ARC Document Solutions Inc (ARC) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the American Reprographics Company fourth quarter 2008 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Stickney, Vice President of Corporate Communications for American Reprographics.

Thank you, Mr. Stickney. You may begin.

Thank you, Manny, and thanks for joining us here on this Monday afternoon. We typically report our earnings results later in the week but we have an investor conference in Phoenix in a few days, and we wanted to take advantage of the opportunity to talk to as many of our shareholders as we could during this time period. We hope to see some of you there.

Joining me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer. and Jonathan Mather, our Chief Financial Officer.

The Company's release reporting financial results for the full year and fourth quarter ending December 31st, 2008 was issued earlier today. This call will review and expand on the information contained in the press release after which we will open the call to your questions.

You can access the press release and the Company's other releases from the Investor Relations section of American Reprographics Company's Web site at e-arc.com. A taped replay of this call will be made available beginning about an hour after its conclusions and you can access the call any time within seven days from today.

You can find the dial in number for the replay in our press release.

As usual, we are Webcasting our call and that Webcast will also be available on our Web site after the call's conclusion. The call today will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the Company including the Company's financial outlook.

Bear in mind that such statements are only predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today, February 23rd, 2009, and except as required by law the Company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non GAAP measures. The reconciliation of these non GAAP measures is set forth in today's press release and in our Form 8-K filing.

With that I'll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon, everybody. During this unprecedented time of economic upheaval, I am pleased to report that American Reprographics Company continued to deliver strong and consistent performance.

It comes from experience, planning ahead and being nimble enough to respond quickly to our unexpected events, such as the precipitous dropoff in construction activity we saw in the last month of the year. It also comes from our financial discipline and our strong and healthy cash flow, both of which we monitor very closely.

For the full year, we reported sales of $701 million compared to $688.4 million in 2007, representing an annual increase of 1.8%. Our gross margin for the year was 40.7% compared to 41.7% for the 12 months ended December 31st, 2007.

The Company's EBITDA margin for 2008 was 24.1% compared to the 2007 EBITDA margin of 25.6%. Fully diluted earnings per share for 2008 were $1.30.

While the gross margins and the EBITDA margins for 2008 were not as strong as they were in 2007, I must remind you that the construction market was weak at best throughout 2008 and had a precipitous fall in the last two months of the year. In light of these facts, I consider our performance to be extraordinary.

What is even more compelling is that we finished the year with $127 million in cash flow from operations, [the regard] for the Company during one of the worst markets during our lifetime. And our DSO was down to 45 days from 15 quarter 3, the lowest it has been since we became a public company in 2005.

None of this, of course, came by accident. We took a hard look at what needed to be done and made the tough decisions to make it happen. This included a headcount reduction of nearly 20% of our workforce.

During the last quarter, we also began to see cost-cutting measures that will result in annualized savings of $6.5 million in production expenses; $2.5 million in G&A; and a reduction in sales expenses by $2.5 million. This is what you can expect from a well-seasoned management team -- smooth and swift corrective action in times of crisis.

Let me give you a quick snapshot of our fourth quarter so that you can see how quickly the market deteriorated in the latter part of the year.

Our net revenue for the quarter was $154 million, compared to $174 million in the fourth quarter 2007, a decrease of 11.6%. The Company's gross margin for the fourth quarter was 36.7% compared to 41.2% for the same period in 2007. Our EBITDA margin was 19.3%, down from 25.8% from the same period last year. There is what the quarter left us in December.

In reviewing the numbers for the first six weeks of the year, it is really clear that there is no sign of recovery just yet.

Given the current uncertainty of the construction market, attempting to forecast an annual revenue range with any accuracy is likely to be futile. Rather than foregoing the exercise entirely, as many other companies have done, we have decided to offer a forecast based on earnings per share and cash flow from operations.

These elements are critical during this period and our success in this area will ensure that we meet all of our financial obligations.

As such, we are offering an annual EPS forecast of $0.50 to $0.75 on a fully diluted basis. And we are projecting cash flow from operations in the range of $70 million to $90 million.

So what does a company like ours do in times like this? This is where a solid and experienced management team comes into play.

There is no panic or fear in our actions. We know exactly what to do and how to do it. And we are executing it every day.

Allow me to tell you what we have accomplished since the first of the year. We have reduced the headcount further by 200 positions since the first of the year. We have closed our consolidated 20 locations across the nation. We have cut corporate executive wages by 5 to 10% and eliminated their bonuses for the year 2009.

In the first quarter, I expect to reduce our operating cost by at least $20 million on an annual basis in addition to what we have done already. However should the market continue to deteriorate, we have already identified a group of 40 more locations for potential closure and we are prepared to reduce our footprint even further if the circumstances warrant it.

Construction is a mainstay of the US and global economy. It is only a matter of time before it comes back. What is critical for our ability to weather this period of uncertainty calmly with confidence. That is exactly what we're doing right now.

In the past, people have questioned the effectiveness of our decentralized business model. In a difficult time like this, a decentralized business model is a blessing in disguise. This is especially true when coupled with the technology advantages we have developed over the past 10 years. The combination allows us to rightsize quickly without losing customers.

What may surprise some of you is that we are gaining customers with our Premier Accounts division. Premier Accounts was responsible for more than $40 million of new business last year. We expect to gain significant market share through this service because of [bleakness] in the marketplace.

Large nationwide customers are looking to improve efficiency and save money by working with single source suppliers. The [used garment] stimulus package is also another element that can help us from a sales perspective as the construction activity picks up in the public sector.

In addition, being the largest and the dominant player in many of our markets, we are aggressively pushing sales by providing technology and service benefits for our customers that our local competition simply cannot.

This aggressive effort to acquire new market share, combined with quick and efficient actions to resize the Company, will allow us to operate successfully through these difficult times.

With that, I will pass it on to Jonathan for a review of all financials. Jonathan?

Thank you, Suri.

I will spend the next few minutes reviewing our revenue numbers and I will address some of the cost-cutting measures in more details. We will also do a short review of the balance sheet and address our expected goodwill impairment charge.

Historically, the fourth quarter is our slowest period and this year was no different. In October, the Company performed well regarding overall sales, but November was a short month with only 19 working days. This was also the first month in which we saw a dramatic decline in overall sales. Even factoring of fewer working days, we saw sales come in well below our expectations.

At 22 days, December should have been better. Unfortunately both Christmas and New Year's fell on a Thursday. As a result we lost the better part of both weeks. Many clients also kept their workforces at home during the entire week between Christmas and New Year's. Finally weather events in the Midwest and the Northwest shut things down in those regions.

All in all, December revenue was significantly weaker than expected.

Looking team at the fourth quarter 2008, with regard to product categories, Reprographic Services declined approximately 15.5% compared to quarter 4 in 2007.

Digital Services, which are included in our overall Reprographic Services, grew 4% year over year and contributed 7.9% of total revenue in the fourth quarter, compared to 6.7% over the same period last year. (inaudible) management was basically flat compared to quarter 4 2007, as was equipment sales in the fourth quarter compared to the same period in 2007.

While equipment sales domestically declined, the shortfall was made up by [UDS] sales in China. Revenue and revenue trend by geography [called] segment in this quarter was as, follows, Southern California, $32.6 million, down 24.6%; Northern California, $20.2 million, down 16.9%; Pacific Northwest, $10.5 million, down 11.8%; South, $40.7 million, down 11.5%; Midwest, $21.1 million, down 7.5%, and finally, Northeast, $24.5 million, down 6.1%.

Our international revenue comprised of UDS sales in China and the sales from our operations in London, England. This quarter, we generated $4.4 million in international revenue. Revenue from acquisitions in the quarter was approximately 6.5%. Organic growth for the quarter was down at negative 18.1%.

Our gross margin in the fourth quarter was 36.7%, a decline from 41.2% in the same period of 2007. The decline was driven largely by the decrease in revenue and some dilution from operations in China, which is currently driven by equipment and supply sales.

UDS returned a gross margin this quarter of 22% on $4.1 million of sales.

SG&A expenses as a percentage of revenue came in at 24% during the fourth quarter of 2008. This compares to 21.8% in the fourth quarter of 2007.

In the fourth quarter of 2008, bad debt expense increased by $1.2 million, compared to prior year, due to the recent liquidity issues experienced by some of our customers. The biggest factor for the year-over-year dollar increase was the $2.9 million gain from the Louis Frey settlement settlement recorded in quarter 4, 2007.

Stock-based compensation is included in the SG&A expense. In quarter 4, stock-based compensation was $1.1 million compared to $889,000 in quarter 4, 2007.

In the fourth quarter 2008, total depreciation, amortization and interest were $18.9 million. This figure is made up of depreciation at $9.9 million; amortization expense at $3 million; and interest expense at $6 million. This compares to quarter 4, 2007 with $17.6 million with depreciation at $8.1 million; amortization at $2.5 million; and interest of $7 million.

In viewing the balance sheet we ended the fourth quarter of 2008 with working capital of $30.4 million, or approximately 4.3% of trailing 12 months revenue. This compares to $40.7 million for September of 2008, or approximately 5.6% of trailing 12 months revenue.

Day sales outstanding or DSO was at 45 days in the fourth quarter of 2008. This compares to 50 days in the fourth quarter of 2007 and 50 days in the third quarter of 2008.

Total debt, including capital leases at the end of fourth quarter 2008, was $361 million, down from $364 million for the third quarter of 2008. The ratio of debt to trailing 12 month EBITDA at the end of the fourth quarter was 2.1 compared to 2 at the end of the third quarter of 2008.

As Suri mentioned, cash flow from operations was $127.2 million in 2008 or $2.80 per fully diluted share. This compares to $101.4 million or $2.21 per fully diluted share in 2007. As we had previously stated throughout 2008, we had targeted roughly $100 million in cash flow from operations and obviously exceeded this internal target by more than 25%.

As Suri also mentioned, this is a solid demonstration of our business model stability to generate cash in good times and bad.

2008 cash payments for acquisitions and payments associated with acquisitions including earn out to sellers amounted to $23.9 million. This compares to $132.7 million in the same period last year.

As noted in our press release earlier today, our financial results for the fourth quarter and full year ended December 31st, 2008 do not include a non-cash goodwill impairment charge that we have determined we will incur. We currently estimate the impairment charge to be within a range of $27.6 million to $40.5 million.

Normally, we would test for these impairments in September of each year. However during the fourth quarter when the market dropped so hard, we performed an [internal] test for impairment prompted by the decline in the Company's market capitalizations during the same time period. The impairment charge will be reflected in the Company's financial statements in the ARC 10-K for fiscal year 2008.

Finally, we realized income tax credits in the amount of $900,000 for the fourth quarter 2008 and $2.1 million for the year. These credits were granted for hiring employees and purchasing fixed assets in the areas of California considered disadvantaged. These are areas where the state government created incentives for investments and revitalization efforts.

That concludes our financial discussion.

At this point, I will turn the call back to our CEO, Suri.

Thank you, Jonathan. Operator, we will now take the questions.

(Operator Instructions) Scott Schneeberger with Oppenheimer.

Good evening. First question, could you speak a little bit about the environment? Suri, you mentioned that you are looking for aggressive market share growth in this very challenging environment. Could you just speak to the price environment?

The pricing environment you are talking about?

Yes.

Okay. Basically, the opportunities we are talking about especially is in the Premier Accounts area. Last year Premier Accounts brought in over $40 million in new business, which is extremely encouraging. This primarily came from [HDR] and Boeing which is all new business for us.

And what we're doing is we are taking the same concept and we are going to the large national accounts, and being able to offer them a service as a single source provider across the nation. In this aspect, we believe this year would contribute also significantly.

In addition to that, what we're doing is that we are taking the opportunity to drive sales even harder with all the new products we have, the color products and the technology products we have to drive sales. And we do have the pricing advantage. However, pricing hasn't started playing a role as such because technology is taking a more important role because people are looking for efficiencies and improved costs.

And so could you speak a little bit about, I guess -- so you have the sales force focused on national accounts. And I imagined on PlanWell and digital. Could you just -- is -- are you focusing less on construction, more on construction? Just kind of how you are spreading around the sales force right now?

Okay. So there are two elements, two segments to our sales strategy. One element is what we talk about as the Premier Accounts strategy. We set up this division a few years ago to provide services as a single-source supplier, as one company to large accounts.

That is the division which we call Premier Accounts. And last year we did very well with Premier Accounts.

So what we did this year, early this year, is knowing the momentum we have behind this initiative, we virtually tripled the number of salespeople and quadrupled the number of operations people backing this operation. In other words we want to increase our sales and be ready for it when we sign that these accounts. That is the key.

Because we talked about it in the last calls, customers such as Boeing and HDR, it takes a few months to sign them up. It takes three or four months -- three, four, five months to sign these accounts up. And once you sign the accounts up it takes several months to bring them on board.

How do we fast-track them? In order to do that, what we did we just tripled the number of salespeople so that we can have more presentations, more bits put in with these large national accounts and be able to facilitate them when they come on board. So if you take those kinds of large accounts which does in excess of $8 million to $10 million, if you are able to bring three, four, five accounts this year, over the year, that will be a substantial amount of brand new business for us.

So that is one segment which is going after the national accounts.

The second segment is to continue to focus on sales efforts, using our traditional methodology. That has two segments to it. The AEC, the construction side of it and the non AEC side of it. On the construction site of it we have more technology tools now with PlanWell, MetaPrint, Abacus and [I Ship Docs] which is actually a shipping tool to improve efficiency. So we are selling those new tools.

We also released PlanWell (inaudible) 5 which is a new version of PlanWell which is much more efficient in terms of how the contractors and general contractors can use that. So we are driving that aspect of it.

On the color side, we have added new several color output devices. A significant one is called GD 250. We ordered 20 of those machines in the last three to four months, [Denosh], would you say that? I have our Chief of Operations here.

And we have installed them in large locations driving large format color sales. So that is exactly what we're doing right now.

Great. Thanks. I appreciate the color. One more and then I will step to the back.

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

Absolutely. Scott, what we did is this is not an effort just happened overnight. We had started identifying, Jonathan and I, early last year that we need to continually improve our daily sales outstanding. And we have been working towards that.

And what happened was as the economy started showing signs of weakness, we stepped it up and we really aggressively went after collections. Because it is only natural and as evidenced by, not just in our business, in any business across the nation, you find bad debts popping up because less and less people are able to meet their financial obligations.

So what we did is, we told all of our controllers to be proactive and then start working towards collecting the money on a timely basis. And that paid off handsomely. We did write off some amounts which is, again, being proactive in an aggressive financial or economic condition like this.

But we have been able to do a record number to bring it down to 45 days in the last quarter. But I think it's sustainable. Whether 45 will be sustainable is yet to be seen. But it will certainly be under 50 days. 50 days is what we aim for, but because of the extraordinary efforts we were able to push it down to 45.

Would you agree, Jonathan?

I agreed with everything you said.

Great. Thanks.

Andrew Steinerman with JPMorgan.

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

Yes, we can. One of the things we have been thinking about is the guidance for 2009. It has been a very popular and a very controversial subject across most public companies deciding how to approach it.

So our focus has been on cash. Because the whole idea is, we understand the market has been pretty challenged. And we have had some precipitous falloff in the revenues, especially in the last two months of last year.

So what do we focus on? So we have said it in the last quarter. So our key focus has been on generation of cash. And that is evidenced by the $127 million we did last year.

So we continue to focus for the year 2009 on cash. That is why what we did is, we focus on EPS and the cash generation.

So the general assumption for us to be able to really be within that range is about $540 million to $580 million. That is what we are assuming.

But, remember, that is a fluid number. Our ideology is to say look, we are able to rightsize the business as we go on. It the market turns down, then we can continue to rightsize the business.

The benefit we have is, we are in 300 locations. We also grew as a company over the last several years. We have been there at $100 million, $150 million, $200 million, $250 million. So we have gone through all of these stages.

In fact when we were public, the year we went public in 2005, we were $494 million and still generated substantial amount of cash. If I recall it was $56 million.

So our concept is to make sure that we focus on generating that $50 million to $70 million in cash. And that's based on $540 million to $580 million, but it also varies, depending on how hard we attack the cost.

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

It will, to some extent, level off. I will let Jonathan answer that question.

Here is the focus. What we are looking at it and saying at $540 million we will (inaudible) $50 million in what do you call $0.50 to -- $0.50 to $0.75 and $75 million to $90 million in cash. So the key is to generate that $75 million in cash. I might have misspoke earlier.

So it is $0.50 to $0.75 is the guidance; and based on $0.50 we [won't be] generating at least $75 million in cash. So that is the focus we have. And if for some reason $540 million starts showing signs of slippage, we don't think that will happen, but if that starts showing signs of slippage, then we will continue to reduce the number of branches, locations and headcount to make sure that we will still arrive at those gross margins so that we can deliver $75 million in cash.

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

Yes. So let me add to what Suri said is, with respect to the gross margin, quarter 4, 36.7% and this was before some additional cost reductions that Suri talked of earlier. Right?

We think the EPS that we have shared with you, the guidance assumes gross margin in that range as the cost-cutting that we have done takes in the effect fully. We will see slight improvement, but expect it to be in the fourth quarter range.

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

Say that again, please? Fourth quarter gross margins --

Fourth quarter '08. What drove the change in gross margins year over year?

From the prior year to down, the reason for the decline in the gross margin in fourth quarter 2008 compared to 2007, on a high level, it is absorption of expenses with a revenue decline. The absorption of expenses, even including labor and overhead.

That -- the two main components coming from (inaudible). Then the -- to (inaudible), you know, talk about 40 basis points coming from the China sales which is lower gross margin. And the absorption, we have taken action to reduce it.

For example, the headcount reduction that Suri talked of earlier and for the reduction in headcount in the month of -- in the first six weeks of this year, to the location reductions and corresponding (inaudible) costs equipment costs, etc., that go along with it. So the absorption being your main cost factor that was detrimental in 2008 compared to 2007.

Okay. Thank you very much.

David Manthey with Robert W. Baird.

Thank you.

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

Yes and so okay -- so, Jonathan.

Yes, it started for 18% was not growth in organic. It was negative (multiple speakers). Right.

You got it? Okay, great, David. So Jonathan was just chipping in to just highlight that. So if you are talking October, November, December, October was very much in line with what the rest of the year 2008 performed.

So the October sales was pretty much in line with the 2008 sales. But however when it came to November, though, the fall was precipitous. So we went from -- I'm just speaking off the cuff here from about $60 million down to $47 million in November. And then we were around $46 plus million dollars in December.

So we basically -- that is the precipitous drop we talked about. But once we dropped in November, December there, it continued to stay like that and it has continued to maintain that same pace during January and the early parts of February.

Okay. Thank you. That's very helpful.

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

Sure. I am going to pass on to give the details to Jonathan, but just so you know in 2008 we had already started slowing down the acquisitions. We did some in third and pretty much put the brakes on fourth. The concept being especially when the market started calling precipitously.

We basically slowed the -- pretty much put a halt on acquisition. Unless otherwise something shows on the radar screen and we buy a customer list or something like that at an extraordinarily good price. The concept being to put a halt on acquisitions because, obviously, these are very unpredictable times and it would not be futile, it would not be advantageous for us to look at acquisitions. Johnson, would you like to --?

Sure. To answer your question on the acquisitions, impact in those two quarters, quarter 4, the acquisitions that we did, we benefited in revenue of $2 million. So against the $154 million just the acquisitions done in the fourth quarter had a positive effect of $2 million. In the prior quarter, third quarter, there was a $2.7 million.

Similarly if you recollect we did an acquisition in New Jersey that was a large one and two other smaller acquisitions. We had $2.7 million that was acquisition-related in the third quarter of '08.

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

Let me -- for the year 2008, our total revenue that we acquired on an annualized basis was $38 million, round number. Follow me?

Yes. I was wondering if you had the corresponding revenue run rates for the third and fourth quarter? (multiple speakers).

We can actually look that and get back to you. I don't think we have that -- do we have that off the cuff?

No, I don't have that.

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

Yes.

Absolutely. We can get back to you on that.

All right. Perfect. Thanks very much.

Franco Turrinelli. William Blair & Co.

Good afternoon. Just a couple of real quick data points that we just have these correct. Suri, what was the number of branches at the end of the quarter before you cut the additional 20?

End of the quarter?

Yes.

297.

297. Okay, so the 20 is a little bit less than 8% or so of branches. (multiple speakers) think about it. And I mean, obviously, when times were better, your branch density was certainly a factor in terms of convenience for customers. And obviously as you -- I'm sure you are cutting back the least -- the low volume or least productive branches, but are you able to hold onto customers as -- if they need to travel a few more miles to get to the remaining branches in the area?

Absolutely. There are two elements to that. You actually -- I think you said it very nicely. There are two elements to this.

One being that, you know, not all branches are the same size. Obviously we have the hubs and spokes concept. So we have several spokes spread across a main branch almost in every city with the idea being exactly what you said.

When there's a lot of work, density is higher, we actually try to remain closer to the customer and extract that work. With the work thinning off, we are able to identify those branches and consolidate some of them.

In some instances, we have two companies operating in the same region, so we might actually ask one company to hold onto the branch and the other company to shut the branch down. So there are things like that we did.

In addition to that, what has been happening especially in 2008 is more and more customers are using technology. The technology adoption is higher. So we are able to move jobs around without really having to physically move the jobs around which we used to do in the past.

So our ability to operate from slightly further away locations are greater now. So for example, if you take the Bay area, the amount of large jobs we can actually do in San Francisco and deliver (inaudible) in Oakland or (inaudible) or in the San Jose area is much greater than what it used to the in the past because most originals come to us over the Web or in digital format. And then we're able to process all of the documents and drop them off in a timely manner.

So a combination of the fact that there is less thinning of work. So we can consolidate the branches and the impact of technology is allowing us to actually serve the customers efficiently with lesser branches. I would say we have very little impact on the services we are providing to the customers.

What happens to the equipment in those branches? Is it generally relocated or put into storage or is it somehow scrapped or if it's on lease, you know (multiple speakers) --?

That's a good question again. Because of our size and scope, think about it. We have 5,600 FMs and, then, we also had 300 plus locations or nearly 300 locations. So in our Company, buying 20, 30, 50 output devices a month is pretty standard operating procedure in the Company, because we regulate buy out devices from say from Canon, from Xerox and from all kinds of manufacturers.

What we have been able to do is in the last three, four months, we have been able to put a freeze on acquisition of output devices. Because we do know that our output devices we have inside the system are being underutilized because of capacity issues because of the lack of work.

So we have been very aggressively repositioning equipment. So, again, we use the technology to get the best out of it. So we have a forum in which we consistently have all of the overflow equipment, all of the existing equipment listed. So as and when people require equipment, it is immediately identified. Okay.

We have this particular piece of output device in the system. We shipped it out there and get it installed. So as a result what has happened is that we have been able to substantially reduce our equipment cost in the last three or four months. And I expect this to continue because we are constantly looking for output devices which are underperforming. And we are replacing them with smaller output devices and the nice part is because we have thousands of output devices spread all over, we can move them around very efficiently.

If you recall last year, we did a program which we called Search and Destroy Deadwood. In other words we identified all output devices [we are] underperforming or the leases have come up or where the equipment capacity is too much. And in doing that [excises], we found hundreds of output devices being taken away from the system.

And we put out them in a pool and we are redeploying them. So that is really helping us during this time.

One other question and this is probably as much for Jonathan as for you and I'm kind of interested -- I mean, obviously the cash flow performance is very strong and you have a good healthy cash position on the balance sheet.

And as Jonathan pointed out, your debt service lever is real comfortable. So what now is the priority for cash flow in 2009 and into 2010? You've talked about not wanting to do acquisitions in this environment and I understand the reason for that.

On the other hand if you are hurting, we know that your competitors are hurting even more. And maybe acquisitions might be a good way of strategic positioning for the future. So can you just talk us back through the cash usage and acquisition strategy?

Absolutely. Now I mean if we do have excess cash that would be a good problem to have. I firmly hope that's where we will be. Of course, we are always very confident of our cash flow and clearly evidenced by the performance last year.

We expected the cash flow certainly to be in excess of $100 million. But by aggressively pursuing that strategy, we were able to maximize it at $127 million.

Now that of course is given the fact that we had $700 million in revenue. Now of course, based on the run rate we have, we are looking probably at $550 million to $600 million kind of range. I mean I am just giving a range. Nobody can with certainty predict their revenues, unfortunately.

And we are not confident enough to say, given what we experienced in the market, that this revenue will hold good. All we know is for the last three months, this has stabilized and staying around the $550 million range. If we have that revenue, then we will comfortably generate enough cash to meet our debt service -- our financial obligations and meet our [covenants]. That is the nice spot.

Now if the sales do go up and we suddenly expect it to happen, if the market doesn't slide any further with our Premier Accounts effort and our sales effort, our sales will be in $600 plus million range. In which case we will comfortably have that much more cash and should we have that position, we will certainly looked at acquisitions. There is no downside in not looking at that.

What we don't want to do is that if days (inaudible) we don't want to be acquiring companies in an environment where the market is really going down.

So to answer your question, if the sales stabilize and actually our revenues go up to $600 plus million that is an indication the market is coming back and that is an indication we will have extra cash. And it will be good to buy because that is the right decision to do.

However, if the revenues don't improve and we struggle with the construction standards and the stimulus doesn't do what it is supposed to do and the market, the credit doesn't(inaudible) and if it gets stuck, then of course we would be doing $550 million say, for example, and therefore we probably won't be doing acquisitions. Because there won't be a whole lot of cash floating around anywhere.

Right. That certainly makes sense. Thank you. I'll get back in line.

(Operator Instructions). Joe Ritchie with Goldman Sachs.

Good afternoon. Couple of questions. A lot of my questions have actually been answered, but I wanted to follow up on the -- you mentioned that the fourth quarter you saw a precipitous decline over the last few months.

Based on the information you gave us, November sounded like it was down about 22 to 23% from an organic revenue standpoint. Does that sound about right?

Yes, I think it is about -- it is more than it is 25 plus percent and December slipped into 26% nearly. I'm just speaking off the cuff. But know that that is the level of drop we had in the revenues, yes.

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

Two things. One is, that is just revenue trend month over month. Just so that you know. It is not pure organic. We can split it out because there was some acquisition revenue in that.

But month over month, this is what we had. Generally November, December, October, November, December are softer months. But to answer your question specifically, that is what -- something that we talked about. In the history of our Company, we have never experienced drop like we experienced in November and December.

Okay. Right. Great. Then on the cost side, you mentioned that in 2009 that you're going to eliminate bonuses.

Yes.

Can you give us a rough number for what bonuses were in 2008?

2008. Jonathan, do you have that number?

Yes. In the -- the bonuses that -- there are two elements to bonuses. The first question to answer you is corporate executive bonuses was over $2 million. And then we have a divisional level bonuses which again is over approximately $6 plus million.

$16 million.

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

So fundamentally what we've done is that, from a corporate perspective, we have across the board said all corporate executives in the corporate offices in Walnut Creek, Glendale, and Fremont, we have said we have eliminated bonuses.

With regard to the divisional heads, these are divisional presidents and CEOs, you know we have not made a statement like that. But their compensation packages are structured in such a manner that it is very unlikely, given the revenue numbers we have, they will be able to make their bonuses.

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

Yes. I think we didn't quite mentioned that, but I think we have 5000.

600.

600 is the number.

Okay, so, you actually grew that sequentially and pretty significant growth year over year?

Yes year over year it is pretty significant growth. I think the last month we went up or the last quarter we went up by 200. And we can continue to -- that is something that we continue to expect to grow. Of course what happens is the volume in the FM customers' offices would drop given the fact that they're doing less work.

But we certainly seek the FM opportunity to continue to be growing.

Got it. Great. Thanks for all the clarifying responses.

(Operator Instructions). [Michael Graves] with [Dumar] Merchant Services.

Good afternoon. I'm in the Southern California area here and you have a couple of big shops out here. Can you tell me what is your -- you said you were closing some plants depending on -- the economy here? What does it look like down here in Southern California? Looking to shut a bunch of plants down or can you tell me more about your Southern California (multiple speakers)?

Sure. I mean this very much depends on -- very much depends on these revenues in the regions and their construction activity in the regions, and the business activity in general in the region. For example if you take our Southern California area, we have a total of 22 branches in that area. This is including Los Angeles and Orange County area.

And in a place like that, we have four different companies operating. We have [Full] Graphics, we have [Reliable] Graphics and we have [Blair graphics] and we have [OCB] and in that we have five. We have Consolidated (inaudible) Graphics.

So we have five companies operating in that region. Now without Orange County, we would have at least 22 locations in Southern California. If you really take the Orange County area, we have probably up to almost 40 locations. Now in an area like that we will selectively identify area -- branches which are overlapping and if the work in that area is starting to drop, we can pick and choose as to which branches we are closing. We might close a location in Full Graphics, and then we might close one in Blair Graphics. And then we might close one in Reliable Graphics.

So because our intensity is pretty high, our density is pretty high there, selectively we close. Right now we are not planning to close any. We have adequate business for all of those branches.

But we have some idea as to which branches we may actually close down if indeed the business continues to deteriorate.

In the Bay area, we have 24 locations with five companies in that region. There again we might close five or six branches. So in this first round of cuts, if indeed the business continues to deteriorate, we might close five or six locations in the Northern California area, and five or six locations in the Southern California area.

But we pretty much watch the revenue and then take those decisions. So what we are doing is in the past we would look at quarterly revenues and performance and we would then look at monthly revenues. What we're doing out is we are watching daily revenues to see how the market is performing. So it is something that we are closely watching.

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

Thanks Manny, and thank you, ladies and gentlemen, for your attention this evening and your continued interest in American Reprographics Company.

At this time we will wrap the call and look forward to speaking with you again in our first quarter call for 2009. Have a great evening. Bye-bye.

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