ARC Document Solutions Inc (ARC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience and welcome to the third quarter 2005 American Reprographics Company earnings conference call. (Operator instructions) I would now like to turn the conference over to your host for today's presentation, Mr. David Stickney, Director of Corporate Communications. Please proceed, sir.

Thank you, Bill (ph), and good afternoon, everyone. The company's senior executives joining me today are Mohan Chandramohan, our Chairman and Chief Executive Officer; Suri Suriyakumar, our President and Chief Operating Officer; and Mark Legg, our Chief Financial Officer. Earlier this afternoon, the company issued a release reporting financial results for the third quarter of 2005, ending September 30, 2005. This release can be accessed from the investor relations section of our website at www.e-arc.com.

Before we begin, here are a few items for everyone's reference. First, we have arranged for a taped replay of this call, which may be accessed by phone. It will be available approximately one hour after the call's conclusion and will be accessible for 90 days. The dial-in access number for this replay is 617-801-6888. The replay pass code is 33889221. Secondly, this call is also being webcast live with a web replay also available. Both the call and the webcast can be accessed from the investor relations section of American Repographics Company's website at e-arc.com. Please feel free to contact Financial Dynamics of San Francisco, our investor relations firm for general information about the company. Their contact information is on our press releases.

Before we begin, I would like to make a brief statement regarding forward-looking remarks and the use of non-GAAP financial measures. This call contains 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 2005 financial outlook.

We wish to caution you 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 SEC filings, specifically our quarterly reports on Form 10-Q for the quarters ended June 30, 2005 and March 31, 2005 under the risk factor section of our annual report on Form 10-K for the year ended December 31, 2004 and in our final prospectus dated February 3, 2005.

The forward-looking statements contained in this call are based on information as of October 31, 2005 and, except as required by law, American Reprographics Company undertakes no obligation to update or revise any of these forward-looking statements. This call will also contain references to certain non-GAAP measures such as EBITDA, EBIT, pro forma incremental tax provision and pro forma net income. The reconciliation of these non-GAAP measures is set forth in our press release dated October 31, 2005, reporting our financial results for the third quarter of 2005, which is also available on our website at www.e-arc.com. At this time, I'll turn the call over to our chairman and CEO, Mohan Chandramohan.

Thank you, David. Good afternoon and thank you for joining us today as we discuss ARC's third quarter financial and operating performance for 2005. Over the past year, we have used these calls to explain some of the details of our operations and management structure for those of you who are new to our industry. Today, we will continue that practice after I give you a general update. Suri and I will spend a few minutes outlining ARC's technology strategy and infrastructure after we cover the relevant details of our third quarter.

Let's begin with a look at our financials. ARC reported sales for the third quarter of 127.5 million compared to the 110.2 million in the third quarter of 2004. Our gross margin for the third quarter was 41.2% and our EBITDA margin was 22.5%. This compares to gross margin of 40.2% and an EBITDA margin of 20.4% in the third quarter of 2004. For the current period, we reported an operating profit of 23.6 million and a net income of 10.5 million, or fully diluted earnings per share of $0.23. Additionally, we generated significant operating cash flow as Mark Legg will elaborate later in the call.

As we all know, Hurricane Katrina devastated New Orleans on August 29 and the Gulf Coast was pounded again on September 25 by Hurricane Rita. Most recently, Hurricane Wilma cut a swath across south Florida. In total, 19 of our facilities experienced business interruptions, ranging on average from two to ten days, with a few notable exceptions.

Eight of our branches were affected by Katrina and several were without power for weeks. Six of the eight facilities are now open, but two remain closed due to physical damage. Thankfully, Rita missed us in Houston a month later. Our eight shops were - they have suffered no damage. But we did experience a business interruption of nearly five full days, due to the tremendous preparation efforts of our regional staff and the fact that the city was evacuated.

In Miami, our main location remained open throughout Hurricane Wilma, but three branch facilities still remain without power. Considering the number and size of the hurricanes, and their impact in the region we are fortunate that all our employees in the area and their families are safe.

In spite of the business interruption throughout the Gulf Coast and southern Florida, we are maintaining our revenue forecast for 2005 to be between 485-490 million, due to the continuing strength in the numbers non-residential construction sector from which we draw two-thirds of our overall revenues. We are devising our fully diluted earnings per share slightly upwards. We anticipate our earnings per share to range between $0.83 to $0.85.

I would now like to turn from current events to an explanation of one of the company's strategic strengths. In the past two calls, we have taken the opportunity to explain the industry in which we operate as well as an outline of our management structure. Today, I would like to discuss our technology resources, infrastructure and the role technology plays within the company. During the mid-90s, the reprographics industry began addressing an internal technology transition, primarily in its adoption of a digital workflow, do to the advances in print-on-demand equipment. It soon became clear that this transition would extend to the web, especially in the area of distribute and print.

Distribute and print is a workflow where digital files are transferred from one location to another and produced closer to their use. For example, when a consultant base based in Chicago needs a few drawings to review on a project that is being designed in New York, it is frequently faster, less expense and more efficient to move the digital file over the Internet from a reprographics facility in New York to one in Chicago where it is ultimately produced and delivered.

While many ideas were floated on how best to accomplish this web-based workflow, no software provider was addressing the needs of a large firm like ours. Technology under scale, needed for the national decentralized operational structure like ours was not being considered. As a result, we took on the task ourselves. We knew the challenges our business faced and the requirements necessary to meet such challenges. We have to have scalable architecture that could grow with us. Any hardware or software solution had to be 100% reliable with redundancies and backups in every critical area.

Our solutions had to be designed with interoperability with other systems as a primary component and our sites had to be significantly more than just a pretty web page. And we knew that once the infrastructure was built, our entire business would eventually run on it. After laying the groundwork for an e-commerce driven workflow and conceptualizing many of the products that are in use throughout the company today, ERC acquired its only non-repro centric business, MirrorPlus Technologies. MirrorPlus was a pioneer in developing print management software and related accounting systems. In 2000, one year after they joined us, MirrorPlus launched the first version of PlanWell, our flagship technology platform for online document management and fulfillment.

Our infrastructure today encompasses hardware, software and technical support for the growing portfolio of products and services. We work closely with Microsoft in developing our technology backbone and have standardized on Microsoft's broad net (ph) platform and sequel-based applications. We also continue our R&D efforts to enhance existing products, exploit opportunities for interoperability with other applications and, of course, to develop new technology. ARC owns and operates two technology centers in the Silicon Valley with a programming facility in India. Overall, we employ more than 40 engineers who conduct a remote database management, develop software and support our R&D efforts.

Today, 11 applications make up our technology product portfolio. All told, our technology solutions offer end-to-end support to our business processes and procedures. It has been our belief from the beginning of our technology development efforts that software and web applications are not worth building unless they hold the potential to become industry standards. This strategy protects us from the bleeding edge of technology development where money, time and energy are at tremendous risk.

Instead, it focuses our efforts on delivering value where and when it's needed and increasing efficiency and professionalism of the reprographics industry. Today, our products are offered in more than 200 of our own facilities across the country and we license our products to more than 100 independent reprographics firms in the U.S., Canada, Europe and Australia. With this introduction to our technology, I will turn the call over to Suri to provide you with a picture of how we use technology in our business operations and to provide you with some of the operating highlights from the most recent quarter. Suri?

Thank you, Mohan. As many of you know, the company's core competencies are document management, document distribution and logistics and print-on-demand. As we developed our digital strategy, we were mindful of these core competencies and did not stray away from them in our technology development. As a result, each of our 11 technology products directly supports one or more of these primary business activities.

We also recognize the vast reprographic experience and expertise that had joined the company through requisitions over the years. Thus, as we developed our products, our senior operating executive were tapped for their industry knowledge and understanding to improve the efficiency and convenience of the construction documentation process. Putting this domain expertise to use, we have developed technology that provides significant benefits to both our customers and ourselves.

For example, our digital document management tasks are supported by our online planned rooms - PlanWell Enterprise and PlanWell PDS. Both products provide password protected access to plans online and each include management tools to the reprographers who operate them. Enterprise is a highly sophisticated database driven document management and procurement system. The system organizes and stores millions of project documents, tracks them - each of them and their uses toward the unusual (ph) product lifecycle, keep historical records of all document activity and provide e-mail broadcast services and more.

PDS, on the other hand is our entry level planned room product, which is used primarily by small reprographic operations. With PDS, reprographers can quickly and easily fill these projects with a limited need for heavy administrative services or the distribution and document tracking functions. Our document distribution and logistic services are supported by our online services such as PlanWell BidCaster. BidCaster works hand-in-glove with our online planned rooms and makes inviting subcontractors and building supplies vendors to bid on construction projects fast, easy and efficient.

(inaudible) products Abacus is an onsite services tool for tracking machine and printing usage in a network print environment. Small utilities like our Quick Pickup and Quick EWO, which we refer to as Quick EWO offer convenient desktop access to our customers for commonly ordered services. Print-on-demand needs are being met mostly by one of our latest developments, a product which we call MetaPrint. Our product equipment comes in many different configurations from several different vendors.

Each machine we use has its own version of software to drive it. Purchasing all these different software products to drive our equipment has been a burden we have long looked to mitigate. And MetaPrint is now allowing us to do so. The software is a universal driver for nearly all of our large format production equipment. And not only reduces our purchasing cost, but also limits or training time and associated labor costs, since our production personnel are no longer forced to learn multiples of applications. Most of these products are available for licensing to independent reprographers as well.

No reprographer in the world today has the resources to build the infrastructure necessary to support an industry standard individual reprographic tool. We also believe that no other company has the global view of the industry necessary to guide such development efforts. With operations all over North America and a huge client base representing every need in the industry, we hold a unique position of being able to view the wide spectrum of document management needs for the entire AEC market.

This perspective allows us to develop products that are needed by each one of our clients in every market and allows us to meet our own needs as reprographers as well. This information, of course, is a very quick snapshot of more than five years of research and development and investment and activity. But I hope it gives you a broader understanding of why our technology development efforts play such an important role in our business.

At this time, I would like to provide you with a picture of our operations during the third quarter. Our company saw continued growth in our core business segments based on excellent fundamentals. Overall, our business mix remained consistent with 74.3% of our revenue being generated by reprographic services, nearly 17% from our onsite services, which we refer to as FMs and a little less than 9% coming from equipment and supplies.

During the third quarter, we experienced a net gain of 6.6% in new FM contracts, bringing our total up to 2,238 compared with 2,100 contracts at the end of this quarter, this year's second quarter, actually. Geographically, we saw significant revenue growth in all six of the regions we track. And the Midwest was particularly strong, due in large measure to continued acquisitions there. We noted in our last call that we had entered new markets in Ohio during the second quarter. (inaudible) solidified its presence (in this part of the country during August with the acquisition of Cincinnati's Queen City Reprographics.

As one of the strongest reprographic firms in this part of the Midwest, its leadership position in the region provides an excellent platform from which to expand our presence into markets such as southern Ohio, northern Kentucky and the Indianapolis metropolitan area. Through a combination of acquisitions and branch openings, we also strengthened our presence in Florida, Georgia, Wisconsin, Colorado, Nevada and California. The peer group - ARC's wholly-owned industry association for independent reprographers continue to find a gratifying reception in the international community through all the third quarter.

More than 24 reprographic locations now represent the peer group in the UK and Ireland, 18 in France, and four locations in both Canada and Australia. This also represents growth in our licensing efforts as each new peer group membership requires the purchase of at least one significant PlanWell technology product. Those are the highlights of ARC's third quarter. I'll let Mark Legg, our CFO, take the call now and fill you in on the financial details. Mark?

Thank you, Suri, and good afternoon to everyone. I'd like to start the financial review today with our third quarter results of operations. Revenue for the third quarter of 2005 came in at 127.5 million compared to 110.2 million reported in the same period of 2004 for an increase of 15.7%. Segmented by our three primary product lines, revenue in the third quarter was as follows. Reprographic services - 94.7 million, facilities management - 21.6 million and equipment and supplies - 11.2 million. Reprographic services and facilities management business grew at 15.6% and 12.1% respectively while equipment and supplies increased by 24.9%.

We track six geographic regions. Revenues per region were as follows - Southern California was 39.6 million. Northern California was 22.5 million. The Pacific Northwest reached 6.5 million. Our southern region, which extends from Florida to Las Vegas came in at 21.7 million. The Midwest delivered 17 million. And our Northeast division came in at 20.1 million. Compared to the third quarter of 2004, all geographic regions achieved increased revenue. The Midwestern region grew the most at 47.8%, primarily due to our acquisition activity as reported during previous earnings calls. Northern California and southern California grew at 8.5% and 13.5% respectively. The Pacific Northwest grew at 3%, while the Southern and Northeast regions grew at 22.1% and 6.4% respectively.

Gross margins for the third quarter came in at 41.2%. This is an increase of 100 basis points compared to the 40.2% for the same period in 2004 butrepresents a decrease of 150 basis points from the second quarter of 2005. This sequential decline is due to acquisition activity and new branch openings during the third quarter that tend to temporarily reduce growth and operating margins. Our SG&A expenses came in at 28.3 million during the third quarter 2005 as compared to 26.2 million in the same quarter of 2004. Expressed as a percentage of revenue, SG&A was lower by 155 basis points compared to 2004.

EBITDA of 28.7 million was achieved in the third quarter of '05 compared to 22.5 million in the third quarter of 2004 or a growth of 27.6%. EBITDA margins in the third quarter of 2005 came in at 22.5% compared to 20.4% last year or an increase of over 200 basis points year-over-year. Operating income in the third quarter of 2005 was 23.6 million or 18.5% of revenue compared to 17.7 million or 16.1% of revenue in the third quarter of 2004.

Operating margins achieved on our incremental revenue of 17.3 million came in at 34.1% or 212% of our base margin. Operating margins have increased over third quarter 2004 to the leverage benefit and thus margin expansion we enjoy from organically derived incremental revenue. This expansion, as has been explained in the past, is a result of our cost structure being approximately 60% fixed and the fact that we have additional capacity today on our existing production floor.

Interest expense in the third quarter of 2005 was 6.1 million as compared to 8.6 million in the third quarter of 2004. Interest cost is lower because all of the proceeds from our initial public offering in February 2005 were used to pay down debt in addition to our debt payments from internally generated cash flows over the past 12 months. The company's income tax provision for the third quarter of 205 was $7 million compared to $2 million in 2004. This increase was because a substantial portion of our business was operated in an LLC prior to the IPO in February 2005 and was taxed as a partnership.

Effective from our reorganization, upon the consummation of our IPO, all of our earnings are subject to federal, state and local taxes at a combined effective tax rate of approximately 41%. Had ARC been a C Corporation in 2004 as opposed to an LLC, we would have recorded income taxes of 4.1 million for the three months ended September 30, 2004.

Net income for the third quarter 2005 was 10.5 million or $0.23 per share fully diluted. Our third quarter 2004 net income adjusted for the incremental income tax provision as if we were a C Corporation in 2004, amounted to $5 million or $0.13 per share fully diluted. This represents an increase of 76.9% in our fully diluted earnings per share in quarter three of 2005 compared to the same quarter last year.

Cash flow from operations in the third quarter of 2005 came in at $18 million compared to 13.7 million in the third quarter of '04. This increase was caused primarily by our increase in earnings. At September 30, 2005, working capital was 31.1 million or approximately 6.5% of trailing 12 months revenue. This compared to 6.4% in 2004. Working capital as a percent of revenue has remained relatively static, due to acquisition activity during the third quarter of 2005. Without this acquisition activity, working capital as a percent of revenue would have been considerably lower than in 2004.

Despite the fact that net accounts receivable have increased from 65.7 million in the third quarter last year to 72.8 million in the third quarter of 2005, our days sales outstanding actually improved from 50 days, as of September '04, to 51 days, as of September '05. Inventory at the end of the third quarter 2005 came in at $7 million compared to 5.9 million in the same period last year and represents an inventory supply on hand of 31 days, unchanged from a year earlier. The dollar increase in inventory was caused primarily from acquisition activity over the trailing 12 months.

Total debt, including capital leases at the end of the third quarter of 2005, was 258.3 million. This is down from 358.4 million in the third quarter of '04. This decrease in attributable to net IPO proceeds of $89 million used to retire debt coupled with 30.3 million of net debt payments made from internal cash flow since September 2004.

As Mohan mentioned a few minutes ago and despite the business interruption caused by Hurricane Katrina, we are maintaining our full year revenue outlook which will be in the range of $485-490 million. Our outlook for earnings per share has been revised slightly upwards. We now expect to report fully diluted earnings per share of between $0.83 and $0.85 for the full year ended December 31, 2005. In addition to updating our guidance for the year, I am happy to tell you that we are currently looking into refinancing our second lien debt.

As you will recall from our road show, another disclosure since our IPO, our second lien debt carries a relatively high interest rate of 6.875% above LIBOR. This, coupled with a prepayment penalty of 7% of the outstanding principle. This prepayment penalty decreases to 2.5% in December of this year and, accordingly, the refinancing of this debt becomes economically feasible. Assuming we accomplish this before the end of the year, the company will incur a cash prepayment penalty of 3.9 million in addition to the early write-off of 5.3 million in deferred finance costs. These incremental one-time costs will be quickly offset by interest savings anticipated to be approximately $8 million per year.

That concludes our financial discussion and at this point I will turn the call back to Mohan for the question-and-answer session. Mohan?

Thanks, Mark. As usual, I will take your questions and, where appropriate, I will redirect them to Suri or Mark. With that, I'd like to turn it back to the moderator for the Q&A.

Thank you very much, sir. (Operator instructions) And our first question comes from the line of Mr. Eric Sledgister of CSFB. Please proceed.

Good afternoon and good quarter.

Hello, Eric. Thank you.

Mohan, you discussed the impact of hurricane season from a high level. I was hoping you could provide more financial information with regard to the fourth quarter forecast.

Well, first of all, Eric, as I mentioned earlier, 19 of our locations were affected, but 17 of them are in operation today. I do know that three in Miami are trying to get their power back. The impact if they're all shut would be about 1.5% of revenues, but the fact is they're all, with the exception of two, they are all up and running. In terms of the rebuilding effort, we have no visibility on when that would commence, although there is heightened activity on planning for the rebuilding. So, at this time, given that I will not be able to provide you much visibility on what the impact might be in the fourth quarter, Eric.

Okay. Second, I was just hoping to get an update on pricing power, whether you're seeing an organic pricing power or if you have any surcharges you're implementing for fuel costs.

We are implementing surcharges for fuel costs in all our operations and they're being well received by our customers. In terms of pricing power, we feel pretty confident that we have reached that stage and part of our discussions coming up in our executive conference would be discussing a price increase going into 2006.

Okay. Thanks a lot.

You're welcome.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Michael Schneider of Robert W. Baird. Please proceed.

Good afternoon, guys. Nice quarter.

Well, hi. Thanks, Michael.

First, I guess, just on the guidance. Does it include the 8 million in expenses for the debt?

No, that - we are not sure if we can get it done this year, so it's - since it's not a confirmed event, it's not in the guidance.

Okay. And then, along the same lines, as we look into next year, do you have any estimate on what options expense might cause you into the new FAS rule?

Mark, do you want to take that question?

Yes, Mohan, I will. New option expense is expected to hit us approximately 300 - $380-400 per quarter.

Okay. Thanks for the precision. And then, just on the business momentum, can you talk, what you've seen, I guess, on the actual momentum of the business through the quarter, especially in light of the hurricane season. Some people now have started to pull back their expectations and are talking cautiously about the outlook. Have you guys seen anything along those lines that suggests that higher loans from rates and the storms, et cetera, have dampened enthusiasm about the cycle?

Well, first, the storm reconstruction is projected to contribute almost 1% - 0.8% to GDP next year or almost 25% of projected growth. Now, that's a sizable number, over 100 billion. And we are the reprographics company in those affected areas and we are ready and we look forward to that growth. So, I don't think they're holding back on the reconstruction. In terms of overall growth, our revenues are derived from three broad categories and they are non-residential construction, residential construction and non-AEC business.

65% of our revenues come from non-residential construction with the residential construction and non-AEC being 15% and 20% respectively. So, if you focus on the non-residential, which is the single biggest area, FMI, a highly regarded construction industry think tank or research firm, is projecting compounded annual growth rate of 8% over the next three years. We are seeing ample evidence to support that from a number of sectors in the economy. Having said that, there was a temporary lull right after these hurricanes. But I think that will pass and the momentum will be resumed. That's our outlook.

Okay. And then, just some precision as well on acquisitions during the quarter. How much revenue did they contribute?

Let me give you the - both the quarter and the year to date. Year to date, our revenues, year over year, approximately 10% -- 9.9%, to be precise - of which, organically, derived revenues or growth was 7.5% and acquisition related growth was 2.4%. For the third quarter, the growth was 15.7% of which organic growth was 11.1% and acquisition related growth was 4.6%.

And again, for the organic, you're including just the single site acquisitions that you do that are relatively immaterial?

Exactly.

Okay. And how many of those new branches and/or one-site acquisitions were there during the quarter?

We had a goal of opening 15 new branches for this year. We are, right now, at 20. Twelve of them were cold startups and eight of those came through these small folding acquisitions. So, eight is the answer.

Great. Thanks again, guys.

You're welcome.

Thank you very much, sir. Ladies and gentlemen, our next question comes from the line of Thatcher Thompson of CIBC World Markets. Please proceed.

Congratulations, guys. Great quarter.

Thanks, Thatcher.

Suri, last quarter I think the peer group had added 45 new companies in Q2. How many did you add in Q3 and what's the total count now?

The total count for the peer group is at 108.

Okay.

And so, we're added about - I think last quarter we said 108, if I recall right. And we had the same number. There are a couple of reasons for that. One is that I think several of our large acquisitions that we inquired, about four or five companies, all of them, actually, have been peer members. So, sometimes, the peer numbers reduction is due to the fact that we keep acquiring those companies. So, from that perspective that they grow.

Okay.

That's the number there.

Okay. And then, I think the goal for the year was 3% of your revenue from digital services. Where were you in the quarter and where does it look like you're going to be for the year? I think year to date, through the second quarter, you were already there.

Yes. The two areas where we have zero to none are our two biggest growth drivers - digital services and facilities management. Our goal for those two by year-end was - I'm sorry - 16% for facilities management - 16% of overall revenues - and 3% would be digital services. As of the end of the third quarter, facilities management came in at 16.7% for the year. And digital services came in at 3.5%. So, we are clearly above our goals on both areas.

Okay. And can you comment - I know it's just eight small acquisitions, but can you comment on the general pricing range you're paying for those?

Thatcher, I would rather not discuss that, particularly since we are in the middle other negotiations.

Okay. Thank you, guys.

You're welcome.

Thank you very much, sir. And again, ladies and gentlemen, if you do have a question, please key star, one. Our next question comes from the line of Jonathan Shapiro of Goldman Sachs. Please proceed.

Hi. It's actually Al Cavilli (ph) sitting in for Jon.

Hi, Al.

Hi. How are you?

Good. Thanks.

Good. I actually - most of the questions have been answered, but I guess, on a couple details, the pricing increase for 2006 ...

Yes.

... that you're mentioning. What level are you targeting in terms of a percentage basis?

That, too, is something that we will brainstorm in - two weeks from now. We are beginning to see cyclical inflation begin to set in and that is usually the time for us to move on price increases. And as you would have seen, that is the case right now. That is what the Federal Reserve is also faced with - looming inflation. So, that is the reason we feel comfortable to do that now. But as to how much is something that we will consult with our regional presidents and regional CEOs.

Okay. And then, on the debt refinancing, what does the interest rate do you anticipate going down to next year? I know it was LIBOR and 6 - plus 6.875%, you mentioned.

We are looking to reduce our - the interest rate on the second priority, second - the bond debt by up to 500 points. And right now, it's at 6.875%. Our goal is to get to 1 and - 1.75 over LIBOR. So, that's what we're anticipating and our anticipated savings on the interest expenses is about eight million a year.

Okay. Great. Thanks. And then, this quarter we saw year over year gross margin expansion. Is that something that we should expect to continue or was this more a just a one-time item here in the quarter?

What we should - what we're anticipating continuing and actually ramping up our acquisition activity. And with that in mind, we should plan on gross margins between 41-4% because acquisitions do pull our gross margins down. ARC's gross margins are about 500 basis points above the industry average and hence new acquisitions tend to pull it down. So, if we do more acquisitions in the coming quarters, then that will be a reflection on lower gross margins. It will reflect that in grow gross margins because they come in at lower gross margins when they join us. It takes about 18-24 months for them to become part of the mainstream in terms of gross margin contribution.

Okay. And the 41 - that wouldn't be the fourth quarter, though. That - the 41-42 you're mentioning would be ....

On an ongoing basis.

Right. Okay. Great. And then, the final question is, in terms of the acquisition pipeline, I guess how is it looking going forward? You mentioned there's some others you're looking at. Are these going to be kind of the small tuck-in ones or a bigger more meaningful one like the Queen City that you just closed on?

We will do both. We also have a mandate to open new branches to facilitate, distribute and print, where we print close to the customer and deliver it to them quickly. So, we will do both. The - so, there will be a said number of talking (ph) acquisitions as part of our ongoing branch opening strategy.

Okay. Great. Thanks a lot.

You're welcome.

Thank you very much, sir. And again, ladies and gentlemen, if you have a question, please key star, one at this time. At this time, we have no further questions. I'd like to turn the call back over to Mr. Stickney for any closing remarks you may have.

Thanks, Bill, and thank you, everyone, for joining us today. We appreciate your continued interest in American Reprographics Company. Have a great evening and, of course, Happy Halloween.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.