ARC Document Solutions Inc (ARC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2006 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.

Thank you, Sean. Welcome to the call, everyone. Joining me today are Mohan Chandramohan, our Chairman and Chief Executive Officer, Suri Suriyakumar, our President and Chief Operating Officer, and Jonathan Mather, our Chief Financial Officer.

Earlier today, the company issued a release reporting financial results for the fourth quarter and year ending December 31, 2006. You can access this release and other previous releases from the Investor Relations section of the company's website at www.e-arc.com. You can listen to a taped replay at your convenience, beginning about an hour after this call's conclusion. It will be accessible for seven days after the call. The dial-in number for this replay is in today's press release.

Please be advised that this call is being webcast live. A replay of the webcast will be available for 90 days from today. And, again, you can access it from the Investor Relations section on our website. Before we begin, I'm required 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 financial outlook. Such statements are only predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings. The forward-looking statements contained in this call are based on information as of today, February 22, 2007, and except as required by law, the 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. The reconciliation of these non-GAAP measures is set forth today -- set forth in today's press release and in our form 8-K filing.

With that out of the way, 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 I will begin our call with a brief overview of our 2006 financial performance for the fourth quarter and the full year, followed by a look at how we performed against our goals. After this discussion, Suri will provide a picture of the operational performance of the company, and our new CFO, Jonathan Mather, will then review the financials in detail. As usual, we will take your questions after that.

ARC reported sales for the fourth quarter of 2006 of $147 million, compared to $124.7 million in the fourth quarter of 2005. This represents a 17.9% increase year-over-year.

Our gross margin for the fourth quarter was 41.6%, which compares to 40.2% for the same period in 2005. Our EBITDA margin for the quarter was 23.7%, compared to 20.4% in the fourth quarter of 2005. Earnings per share for the fourth quarter of 2006 were $0.28, fully diluted.

It is worth noting here that our performance in the fourth quarter was achieved at the expense of one fewer working day, compared to the same period in 2005, and with significant business interruptions caused by extreme weather conditions in our Pacific Northwest and Colorado operations during the months of November and December.

For the full year, we reported sales of $591.8 million, compared to $494.2 million in 2005. This represents an annual increase of 19.8%. Our gross margin for 2006 was 43%, which compares to 41.4% for the same period in 2005. Our EBITDA margin for 2006 was 24.6%, compared to 22.1% for 2005. And fully diluted earnings per share for 2006 were $1.31. These figures exclude the Louis Frey litigation charge.

On our last call, I expressed my belief that the company has the potential for 10% to 15% revenue growth per year, based on both organic and acquired business. I also stated that I thought we would be projecting revenues in the high end of that range for 2007, based on the trends we were observing.

Today, I am confirming my optimism for our performance with a forecast for 2007 revenues to be in the range of $690 million to $710 million and earnings per share to be in the range of $1.58 to $1.62.

In order to recap our 2006 performance, I would like to call your attention to the company's growth objectives in five critical areas; areas we consider to be vital factors for our business. They are revenue, earnings, digital document management services, facilities-management services and free cash flow. We consider these objectives to be our principle guides in creating an unshakable leadership position in the industry as it transitions to a more digitally sophisticated value-added service segment.

We began the year with a focus on revenue and earnings growth at 15% and 41%, respectively. By year end, revenue growth was nearly 20% and earnings grew close to 50%. The mix of 11% organic growth and 9% acquired business not only surpassed our growth objectives, but also posted substantial progress against our long-term objective of expanding our geographic footprint.

Out of the top 50 metropolitan markets, as measured by the Nielsen Media Group, we are currently in 39 of them, with what we consider to be the number one or number two market share in 28 of those markets. In total, we had a net gain of 33 production locations in 2006 and ended the year operating a total of 231 branches.

We exceed our goals in growing our emerging high margin service lines as well. As we have stated many times during investor meetings and presentations, our goal has been to achieve a combined revenue contribution from digital document management services and FMs of 25% of overall revenues by the end of 2007.

At the beginning of 2006, we set out to create the necessary momentum to hit that target. We achieved that and more. By year end, the revenue combination of these two service lines contributed 22.1% of our overall sales for the year. As we have stated before, we believe the market for these services is as large as we chose to make it. So we are continually educating our customer base and innovating with new services and technology to create demand.

On the cash flow front, we set a goal of generating free cash flow before CapEx above our historic average, which is, typically, about 60% of EBITDA. We ended the year at 67% of EBITDA or $98.4 million. The practical evidence of our success in this area can be found in our continuing ability to fund acquisitions from cash, while at the same time, paying down our debt and reaching our debt to EBITDA goal of 2 to 1.

In addition to our accomplishments in these five critical areas, our EBITDA margin expanded to 24.6%. This is especially significant in light of our aggressive acquisition activity. Generally, we acquire businesses whose EBITDA margins and product mix are both dilutive to our performance. Acquisitions average approximately 10% EBITDA, and their product mix rarely includes a digital services or a meaningful FM component, both of which, as we have noted, produce significantly higher margins than traditional reprographics work.

We are able to mitigate this dilutive effect on margins and product mix by continuing to leverage a high fixed cost structure, building efficiencies through better and greater use of technology, and, of course, by continuing to tweak the management of our costs.

Overall, I am enormously proud of our success in 2006. What makes our performance even more satisfying for me is that our people performed so well, while tackling our first year of Sarbanes-Oxley certification.

As many of you know, the task of achieving certification is a very time consuming exercise, and could have been onerous for a highly decentralized company such as ARC. Yet, at every turn throughout the year, ARC staff took on the extra compliance work with the resolve and professionalism that has distinguished our company from its inception.

In closing, I would like to update you with regard to the management transition we announced last quarter. Suri will be taking the helm of the company, as planned. Given that we have been partners in building this business over the past 19 years, it should come as no surprise that this transition is proceeding even better than expected. As those of you who know Suri can attest, Suri has tremendous energy and an in-depth knowledge of both the company and the industry. He has not hesitated in taking the steps necessary to create a smooth and seamless change in leadership.

Our new CFO, Jonathan Mather, has also exhibited the tremendous drive he has become known for over his distinguished career. Jonathan took the reigns of finance firmly in hand late last year, and is aggressively building on the solid foundation he inherited.

With that as a general review of our performance for the year, I will now pass the call over to Suri to explain some of the details behind our operational success in 2006. Suri?

Thanks, Mohan. This year produced both real business gains for ARC -- excuse me -- and opened up new possibilities for growth everywhere we turned. To begin, however, let's review a quick snapshot of key metrics for the company.

For the quarter, we added nine new branches to our roster of locations. We closed or consolidated three, leaving us with a net gain of six. For the year, we added 47 locations, closed or consolidated 14, ended 2006 with a net gain of 33 locations.

With this expansion, as you might imagine, come new faces. In 2005, we ended the year with 3,871 employees. Today, ARC employs more than 4,400 people. In 2006, we maintained our business mix with roughly 80% of our revenue produced our AEC clients, while 20% of our revenue were generated from non-AEC clients.

Our FM business continues to remain robust, posting approximately 38% growth year-over-year in contract volume. Our contract count one year ago was 2,343. By year end, it was 3,228 and it contributed 16.9% of our overall revenue.

Our digital document management services continued to contribute 5.2% of our total sales this year. It is a small but important gain, especially when considering that most of our acquisitions have no digital services revenue component at all.

In addition to advancing the digital transition in reprographics, our digital services also protect our business in the face of cost cutting by our less technology savvy competitors. As we continue to develop best-of-breed technology, our internal efficiency has improved and our customers, obviously, reap benefits of value-added services.

Meanwhile, much of our local competition cannot afford these services. The technology is either cost prohibitive or they lack the vision to embrace it. As a result, they are often forced to lower their prices to compete with us in various local markets.

In such a scenario, we often maintain our prices in order to keep the business and maintain our market share. While we must navigate this transition very carefully, our aggressive use of technology puts ARC in the enviable position of capturing the increased volume of work that relies of a sophisticated digital approach to document management distribution and print on demand.

Our digital services were a main factor in the success of Premier Accounts over the past 12 months. Most notably, in our recent contract of Whiting-Turner, the number 11 on ENR'sTop 400 Contractors list for 2006.

This $3 billion company has chosen to integrate PlanWell Enterprise and PlanWell BidCaster into their workflow as their standard tool set for online document management and invitation to bid services. This contract was based primarily on our technology offering and did not include a nationwide reprographic pricing arrangement. The Whiting-Turner contract will observe local reprographics pricing in its 27 locations.

Another big, but atypical, win with Premier Accounts was the contract awarded to ARC by Boeing in early January. This contract is an exclusive arrangement to move nearly all of the company's in-house printing to our centralized facilities. We are opening two brand new facilities in Birmingham, Alabama, and Wichita, Kansas, to service the account, and expanding facilities in the Seattle area.

By leveraging our core competencies, such as flexibility, high capacity, quick-turn production times and document management, this contract is still distinctive for its focus on non-AEC reprographics work.

Outside of our continued focus on domestic business development, we have been looking abroad for the right opportunities and timing to pursue our growth strategy beyond the borders of North America. With the opportunities for business development in Asia dominating international business news, it should come as no surprise that ARC has been engaged in some digital document distribution in China for some of our key customers.

Like the US, China document services industry is being influenced by the digital document workflow transition. Given China's emergence as an influential economic engine, this transition will occur much faster than we have seen here at home.

Unlike the US, where familiar, but inefficient analog conventions slow down the adoption of new technology, China's market is nearly a greenfield opportunity. Since China is actively seeking business solutions that can scale quickly, both technology and infrastructure are required to meet growing demand.

For a first mover with resources to deliver technology, strategic direction and management expertise to grow a business quickly in a large and decentralized fashion, the opportunities are obvious and compelling. We are currently in preliminary and confidential discussions with one of China's leading technology companies to explore such an opportunity, and we are doing it with enthusiasm.

Moving to the West, the possibilities for business development in Europe are also compelling, though, of a more familiar nature. The reprographics industry in Europe is well established, but even more fragmented than in the US market. We have made progress with our peer group trade association over the past year in establishing relationships and placing technology in England, Ireland and to a smaller degree, in France.

Earlier this year, we chose to leverage some of our success here and began to promote the peer group in Europe more aggressively. While potential membership and licensing fees are attractive in this market, business relationships built on PlanWell technology continue to be the driving force behind our efforts in the trade association.

Today, we are translating our software interface and we will be hosting our first international peer group meeting in Paris during the first week in April. Invitations have been issued to reprographers in France, Germany, UK and Spain. We expect to provide a dynamic and distinctive offering to the European reprographics community.

We have no plans at this time, however, to expand directly into Europe. But we fully intend to foster business partnerships with the new peer group members there. While the ability to leverage a common technology platform, we will expand the delivery of document management services and on-print demand wherever they are required.

For your reference, we now have 160 member companies in the peer group, with shops in more than 271 locations. Combined with ARC's penetration, more than 500 locations of our technology and tools, the reprographers -- are reprographic customers of all kinds.

With that as the broad view of our operations and business development activity during the past year, I would like to introduce our new CFO, Jonathan Mather.

Jonathan came to us at the beginning of December from NETGEAR, a technology and network hardworking -- hardware company. And he has made excellent progress on building on the solid financial staff and the structure he found here. He also has made tremendous foreground into forming relationships with the CEOs and other management personnel in the company.

We are glad to have him onboard, and he will now walk you through the financials of 2006. Jonathan?

Thank you, Suri, and good afternoon, everyone. I am happy to be joining you for the first time, and even more pleased to report on such solid company performance for 2006. As part of my due diligence in joining the company as its new CFO, I performed a close review of the company's financial and was pleased with their condition and integrity. With that as an introduction, I will now turn to our performance for the quarter and full year 2006 results.

As Mohan mentioned earlier, revenue for the fourth quarter of 2006 was $147 million, compared to $124.7 million, reported in the same period of 2005, or an increase of 17.9%. Revenue by segment was as follows. Reprographic services, $107.7 million, representing 17.1% growth; on-site services or FMs, $26.7 million, representing 25.5% growth; equipment and supplies, $12.5 million, representing 9.9% growth.

Fourth quarter revenues by geographic region were as follows. Southern California, $44.6 million; Northern California, $23.2 million; Pacific Northwest, $8 million; South, $32.3 million; Midwest $18.1 million; and Northeast, $20.8 million. All geographic regions received growth over the fourth quarter last year.

For the year, revenue in 2006 came in at $591.8 million, compared to $494.2 million reported for 2005, an increase of 19.8%. Revenue by segment for the year was Reprographic services, $438.4 million, representing 18.8% growth; on-site services or FMs, $100.1 million, representing 20.5%; equipment and supplies, $53.3 million, representing 27% growth.

Annual revenues by geographic region were as follows. Southern California, $179.4 million; Northern California, $96.4 million; Pacific Northwest, $32 million; South, $122.3 million; Midwest, $78.1 million; and Northeast, $83.3 million.

Gross margin for the fourth quarter was 41.6%. This compares to 40.2% for the same period in 2005, or an increase of 140 basis points. Gross margin for the full year 2006, was 43%, compared to 41.4% for the 12 months ended December 31, 2005.

The increase in our gross margin was driven by various factors, including the increase in revenue to more profitable digital services and facilities management business and leveraging our labor costs and improved capacity utilization.

Our SG&A expense was 22.2% during the fourth quarter of 2006, as compared to 23.5% in the same quarter of 2005. For the full year 2006, SG&A was 22.3%, compared to 22.8% in 2005. SG&A as a percentage of overall revenue came down in 2006, despite higher costs in real dollars associated with the Sarbanes-Oxley compliance implementation and higher than normal legal expenses due to litigation matters.

Operating income in the fourth quarter was $26.7 million, or 18.2% of revenue, compared to $20.1 million, or 16.1% of revenue, in the fourth quarter of 2005. For the full year, operating income came at $106.3 million, or 18% of revenue, compared to $89.8 million, or 18.2% of revenue in 2005.

Interest expense. Interest expense during the fourth quarter of 2006 was $5.9 million, compared to $6.1 million in the fourth quarter of 2005. For the full year 2006, interest expense was $23.2 million, including a $2.7 million, attributable to the Louis Frey litigation. This compares to interest expense of $26.7 million in 2005.

The company's income tax provision in 2006 was $32 million, and the effective tax rate was 38%, compared to 39% in 2005, excluding the one-time tax benefit as a result of our reorganization associated with the company's IPO in that year, 2005.

Net income for the fourth quarter 2006, was $12.8 million, or $0.28 per fully diluted share. This compares to net income for the fourth quarter 2005 of $3 million, or $0.07 per share, fully diluted, which includes the costs associated with our early extinguishment of debt in 2005. Excluding this expense, the comparable income last year would have been $8.6 million, or $0.19 per diluted share. Using the non-GAAP comparison, net income increased 51% over 2005.

Fully diluted shares outstanding were 45.8 million at the end of the fourth quarter in 2006. Net income for the full year 2006 was $51.4 million, or $1.31 per fully diluted share, adjusting for the Louis Frey litigation charges. This compares to adjusted net income for 2005 of $38 million, or $0.88 per share. Fully diluted shares outstanding for the full year 2006 were 45.6 million.

Moving on to the balance sheet, we ended the fourth quarter of 2006 with working capital, excluding restricted shares of $11.3 million, or approximately 1.9% of trailing 12-months revenue. This compares to $35.8 million, or approximately 7.2% of trailing revenue in 2005.

Days sales outstanding, or DSO, were 51 days in the fourth quarter, equal to 51 days in the fourth quarter of 2005.

Total debt, including capital leases, at the end of fourth quarter 2006, was $273.1 million, down slightly from $273.8 million for the same period in 2005. In 2006, our year-end debt to EBITDA ratio was 2. This compares to 2.5 in 2005.

Cash flow from operations in the fourth quarter 2006 was $25.8 million, compared to $14.1 million in the same period of 2005. Full-year cash flow from operations for 2006 was $98.4 million, as compared to $56.6 million for 2005.

That concludes our financial discussion. And at this point, I will turn the call back to Mohan. Mohan?

Thanks, Jonathan. At this time, we'll take your questions. As usual, I will answer them. And where necessary, I will direct them to either Suri or Jonathan.

Operator?

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question, from the line of Scott Schneeberger with CIBC World Markets. You may proceed.

Hi, guys. This is [Alav], calling for Scott. How are you?

Good.

Congratulations on the great quarter.

Thank you.

A couple of question here. First is, we see some margins improvement in the quarter. Is all of the investment you had anticipated in the second half of '06 concluded for the initiatives such as [inaudible], and if so, what should we expect for margins as a result of the new more steady state investment level?

I would, as I have previously stated, in terms of gross margin, your expectation going forward should be approximately 43% --

Okay.

-- for the full year.

For the full year?

Yes.

All right. I guess, for -- looking forward, as you're giving the guidance of the revenue for '07, it's about 16% to 20% increase year-over-year.

Yes.

Can you break down into new branches -- existing branches versus acquisitions?

I would be happy to do that. We are projecting approximately 8% organic growth and approximately 8% to 12% growth from acquisitions. So that is the breakdown.

Okay. And within the organic of 8%, do you have any further? Can you be more specific about? --

Yes. Basically, we peg our outlook to a reliable, credible source or forecaster, which, in our case, is FMI. As you know, FMI does in-depth and up-to-date research and they enjoy tremendous credibility and a track record.

Right.

FMI is projecting 8% market growth in the non-residential construction sector for 2007. After adjusting for construction cost escalation, because the cost escalations are included in that 8% projection -- after adjusting for that, and also after adjusting for our own marketing mix, which is 65% non-residential construction, 15% residential and 20% non-AEC, we believe the true projected growth for our space is about 5.5% for 2007.

And in giving an 8% outlook, we are implying that we will not only get our fair share of that 5% market growth, we will also gain significant market share.

Okay. Thank you, that's --

You're welcome.

That's helpful. The third question is, you've just signed a new premier account with Boeing. And how much revenue can you see from that?

It's very early to project. The full impact of the revenues from this Boeing will be felt only in 2008 because we will be ramping up throughout the year.

Okay.

So our revenue impact expectation for this year is about 1% organic growth from that Boeing contract.

All right. Thank you.

Thank you.

And last one, if I could -- you mentioned some new market development in China and in Europe.

Yes.

Is 2007 -- is it still in its nascent stage or are you going to see top-line growth from that area?

It's very much in the nascent stage and we have not accounted for any revenues in outlook from those markets for 2007.

Okay. Okay. Okay, thank you, and congratulations, again.

Thank you so much.

And your next question comes from the line of Matt Litfin with William Blair & Company. You may proceed.

Yes, good afternoon.

Hello, Matt.

Congratulations on the fourth quarter.

Thank you.

I wondered if you could tell me the organic revenue growth in the fourth quarter, to start off.

Absolutely. The organic revenue growth and the acquisition related growth for the fourth quarter of 2006 are 10% and approximately 8%, respectively.

Great. Thank you.

And as you know, the full-year, Matt, is 11% and approximately 9%, respectively.

Yes. And Mohan, have you made any acquisitions since the year end of '06?

No. And if you -- you would have noticed, we are giving guidance of 8% to 12%. Now, if you were to take the acquisitions that were done last year and carried over to this year, they account for about 4% of that growth, which means we have to do anywhere between $35 million to about $45 million of revenue impact in terms of acquisitions for 2007 --

Right.

-- which, then, translates to about $80 million in annualized revenue acquisition. We feel very good, given the strength of our pipeline, and also given the advanced stages of negotiations that we are in with a number of firms.

Okay, great. And I wondered, in the first quarter, here, if you could update us as to the number of days in the quarter versus Q1 '05, and, maybe, just give us a general sense of -- since we're seven weeks into the quarter already -- what your tone of business is and how that compares to the Q4, when you mentioned you had some one-time weather issues, et cetera.

Absolutely. For the full year, Matt, we will have 255 working days in 2007, compared to 254 last year. And we will realize that extra day in the fourth quarter.

In terms of giving some color, we only give annual guidance, Matt. As to how this quarter is going, I would simply state that outlook is 17% to 20% top-line growth.

Right, great. And, then, last question is -- the new year -- we've got a different looking balance sheet than we've had in the past. Can you update us on your priorities for uses of cash as it's generated across '07?

Very much so. As I've always stated, our objective is to get to a reasonable level of leverage, which we are at, 2 to1. Considering free cash flow, which was pretty close to $100 million, clearly, well above $100 million projected for 2007, will be exclusively used for acquisitions.

We are at a stage where the return on acquisitions are much greater than the interest savings. It's roughly 7% interest savings versus 30% to 35% return from acquisitions. So we are going to be deploying all of that cash towards acquisitions, which is reflected in our aggressive outlook for acquisitions for the year.

Okay. Actually, I have one follow-up, and then I'm all done. The -- can you give us an update on the pricing of acquisitions there? It just -- your answer piqued my curiosity.

Yes. Yes, absolutely.

-- if there was any change there.

We haven't shifted much from historic multiples, okay? I would say they are between 4 and 6. That said, if there are acquisitions that we believe are very strategic to our growth plans, we will be willing to pay multiples higher than that, provided they are highly strategic and highly accretive to earnings per share growth.

Great. Congratulations, again.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Michael Schneider, with Robert W. Baird & Company. Please proceed.

Good afternoon, guys.

Hi, Michael.

Mohan, maybe you can just first comment just broadly on the status of the commercial construction cycle. As we went through '06, you started to comment that some of the larger projects were being stalled because of raw material inflation. Have you seen any release in that activity or any change?

No, the -- in fact, we highly subscribe and highly believe FMI's outlook of 8%; although, as I said, once you adjust it -- and also adjusted for our marketing mix -- the growth we expect overall is about 5.5%.

So why do we believe FMI's projection? Because of the activity that we see on the ground. And the activity is coming from three different components.

The first one is the cyclical component. As far as we are concerned, what drives the cyclical component are two factors -- jobs creation and the vacancy rate. And last year, job creation was about 200,000 jobs per month. It is projected to be around 180,000, which is a pretty decent clip, per month this year. And we consider it's approaching historic lows. So given those two, we believe that the cyclical component of the activity will be pretty robust for the foreseeable future.

The second component is the non-cyclical area. This is where our projects are funded through bond issues, budget appropriations and also pre-committed private funding. Examples are the education sector, the [car] classroom reduction, price reduction mandate, healthcare, the aging of the baby boomers, infrastructure such as the Highway Bill, and, lately, the California propositions. Then, you have the homeland security related stuff.

On the private side, there are mega-projects like the World Trade Center, multiple projects in Las Vegas, projects in LA like the Staples Center, Grand Avenue project. There are projects like that all across the country. And, finally, we have the Katrina rebuilding, which, with the strengthening of the levees, I think, will finally get started.

The third component is the international component, and that's work in China, in the Persian Gulf states. Just in the Persian Gulf states, they have announced over $0.5 trillion worth of projects. And a number of our clients -- a number of US-based firms -- are vying for those projects, and it will definitely be reflected in the architectural engineering design component of our work.

So we believe that FMI's projection is very plausible and we're already seeing that.

Okay. And, Mohan, just a follow-up on the digital strategy, can you give us a sense now -- we're one year further into this -- what the profitability on a gross or operating basis looks like versus the core reprographics business --?

Yes.

-- and what spending on that initiative looks like going forward; that is, the IT budget going forward?

First of all, we've been able to, very comfortably, hold those gross margins of 50-plus percent in the digital area, the same as facilities management. Those two services go hand in hand, and they're growing nicely. And that compares to traditional margins of about 40%.

In terms of our spending -- and I have said many times that our industry is in the midst of a major transition to web-based services, which would require significant investment if we are to stay as leaders in the business and also to position ourselves for success in the future and margin expansion in the future. We believe we can accomplish that, we can make the necessary investment, while maintaining our EBITDA margins between 22% and 24%, which is what we did in 2006. We ended at 24.6%.

In the second half of the year, we invested an additional $2.5 million on an annualized basis. That's about $5 million. About $3 million of that -- of those costs -- are permanent. They will repeat this year. The other two were ramp-up costs. They will not exist this year, and we have factored that into our outlook. Does that answer your question, Mike?

Yes. And the acquisitions that you've built into the model for guidance in '07 fell on -- generally, they're dilutive to margins up front. Have you built in that effect, both revenue and the impact of margins, for the guidance in '07?

We have.

Okay. Thank you.

You're welcome.

And your next question comes from the line of Al Kabili, with Goldman Sachs. You may proceed.

Hi. Good afternoon, guys.

Hi, Al.

A question on the outlook is, first, it looks like you're assuming flattish gross margins versus this year. And help us understand, again -- I understand the acquisitions are dilutive, but I would have thought you'd have got a little bit more operating leverage next year. Is there anything else going on?

No. There are two things. One is the dilution you talked about. And the second one, I just was addressing with Michael Schneider, and that is the continued increased investments that we have to make. And we are pretty sure -- we are confident that we will make that while not diluting our gross margins.

Okay. And any -- what -- any magnitude of what the additional investment is?

Oh -- they -- again, it will be very carefully managed, proportionate to the growth. The initiatives that we put in place last year will bear fruit this year. And as they bear fruit, we will invest in more initiatives as they present themselves. So we -- our outlook factors that in.

Okay. And then, a tax rate of -- it looks like your tax rate this back half of the year -- it was down a bit from the 40%. What should we be looking for this year in terms of --?

We are projecting a 39% rate for the full year.

Okay. And then, last question, how much did acquisitions this year do in total revenue?

Approximately 9%. That's on a base of $494 million at the end of 2005. 9% growth from that. So -- was the total acquisition growth in 2006.

Okay. So it looks like $40-$45 million or so of acquisitions in '06?

That is correct. One of the things you have to factor into that is some of the carryover that came from 2005.

Right.

But we also carried over some things -- about $25 million or acquisitions into 2007.

Right. And then -- but I guess the question is, in '07, you're going to do about $60 million of -- $60 million of revenue from acquisitions in '07?

That -- using the -- yes. 8% to 12%, if you are talking about the high end of that range. You are absolutely right.

All right. So I guess, conceptually, if your revenue from acquisitions is only going up $15 million this year, it just -- the drag on gross margins, they kind of keep them flat versus sort of what you've, historically, been able to -- expand margins? I'm still having a little trouble --

You're assuming, then, Al, that every company we acquired in 2006 had low margins. We did acquire one real good company by the name of Reliable Reprographics. And we don't -- that was a one-off deal. We don't see companies like that too often.

So our assumption is, in 2007, all the companies we acquire will be around 10% EBITDA. So 2007, we expect greater dilution than in 2006.

Okay, great. Thanks, guys. I'll turn it over.

Thank you.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Mike Fox, with JPMorgan. You may proceed.

Good afternoon, guys, and congratulations on the strong quarter and strong year.

Thanks, Mike.

The organic growth of 10%, and then there was the one last day -- so on an adjusted basis -- if you adjust for that one less day, can you say with the organic growth was?

Yes. My estimation is, Mike, if you would adjust for that and adjust for business interruptions -- I mean, we had to close locations, I would say, if we were to put together all the closures, about three days of business in the Pacific Northwest and Colorado. If you were to adjust for both, that would translate to about 200 basis points of organic growth.

Okay. And that's an acceleration, then, if you adjust between -- from the second and third quarters. Do you sense that business is accelerating or it just -- is that too much -- am I reading too much into that?

I would simply say that we subscribe to the -- to FMI's forecast and -- just like we did at the beginning of last year. If this year turns out to be better than FMI, we will certainly notify you promptly. And we are hoping that it will be better than what FMI is forecasting.

Okay. And then, on the national account, it seems like you -- the investments you've been making are definitely paying off with some of the ones that you've talked about.

Yes, absolutely.

Talk about -- and you can give a relative to traditional business whatnot -- but it seems like the digital services was definitely [differentiated], or at least, that's what you said, to get that business. So it seems like that will help increase the digital as a percent of the total. So it would seem that that's a pretty profitable business. Could you just comment on that?

Yes. We are definitely focused on taking our digital and FM business combined to 25% of our overall business by the end of this year, in spite of -- despite the dilution that comes from acquisitions. And we are taking a very aggressive outlook on acquisitions. That is because of our increased penetration into those markets. So that's why, despite the dilution, we are saying that our gross margin outlook is at least 43%.

Okay. But can you comment at all on the specifics of the national accounts -- on the -- what you? --

Yes, I will -- absolutely. In fact, let me call upon Suri to give you a little more color on our national accounts effort.

Thanks.

Suri?

Yes. Thanks, Mohan.

Mike, obviously, we talked about Boeing, which is an excellent opportunity we got to work where -- get through Premier Accounts. As you know, Boeing is a non-AEC account. It is not a traditional reprographics account. But obviously, in order to meet their very high level of demands in terms of quick turnaround, digital document management and a very high level of confidence in the technology, we were able to measure up to all that. So that's how we got the Boeing contract.

It's a three-year contract and obviously, it's going to take a little time because really -- it's a non-AEC account and this is not an account we had. Most of the work was done in Boeing facilities and it's going to take some time to ramp-up here, because we've got to get the existing supplier out of the way and be able to transfer all these services of -- contracts and all the details into our facilities. So that's the ramp-up time Mohan talked about.

And then, we signed up Whiting-Turner, which is, obviously, a great account. And what is notable there is that, if you noticed, our pricing structure with Whiting-Turner for reprographic services across the nation stayed the same. We just had in what -- in different locations, we had different prices for reprographic services. And that remained the same.

Where we signed the national account is providing technology on a single platform. So that becomes a very different or typical reprographics account we get, where we negotiate prices on reprographic services.

So we are starting to see more and more activities. Obviously, I cannot -- I won't be able to name names given the confidential nature of these discussions, but certainly, Premier Accounts are starting to make a significant difference.

Okay, great. And just one quick follow-up, if I could -- could you tell us what the digital and FM was combined in the quarter as a percent of the total revenue?

In the quarter? Onc second. I have that information. I will give it to you momentarily.

Okay.

In the fourth quarter, they were at -- facilities management was 18.2% and digital document management services were 5.6%. So we are looking at 23.8% for the fourth quarter.

Okay, great. Thanks a lot for all the details.

Thank you.

Congratulations again.

There are no other questions at this time. I would now like to turn it over to management for closing remarks.

Thank you very much, everyone, for joining us today. This concludes our call. Thank you for your continued interest in ARC, and we wish everyone a great evening. Good night.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.