ARC Document Solutions Inc (ARC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2005 American Reprographics company conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. David Stickney, Vice President of Corporate Communications. Please proceed sir.

Thanks, Anthony. I would like to welcome everyone to our 2005 fourth quarter and year-end earnings report. Joining me on the call 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 fourth quarter and the full year of 2005 ending December 31, 2005. You can access this release and other previous releases from the Investor Relations section of our website at www.e-arc.com, that's 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 about an hour after the conclusion of today's call and will be accessible for 90 days. The dial-in number for this replay is 617-801-6888. The replay passcode is 913-71992.

Secondly, this call is 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 Reprographics Company's website at e-arc.com. Please feel free to contact myself or Financial Dynamics of San Francisco, our Investor Relations firm, for general information about the company. Contact information can be found 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 2006 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 September 30, 2005; 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 March 2, 2006 and except as required by law, American Reprographics Company undertakes no obligation to update or revise any of these forward-looking statements.

This call also will contain references to certain non-GAAP measures such as EBITDA, EBIT, pro forma incremental tax provision, pro forma net income and pro forma earnings per share. The reconciliation of these non-GAAP measures is set forth in today's press release reporting our financial results for the fourth quarter and yearend of 2005. That takes care of the housekeeping tasks.

So, at this time, I will turn the call over to our Chairman and CEO, Mohan Chandramohan.

Thanks David. Good afternoon and thank you for joining us today as we discuss ARC's fourth quarter and full year financial and operating performance for 2005.

On today's call, I will begin with an overview of our results and provide a yearend review. Suri will then outline the operational highlights for the year. And after that, Mark will discuss our financial details. At the conclusion of our presentation, we will take your questions.

To begin, ARC reported sales for the fourth quarter of 124.7 million compared to 107.6 million in the fourth quarter of 2004. This represents a 15.9% increase year-over-year. Our gross margin for the fourth quarter was 40.2% which compares to 37.6% for the same period in 2004. Our EBITDA margin for the quarter was 20.4% which compares to 17.2% in the fourth quarter of 2004. Earning per share for the fourth quarter of 2005 excluding the refinancing charge were $0.19.

For the full year, we reported sales of 494.2 million compared to 443.9 million in 2004. This represents an annual increase of 11.3%. Our gross margin for 2005 was 41.4%, which compares to 40.6% for the same period in 2004. Our EBITDA margin for 2005 was 22.1%, which compares to 20.5% for 2004. Earnings per share for 2005 excluding the refinancing charge and the one-time tax credit attributable to the IPO were $0.88.

Based on our view of current economic trends, trends in the AEC industry and our business plans for the coming year, we anticipate that annual revenue for 2006 will be between 560 million and 565 million. At that revenue level, we estimate earnings per shares to be in the range of $1.21 to $1.24 per share fully diluted.

Now, I would like to give you a brief recap of the company's performance in 2005. We began the year with strong set of goals, the first of which was to attain double-digit revenue growth through a combination of significant organic growth which would include a program of targeted new branch openings and strategic acquisitions to penetrate new markets. Our branch opening goal for the year was 15 new branches.

Second, we consideedr it imperative that we advance our position in two revenue categories critical to the work flow and business practices of the future, thus important to our future success, digital document management services and on-site services commonly referred to as facilities management. Our goal was to achieve 3% of overall revenues from digital document management services and 16% of revenues from facilities management services.

Third, we needed to solidify our presence as a national player and continue the strong incremental gains we have made in capturing large national customers through our Premiere Accounts business unit. Our target was to gain three such accounts in 2005.

Fourth, we wanted to capitalize on opportunities to extend our lead in web-based technology solutions for our customers and ourselves. To take advantage of new markets and new customer segments, we planned for the enhancement of three products and the introduction of new value-added applications.

Finally and most importantly, our regional executive management team had to realize its promise as a key element in our decentralized operational structure. We needed to shift from focusing talent and skills solely on local issues and broaden the scope of this group to apply its power within the larger context of the company.

At the end of 2005, I am happy to tell you that we exceeded our expectations in every area of endeavor. First, we achieved our topline goals with growth of 11.3% in overall revenues. 7.6% of this revenue growth was generated organically and 3.7% came from acquisitions. We also exceeded our expansion goals by extending our footprint to 215 reprographic service centers. Our new branch opening program was hugely successful as we opened 19 new branches to augment our hub-and-spoke structure in some of the fastest growing metropolitan regions of the country.

During the year, we intensified our acquisition program by establishing significant operating platforms in Georgia and Southern Ohio. More significantly, we ended the year with a strong pipeline of acquisition prospects which will enable us to enter new strategic territories over the next several months.

In the critical areas of digital document management and facilities management, we surpassed our goals by capturing 3.6% of our overall sales through digital document management services and 16.8% of revenues from facilities management contracts. In all, more than 20% of 2005 full year revenues came from these two services which we believe are essential to our future success.

In terms of establishing our position as a national supplier of reprographic services, we again succeeded by solidifying accounts with Turner Construction, reassigning a three year exclusive contract with Dulaney Construction and by adding new accounts with Camp Dresser and McKee, Mortensen Construction and the new 4.7 billion resort and casino project in Las Vegas known as the MGM City Center.

On the technology front, we started the year by completing a major integration of two of our flagship products PlanWell Enterprise and PlanWell BidCaster, by seamlessly integrating broadcast communication services into our premier online planroom service. We began a pilot program of a new web application for sub contractors called SubHub. We also enhanced a new licensable version of MetaPrint, our imaging and device driver and continue to refine our print cost recovery software Abacus PCR.

And finally, our regional executives came together with our corporate operations staff to form a new board of operations within ARC. Among its other accomplishments, this new integrated management team began a concerted effort to consolidate key regional back office functions such as information technology and divisional accounting. By doing so, we freed our local divisions to focus on our customers by leveraging our best and brightest engineering administrative and accounting talent across a broader operational landscape.

This team also injected more accountability into our organization and a clearer vision of our company objectives through better and more formalized communication tools. And divisional presidents received more guidance and closer management focus in order to operate close to peak performance. While we still have improvements to make and potential to fulfill, the best evidence of this team's success is its achievements in meeting the aggressive goals we have set for ourselves at the beginning of the year. I am proud of them and I am proud of ARC.

With that, as a broad review of the year, I will now turn the call over to Suri for a more detailed look at operations. Suri?

Thanks Mohan. As many of you know, the fourth quarter is typically a slow period for ARC primarily because it is slower for the AEC industry. Weather effects construction in large portions of the country and extended the holiday periods tend to depress activity overall.

This year, however, we saw activity remain strong right up until the holidays. This trend together with maintaining our culture of cost control and continuing gains in the market share helped us post nearly 16% improvement in sales during the fourth quarter as compared to the same quarter in 2004 and a strong improvement in profitability. As a percentage of overall revenue for the quarter, reprographic services generated 73.7%, facilities management generated 17.8%, and equipment and supplies posted a healthy 9.14%.

We saw year-over-year growth in each of the geographical territories we track. This growth was supplemented by acquisitions and branch openings in South, Midwest, and Southern California. Some of these new businesses not only added sales from their book of business to our own, but also allowed us to combine regional work for some of our larger clients especially in the upper Midwest. Regional managers reported continued strength in large format printing sales and several regions also saw increases in large and small format color sales as our AEC customers begin to market new projects in view of the improving economy.

Many of you have heard us talk about a digital transition occurring in AEC marketplace. The leaders in this transition are exploiting the advantages of better technology and greater efficiencies with their digital tools and current charge premium. Companies without those advantages however, fight back with lower pricing.

As key suppliers to the industry, we obviously feel the impact of both. So between the leaders and the followers in our customer base, we feel our pricing power is currently neutral. That being said, we were able to affect the surcharge for fuel cost and we believe that most of our customers are beginning to embrace the technology we offer. To us, this means, that our strategy to capture digital services revenue was obviously well-timed and we will continue to emphasize it as a critical component of our revenue growth plans.

As customers continue to demand convenience and speed and as printing equipment continues to become smaller and more affordable, demand for facilities management program remain strong. As we discussed on previous calls, by placing such equipment onsite and dealing on a per use and a per project basis, invoices continue to be issued by us, just as if the work was produced in one of our centralized production facilities. The customer gets the convenience of onsite production within invoice that they can passthrough as reimbursable. We ended the year by adding 431 FM contracts to our list with 2,357 contracts in total.

In 2005, we experienced a 10% year-over-year gain in sales revenue for equipment and supply sales. Our acquisitions of Queen City in Cincinnati in 2005 and FDC in 2004 contributed to this sales increase, as each businesses processes a strong equipment and supply business unit. As mentioned earlier, trends in smaller less expensive printing equipment make the convenience of in-house production attractive even for those customers who have no need for reimbursable invoices, such as our FM customer. We think we can capitalize on this type of customer and continue to grow equipment and supply sales.

Our efforts to advance ARC's leadership position in reprographics technology produced some very exciting results this year. By bringing PlanWell Enterprise and PlanWell BidCaster together, we were able to integrate two separate processes under single technology platform and increase our customer's ability to leverage the value of the web-enabled construction plan.

As the name BidCaster implies, this has tremendous value during the bid cycle when communication is critical to accurately estimating a construction project's cost. We also introduced an experimental service called SubHub that matches projects bids in a given area to local contractor. It allows a contractor to create a profile of his business, so that it can be matched to a local project in need of his skills. The project bids have plans associated with them that the contractor can view online and of course, they order prints. We currently are conducting a pilot program in select cities on both Coasts and in Texas.

Those of you on our call -- on our last call may remember my discussion of Abacus PCR and MetaPrint. Abacus is an on-site tool for tracking machine and printing usage in a network print environment. The application went through a round of enhancements in the fourth quarter and now is being used in more than 20 of our client offices. We expect to use it in place of expensive third party applications in many of our FM placements going forward.

MetaPrint is a print-on-demand product that replaces the many different pieces of software typically used to drive each of our production scanners and printers. Using MetaPrint, our production staff can learn and use a single piece of software to drive multiple machines from multiple manufacturers. We are now using this application in all of our own production centers, and we are confident that we will save money and resources on our own production floors. Early licensing efforts appeared to have convinced independent reprographers that they can achieve similar results themselves.

Finally, membership with our independent trade association, the peer group picked up again in the fourth quarter with nine new companies joining the association. We ended the year with 117 companies in the peer group after starting with just 45. Through the peer group and other technology licensing efforts, there were nearly 140 locations in addition to ARC's 215 locations where PlanWell technology was available at the end of 2005.

With that, as the operational backdrop for the quarter and the year, I will now turn the call over to Mark Legg, our CFO. Mark?

Thank you, Suri and good afternoon to everyone. I would like to start the financial review today with our fourth quarter results of operations. As Mohan stated earlier, revenue for the fourth quarter of 2005 came in at 124.7 million compared to 107.6 million reported in the same period of 2004 or an increase of 15.9%. For the year, we reported sales of 494.2 million compared to 443.9 million in 2004. This represents an annual increase of 11.3%.

Segmented by our three primary product lines, revenue in the fourth quarter was as follows. Reprographic services, 92 million; facilities management, 21.3 million; and equipment and supplies, 11.4 million. Reprographic services and facilities management business grew at 15.1% and 14.4% respectively, while equipment and supplies increased by 26.6% primarily due to the acquisition of Queen City Reprographics during the third quarter of this year.

We track six geographic regions. Revenues per region were as follows. Southern California achieved 39.1 million; Northern California came in at 21.6 million; the Pacific Northwest reached 6.5 million; our southern region which extends from Florida to Las Vegas came in at 21.1 million; the Midwest delivered 17.7 million and our Northeast division came in at 18.8 million.

Gross margins for the fourth quarter came in at 40.2%. This compares to 37.6% for the same period in 2004 or an increase of 260 basis points. Our SG&A expenses came in at 29.3 million during the fourth quarter 2005 as compared to 23.4 million in the same quarter of 2004. This increase is a result of acquisition activity coupled with additional cost incurred due to our public company status during 2005.

Operating income in the fourth quarter of '05 was 20.1 million or 16.1% of revenue, compared to 14.3 million or 13.3% of revenue in the fourth quarter of '04. Operating margins achieved on our incremental revenue of 17.1 million for the fourth quarter came in at 33.8% or over 200% of our base operating margins. Operating margins have increased over the fourth quarter of 2004 due to the leverage benefit, and thus, margin expansion we enjoyed form organically derived incremental revenue.

Interest expense in the fourth quarter of 2005 was 15.4 million compared to 8.5 million in the fourth quarter of 2004. Included in interest expense this past quarter were costs associated with the refinancing of our debt, specifically, a prepayment penalty of $4 million, coupled with the write-off of deferred financing cost of $5.3 million. Excluding these amounts, interest expense would have been 6.1 million in the fourth quarter of 2005.

Pro forma interest cost is lower because all of the proceeds of our IPO in February 2005 were used to pay down debt, in addition to our debt payments made from internally generated cash flow throughout the year. The Company's income tax provision in the fourth quarter 2005 was 1.7 million compared to 1.6 million in 2004. Had ARC been a C corporation for all of 2004 as opposed to an LLC, we would have recorded taxes of 3.1 million for the three months ended December 31, 2004.

Net income for the fourth quarter of 2005 was $3 million or $0.07 per share fully diluted. Pro forma net income for the fourth quarter of 2005, which excludes the onetime cost associated with the refinancing of our debt, was 8.6 million or $0.19 per share fully diluted. Our fourth quarter 2004 net income adjusted for the incremental income tax provision, assuming we were a C corporation in 2004, amounted to 2.6 million or $0.07 a share fully diluted. This represents an increase of 171% in our fully diluted EPS during the fourth quarter of 2005 compared to last year.

Earnings per share for the entire year of 2005, excluding the refinancing charge and the onetime tax benefit related to our IPO, was $0.88 fully diluted. This compares to $0.54 earned in 2004 or an increase of 63%. Cash flow from operations in the fourth quarter of 2005 came in at 14.1 million compared to 18.4 million in the fourth quarter of 2004.

This decrease was caused primarily by two factors. First, we paid additional interest in the fourth quarter of 2005 of $9 million due to the refinancing of our debt. In addition, accounts receivable increased by $9 million year-over-year despite the fact that our day sales outstanding and accounts receivable remained constant at 51 days. This increase in working capital is the result of our strong organic growth during 2005.

At December 31, 2005 working capital, excluding cash, was 15.3 million or approximately 3.1% of trailing 12 months revenue compared to 1.9% in 2004. This increase in working capital is due to the increase in accounts receivable mentioned earlier, coupled with the timing of interest payment on our bank debt.

Inventory at the end of the fourth quarter 2005 was 6.8 million compared to 6 million at the same time last year. The dollar increase in inventory was caused primarily from inventory associated with acquisitions. That being said, our days supply of inventory actually improved from 32 days in 2004 to 30 days at December 31, 2005.

Total debt, including capital leases, at the end of the fourth quarter 2005 was 267.4 million. This is down from 348.7 million at the end of the fourth quarter 2004. The decrease is attributable to net IPO proceeds used to retire debt, coupled with debt payments made from internal cash flow since December 2004.

Our debt payments from internally generated cash flow were offset by increased debt in the form of subordinated seller notes and capital leases associated with our acquisition activity during the year. It is important to note that since the end of 2005, we have paid down 12.6 million in additional bank debt through today.

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

Thanks Mark. Thanks Mark. As usual I will take your questions, and where necessary, I will either have Suri or Mark to answer. So I'd like to pass it back to Anthony for the Q&A.

[OPERATOR INSTRUCTIONS].

Our first question comes from Jonathan Shapiro from Goldman Sachs. Please proceed.

Hi. Good afternoon.

Good afternoon, Jonathan.

Just a couple of quick questions. The first is on the SG&A, I guess, I understand how it goes up because of the acquisitions in the public Company cost. I guess specifically on the acquisitions you weren't able to get pretty good leverage on the gross margin line, but not on the SG&A line. Can you just maybe talk about what goes on, sort of, between those two?

Yes, Mark, do you want to answer that question?

Hi Jonathan, how are you.

Good. How are you? Thanks.

Very good. Thank you. As I mentioned earlier and as you pointed out there are two components to the increase in SG&A. One is, when we acquire a company typically with the SG&A is higher than it will be as the company matures. So we will see that slowly reduced as we come in with our own best practices and continue to consolidate their back offices into our existing regional accounting structure.

So when we have years where acquisitions are a large part of our activity you see a spike in SG&A. On top of that, as you know we went public in February and the cost of compliance with Sarbanes-Oxley, printing cost, legal cost, accounting cost and filing fees are all significant and that shows the increase there.

And another cost component there is the D&O insurance, which was significant.

What was the rough number for the public company cost for the year, plus or minus?

Mark?

That's about $2.5 million.

Okay. And then on the outlook for 2006, if I just go sort at the middle of that range it's about 14% revenue growth. Can you just talk about what you see the components of that are, I guess, volume price, acquisition rollover and then maybe new branches, however you think about the breakout?

As we have always communicated to the analysts, there are three components to the good part of our revenues. And they are, if I may, same store sales growth, new branch openings, and acquisitions. The 14.3% projected growth will break down as follows. Organic growth as defined by same store sales growth is 8.5% of that. New branch openings would be about 0.7% of that and acquisitions would account for about 5% of that.

And that's the acquisition -- this is just acquisitions you've made that rollover or just to see further acquisition activity.

This is based on our position today, what we project. The rollover plus what we planned to accomplish. Throughout the road show and subsequent presentations, we've always told you our potential is about 15% of which acquisitions would be 3% to 5%. So I am saying we would push for full the potential on acquisitions.

Understood. Okay. Thanks very much.

You are welcome.

Our next question comes from Michael Fox from JP Morgan. Please proceed.

Good afternoon guys. Congratulations on a great quarter and a great year.

Thanks Michael.

Thank you, Michael.

Can you just talk about the guidance, the seasonality in the revenue and the earnings whether there will be the growth rates are pretty consistent throughout the year, or some quarters will be bigger than others?

It all of the seasonality primarily occurs in the fourth quarter Michael. The strongest quarter usually is the second quarter that's because again because of the number of days and that's the ramp up quarter for us, yearend, year-out.

The fourth quarter typically is the slowest quarter because, once again because of the number of days largely due to the holidays and other related base lost for instance. We lose the Friday after Thanksgiving completely. And again depending on when Christmas falls or where it falls, we tend to lose anywhere from 2 to 4 days. If Christmas falls on a Wednesday that whole week is pretty much lost. So that's why the fourth quarter is the slowest quarter. But what you can do is overlay 2005 onto the projected numbers.

Okay. And then just a couple of housekeeping. Can you give us your expected guidance for interest, D&A and tax rate projects?

Yes. The tax rate is projected to be 40% that is broken down between a cash tax rate of 36% and the amortization of tax credits of 4%. In terms of, did you say G&A?

D&A, depreciation and amortization.

Mark, what was that number?

Depreciation is going to well -- depreciation for '05 ended up at 13.7 million in the production shop level and 2.3 million in the SG&A level. Amortization which includes amortization of intangibles remained at $2 million. I am reluctant to give guidance on either of those because we typically limit our guidance to revenue and EPS only. I will tell you that due to the adoption of FAS 123(r)) we currently are expensing or amortizing $150,000 a month for options issued through 12/31/05 that number will increase by about 300,000 in '06 for options issued during the first quarter.

And what was the third component of your question Michael?

It was interest, but it sounds like, that might not be given out?

Yes. And but me say this. The refinancing resulted in our interest rates on our prime, our principal debt, at least a large portion of our principal debt, going from 6.875 over LIBOR to 175 basis points over LIBOR. We had the benefit of that two weeks in 2005. So the rollover benefit would be for 50 weeks and I would estimate that number to be about 7.6 million in 2006.

Okay. Great. Thanks a lot. I appreciate it.

You are welcome.

Our next question comes from Michael Schneider from Robert W. Baird. Please proceed.

Good afternoon guys.

Hello Michael.

Congratulations on a great year.

Thank you.

I guess first starting on the incremental margins. Mark you highlighted you did 33% of your [inaudible] of the acquisitions, although that number has been trending down through the year. I am just curious as to what you are assuming, looks like you are assuming about 30% for 2006. And maybe why that number have been in the mid 40s, today is low to mid 30s is it mix? Is it more equipment sales? Just any color you can provide there and again your assumption for '06.

We are happy to talk about that Michael. The pure organic growth, the same store sales we would project that to be around 35% incremental operating margin from the incremental sales. This is fully leveraging the high leverage nature of our business.

The second component new branch openings, it typically takes a new branch to breakeven. It takes between 9 to 12 months. Now in our projections that's a very small component, 0.7%. I would attribute zero to that.

The third area is acquisitions. The industry average is about 10% EBITDA. So if you were to go back and look at our acquisitions, the acquired EBITDA is typically about 10%, which would put operating profit between 6% and 8%. So we are planning 5% of the growth to come from acquisitions. Picture that coming in at anywhere between 6 to 8% at the EBIT level -- at the operating profit level. We are able to improve that profit by 500 basis points within a 90 to 180 day period. Then after that over the ensuing 18 months, we're able to pick it up to about 20%, which comes gradually as our best practices take hold. So that's what in the mix.

So as the year progress the incremental margin really going from the mid-40s to the mid-30s is probably just representative for the acquisitions.

That -- and the new branch openings, which is going to be an ongoing program in our efforts to continue to build out that footprint to get close to our customers.

And on the new branches topic what is the -- are you targeting 15 branches, again, this year?

That is correct.

Okay. And then on the acquisitions, Mohan, you indicated 5 points from acquisitions, which is roughly $25 million. How much of that have you already acquired though that rolls into the model in 2006 so I can get a sense of what's you're actually assuming in additional acquisitions.

The carryover effect from 2005 to 2006 is about $9 million.

Okay.

So the remaining will come from acquisitions that we've pretty much lined up.

And in terms of pricing, you guys went out with a price increase at the start of the year. Can you talk about the industries receptivity to that, and does that explain the acceleration you can built in from 7.6% organic growth to 8.5 in 2006.

No. We are looking at it more as a neutral. If we are able to get a bounce from that, we'll be happy. There is some pressure from those who are unable to keep up with the new technology their answer to that cut is usually priced, which tends to pull down any gains that it make, but worse case our pricing position is neutral and the guidance that we are putting out does not include any potential bounce from price increases.

And you did issue a price increase though in the first quarter?

Yes. Really, again it's been done really surgically, Michael.

Okay.

Testing the waters, if I may.

Okay. And then, Mohan, maybe you can just take a step back and look at the strategy for '06. '05 was your debuts, a public company. What's new and different now in the strategy for '06, as you settle in for the role as a public company in your growth goals?

Well, a number of times, we are focused on the top 50 metropolitan regions of the country as defined by Nielsen. We are the largest local player in 26 of them. So going forward, the focus is the other 24. That's number one. Number two, the focus is to continue to push forward on digital document management services, and especially these management services.

Our goal by the end of 2007 is to have a digital document management, services produced over 10% of our revenues and facilities management producing 19% of our revenues because they are the emerging services that are being demanded by our customers. Thirdly, we want to continue to build our technology, again, on our present strength to make it the industry standard. To do that, we will continue to enhance existing products, introduce new applications while growing the licensing and peer programs.

Fourth, continue to build the management infrastructure. We've actually gone long way in that effort. We now have nine regions that are being managed by nine regional CEOs. And as I said earlier, they together with the corporate operations team have formed the operations board. And we have some vital fact that that we have come up with to measure the performance of this operating board. So we will continue to tweak that during 2006.

Great. Thank you very much.

You're welcome.

Our next question comes from Thatcher Thompson from CIBC World Markets. Please proceed.

Good afternoon, guys.

Hello Thatcher.

Mohan, if you could just repeat what's the additional document cover as the percent of revenue for '06?

For '06, we want to see about 7%, that's our goal. We want to get to 7% but by the end of -- the goal that we are focused on is where do we want to be by the end of 2007. And that is above 10%. And that's what we are pushing towards and yet we're enjoying some significant traction in that effort.

Our next question comes from Matt Litfin from William Blair. Please proceed.

Hi. Good afternoon. Let me add my own congratulations as well.

Thanks, Matt.

Thanks, Matt.

I wasn't sure if you said this or not, but organic revenue growth in the quarter, what was that?

Yes. Our growth as we discussed earlier was 15.9%. That breaks down between organic growth of 9.4% and acquisition growth of 6.5% largely because the acquisitions are back loaded. Queen City and Georgia Blue were completed in the third quarter.

I had a follow up question about your acquisition pipeline, you mentioned 20 something billion dollars of acquisitions that are, I think, you said pretty much lined up. Is that the extent of your acquisition pool or how would you characterize the size of your total potential acquisition pool, and maybe, characterize that versus one year ago?

Yes. It's a highly fragmented industry, over 3000 firms, average firm size to be considered, a meaningful player would be about 3 million. And overlay on that, couple of transitions that are occurring. Number one, there is a generational shift that's occurring. Entrepreneurs are - a number of entrepreneurs who started their businesses in the 60s and 70s are looking to exit.

And then there is the digital transition, it's getting expensive. The transition is going slowly because of the nature of the construction industry, takes a lot of staying power. Because of these two -- the convergence of these two and number of firms will sell, and are looking to sell.

My-- I would say there is no shortage of companies to acquire. And I would like to say that we can continue to acquire for two cycles, because of the number of firms that are there. But we want to do it at a measured pace. Our goal is 5%. If we are able to do that and if you integrate well, bring those companies on to the mainstream with -- effortlessly, then we will continue -- we'll expand. We can do more. But our goal right now is 5%.

Okay. Final question. Gross margin in the quarter was better than we had modeled. Is there any reason to believe that seasonality is less pronounced today or will be in future years or is that all just the strength of the industry currently in the business today?

Combination of both, Matt. Fourth quarter, like I said, has the fewest number of working days, 61 as compared to 63 in the other three quarters. But in reality, it's less than 61 because of the related loss of days, day after Thanksgiving and a couple of days connected to Christmas.

So when you have a busy December or busy November, we are forced to perform that work in a fewer number of days, incurring tremendous overtime. Add to that, holiday pay, and that takes about 150 to 250 basis points write-off of gross margins. So the lower gross margin is a fourth quarter phenomenon.

Why is this year better than last year? I would attribute that to higher activity and Christmas falling on a Sunday. So actually we lost one day compared to the prior year, so a combination of both.

Thank you.

You are welcome.

Our next question comes from Thatcher Thompson from CIBC World Markets.

Sorry about that, guys. You hit me on the one tunnel on my way home here.

Yes, okay. And I was wondering would you got mad at me or not.

Just a quick question. We are so far into the first quarter and your comments about how the non-residential construction spends have gone since Christmas and how you're expecting your business?

There is you know increased activity in all segments of non-residential construction. We have increased activity in commercial construction, in office construction, but fast activity in areas like hospitality industry, the healthcare industry, the education area and now as of the fourth quarter, tremendous uptake in the manufacturing area. So it's a broad-based groundswell of activity. Okay? That's one. Besides, you know, there's high customer optimism, increased activity at the FM installations signifying more design activity, which is an early indicator and anecdotal evidence of projects that we are getting enrolled and increasing. So its -- what you are seeing is what's being projected by the pundits out there.

Okay. And then just one final question. At this the bigger part of the mix, in '06 then last year, can you just remind us kind of the historical acquisition prices and what have you been able to do with those in following 12 to 18 months?

We have successfully completed in -- that was going back to 2000 over 100 million in acquisitions or up to 19 companies. So we've been there and we have done that. We put acquisitions on hold as we were going through the trough of the last downturn, primarily because we wanted to consolidate, reaffirm our best practices with our people and didn't want to buy companies on their way down. So we -- again, we have the experience of buying and integrating and improving companies, but we want to hit our stride in an orderly way and that's why our focus of 5%.

Okay. And remind us of the prices you paid historically on those acquisitions.

I didn't get that Thatcher.

I am sorry. The prices you paid historically on acquisitions?

I wouldn't like to discuss that if you don't mind.

Okay. Thank you.

Thank you.

Gentlemen, we have no further questions in queue. I would like to turn it back to Mr. David Stickney for closing remarks.

Thanks, Anthony. Thank you very much everyone for joining us today. We appreciate your continued interest in American Reprographics Company. Have a great evening. We will talk to you in a few months.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone, have a wonderful day.