ARC Document Solutions Inc (ARC) 2014 Q3 法說會逐字稿

Good day, and welcome to the ARC Document Solutions third-quarter 2014 conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. David Stickney, Vice President of Corporate Communications and Investor Relations. Please go ahead, sir.

Thank you, Hannah, and welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our Chief Operating Officer; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer.

Our third-quarter financial results for 2014 were publicized earlier today in a press release. The press release and other Company releases are available from our investor relations pages on ARC Documents Solutions website at e-arc.com.

A taped replay of this call will be made available several hours after its conclusion. It will be accessible for seven days after the call. The dial-in number is in today's press release.

Per our usual practice we are webcasting our call today. And the replay of the webcast will also be available on ARC's website.

Today's call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the Company including the Company's financial outlook. Bear in mind that such statements are only predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today November 6, 2014. 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 in mind I will now turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Thank you, David. Good afternoon, everyone.

As I mentioned on our last call momentum is building here at ARC and I am pleased with our continued growth and progress in the third quarter. While I am happy with the results we have produced in the quarter, the work we have done over the past several years to reposition ARC from a reprographics company to a true document solutions provider has been nothing short of staggering. Many of our friends and observers have wondered what if anything it might produce.

Throughout this year I believe we have provided ample proof that the new configuration of our business is not only viable but vibrant and meaningful to our market. Our three primary solutions today deliver unprecedented value to all of our customers. I think the success we have achieved year-to-date is just a preview of the success we will achieve in the future.

At more than $1 trillion in size, the industry we serve is one of the largest in the world and the pace of change within it continues to increase. We are fortunate to be in a position where we can help our customers make a meaningful difference in nearly everything they do. By supporting those customers as the key player in distributing construction documents and information in the cloud, and providing secure mobile access to any kind of data they might produce, we think the possibilities of our future business are endless.

In terms of specific progress during the quarter, our net sales grew 5.5% year-over-year during the period. Our gross margin improved by 140 basis points. And we were able to translate those improvements into solid earnings, continued growth in adjusted EBITDA and strong cash flows.

Once again, we used our cash to aggressively reduce our senior debt in the third quarter much in the same way we did in the first two quarters of this year. In so doing, we further improved our capital structure and accelerated our plans to refinance our senior debt at a significantly lower interest rate as we noted in today's release.

In fact, S&P issued an upgrade to both our debt and recovery ratings for the second time in four months shortly after we announced our results today. The ratings are, of course, based on the completion of our refinancing. I will let John provide you with the details shortly.

Other highlights from the quarters includes renewals and new customer acquisition in our managed print services program, significant wins in our color business both here and abroad, continuing progress in archiving and information management and growth in construction document hyperlinking, building information modeling projects and the placement of PlanWell SmartScreens.

These achievements along with other internal initiatives led us to revise our annual guidance for 2014. First, we increased our fully diluted annual adjusted earnings per share outlook from $0.19 to $0.23 to be in the range $0.24 to $0.27; second, we narrowed the outlook for 2014 annual cash provided by operating activities from $51 million to $56 million to be in the range of $52 million to $54 million; finally, we increased the outlook for the annual adjusted EBITDA from $69 million to $73 million to be in the range of $71 million to $74 million.

With that as a background and to give you more details on our achievements for the quarter I will turn the call over to our Chief Operating Officer, Dilo Wijesuriya. Dilo?

Thank you, Suri. Once again quarterly growth was led by sales in on-site services which grew 12.8% year-over-year.

Since we last reported to you we have acquired new MPS customers, agreed to an expansion of our services with CH2M Hill in 2015 as they acquired a competitor, and we renewed several large MPS engagements including the one we announced several weeks ago with Parsons Brinckerhoff. In all we added roughly 300 new on-site service contracts during the third quarter.

Color grew strongly again at 10.8% in the third quarter driven by new sales acquired in the UK earlier in the year. In the US we also won substantial projects for Rice University, Stadium Graphics, Southwest Airlines' rebranding campaign and some pilot work for Starbucks as they experimented with mobile coffee shops on selected college campuses.

Year-over-year sales for equipment and supplies were relatively flat with decreases in China driven by the softening economy there. This decline was partially offset by sales improvement in other US businesses.

It is worth noting that quarterly improvements in the equipment and supply sales are largely driven by the timing of the placements of customers' aging equipment fleets. Year-over-year digital sales rose about 1% for the second quarter in a row primarily on incremental gains in archiving and information work.

While we are primarily targeting our AEC customers, AIM continues to attract city, municipal and state agencies. Most recently we won a contract to digitize and archive infrastructure documents for the Department of General Services in the state of Hawaii.

The Department is responsible for managing and supervising a wide range of state programs and activities through its communications and information services divisions, the state's Public Works Division and others. The diversity of our early wins in AIM are providing an excellent environment in which to define our service and improve our operations.

Speaking of operations, we have specifically configured six of our existing service centers across the country to cater to AIM work. All of our locations are capable of scanning and uploading documents to the cloud but we have used the existing infrastructure of these six facilities to specifically address large ongoing AIM activities.

In other digital news, we recently received the second order for our MetaPrint software from the China Architectural Research and Design Group. As a reminder, we provide the software to drive their new digital blueprinting machines.

We saw increased demand for our hyperlinking service, which allows customers to navigate construction documents as easily as they do on a website. The adoption of building information modeling, otherwise known as BIM, continues to gain traction throughout the industry and we are noticing increasing demand for our services in this area.

And finally, interest in our PlanWell SmartScreens continue to remain high both inside and out of the construction market. These large touch-enabled LCD screens assist our customers to communicate, share and work in a highly collaborative, entirely digital environment minimizing the need for paper.

As we have mentioned in the past, our addressable market has expanded dramatically with our new services and products. These are new opportunities and new challenges but we remain committed to leveraging all of our strengths and to look at new ways to take advantage of BIM as we move forward into the future.

At this point I will turn the call over to John Toth, our CFO, for a perspective on our finances. John?

Thank you, Dilo. Last quarter I spent some time developing the thesis that our financial performance accelerates as you move through our P&L. By that I mean that the rate of growth of the profit line items in our income statement increases as you move down the P&L from revenue to earnings and then out through free cash flow.

As anticipated, our Q3 results show a continuation of this trend. In Q3 our revenue grew 5.5% year-over-year. However, our gross profit and adjusted EBITDA dollars grew by more than 10%, almost doubling our revenue growth rate, and continuing down to the bottom of the P&L, our earnings grew by more than 260% year-over-year.

Some of this acceleration is driven by sales growth, which leverages our fixed costs. For example, while the rollout of a new MPS customer such as Cardno or EXP or CH2M Hill have a dramatic effect on our top line, renewals of the existing agreements, like the ones we signed this year with HOK and Parsons Brinckerhoff, can have a significant impact on our expanding margins. This is because there are far fewer contract implementation costs on an MPS renewal than an initial sale and when combined with an existing equipment fleet that is being optimized on an ongoing basis rather than replaced all at once, these renewed engagements contribute to the growth of an already expanding gross margin.

In addition, our mix shift towards higher-margin sales as well as our targeted margin improvement initiatives combined to expand our gross margin 140 basis points to 33.9% from 32.5% and increase our adjusted EBITDA margin 70 basis points from 16.4% to 17.1%. We did not see an increase in free cash flow in Q3 we did last quarter but that was due almost entirely to two timing issues related to change things in levels of working capital.

First in 2014, we are paying interest on our Term B alone on a quarterly basis as opposed to last year when we paid interest on a semiannual basis. This change in cadence from semiannual to quarterly skews the quarterly year-over-year comparison by approximately $3 million. Second, the collection of receivables from the increase in third-quarter sales will happen primarily in the fourth quarter as we achieve much of those sales later in the quarter after summer vacations had ended.

These two timing issues amount to a swing of more than $8 million and therefore our free cash flow did not expand in the third quarter. However, we expect to see the impact of these timing issues largely reversed out in the fourth quarter of this year, thus our cash flow from operations guidance of $52 million to $54 million. Simply put this high degree of visibility into our numbers is driven largely by the rapid growth in the recurring revenue lines of our business as well as the very focused and tangible nature of our margin expansion initiatives.

As we have emphasized in the past, we have been using our cash flow to invest in technology development, invest in sales training and to aggressively deleverage the Company. In the third quarter we paid down another $7.5 million of principle and in the month of October we paid down an additional $3.5 million. This has positioned us well to accelerate our plans to refinance our long-term debt.

We are very pleased to report that ARC has entered into a commitment letter with our long-term and much appreciated commercial banking partner, Wells Fargo, to refinance the Company's 6.25% Term B loan with a Term A senior facility funded by the pro rata bank market. We issued our Term B loan last December with a clause specifically contracting that there would be no prepayment penalty to the Company, no call premium, if we were able to refinance the loan into the Term A market.

While the details of this agreement remain subject to approval by ARC and our lenders, we expect the interest rate on the new five-year Term A to be LIBOR plus 250 basis points excluding the cost of any interest rate protection we put in place. This deal would take the interest cost of our long-term debt from 6.25% to roughly 2.75%, a 350 basis point savings on $175 million of principle, or more than $6 million per year of savings, excluding the cost of any hedging.

Assuming a satisfactory conclusion to the agreement we expect to announce the execution of the new loan facility before the end of the fourth quarter. As Suri mentioned, S&P issued another upgrade a few hours ago taking our debt rating up one notch from BB flat to BB+ and our recovery rating from 2 to 1, which is the highest recovery rating.

In closing, the acceleration of our performance through the P&L continues at a healthy pace. Sales increased by 5.5% year-over-year, gross profit and adjusted EBITDA dollars both grew by over 10%, earnings grew by over 250% and although free cash flow for the quarter contracted due to timing issues, we expect to see free cash flow growth for the year be north of 30% as the timing issues reverse themselves out.

That concludes the highlights for the quarter. So at this point I will turn call back to Suri. Suri?

Thank you, John. At this time we are available to take all callers' questions. Operator, please go ahead.

Thank you. (Operator Instructions) Brandon Dobell, William Blair.

John, maybe first for you, should we expect any seasonality in the cost of services line heading into the fourth quarter? I'm trying to figure out quarter on quarter how that cost of services should look and I guess that's from a longer-term perspective. Do you think the gross margin leverage year on year you have seen should be sustainable for the next handful of quarters going through 2015?

Taking the seasonality first, we do still see seasonality in Q4. We see it in two forms. We see just reduced activity in the US as winter kicks in and we see equipment sales in China tend to be higher.

Those two tend to be seasonal events but per last year and the prior year, the seasonality continues to be muted as those portion of our businesses contract as a percent of the total. So you will see some seasonality in our sales. You will see sales in the US be a bit lower, sales in China be a little bit higher, a little bit more equipment sales.

On a margin basis you will see that the year-over-year comparison will probably be muted, be a little smaller in Q4 because of the seasonality. All of that said, kind of transitioning into the second part of your question, going forward into 2015 we expect to see this continued trend of faster growth deeper in the P&L.

Our margin expansion initiatives will be less dramatic but our revenue growth and our mix shift should be stronger next year than what you have seen this year. Does that speak to your question?

Yes, that does. I think in the past you guys have talked about having made and continuing to make some pretty decent investments in sales and marketing. And I guess I'm trying to get a feel for on a dollar basis -- forget percentage of sales for a second -- but on a dollar basis should we continue to expect you guys to add headcount, to continue to push the pedal on marketing and get your name out there, travel and all that kind of stuff for sales guys, or do you think you've got the right scale of the sales and marketing operations going and it's more about better utilization of those people?

Yes, you touched almost literally on all those points and all of those very key points and we will actually expand. For example, we are already having plan, in place a plan to actually have a business development unit in place, which we didn't previously have so there will be additional headcount for each one of our service solutions. We would have a head of business development and then we will have solutions consultants across the nation for each of those segments.

In addition to that we are going to beef up our training because as we pick up momentum and we find that our customers are starting to look for our services we want to be able to provide these services across the board and this is training for both sales and operations. And as part of this training and also increased activity on the sales side, we would be organizing during next year significantly more number of conferences with regard to our sales teams on a regional basis bringing sales and operations together and really bringing them up to speed on some of the new products we are leasing and what impact we can have on our customers' businesses.

And obviously to wrap all of this up, we would also be investing more in the marketing area. We already started that process looking at our website. How is the new company positioned so that customers understand what we are doing, what are the key segments of our business and what is our messaging.

We are looking at the messaging. We are also looking at several other marketing materials and of course some new marketing materials for the construction document and information management segment where we are releasing new software. So all of that would be included and that is not -- we don't have a defined number -- John, Dilo, would you like to comment on that?

Not a defined number. We don't have a defined number yet.

But those are all the areas where we think significant investment will be made during the 2015. We have already started many of those programs, Brandon, because obviously we expect our sales to accelerate. In order to facilitate that we need to actually make all these investments.

Okay. With the visibility you guys have on the refinance here in the near term, kind of a two-part question.

Has the level of debt or leverage been any kind of hindrance for you as a company going out and getting new business, i.e. are people saying I like the idea but maybe I'm not quite as sure about your sustainability? And then second, does the lower interest rate, the better situation there, change the lease versus buy decision over that process for you guys in terms of acquiring equipment for customer contracts?

Right. So the first part of the question, Brandon, we have had every now and then people ask questions about our sustainability with regard to how is your business doing, where are you? We never thought of that is a major roadblock for any major accounts.

They would always ask us and we would answer those questions confidently and I have always been able to convince the customers. But I think given where we are today and the progress we are making it certainly makes it even more compelling for our customers to look at us in different light, that indeed that our strategy is changing.

And in fact, I think mostly even the vendors, our vendors, large suppliers, are starting to see how our business strategy is working and that we are making inroads into the construction space significantly. So I think that is really a positive.

With regard to lease versus buy, I think it is going to help us more now that we've got such attractive situations with regard to the cash generation and the refinance. It is going to help us further drive the cost down of the leasing rate because the leasing companies are always interested in leasing to us.

We are a very large customer for them from that perspective because we buy a lot of equipment. We lease a lot of equipment on behalf of our customers.

So as a result, we are a very attractive customer for the leasing companies and I think it will allow us to further negotiate our lease rates. John, would you like to add to that?

That's exactly what I think. It gives us more ammunition to bring down the lease rate, so I wouldn't anticipate a shift in the balance of lease versus buy. Ken Gini and Steve Biernbaum are already dialing up the lease companies to tell them what our new cost of funds is internally to move that cost down.

Right. Got it. Okay. That makes sense.

Great, thanks guys. Appreciate it.

Scott Schneeberger, Oppenheimer.

In traditional reprographics I imagine you are seeing some signs of nonresidential construction improvement. Just curious what you are seeing on the street with regard to the traditional business and customer interaction there? Thanks.

The attraction of business, Scott, from an industry perspective is definitely picking up. There are signs of new buildings coming on and activity is up. There is no question.

You are big on reporting the ABI yourself, so as you can see the market is coming alive. It is not going full-blown in terms of nonresidential but it is certainly coming alive.

We can see a lot more green shoots popping up. However, remember this is -- we are heading into the last quarter when seasonality starts kicking in, so that kind of slows down the activity from a traditional perspective. We don't see a whole lot of that in the managed print services area, but in the traditional reprographics area, there is a little bit of softness for this quarter coming up.

Thanks, Suri. And is there, obviously managed print services is a focus of the Company going forward for multiple strategic reasons. Is your allocation of sales resources the same in traditional reprographics services change your strategy there relative to some of your other business areas? Thanks.

So basically, Scott, the way you think about our business going forward is we have three major segments of businesses. And those three fall into managed print services, that is one.

And we have that -- that's MPS. We call the other one AIM, which is archiving and information management and the third one is called CDIM, which is construction document and information management. That exactly is the successor to the reprographics business.

We don't necessarily refer to that as the reprographics business because what we consider the reprographics business is distribution of information and documents using print as a medium. But what customers are doing is they are using cloud and actually mobile access to distribute the information.

So our third segment is we refer to it as CDIM, construction document and information management and so all three segments are equally powerful. We just happen to have made significant inroads into managed print services but we have the same level of investment and salespeople and infrastructure attached to all three of the solutions we provide, these what we refer to as the three key solutions in the three segments. And we have the same level of investment in all three of the areas.

For what you refer to as reprographics, which we now refer to as CDIM, we have a brand-new product coming out. When is the product released, Dilo?

January.

January. This is really exciting. This is distribution of documents and information using a really slick web program we have.

It is on the cloud. It's got superb mobile access. It's already being tested with about -- how many customers, Dilo?

30 customers.

About 30 different customers. Acceptance is exciting, Scott. And by the end of the year we will actually release that full speed.

It's going to be really exciting. So we are going to see that segment grow. It's just that we won't call it reprographics because we will call it CDIM.

Excellent. Thanks, Suri. That's probably a good segue into another question.

I noticed you highlighted the SmartScreens in the press release and certainly an exciting tool. Could you elaborate -- you or Dilo -- on how progress is coming, what customer reaction is and just a little bit around your developments there? Thanks.

Okay. I'll give you the first part of the question then let Dilo answer, he knows more specifics on the SmartScreen.

So what we basically do is called -- for all three of these solutions, managed print services, AIM and CDIM especially on CDIM, which is construction document and information management, and AIM, we actually tie in the SmartScreen into that solution. So what happens is customers are able to see the documents not on just tablets, or on their computers, but they can see this in large SmartScreens.

So we will place them strategically in the project teams, in worksites, in construction sites and in sometimes offices. And this is really exciting because if you just sold the SmartScreen, SmartScreens are not difficult to find. Similar screens are available, you can buy them anywhere.

But the combination of SmartScreens with the software, which has hyperlinking and which has the ability to search large format documents and distribute documents makes it really really powerful for that same graphics you talked about. It's not reprographics anymore, it is CDIM, construction document and information management using cloud and the tablet.

So it's really exciting and there's a lot of interest in these screens. Dilo, would you like to tell them what is going on on the ground?

Exactly. So Scott, in addition to what Suri mentioned, the SmartScreens that we offer are for the construction industry.

There are lots of different brands and models that are available. They are primarily for the education industry.

But for construction we need very powerful SmartScreens with a lot of computing power to look at large files like 3D models and so forth. So what we manufacture in China and bring it over here is exactly for the AEC construction industry. So that's one big differentiation of our machines.

And again because we are able to combine our software right into the SmartScreen, customers can very quickly bring documents from the cloud and view it on the SmartScreens, make annotations, markups, push it back into digital workflow and similarly, all these SmartScreens are connected through other software to printers and scanners at the jobsite and at project sites. So the customers have a very seamless workflow so they don't have to buy these different pieces and put them together themselves. Our software clearly combines the workflow from the cloud from the desktop to the SmartScreens and to the hardware devices.

Great. Thanks, that's excellent color. And then lastly you touched on it a bit throughout, but could you provide an update on AIM and just some trends you are seeing there? Thanks.

So AIM as I reported in the earnings call today, we are continuing to get wins from different organizations. Earlier we thought we will get a lot of AIM work from architects or maybe construction companies. What we see is the AIM solution is required by everybody.

Anybody who has infrastructure documents, complex documents, [as view] documents that have been produced and saved on paper, very vital information. Everybody wants to digitize them. And everyone wants to bring that paper into a digitized format, save it into a cloud and able to move it and also passed that digital information to their general contractor or to an architect to start rebuilding or do renovations.

So therefore we are seeing different customers coming our way for archiving solutions. And the opportunity we had in Hawaii that was basically an opportunity we pitched to the local public works. All the buildings in Hawaii that are owned by the state of Hawaii they are getting digitized and uploaded into our cloud because earlier Hawaii did not have a solution to keep all their valuable paper documents in a digital format.

So they have gone into that. They have funded the project. We started the project.

All the buildings owned by the government will be on PlanWell Archive System. So we are getting nice wins. They are like in the mid-50,000 range.

It could be slightly higher than that. Architects are coming on board, general contractors. Because every project that we see today they have their documents are in a digital format but they also receive so much of paper documents that it is part of the workflow.

So the customer to truly be in a digital workflow they got to keep digitizing their paper documents that comes to them when the project is underway. So it's a nice, good plan because ARC is the only solution provider that can handle the local scanning as well as the cloud with the equipment provided on-site through our MPS program.

Excellent. Thanks for taking my questions, guys.

Alan Weber, Robotti & Company.

When you look at the Company and you look out -- earlier there was a question about investment in marketing and I guess more tradeshows and like that that you're going to continue to invest. So when you look out five years, you pick the time frame, can you talk about how you view the market and how you view the market share that you think you could get if you did get what the size of the Company would be?

So that's a really interesting question. So one of the things which we are starting to position ourselves now are basically a company who can provide total document solutions for the AEC space, which means we can actually handle their project-related work and all the documents in the project space. We can handle all of their work in their offices, which is the managed print services component, which is all of the marketing, all the sales, all the contracts, all HR documents, legal documents, finance documents, all those documents and then finally the only other area those companies would have other documents would be in storage like Dilo referred to earlier.

So if you capture all those documents, we have the ability to provide what you referred to as document solutions in its entirety for a company. So what has happened is after this downturn in repositioning and investing in these new segments of business, we have actually quadrupled our addressable market size.

Previously, we did only what we refer to as reprographics, which is largely revolves around project work. That's what we did.

Now we have a situation where we not only do the reprographics part of it, which is the success of the reprographics business which we call CDIM, construction documents and information management, we have the MPS segment of the business and we have the archival business. So early addressable market was about $4 billion to $5 billion.

Now we have an addressable market about $16 billion-plus, so therefore our addressable market has expanded substantially. Over the next three to five years we will continue to invest in these areas. That's why we consider this investment to be very critical.

Before the downturn we were about $750 million-plus in terms of revenues. I think the real number was $740 million. We were doing a run rate of almost $820 million and after the -- currently we are $400 million-plus. So we have the opportunity to reach to the previous levels of revenues very easily because our addressable market has expanded and the market is recovering.

And then from there onwards we think we will be a bigger company than we were previously because our addressable market is much bigger. So in order to get there we need to invest in sales and marketing and training and attend all these conferences and make our presence known and reposition and rebrand the Company.

I'm not sure, Alan you know, but in the past we grew by consolidation. So we were the largest consolidator in the reprographics industry. That year has gone.

We don't acquire companies for the purpose of growing. Our growth is going to come largely from the organic growth and that is largely driven by the technology solutions which we have whereby we distribute our customers' documents and information from the cloud using mobile access. Does that answer your question?

It does. I just have one more question.

So when you look out, though, compared to where you were, what you used to call the traditional reprographics business, is the focus now more towards larger clients? You got that $800 million or $900 million of revenue, would there be a bigger percent of larger clients than what you had previously when you were doing more of a roll up?

Absolutely. So one of the reasons for that is not because we are now concentrating on larger clients because how our customers are evolving. Our customers are becoming bigger.

There is a lot of M&A activity going on in the construction space. You might have heard recently AECOM acquired URS. It's a $10 billion company acquiring an $8 billion company.

WSP acquiring Parsons Brinkerhoff, $1.5 billion. So this M&A trend is continuing to increase and these large customers who are actually spread across the nation and the globe are looking to reduce the number of suppliers they have. It makes logical sense when they grow and become bigger to reduce the number of suppliers.

And we are in the perfect position to serve that market because nobody else can do what we do because we have 200-plus locations on the ground and we can help our customers become -- reduce the number of suppliers by becoming the single source supplier. So that is a great opportunity we have, not that we didn't have the customers before -- we had them before -- but we would serve a large customer, let's say in 20, or 25, or 30 locations and the customer would have decentralized operations.

Increasingly customers are acquiring, becoming bigger and centralizing their operations and streamlining their operations in order to gain those benefits. Primarily driven by this downturn people are starting to save money, think about suppliers very differently.

So it puts us in a perfect spot to be able to be the most suitable candidate to actually accomplish that goal. So now it is one of our top focuses to go after the top 100 ENR companies that you will recall, engineering news record, they always identify the top 100 construction companies there.

That's our primary space. In fact in the managed print services space, if you take the top 100 companies we are by far the largest player there, not any manufacturers, simply because we can deliver value, which nobody else can.

All right. And I don't know if this is easy to answer. So when you talk about the managed print services, if you got to I don't know a 10% market share with the top 100 customers, what would that mean in revenues?

That's a hard number to put together. John, Dilo, any ideas? If you take the -- did you say top 10% of the customers?

Yes, just assume you ended up with a 10% market share of the top 100 customers on the managed print service, what that would roughly mean from where you are today.

John, do you want to give it a shot?

I'll try and give it a shot to try and be helpful. It's a very hard number, but I think the top 100 now includes the URS/AECOM being number one, which is a megacompany. So if we take the top 10% of that, I think that's a 50% expansion off where we are, 50% to 100% and that's probably conservative given how big WSP/Parsons Brinkerhoff gets and Fluor and these other guys.

Another way to look at it is that depending on whose research you are reading whether you are looking at [Veraxis] numbers or [HPS] numbers, managed print services market across the United States is supposed to be $20 billion to $25 billion. Now if you segment out AEC out of that, it could be $3 billion to $5 billion easily and if you take 10% of that that's another way to look at it. But it's not something we have put our arms around, all we know is it's a very large --

Well, that's the answer. The answer is if you can gain market share and continue doing what you are doing and the financials will continue leveraging that revenue growth, five years out cash flow and all those good things will be much higher.

Absolutely. Because the other thing is --

I'm just trying to understand the magnitude. Okay. (multiple speakers)

The other thing to just keep in mind is, Alan, while we are doing the managed print services we will add on the AIM because it's the same customer, same relationship and the same issues because they will be now storing documents in 50, 60 locations. And today they may not want to digitize everything but in three years if you are talking three to five years, more people will want things digitize.

That's for sure. And nobody is going to do distribution of documents without using the cloud. So what happens is technically the rate of growth will accelerate and that is why it is important for us to invest in our marketing and in our sales in order to get the penetration we need with the customers in one segment and the other two will literally be automatic over a period of time.

Right. Okay, great. Thank you very much for the answers. Thank you.

(Operator Instructions) Howard Rosencrans, VA.

It all sounds very encouraging. Just a quickie bookkeeping question. You guys went from 6 to 275 and that's at about $200 million and what is the term on that?

Five years.

Five years. Okay. Does it give you the flexibility to buy back stock, or do you have to just pay down debt or do you have to be under some sort of leverage ratio?

We have the flexibility to buy down stock at different levels of debt. But we have the ability out of the gate subject to completion of the documents.

Okay. And I love all the new areas you're going into and expanding the addressable market, etc., etc., but let me ask you about the legacy -- I don't know if we can call it that -- the legacy business pretty much.

It used to be $300-something million. It now is $100-something million, not much over on a run rate business.

As the industry gets better you can tell me whether we're talking 2005, 2006, 2007 or whatever level you want to say -- as the business gets better where do you see that part of the business returning to? Or is it just going to migrate to digital and will we -- that's what I'm trying to understand.

Sure. So the way you think about that is that the simple answer is when the market recovers, meaning when numbers eventually is kicking into full gear, that segment of the business will grow. No questions.

Because construction is there, the customers are there, the documents are there, they need to be distributed and they need to be stored. So the question about the number of documents have gone up, customers are the same, they need the documents and that is $1 trillion market segment, it's not going anywhere, it is going to grow.

Should the short answer to your question is, it will grow. But the key is (multiple speakers)

I don't mean to be too harsh in pinning you down but I just wonder is that when we get back to that say peak of the cycle, is that a $200 million business instead of a $300 million business, or is that really a $150 million? Where do you think peak of the cycle that business goes to?

Okay. So when we did $300 million, that was 15% of the reprographics industry. Does that make sense?

Of the reprographics industry. So of that industry we did 15%. We were 15% of that market size and we actually had about $300 million-plus in the traditional reprographics business when we did $740 million.

So if you were to have the same business, that revenue generated out of that work which is called reprographics, probably will be about 40% or 50%, if you know what I mean. Because that won't come in the form of traditional print, it will come in the form of digital, digital distribution. Does that make sense?

Sure. Absolutely. The digital business still doesn't really seem to be going up at a trajectory.

Is that sloppy or that is coming along, or? I think it's been fits and starts for years, no?

There are two issues here. One is it is coming along really strong, we can feel it and we can sense it. One of the reasons it's not reflected in our numbers is the way we categorize our numbers.

We've been traditionally categorizing numbers in different buckets. And we are looking at each other and smiling here because we are hoping by next quarter we will be able to in 2015, or by next quarter we will be able to change that category to show where really this digital growth is coming. Right now it is not accurately showing.

For example, we have a lot of revenues coming out of Abacus, which is actually which we use for managed print services, but that's not reflected in the digital revenue. But it is largely driven by technology. So I think you will see those numbers reflected accurately going forward.

And one more question, which is three parts I'm going to bundle it all into one. Are you concerned about, one, any of these having a negative impact on your business, one, the consolidations that you highlight going on in your business; number two, is the Stadium work possibly closer to finish than begun and I think the stadium work maybe Minnesota and Atlanta was pretty important; and three, are you concerned -- what portion of your business is energy and are you concerned with the -- do you think your customers are going to start to get impacted by the precipitous falloff in price there? Thank you.

Okay, so the consolidation is very attractive for us. It makes us even stronger because as companies consolidate, like a perfect example is URS/AECOM, they are looking to reduce cost. We are in a better position to deliver that to them than anybody else.

So acquisitions like Parsons Brinkerhoff with WSP we have a better chance of getting a shot at that WSP business, which we didn't have all these days. We have some parts of it but we don't have the centralized business.

So consolidation is very good for us. Every time they consolidate we target those customers aggressively. Because as part and parcel of the merger or post-merger, we can be a significant part in helping them streamline and reduce costs in their facilities by putting it together.

With regard to (multiple speakers)

We don't have to worry that since they got bigger that they're going to use their leverage against you and say, sorry we're cutting rates and that sort of thing?

Yes, they will always try to do that. Every company does that and that's obviously any mergers and acquisitions result in that. It's up to us to show them, yes, you can do that, you can reduce our costs but what we can do is help you find more dollars that you can't otherwise find yourself.

That's our strategy. So we will kind of function almost like consultants in the industry going and saying look, if you are a $5 billion company do you how much you are spending on documents and most of the time the answer is they don't know. And we help them find out and then we help them reduce.

That's the idea and managed print services. So that's worked to our favor. However, every time companies come together they would ask us for a better price.

And we would actually find a way to mitigate that and expand our margins by giving them other creative solutions. For example, when we extend the contract after five years, if a new person comes in they have to replace all the equipment because the equipment is ours. When we extend the contract we will help them actually replace them all over a period of time without having to replace all of them right away, which will give them a cost-benefit and give us a better margin benefit.

With regard to the Stadium work, the Stadium work we do unlike in the past does not generate us several millions of dollars. It generates -- the generation of revenues out of those stadiums are lower and we will have new stadiums and new projects come up. Am I right, Dilo?

Absolutely. Our project work is continuing to pick up.

There may not be new stadiums coming up but the projects are getting diversified. Our customers are getting busier than ever before.

You can literally see almost every city you fly into, you can see cranes up. And we know nonresidential has not even kicked in, so we are looking at the future and saying this is going to be really really exciting.

Lastly on the energy side we actually did not have a whole lot of work with our energy customers and we are marketing to them because they are big AIM customers. For energy companies AIM is very important and their requirement to store these documents are much more stringent. And we are starting to work on the energy companies and in fact recently I think -- David, do you have a press announcement on the power engineers?

Not yet. Not just yet.

Okay. So we actually got some deals with the energy companies.

We are moving in the right direction. But traditionally we did not do a whole lot of work with them.

Fabulous. Thank you for all of the color.

Matt Blazei, Lake Street Capital Markets.

Most of my questions have been asked here since I got kicked to the back of the queue. But a couple of things I wanted, one of the things I wanted to follow-up on was, on the use of free cash flow and the debt repayment, you've been very aggressive obviously in 2014 paying down that debt maybe as much as -- hopefully as much as $25 million or $30 million here this year.

But with the refinance, I am curious if you are going to continue with your plans to use the free cash flow to pay down the debt as aggressively as you have. I think you had originally thought you might pay down as much as another $30 million or $40 million in 2015. But obviously with much more attractive rates, is that still your overall strategy?

I will let John give a little more color, but fundamentally, Matt, the way we look at it is obviously we don't want to have a whole lot of debt. There was a time that debt looked very big.

It doesn't look very big to us now simply given the direction we are headed, the cash we are generating and all of the new things we are doing the debt doesn't -- it's not a worry something. But having said that, we want to bring that debt to a very very manageable size and at that point of time then we can look at the ordinary lender options.

But we will be paying down the debt because there is no point even paying it at -- whatever percentage you are paying they are paying a percentage, so we will want to bring the debt down. John, would you like to add some color?

Yes, I think that's the plan going forward for the foreseeable future. And it drives more of our enterprise value into our equity, gets our debt to a more manageable level and allows us to free up cash flow for other uses in the medium and longer term.

Absolutely.

And John is your target there still going to be about 1.5 times EBITDA? As sort of a target level --

Directionally I think that's a reasonable assumption, yes.

Secondly, I know this is a tougher question to answer because it's a little but more subjective, but you have talked about your end markets and your AEC customers particularly starting to show some signs of strength. I think you used the term green shoots.

Obviously this Q4 is not a great time for that. But do you think there's a chance that you could actually show positive year-over-year growth in the traditional reprographics line in 2015? For the first time in seven years?

In 2015 that is a possibility. It is hard for us to say depending on how it is progressing. Like I said, Matt, if you remember.

So again this is a part a lot of people find very difficult to understand because when the traditional reprographics business comes, which simply means distribution of documents are increasing because you have more projects. When you have more projects more documents have to be distributed but it won't come in the same form because it is not coming in printed form.

So it will come now in digital form. And that's what we call CDIM.

So sometimes people ask me are you out of the reprographics business and I would explain by saying no, I am not out of the reprographics business per se. The reprographics business has evolved.

Distribution of documents using print as a medium was referred to as reprographics. We are doing --

Are the end markets strong enough to actually increase the paper usage?

Whether the paper usage -- that's a hard question to answer depending on how much customers are transitioning. As long as they use paper, Matt, what happens is the period, the time they're going to take to construction is going to be taking a long time because somebody has to make a change, take it to paper, put it on paper, make multiple copies, distribute the paper.

What increasingly customers are seeing is they can take the change, take it to digital, post it on the web, get others to go to the web and download it. And what we are doing is we are hyperlinking them, or what they do is they just download the document, double click on the hyperlink, they got the change order.

So what's happening is if you look at the construction industry, one of the things which delays construction progress is the distribution of documents and change orders and the amount of changes which take place. What's digital doing is making it fast and people are loving it. It's just that they were not comfortable with technology before, the subcontractors and general contractors.

With these tablets and all the new apps they have they are getting really comfortable and the new product we are releasing, which Dilo just talked about, is making it even easier. So that part of the business will grow.

We won't get the same revenue. Of course that part of our revenue we will get, we will get it at a much higher margin.

Now it is all technology revenue so it's at a much higher margin. But if you look at the end markets, are they becoming stronger? Yes.

Are they building more? Yes.

Will the documents increase? Yes.

But they won't be printed as much so therefore the dollars which come because of printing would be less and how much it will grow I am unable to predict. I would be guessing too much on that.

But the number of documents getting stored and distributed would increase. Dilo?

Yes, absolutely. Like you may have probably seen on a southern region like the Texas region, there reprographics print-related revenue picked up year-over-year because there are a lot more projects happening in the Texas Southern region and a lot of paper printing is taking place with distribution. The rest of the country we still have a year-over-year downward shift because the project activity has not grown as much as in the Texas area.

Hopefully in the next year or next couple of quarters more customers, more projects will come along. There will be a print component to that. We will get it.

But again, as Suri said, I will not be able to predict is it going to be over the previous years. But whatever the customers have we will get that work.

Okay. Thank you, guys. Nice job.

It appears there are no further questions at this time. Mr. Stickney, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks, Hannah. Ladies and gentlemen, we appreciate your attention and your continued interest in ARC Document Solutions.

Have a great evening. Bye-bye now.

That concludes today's conference. Thank you for your participation.