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Edited Transcript of ARC earnings conference call or presentation 26-Feb-19 10:00pm GMT

Q4 2018 ARC Document Solutions Inc Earnings Call

WALNUT CREEK Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of ARC Document Solutions Inc earnings conference call or presentation Tuesday, February 26, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Stickney

ARC Document Solutions, Inc. - VP of Corporate Communications & IR

* Dilantha Wijesuriya

ARC Document Solutions, Inc. - COO

* Jorge Avalos

ARC Document Solutions, Inc. - CFO

* Suriyakumar Kumarakulasingam

ARC Document Solutions, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Alan W. Weber

Robotti & Company, Incorporated - Portfolio Manager

* Aman Raj Gulani

B. Riley FBR, Inc., Research Division - Associate Analyst

* Matthew Schwarz

Maze Investments, LLC - Director of Research

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Presentation

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Operator [1]

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Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the ARC Fourth Quarter 2018 and Fiscal Year Ending Earnings Report Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. David Stickney, Vice President of Investor Relations. Please go ahead.

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David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [2]

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Thank you, Kelly, and welcome, everyone. On the call with me today are "Suri" Suriyakumar, our Chief Executive Officer; Dilantha Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer.

Our fourth quarter and fiscal year-end results for 2018 were publicized earlier today in a press release. The press release and other company materials are available from our Investor Relations pages on ARC Document Solutions website at ir.e-arc.com.

Please note that today's call will contain forward-looking statements that fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on information as of today, February 26, 2019, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

This call will also contain references to certain non-GAAP measures, which are reconciled in today's press release and in our Form 8-K filing. I'll now turn the call over to our CEO, "Suri" Suriyakumar. Suri?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [3]

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Thanks, David, and welcome, everyone. In the latter part of 2016, we made a commitment to protect our legacy revenues, while continuing to invest in technology solutions that would facilitate future growth in our business. To that end, we made meaningful investments in our legacy business, both in developing technology and acquiring new print equipment that would provide competitive advantages, greater capacity and more efficiency, both in our customers' offices and our service sectors.

Now as we report our 2018 results, we've undoubtedly demonstrated that our investments were well founded. Driven by our strong performance in CDIM, ARC delivered nearly 2% growth in annual sales in 2018. Not only we were able to capitalize and protect our revenue from print, but we grew it while continuing to develop and implement technology to support all aspects of our business.

We'd also highlight the value of our technology solutions across the board. Our facilities solution, which leverages our expertise in construction document management, continues to be embraced by large and well-known clients. It also earned several awards for the best facility software in 2018. Abacus, our print tracking software was upgraded significantly last year and will soon be operating on the cloud, dramatically expanding its on-premise and mobile capabilities.

Our MPS clients are deeply dependent on this technology, and it has proven to be a major differentiator with our competitors. In 2018,

we developed a new mobile app called ARC Print and released it to the general market less than a month ago. The app connects mobile users to our nationwide network of service centers and allows customers to obtain a code, order a variety of services and track and deliver print jobs within a few simple taps on their phone. And we also added new technology services to our portfolio during the year, including drone flight data-capturing services, 3D visual imaging and printing, project closeout services and more.

We've always demonstrated that we can leverage any volume of sales growth throughout our P&L and 2018 was no exception. But we also did tremendous amount of continuing work on margin expansion throughout the year and ensured. Gross margin improved significantly at 32.6% for the year. We delivered $2 million more in cash flow from operations than we anticipated and we beat the high end of EPS estimate by $0.01.

Even in the face of higher-than-anticipated medical expenses for the year, we stabilized our SG&A cost and delivered adjusted EBITDA that was solidly on target.

As we look to the remainder of the year, we continue to protect our print revenue, expand our technology portfolio, generate solid cash flows and maintain a rock-solid capital structure, upon which we can grow.

With this as the backdrop for further discussion, I'll turn the call over to Dilo for some operational detail and then we'll conduct a brief overview of the finances with Jorge before we take your questions. Dilo?

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [4]

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Thank you, Suri. We're very happy with our sales performance in the fourth quarter and how we performed as a company for the year. Our CDIM results were strong and we were successful in growing all our construction-related print services.

Our customers are busier than normal and trends in construction continue to move in the right direction. Our teams were able to successfully hold and grow our share of wallet with our customers, but they did so by selling more than just construction document printing.

Our customers are increasing the use of technology to manage their construction documents and to distribute them digitally. As a result, print requirements per project continue to erode. Our goal is to continually offer our customers best-in-class service and move their documents -- document needs to our digital services when they don't wish to print.

To support this growing trend and to capture every sale from our existing customers, we introduced a variety of technology-enabled services, several of which Suri mentioned a moment ago. They have proven quite successful in keeping business with ARC and attracting new customers.

CDIM also had good support from our color services, and we continue to enjoy a growing share of our customers' color needs. The demand for project site signage, office signage, environmental graphic and marketing in print, make our print services very attractive.

MPS revenue remained flat as we see an increasing number of customers move their small-format document printing to a digital environment. In 2019, we're strengthening our regional and national account teams as we feel there are more opportunities to unify the print hardware requirements of customers that tie in multiple states under a single contract.

We had a double-digit growth in our AIM business in quarter 4. Thanks to our construction and strategic customers, we're busy digitizing their paper documents, adding intelligence and helping them to manage their content in our cloud and mobile platforms.

Our equipment supplies had a moderate sales growth due to strong sales from our Chinese division. We're very proud of our teams in the way they managed our operational expenses. With $6.2 million in overall sales growth in 2018, our teams were able to increase our growth -- gross profit by $6.8 million. This result is no accident, but instead is due to our experienced operational management staff in North America.

Their focus on operational efficiencies and a high level of customer service helped us to achieve this result. We know that our customers are printing less and we know our customers are moving to a digital workflows. This is a fact. Our goal is to focus on the fundamentals of an unparalleled quality and service to our customers and work smartly to increase our market share.

I'll now pass over to Jorge for an update of our financials. Jorge?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [5]

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Thanks, Dilo. ARC's financial story in 2018 has been one of continuous and steady improvement. We delivered 3 consecutive quarters of consolidated revenue growth and 2 consecutive quarters of EBITDA growth. We also overcame a $3.7 million increase in medical cost and still delivered 120 basis points improvement in gross margins and a $0.04 increase in earnings per share.

By itself, the fourth quarter also had its share of success with consolidated sales of 1.3%. While MPS and equipment and supply sales were essentially flat.

CDIM, our largest revenue line, grew 2.1%, and AIM grew an impressive 13%.

Fourth quarter gross margins of 32.7% was an impressive achievement and represented the second-highest quarterly margins for the year, despite occurring in our weakest period.

Combined with stable SG&A cost, our fourth quarter adjusted EBITDA was more than 6% higher than prior year. As we anticipated, cash flow from operations accelerated during the fourth quarter, coming in at $24.9 million or $9.3 million over prior year.

We continue to improve our capital structure by reducing our senior debt by $5 million in the fourth quarter, making our overall reduction $20 million for 2018.

Our current leverage ratio is down to 2.4x, and interest cost continue to decrease, despite rise in interest rates.

As we turn to 2019, we will strive to maintain the sales momentum of 2018, while sustaining our gross margins in the 32% range. SG&A should be at or about $27 million per quarter, absent any surprises. Medical cost remain a wildcard, as claims for chronic diseases or serious conditions verily work themselves out in a single year.

Our GAAP tax rate for 2019 will remain at roughly 30%, though our historical net operating losses will keep our cash taxes at well under $1 million for the year.

With regards to 2019 cash flow from operations, we should note that due to accounting rules, $2.7 million of certain tenant improvement allowances were reflected as an inflow to cash flow from operations and an outflow in capital expenditures.

As such, when compared to 2018, cash flow from operations in 2019 will start out with a $2.7 million deficit.

In closing, our objectives for 2019 are: to protect revenue from our core business, continue to introduce technology solutions where they can help support new sales, keep the focus on our margins and generate strong cash flows to produce another solid year.

With that, I'll turn the call back to Suri. Suri?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [6]

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Thank you, Jorge. Kelly, now we will be taking the questions from our listeners.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question come from the line of Aman Gulani from B. Riley.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [2]

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Just wanted to get a little bit more color on CDIM growth. What was the main driver there? Was it more on the reprographic side or was it color? If you could give more color on that, that'd be great.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [3]

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Yes, Jorge, you want to do that? Or Dilo?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [4]

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Yes, sure. We continued the strong performance in the reprographics. And when I say reprographics, that's probably long-winded because that really means our large-format and small-format black-and-white printing. So the way I really look at it is, our service centers were busy, our 170 service centers were busy printing either black-and-white materials or graphic colors. It definitely was aided by the color graphics. Dilo, anything to add?

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [5]

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Yes. I mean, basically, the way you want to look at is we -- many, many years back, we were heavy on construction-related wide-format blueprinting business, but today, we're migrating more and more into quick, high-speed digital print capabilities that is black-and-white or color, or large format or small format, that's where the bulk of the growth in 2018 came to us. It's primarily from same customers, markets that are very adjacent to construction that require fast turnaround, high-quality, short-run digital color and digital black-and-white print and that's the market that has helped us last year.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [6]

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Good to hear. Okay. That was helpful. And then, just looking at the AIM business. It looks like there was significant growth year-over-year. What was the primary driver there? And then, can we expect to see similar growth trends going into 2019?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [7]

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We hope so. I mean, the AIM business is largely -- the bigger part of that is mostly customers who want to archive their materials. And firstly, percentage growth is big, but it's coming off really small numbers, you know that. Secondly, these AIM business also comes in like -- it doesn't -- it comes in...

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [8]

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Chunks.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [9]

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Chunks. It's not really consistent, recurring kind of a thing, depending on what kind of customers are looking for archival business. And some of the customers who actually are using our facility software, also use the AIM services, so to speak. Because they are basically scanning all these documents and putting it into their database. So the way you look at this is, what we have been able to do is really push our services to customers on multiple fronts using technology in terms of whether it is drone services or BIM services or AIM services, it's really the same customer base, it's construction related. But we're selling them more services with the help of technology-enabled delivery. So that's actually generally driving activity all around the marketplace, so we feel like we've found a way to get more business from areas, which we didn't previously have, which will help us grow the business.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [10]

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Okay. And just turning to the MPS business. Any large regional or national accounts secured during the quarter that we can expect to maybe roll out in 2019?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [11]

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Well, obviously, we don't speak about specific customers, but obviously, MPS business is a business largely challenged because it's mostly driven by a small-format printing. So overall, MPS business is generally challenged. I mean, if you look at any print manufacturing, you'll know at once that Xerox or Canon or HP or whoever who manufactures equipment, they -- all their sales are down simply because technology is replacing most of this print work. However, what we are able to do is to be able to capture more customers from different marketplaces in a way that we can actually sustain the business or hold on to that business, using again, technology, Abacus and so on, like I said previously.

So we don't expect it to grow significantly, but what we're doing is we're offsetting the erosion in the business by adding new customers. And many of these customers are upcoming regional customers because there are only that many large customers out there in the marketplace because after a while, almost all of them, either renew their contracts or there is no more new customers because the big customers are far and few in between. But there are lots of regional customers spread across the country. And recently, we've been starting to focus on them and that has actually helped us sustain our numbers.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [12]

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And one thing to add to that too. Once we're in our customers on their side, then it gives us an opportunity to expand our relationship with that customer. Maybe do some of their AIM services, maybe do some of their color printing. So that's another side benefit of adding new accounts.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [13]

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Got it. Very helpful. Okay, last question for me. Just wanted to get a little bit more color on the ARC app that you recently rolled out. What sort of traction you're getting for that in terms of downloads, subscribers, whatever may be?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [14]

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Okay. So that's basically in line with the trend what we're seeing in the marketplace, people's behavior. As you know, people are turning to apps literally to do anything, whether they're ordering food or whether they're looking at the weather or they're sending a text or sharing videos. There is an increased use of apps by the general population in every sphere of the business. So being the company who has been using technology significantly to integrate it into your business, we thought, why not print? Why not make it easy for our customers?

Our whole team has been for the year 2018, make that easy and fun for customers to do business.

So in that line, in that school of thought, we thought about customers have to actually -- when they send a job or receive a job or they send a print job or when they want to send a print job, they always have to go to their desktops, why? What if they can do it from their mobile phones, which is what more people are doing now.

So we've been working on this app to make it more meaningful, not for the sake of just having an app but make sure that the customers will enjoy using it and actually get the benefit of having an app like that. So we've been developing this over a period of time and we just released this last month, so we don't know how many customers will actively start using it. We're just introducing it to the customer. But it's one thing that we believe that if we make it easier and more convenient for our customers to do business, they'll likely do more business with us. For example, we are now on Yelp. Previously, we had reviews, but it was our private -- our own site. But now we're now on Yelp. So because of that, we're getting more exposure. Because of app, I think, we'll get -- people will be able to -- or download our app, will be able to have access to them, which means we can push products to them.

So I think, again, this goes to what we talked about previously that we're constantly looking to really integrate technology into our print services in a way that we make it easy and faster for people to actually access our services.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [15]

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Definitely, if you look at -- a good way of increasing customer engagement. But yes, again, congrats on the quarter. And I'll pass it on.

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Operator [16]

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Your next question comes from the line of [Glenn Premax] from TDG Capital.

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Unidentified Analyst, [17]

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What will make it even more successful than what you've already done over the past 18 months is, as I look at the guidance, is that like you're just not sure of the environment in terms of being able to grow the top line?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [18]

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Well, I mean...

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Unidentified Analyst, [19]

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Because it seems like you've already improved your gross margin, your debt level, net debt level is down to like sub-2x, the EBITDA that's on here. So I am just -- because if you can actually grow in '19 versus '18, I mean, your equity is cheap anyways, right? But if you can actually grow another year, that's kind of cool. I don't think the multiple would stay where it's at.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [20]

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Right. So obviously, [Glenn], that's our plan. I mean, everybody -- every company wants to grow, but we're mindful of the history -- the recent history and what's happening in this space, we're mindful of that.

And we're also, in terms of operating metrics, I think, we've done a phenomenal job in 2018, because remember, we -- in 2016, we talked about we want to invest in the business, we want to invest, not only just in new technology stock, but we want to invest in the print-related business as well, which is what we took the plunge in 2017, and the results showed in 2018. So -- and therefore, we were even more mindful to make sure that we controlled our cost, which I think, we did a phenomenal job and the numbers speak for themselves, you know that.

So in terms of operating metrics, I don't think there's a whole a lot to improve there, but I think in terms of revenue, can it be improved? Sure, it can be, but it's going to be largely dependent on what the market conditions are going to be. We are as excited and invigorated about this business as we were in 2018 or more because like you said, we turned the corner, we fought hard to turn it and we feel good about it and all of the things we described in the previous question as well, applying newer technology to draw customers from different areas that we haven't drawn before is starting to work. So we hope that 2019 will be a better year, but again, like I said, we would have to, given the market conditions and given what's going on in the industry, we just have to go out there and get it executed, which is exactly what we plan to do.

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Unidentified Analyst, [21]

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Okay. That sounds like a wee bit of conservatism, but that's good. I don't want any -- no victory lap yet.

And I'm just happy that, it's still like, how many people in the 21st century make a promise 18 months ago and then deliver on it. I mean, I...

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [22]

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Well, let's keep our fingers crossed, [Glenn], we'll work hard at it, that's our promise.

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Unidentified Analyst, [23]

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Yes. And AIM, again, like -- the analyst before me -- that showed pretty good growth this quarter, I appreciate that it can be lumpy and sometimes you'll have a good one and sometimes it won't show up as good. My question is more -- is the gross margin in that business larger than the overall margin of the ARC? Or is it in the low 30s?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [24]

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It's about the same, I would say, [Glenn]. I mean, I couldn't say that -- now, here's what happens in AIM. There are good jobs in AIM and there are bad jobs in AIM. And how does that work? If you take archival job, you could have documents which are very, very old, which are more complex to archive, which takes much more labor than an average job, but still it's a job. But on the other hand, you could actually also find somebody who comes and says, we have lots of buildings which are all recently built, but they're not necessarily -- those drawings are not necessarily 40 years old, and they don't -- they're not dog-eared and they don't have coffee stains and they're not creased and they are not torn. That's a different kind of a job. So you get a mix bag. So overall, average is about the margins we get. Do you agree, Jorge?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [25]

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Yes, it would be in that 30%, 35% range. But the one thing I will add to that then, there's an opportunity there as more of that, that book of business turns more into the reoccurring software type of revenue then over time, we would anticipate the margin of the blend, i.e., more software, less of the professional services still has the potential to continue to increase.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [26]

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And when somebody archives a bunch of documents, you don't get to sell 50 licenses, [Glenn], you might sell 3 or 4 or 5. But they add up over a period of time and those things actually come to our set of much higher level of profit and that's what Jorge is referring to.

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Unidentified Analyst, [27]

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Okay. And the average length of AIM deal, is that 6 months, 1 year? It depends, I guess, on how much stuff you're referring?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [28]

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Exactly. So the thing about AIM is that at the beginning the cost is very high because there are a lot of professional services to get all those drawings prepared and uploaded. But once they get -- customers get on board, I mean, those documents are largely with us forever. It's like -- it will stay in our archives, and they'll continue to use it. And they are the -- some charge for using it, that's the charge we are referring to, that comes at a higher margin, obviously, over a period of time, when we have 10,000, 15,000, 20,000, 30,000 customers, that will make a meaningful impact. But most of the services upfront is all professional services.

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Unidentified Analyst, [29]

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Okay. And then, you mentioned Abacus at the beginning of the call. Is that something you made mobile? What was the -- I missed that at the very beginning.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [30]

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Yes. So basically, it was a desktop server kind of a software, which largely customers operated from their servers. It is in line with the previous software developments we have had. But what we did is, we moved that to cloud, we can use that also on a mobile platform, but it's faster, quicker, easier to install and the interface is much more user-friendly. That's something that we are focusing on. Anything which our customers get in touch with, we are making it easy and faster for them to use like the app we have. So that's actually -- we're excited about that. We think the customers will like it even more.

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Unidentified Analyst, [31]

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Great. Because then you'll make them even greener and then maybe you can get picked up by one of those environmentally social-conscious funds.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [32]

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I don't know, but I'll wish for that one but thank you for the comment.

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Unidentified Analyst, [33]

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You're saving paper for folks, right?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [34]

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That's right.

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Unidentified Analyst, [35]

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And then the 170 print centers, are there other technology things that you're working on to drive more traffic into your network?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [36]

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Yes. I mean, like we mentioned, obviously, we are on Yelp now. So there are a lot of people who reach us out through the web, via web chat. We have live chat, people will come to our website and ask us, "Hey, can you help me with this?" And we say, absolutely, and we'll help him with that. Now with the app, which means we can push notifications through the app. Whoever was using the app, every time they pick up a job, we can send them an advertisement or whatever that might be. These are all new initiatives we're trying, we're also working with other print service providers to be able to provide our services like Fathead.

They want stuff printed, they want a network where they can reliably print, we can do that. We're working with retail chains where, I don't want to mention names, but we're working with retail chains, where if they want services in multiple locations, we're able to provide that with the same level of consistency. So there's lots of this stuff which is coming to us now, [Glenn], is coming through different and new channels, which we didn't have before. And that's actually, basically, fundamentally driving, giving us the ability to actually hang on to the business and grow a little bit.

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Unidentified Analyst, [37]

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Are -- have you already hired a national accounts person or has that already been in place? But that's kind of like being able to -- it sounds [write S], right? So you can do the chillies printing all over the country from just someone pressing the button.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [38]

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Yes, we already have that in place.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [39]

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We have, again, regional manager and good -- solid good regional sales management in place to accommodate those type of customer requirements --

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Unidentified Analyst, [40]

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Wow. So the next step is, I am at Bechtel, and I put in my print sting and then, I have an art drone that drops it off over to the site right when the person needs it. Was that like that a couple of years all, you're working on that one?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [41]

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Yes, sure, why not?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [42]

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That's kind of cool.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [43]

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That will be super cool.

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Unidentified Analyst, [44]

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All right. And so your January cash in '19, it's always my question on these things, but I'm not going to even talk about your share buyback, it's more -- since you're already at less than 2x net debt, you don't need to pay down like a ton more debt, but this quarter, you dropped off $5 million. If you just hit $5 million towards a dividend, that would also -- I'm looking -- because your stock at times comes under pressure, but who wouldn't want to earn like 4% in a 3% world and wait for you to hit it out of the park with your next iteration of an e-ARC product.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [45]

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Yes.

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Unidentified Analyst, [46]

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Have you thought about that? Or like relative to other uses of cash? Because there's -- man, you've done a great job paying down debt over the years and now...

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [47]

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Right. When we get there, we'll cross that bridge, [Glenn]. Right now, our focus is seeking out a way to continue to stay in this growth mode. I'm not even thinking about cash or what we're going to do, if we get another couple of years under our belt and we continue to grow, we'll know. But at the moment, because any time, the revenue slips, which we've had in the last 3 years, immediately EBITDA gets affected and immediately it comes back to bite us with ratios and so on. I think that's behind us, we don't know that, we've done it 1 year, we want to do it couple of more years and I think, we'll get there. So we're working hard at it but all points noted, I mean, I'm sure everybody is thinking what will happen if those things happen, but those are good things to happen and then at that time, we'll cross that bridge.

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Unidentified Analyst, [48]

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Yes, well, we still don't have an infrastructure bill in this country, and if you follow the reason of that, I am always thinking about you and Dilo, right? And so that's just the fastest income hitting you from all of your hard work, right?

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Operator [49]

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Your next question comes from the line of Matthew Schwarz from MAZE Investments.

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Matthew Schwarz, Maze Investments, LLC - Director of Research [50]

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Jorge, could you spend a couple of minutes talking about the differences between really the high end and the low end of the EBITDA guidance? And maybe some scenarios that could lead us to the high end or the low end? And how much does the healthcare issue tie into the delta?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [51]

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From a very high level, I think, Suri kind of touched on it in regards from the revenue generation. Obviously, if we do garnish and get a little bit of growth and continue that momentum from 2018 and maybe when improve upon it a little bit, then that definitely would put us in a good position to be in the higher end of the range. Obviously, if there is market conditions and the digital transformation accelerates more than it has been in the last couple of years, which seems to have stabilized, it's happening, but it's stabilized, then obviously, that gives you risk to the bottom end of the guidance. And regards to our cost structure, we feel good about the moves and the changes we made from a cost structure standpoint in 2018, that those are sustainable, with a slight caveat that you know, our employees did a great job and we also need to make sure we retain our employees, we got to consider a 100 -- 35%, 40% of our business comes from California in a very competitive market. So you got to be cognizant of that to be able to compensation wise retain your good people. So that's a challenge we deal with every year, right, nothing new.

In regards to the medical side of it, it's a bit of a wildcard, like I said in my script, typically, when you have chronic diseases or those -- that C word that we all try to avoid when we go to the hospital. Well, those things typically don't flush out in 1 year, typically takes a couple of years. So we still have fair amount of those in the system. What impact they're going to have in 2019, remains to be seen. Any new surprises going on there? We did make some very dramatic changes to our medical structure, providing the best benefits to our employees, but we did decouple a lot of things, that gives us a lot more ability to try to provide great service and hopefully, reduce some cost. So that's a long-winded, say -- way of saying, we hope to improve upon what happened in '17 and hopefully bring that down. But there's so many unknowns there.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [52]

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Yes, just multiple factors, I guess. Obviously, we're going to try very hard to maximize that, but given the various factors involved here, we're just being careful about what we are predicting. We'll see how it goes.

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Matthew Schwarz, Maze Investments, LLC - Director of Research [53]

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Okay. Just to dig in a little bit more on the healthcare. So you said $4.3 million. Can you talk about what that was last year?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [54]

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Well, there was a decrease there...

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Matthew Schwarz, Maze Investments, LLC - Director of Research [55]

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What the structure of your healthcare agreement currently is with the stop losses presently?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [56]

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Yes, the structure. So the increase in '19 -- in '18 over '17 was $3.7 million. So obviously, borrowing that, we would have some nice growth in EBITDA, obviously, outside of the control of operations. Our stop loss is set at $250,000 per individual for the year. So if any individual were to go over $250,000, our stop loss kicks in and they cover that. So it's just a product of how many cases go over that, how many are in that $100,000 and $200,000 range, and that's frankly something that's too early in the year to give a concrete answer on that.

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Matthew Schwarz, Maze Investments, LLC - Director of Research [57]

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I see. And I think, if I extrapolate on what you said about SG&A per quarter, it basically gets us to an SG&A level for the year that's down something like $1 million versus last year. So is it safe to say that if you look at the company as a whole and I know you're doing a lot of increases in tax spending and other initiatives over the year, is that all fully loaded at this point?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [58]

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Yes, I think that's a fair comment with the caveat saying, hey, we're going to continuing to invest in those areas where we think we can generate new growth. But we're also going to be very conscious in managing our costs in those areas that we don't think are providing benefit and continuously do what's in our DNA, right, reduce those costs where we can. And if we get a little bit of help from the medical, maybe we could beat some of those numbers.

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Matthew Schwarz, Maze Investments, LLC - Director of Research [59]

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Okay. Got it. And then just lastly on the facilities management piece. I know I think I asked this last quarter as well, but is there any information you can give us about how many people are maybe testing or using the product? Or anything else to help us understand, I guess, the progress or potentially momentum that this product has in the marketplace?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [60]

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Yes. So obviously, we have -- using several customers and we have airlines using it, we have governments -- some customers from the government sector, we have customers from the healthcare sector. So there's a range of customers who are using, nothing is big enough to be -- for us to be able to quantify and say, it's really meaningful and we want to drive it. Obviously, we're trying to see, which is the sweet spot. Obviously, this is -- there's property development, there are public utilities because when you talk about facilities, we're talking about the bill space. The interesting thing is, we use the same knowledge -- depth of knowledge we have in the new building construction in the bill space. That's what we are doing. And because we have extensive knowledge in construction, documents information and management so that's what we're doing right now. But we don't have enough information to be able to -- it's not material for us to be able to declare that just yet. We just don't want to send the wrong signals out there. So once we come to a stage that we really feel like it's something material, it's going to make an impact, then we would definitely be talking a little bit more about it. But all we know is the product is being received well and people like the product, and we're also trying to understand the customer fit, whether this is working very well. So many of those things we are making changes right now, trying to adjust the software and make the customers respond to that. We'll know more as we continue to use this product.

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Matthew Schwarz, Maze Investments, LLC - Director of Research [61]

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Okay. And just lastly, taking back on [Glenn's] question about debt. I think you've talked a little bit about some leverage targets in the past before you've considered some other uses of capital allocation decisions. Is there a target you have in mind today? Because obviously, you're generating a tremendous amount of cash, especially versus your market cap and even your enterprise value today?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [62]

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Yes. So I mean, obviously, the cash generation depends on how much money we are investing and also, it's all relative to where the market is going. If we have good growth and if we have good EBITDA, then our comfort level goes quickly higher because our ratio has performed better. The thing which we were concerned about in the last 3 years would be right, Jorge, correct me if I'm wrong, is when our EBITDA starts slipping, then we start worrying about what the consequences might be. So one of the things we are focused on, say, look, really bring the debt under control, which is what we have been doing. And now we are in a much better position. But having said that, the changes in the accounting rules, we're going to have new release accounting standards and we'll wait and see how these things fall out. But right now, like I told then, I mean, we are totally focused on making sure that we sustain this level of activity in the marketplace and protect the business we have. And if you can come up with some growth, it will be amazing. We're trying to see how well we can do that. So we are really focused on getting these new revenue avenues really solidified this year. That is our focus.

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Operator [63]

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Your next question comes from the line of Alan Weber from Robotti Advisors.

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Alan W. Weber, Robotti & Company, Incorporated - Portfolio Manager [64]

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Can you talk about kind of -- have you seen any change kind of at service level in competition? Any closing of service centers that's made a difference? Or that you expect to see, given the kind of industry trend over the last few years?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [65]

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Yes, we could discuss -- chat about that a little bit. So in our traditional space where you find other reprographers, that space is getting significantly changing. They are basically all becoming print houses with color capabilities. They are largely -- all become largely color houses. There are a few people doing slightly different things in terms of some technology offerings, 3D work, some people do some 3D printing and so on and so forth. Some people do some building information, modeling kind of work regular. So there are few variations of that. But largely, they have all become really good at printing color and that's a market everybody is driving very, very hard. But we also get competition from newer sources, which is basically, print companies offering print services on the web. So there is bunch of different companies trying that out. But we think there is a way we can structure our services where we could continue to deliver really high-value service or high level of service. For example, if you check our reviews, and if you go to Yelp, it's not uncommon for customers to give us 5 stars, right, Dilo? Would you confirm?

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [66]

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Yes.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [67]

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I can't think of a 4 star we got last time. In other words, we are focusing on that level of service. Somebody comes with a inquiry, literally within hours, we not only respond to them, but in many instances even complete the job. So we're trying to actually adapt to today's needs of customers and that's we previously described about the app and so on and so forth. The idea is to be able to deliver services and solutions, make it much easier for our customers to access us, find us and when they find us and when they want something, make it really, really easy for them to order it and really easy for them to get delivered. And they have the information. Right, Dilo?

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [68]

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Yes.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [69]

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So it's all about making it easy and faster and make it very convenient for that. And that is working for us in multiple fronts. Not only with construction customers, but newer customers who are not necessarily in construction, who are reaching out and saying, "Hey, can you print for this?" Whether it's flyers or whether it is a museum, we get all kinds of orders on the web now. So we are using the web channel also to create that excitement, but in terms of competition, now we have, I would say, more competitors because we are obviously stepping into other markets, which traditionally we didn't get into. But the traditional competition in the form we had has gone down. Would you say that, Dilo?

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [70]

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Yes, absolutely.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [71]

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But they're in different forms.

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [72]

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Yes, yes, same companies are still there, they've probably got a little smaller as we've got even in last few years. So they have not gone away. I think, what's -- mostly what's we are enjoying is that our focus is primarily on good quality service and good customer service because when the markets are good, customers are demanding high level of quality and turnaround time. That's where we have focused over the last 18 months and all our staff around the country. We are super focused on getting the job done very well with high quality and make the customers happy and get their repeat orders coming back to us, so that's where we are focusing on. I think that's where we are continuing to win that extra market share, by providing that high-quality service.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [73]

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And I also would add that, I don't know of any of our traditional competition or people who have been in our space, investing the amount the way we are investing. So we feel good about the investments we are making in order to drive the business. So we think that's the benefit. Because we are a healthy company, we can continue to invest in the business. I think that is the reason why we were able to show this 1% growth -- plus-percent growth, and we are hoping that will help us.

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Alan W. Weber, Robotti & Company, Incorporated - Portfolio Manager [74]

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Okay. I would think that at some point it would lead towards some form of consolidation of the service centers or fewer service centers.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [75]

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I don't -- it's very interesting. As you know, we have been in the consolidation model, there was a period of time that we acquired back to back so many companies. We don't see that opportunity right now. We are -- let's put it this way. We don't see that as a meaningful thing now because any customer we buy, if they are not -- if they don't have the model like we do, it's likely their revenue will erode. So I don't see any more consolidation. I think it's going to be -- the market is going to, depending on the demand out there, adjust itself in terms of size. But it's interesting. It's a challenging market, but we feel very good about what we did in 2018, and we certainly expect to have the same level of energy and enthusiasm going into 2019. It's looking good. And we're very hopeful that we'll continue to grow.

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Alan W. Weber, Robotti & Company, Incorporated - Portfolio Manager [76]

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Okay. And just my final question. In terms of the cash flow, what do you expect capital spending and capital leases to be for '19?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [77]

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Capital spending, I think, will be in that $12 million range. As I mentioned in my script, it was about $2.7 million due to accounting rules that were shown as an inflow from operations and an outflow from capital expenditures. So when you take that $2.7 million out, that would have got you to about $12 million for '18. And I think that's a good proxy to use as we look at into 2019. In regards to capital leases, we're -- the lease rates are still very attractive out there. We did decrease number of capital leases we entered into. We were at $25 million in '17, we dropped it at $21 million. I would anticipate that number dropping a little bit, borrowing any positive news. We signed a big enterprised-type cluster in MPS, and they need to buy $5 million machine, well, that would be a great thing. I don't see that in the horizon right now, that's not the strategy we're going after. So just kind of with that said, getting that in the $15 million to $20 million range is probably a good proxy for the lease side of it.

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Operator [78]

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And there are no further questions at this time. I will now turn the call back to David Stickney for closing comments.

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David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [79]

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Thanks, everyone, for joining us this evening. We appreciate your continued interest in the company and we look forward to talking to you shortly here in the first quarter of 2019. Thanks so much. Good night.

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Operator [80]

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This concludes today's conference call. You may now disconnect.