitment cost, et cetera of the sales, some of the sales team that we hired won't be there in quarter three.
  • Andrew Steinerman:
    Right. So as a percentage of revenues in the third quarter, it should be lower than it was second-quarter?
  • Jonathan Mather:
    That is our assumption.
  • Andrew Steinerman:
    Okay. Thank you very much.
  • Operator:
    The next question comes from Matthew Kempler with Sidoti & Co.
  • Matthew Kempler:
    Hey, good evening.
  • Suri Suriyakumar:
    Good evening, Matt.
  • Matthew Kempler:
    So, a couple of things. First a follow up on MPS, it is great that you have the first new contract wins. I was wondering if you can share a little bit more about the terms of this contract, and how we can affect MPS as you sign these two affect the model. So are these multiyear contracts, and then, you know, what should the margin impact be from these business to be in line with what you see in some of these management and then finally, if you can talk little bit more about (inaudible) with these formal RFPs or these transactions that ARP actually went in there and tried to derive a solution for it.
  • Suri Suriyakumar:
    So I will take them, one at a time, Matt; and hopefully I won't forget any of those questions. So the first one is that you were talking about the multiyear. So fundamentally, most of these MPS are three to five year engagements. Generally they are three years. We try to get five years where we can, so that is actually a five-year contract or a three year contract depending on the customer. Number two, the margins are somewhat not exactly, we cannot say it is very, very high of any height compared to an FM margin. The FM margins are always on the higher side compared to outsourced work we do. MPS would be slightly challenged, because then answering another question you have, we often have to, you know, there are RFPs out there. In some instances, these particular two plans we were referring to, both of them were our existing customers, large national customers who actually had contracts with other equipment manufacturers. So often, when we compete with equipment manufacturers, because they sell equipment on a different basis altogether, those prices are much more competitive, and we need to compete with them. With regard to the general MPS business itself, when we compete in this segment, we often have RFPs and often we compete with other manufacturers of small format devices.
  • Matthew Kempler:
    Okay. Let us clarifying on the margins side, understanding that it is a little bit lower than the absolute management, would you expect overall that when you look at your corporate average, to be positive on the corporate average or to drag it down slightly?
  • Suri Suriyakumar:
    I think it will be positive for now. If MPS becomes a very large portion of our business, then it could have a slightly lower impact. For now, I do not think it is going to be substantially down, Matt, but if you know, two years later, we had $250 million in MPS, now to gain that kind of market share and fight equipment manufacturers, we might actually have to satisfy some margins, which I think is fine, because this segment of the business is ours to gain.
  • Matthew Kempler:
    Okay. And then, I missed it on color. I guess the commentary over there was that it is going to be a driver for the business. But was it in the – what average did it total in the quarter and then maybe you can talk about what areas you are seeing as (inaudible) on the color side.
  • Suri Suriyakumar:
    Okay. I will let Jonathan in a second to answer that. He is looking for the numbers to give you a little more color on the color business. But fundamentally, what we have been able to do, Matt, is bring a clear focus as to how we are selling color. Because we have acquired companies over a period of time, they always operated at separate divisions. So the color capacities and capabilities, kind of substrates we used, kind of trades we serviced, kind of the marketing and collateral material we used, were not consistent across the company, because in the west coast, we would have full graphics, have a brand name called Colorwise, and in New York, we might have a different brand name, and different kind of collateral. What we are trying to bring is consistent in terms of collateral, in terms of services, in terms of substrates, in terms of products, and that is bringing about a greater level of focus. So we tell color at two different levels, one at a national level, and secondly, at the regional level in the local markets, because at the regional level, we already have a big sales team, who is already selling to AEC and non-AEC. So we enhanced that sales team to go sell color. At a national level, we have just kicked off that initiative. We wanted to make sure that we had all of our centers in place. Now that we have six or seven centers, we have brought in a few salespeople and we have kicked off that. So overall, there is a lot of excitement about color, and we are already starting to see color numbers are tracking very positively quarter over quarter. And I will let Jonathan add a color to that. Jonathan?
  • Jonathan Mather:
    No pun intended, he is adding color to it, but the color revenue year-to-date is about 16% to 17% of our total revenue. In the prior year, in 2009, it was approximately 15% of our total revenue. The good news is, the incremental color revenue is coming from the non-AEC segment too. So we are seeing growth in revenue quarter over quarter as I mentioned by 10%. The overall, as a percentage, it is also picking up, and the mix is again to the non-AEC side of the business.
  • Matthew Kempler:
    So, it was up 10% sequentially, you said.
  • Jonathan Mather:
    Yes.
  • Matthew Kempler:
    Okay. And then, finally, I know everybody has been trying to pin down, just to make sure we understand the cost reductions that you were talking about, and yes, what I want to understand is, talking in the second half, should expenses be down on an absolute dollar basis in the second half versus the first half or are these savings going to be reallocating to some of the areas of investment that you have been talking about?
  • Jonathan Mather:
    So as I said, of the $10 million reduction that we will realize in 2010, a higher percentage will be realized in the second half of the year, offset by some of the additional investments that we have been doing in the other new initiatives, but those are to a much lesser extent.
  • Suri Suriyakumar:
    In most of those dollars, I would add with regard to the new investments are already in place, but you know, new salaries, additional salaries are things which will still have some impact, but I don't think they will largely take anything away from the cost savings. And also, the reality of cost savings is incremental, because we are constantly fine tuning it. So we call that the stay-fit program. So our Senior Vice President of Operations is constantly monitoring, and every time there is a reason to reduce cost, whether it is employees, whether it is locations, or consolidations, and then on the financial side, that calls for office consolidations, and then improvements and consolidating our benefits plan, all those dollars, I think what will happen is, it will take, it will come into full impact the second half of the year, as against the first half. So we are fairly confident that it is going to actually benefit us substantially.
  • Matthew Kempler:
    Okay, thank you.
  • Suri Suriyakumar:
    You are welcome.
  • Operator:
    (Operator Instructions). Our next question comes from Brad Safalow with PAA Research.
  • Brad Safalow:
    Hi, good afternoon. Thanks for taking my questions.
  • Suri Suriyakumar:
    Good afternoon, Brad.
  • Brad Safalow:
    Just a quick factual question. How many FM contracts and branch locations do you currently have?
  • Suri Suriyakumar:
    Branch locations, one second, Brad, I am going to look at it. FM count is about 5,789, round number is 5780. That is at the same level as last quarter, because one of the things which is happening is we are signing new contracts, but some of the customers, because of the market conditions, some of the FMs where we think it is not productive, we are removing them. With regard to the location count, I think that is what you asked, is 275 in 211 cities and 43 states, and seven international locations.
  • Brad Safalow:
    And with regard to RIOT color and the MPS initiative, how many salespeople do you have for each of those currently and what is your target over the next six to 12 months?
  • Suri Suriyakumar:
    Right. So the way we, like I said previously, and if you notice that anything we have, any initiative we have, we sell at two levels. One is at a national level through the global solutions division, where we will go after large customers. And the second one is through the regional level, where we will go to the local markets, and in the local markets, Brad, we already have about 260+ salespeople in place, they are the Reprographics salespeople. Now usually, if you take that sales team, usually we have people who are selling in the Reprographics marketplace and we would have a color salesperson and we will also have a non-AEC color person. So the RIOT color is sold through those divisions, through those salespeople in each of the divisions as well. With regard to the national level, we wanted to hire four, we have started off with two for now, and depending on how it is proceeding, if we think there are opportunities greater, we will continue to hire more. And the MPS is the same strategy. So the MPS strategy is to train our local temp salespeople. In every one of our divisions, we have what you refer to as an FM specialist, and then you have FM sales, because we have 6000 FMs, done through our salespeople. Our strategy is to go to these small customers, which of course we have a large volume of customers and we have 6000 FMs, and be able to provide MPS services to them, which is at a local level, which is much less sophisticated, because it is a smaller volume. In the national level, for the MPS, we have now two salespeople covering the nation. Again there, if we grow that marketplace, then we would add more salespeople. So again, like I said, in the national level, it is the same thing, we have several large national accounts who are where we do in-house work, meaning FM work, and also we do the outsource work. Now because they are large clients, they also have a large volume of MPS work. So our existing global services salespeople can still sell MPS, in addition to the fact that we have got MPS specialists, and while on the corner and MPS at the global level, these salespeople are extra. In the regional level, because our revenues on the Reprographics side, relatively speaking, we need lesser salespeople, but we have replaced those salespeople who now understand color sales and non-AEC color and so on, so that we will still have the best of that sales presence in the local marketplace.
  • Brad Safalow:
    Okay, thanks for that. That is actually some great detail. So you are now at, I think you said seven super centers in color, and you plan to open a few more this year. Can you help me understand, I know you are leveraging a lot of your existing infrastructure, but what is involved in terms of upfront investment and what kind of returns are you looking for with the opening of those supercenters?
  • Suri Suriyakumar:
    In terms of the number of super centers, we have seven now. We plan to open 10 before the end of the year. We could open more, that is the good news, because we are in 270 plus locations, so it would be very incremental expenses, mostly large in the tenant improvement, and of course, when we had to make the big banners and signage, we make them in-house, so we don't spend a whole lot of money on that. So when you open these centers, the incremental cost is not a whole lot. I would venture to say I do not have firm numbers on this. It would be still less than $1 million, although we have opened seven centers, because we are moving equipment from locations from within, and we are just bringing them to a central location. So what we do is that when you have 270 locations, let us take a region, let us take Northern California region. Let us say we had 14 or 15 locations. We would pick the largest location there. You know, basically, it is a little more complicated than that, I am putting it in simple terms, empty all the Reprographics equipment from one location, which is a nice location, and move all the color equipment from the divisions into that location, and create the brand and bring some of the best employees into that location, and create a color center. So we are doing that in a very creative way, and we have been able to, you know, we started off with one location, tried it, it worked, and we have opened seven locations. But what we have been able to create is a new brand, new marketing materials, and position ourselves to sell to large customers across the nation, providing a consistent level of service. So that is the promise. And we are starting to develop those markets with marketing materials and we have got two salespeople. While doing that at a national level, at a local level, our productivity has improved, because now we have a greater focus and a dedicated center to do color. So all the increases Jonathan talked about in revenue is primarily related to the local sales reps in selling local markets, they are just selling better, because of greater focus.
  • Brad Safalow:
    Okay. When you guys think about the business and you talked about potentially if you had to cutting back branches and you have 275 branch locations, I think, in this quarter, you are on a run rate of $1.1 million to $1.2 million in revenues per branch, and that is as you know, half of what you were doing 10 years ago. Strategically, color, with a rebound in AEC work, where does that put you, do you think, in terms of getting back to those types levels in terms of revenues per branch?
  • Suri Suriyakumar:
    Right. So you know, obviously, you are just looking at average number, which is fine, which is all right, but we don't necessarily view those numbers like that, because we refer to our network as a hubs and spokes kind of configuration, where you will have a major location, Brad, and right down that location, you might have six branches, seven branches, eight branches, and the size of those branches are substantially smaller. So you could have a facility which is 3,000 to 4,000 square feet, and you could have the main facility to be 15,000 square feet, 20,000 square feet, 25,000 square feet. So just to give a snapshot of these hubs and spokes kind of model we have. However, we must bear in mind that our customers, their revenues, if you take the entire construction industry, and if you take our customers, their revenues have fallen down by 40% to 50%; in some instances, more than that, because of the drop in demand for construction. Now, all I can mention to say is if credit comes back and the economy rebounds, I think it is likely, very, very likely our customers will regain their businesses. Because if you lost customer, that would be different, but in reality, while we might have lost some customers, we have gained substantial market share because of national accounts, because of color, because of MPS, and so on. And yet, I don't think the impact of that is seen, because all of those customers we have gained don't operate at their best potential. So I think what happens is, when the market comes back, there are two or three elements which kick in. Number one, our existing customers business will go up. So debt will go up. And then what will happen is, all the new services we provide to our customers, such as digital services, whether it be collaboration, whether it be color, whether it be MPS, would bring in additional revenues. And then, any new customers we bring in, not just new services to the existing customers, but the new customers we will bring in will add to that. So I am pretty confident. The only thing I am not confident about is, like we said in the earnings call, I don’t know where to put that stake just yet, but I am pretty confident that we will get back to those levels. Especially given the fact that we are by far the largest player in the industry, and we use still only 15% or 16% of our industry, so we have a lot more room to grow.
  • Brad Safalow:
    Okay. So then, if I look last cycle and these are on the publicly available numbers, I know you have a hubs and spoke model, but looking at the branch, revenues per branch, I think you have posted $2 million. Do you think you can have, because of your color initiatives, other initiatives, cycle to cycle growth, that is what I am just trying to get my arms around.
  • Suri Suriyakumar:
    Yes, yes. The short answer is yes, Brad. I was trying to give you a little more color on that.
  • Brad Safalow:
    I appreciate it. Thank you. I will turn it over.
  • Operator:
    At this time, there are no further questions. Are there any closing remarks?
  • Jonathan Mather:
    Ladies and gentlemen, thank you very much for your attention this evening, and your continued interest in American Reprographics Company. We wish you a great evening. Take care. Bye.
  • Operator:
    That does conclude today's conference call. You may now disconnect.