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Edited Transcript of ARC earnings conference call or presentation 25-Feb-20 10:00pm GMT

Q4 2019 ARC Document Solutions Inc Earnings Call

WALNUT CREEK Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of ARC Document Solutions Inc earnings conference call or presentation Tuesday, February 25, 2020 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

* 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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* Bradley G. Safalow

PAA Research LLC - Founder & CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the ARC Document Solutions Fourth Quarter and Full Year 2019 Earnings Report Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Stickney, Vice President of Investor Relations. Thank you. Please go ahead, sir.

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

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Thank you, Chantel, and welcome, everyone.

On the call with me today are Suri Suriyakumar, Chairman, President and CEO; and Jorge Avalos, our Chief Financial Officer. Our Chief Operating Officer, Dilo Wijesuriya is traveling today and won't be joining us.

Our fourth quarter and full year results for 2019 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.

In today's earning announcement, ARC offered expanded supplemental disclosures to provide shareholders and analysts with additional information in advance of our quarterly conference call. The disclosures are largely historical, and other than the overview will not be read on today's call. Instead, we will offer a brief introductory remarks about the previous period and our expectations for 2020 before turning to the question-and-answer period.

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 25, 2020, 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 Chairman, President and CEO, Suri Suriyakumar. Suri?

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

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Thank you, David. Good afternoon, everyone, and thanks for joining us.

As we stated earlier in our press release, 2019 challenged us to reconfigure our product and service portfolios to adapt to a transforming market. We accomplished that successfully and protected our cash flow from operations, which remain a steady source of strength and stability for the company. Sales declined moderately in the U.S., but were adversely affected by the performance of our equipment and supplies business in China. Sales in this division rose early in the year, but fell dramatically late in the year, accounting for more than half of the decline in our overall revenue for the fourth quarter and more than 1/3 of our overall revenue decline for the year.

With regard to margins, the effects of our aggressive restructuring plan early in the third quarter had a significant and positive impact in the second half of the year. We also met our forecast for EPS and EBITDA, and I'm pleased to report that we exceeded our forecast for cash flow from operations.

Looking forward to 2020, we will maintain the same focus we established in 2019. We will continue to focus on protecting cash flows and profitability. We will use more of our excess cash to return shareholder value through dividend and share repurchases, and we will be less aggressive paying down what is a very manageable debt level.

From a sales standpoint, while our AEC segment continues to be the core of our business, we are expanding our reach into opportunities in our non-traditional print offerings in color, promotional and environmental graphics. Our teams are highly focused on promoting our expertise in these areas to larger organizations and franchises and have scored impressive account wins in the back half of 2019. We also expect additional wins of larger MPS customers via our global services unit.

We spent majority of the 2019 marketing our enterprise MPS services to adjacent markets, and I'm pleased with the progress we have made. AIM, while small, is also continuing to demonstrate robust growth and has potential to make a material contribution in 2020. We anticipate equipment and supply sales in China to remain soft. If for no other reason, then the difficult economic conditions the country is experiencing and the recent disruptions caused by the COVID-19. It should be noted that our business has not been affected by the COVID-19 virus to date.

As noted in our third quarter call, it is important to keep in mind that our business is not suffering from a loss of customers and lack of relevant services or competitive pressures. We have what our clients want and need, but they are simply not using our traditional services as much as they have in the past. As our market changes, we will continue to change with it, optimizing the business to produce solid cash flows and healthy margins as we have always done.

Today, we released our annual forecast for 2020, and it reflects the opportunities and the challenges I have outlined here as well as a few special circumstances that I'll let Jorge cover briefly in his remarks before turning to Q&A. Jorge?

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

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Thank you, Suri. As noted in the third quarter, we went through a restructuring exercise that net a $10 million in annual savings. We realized approximately $3.5 million of those savings in 2019, and the remaining $6.5 million will be realized in 2020. We will lap the cost reductions in August of this year.

Our strong cash flows from operations were assisted by these cost-savings measures, but our performance was driven primarily from aggressive inventory management, improved AR collection as well as other changes in working capital.

Our cash flow performance also supported our decision to convert 100% of our long-term bank debt to a revolving facility in the fourth quarter, as previously disclosed, and provided the structure to create our new dividend program. Our most recent quarterly dividend announcement was made 2 weeks ago on February 14.

Before we move to Q&A, I'd like to reiterate the circumstances outlining -- or outlined in our press release regarding our forecast for 2020 cash flow from operations. As our pay period is biweekly, this year, we will have an additional pay period caused by the annual timing differences in payroll, including leap years. This catch-up payroll period affects ARC every 11 years and will have an approximately $4.5 million negative impact to cash flow from operations in 2020, but no impact to net income.

At this point, I'll turn the call back to Suri. Suri?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [5]

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Thank you, Jorge. Operator, at this time, we are available to take our listeners' question if there are any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brad Safalow with PAA Research.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [2]

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Just make sure I have this factually on the payroll side. You said it's a $4.5 million or will be a $4.5 million negative impact on cash from ops for the year for the extra payroll?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [3]

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Correct. Because we'll be doing 27 payroll payments in 2020 versus 26, which is typical. And it's all due to that leap year in every 11 years when you're on biweekly payroll, it happens.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [4]

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Okay. So ex that, you guys would expect cash flow from ops to be roughly consistent with 2019.

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

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Correct.

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

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Exactly, yes.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [7]

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Okay. And then just going through this, I figured this out from what you have in the balance sheet. The bank debt outstanding right now under the revolver is that around $60 million?

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

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Yes, that's correct. It's exactly $60 million, and it's all revolvers, so no required principal payments next year.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [9]

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Okay. And then I think at the end of the last quarter, you had $46.5 million or so of capital leases. Is that number still the same?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [10]

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Yes. Right around there.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [11]

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Okay. So if I start to pencil out next year in terms of cash from ops, you have your guidance, let's take the midpoint of that, what kind of CapEx do you expect for 2020?

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

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I think we'll be a little lower than we were in '19. '19, we're around $14 million. I think we'll be in the $10 million to $12 million.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [13]

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Okay. And then you have -- I think, in your last Q, it said that you had about $18 million in required capital lease payments. Is that right? $20 million?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [14]

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Yes. It's about $18 million, $18.5 million. It's been steady about $4.6 million per quarter.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [15]

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Okay. And then guys, based on what your share count is now, your dividend will cost you -- what is it $1.5 million, $2 million for the year?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [16]

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Yes. $1.6 million, about $400,000 per quarter.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [17]

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Okay. So if I do the basic math there, you're talking about $15 million to $17 million of, let's just say, distributable cash flow for share buybacks and/or debt repayment. You said that you would not be as aggressive paying down debt. Help me understand what the -- how you're thinking about the balance between the 2.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [18]

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As we think about the balance, obviously, with the -- the dividend is the dividend, right? So you know that's $1.6 million. That's what we already announced, obviously, on a quarterly basis. In regards to share repurchase, we're going to purchase them in the open market, and we're going to be opportunistic. I mean if the price is right, obviously, we have the money. There are certain restrictions when you're buying in the open market. But it is an opportunity for a big block trade at a good price, then we'll do it. Once we exhaust our resources on dividend and share repurchase, then we'll kind of take a look at it and say, okay, how much money do we have left over to reduce our interest a little bit and pay down some debt. So a little bit of moving target. Suri, do you want to add to that?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [19]

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Yes. So Brad, I mean, again, we want to be opportunistic here. What we are seeing is, obviously, we want to play it safe in terms of planning for that. We don't want to cut it too fine and not knowing what the year will hold because of the transformation. But like we said, we are super confident we'll make the changes required like we did in 2019 and be able to generate that same level of cash. But we want to be -- we are mindful of the fact that if there is a shift in economy, if something changes, we won't have enough margins there. And if nothing changes and things are exactly like 2019, we'll be in a great place, and then we'll be happy to make decision, whatever decision we had to make. But like Jorge said, if you get a great chance to buy a block of shares at a good price, we'll do that, too. So we want to keep our options open. That's a short answer.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [20]

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Yes. And if history gives you any indication, we spent about $1 million in share repurchases in both the third and fourth quarter. You add a dividend payment of, call it, $400,000, about $1.5 million. At that run rate, you're about $6 million for the year. So then that gives you another $10 million to think about do more share repurchase. Maybe we pay back a little bit of the debt as well, too. Hopefully, that's helpful and gives you a little color to your question.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [21]

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Yes. I'm just thinking of it, if you're in the open market, based on the liquidity of your stock, I don't know how many restricted days you have a quarter, but, let's say, it's 45, 50. I think the max you could repurchase is about 1 million shares in the quarter. Based on trading restrictions, obviously, that 700,000 in the fourth quarter. I guess what -- I don't understand what the stock where it is, like why you're not just considering something more aggressive like a tender for stock. Or is that something you will consider over the course of the year depending on how things shake out?

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

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Yes, depending on how cash is going. I mean, if indeed, we found that there is a reasonable chance that we can do that and it's not going to any way offset the balance in terms of what our capital structure is, it's certainly worth looking at, Brad. Obviously, that's, like I said, keeping the options open to see how we proceed. If the year is looking good, things going well, don't forget, it's an election year. So we are mindful of that, too. You never know what these things turn out to be. But if the year turns out good and we have a lot of extra cash, I think that we can come up with other options to use the cash. Given the stock price where it is, there's no reason for us to buy as much stock as possible. And we don't have an obligation to pay the money to the bank, and that's why we have shifted our focus to saying, we are focused on shareholder returns now, and that's definitely what we are thinking about.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [23]

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Yes. And also, don't forget, you -- obviously, you know the rules in regards to the restrictions of you -- of what you could purchase in the open market. But you could also do a block trade if that's all you do that 1 day, that could be $0.5 million. That could be $1 million. So there are opportunities to get a little bit more aggressive even with the current structure.

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

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We haven't actually been looking for stuff like that, but we do know people show up on the radar screen for block trades every now and then. We have not been encouraging that, but maybe we'll take a different tack towards that when people want to think about it differently. Also -- I also feel with our announcement, Brad, that we are going or moving into this dividend space. I think there will be some shift in our shareholder base because there are different types of shareholders. We are already seeing evidence of that, different type of people are getting into the stock. So there's a little bit of movement in the market as well. So we'll see how it goes.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [25]

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And just so I remember you -- sorry, go ahead.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [26]

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Sorry, go ahead.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [27]

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Go ahead, go ahead, Brad.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [28]

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The cap on share repurchases for the year under the new credit agreement is $10 million?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [29]

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That's -- we have $10 million that we could use for either dividend or share buyback that do not impact our financial covenants.

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

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Financial covenants.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [31]

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Okay...

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

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Combined.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [33]

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Yes. Combined.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [34]

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Yes. And remind me again where the new leverage covenant is set for you guys? I assume that's the only...

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [35]

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Leverage coverage for us is at 2.75 or under -- we're about 1.9, I believe, 1.8. So yes, we have tons of cushion there.

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

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We're in a good play there.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [37]

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Yes. We're in a good place.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [38]

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Okay. Well, at least I would put myself in a camp as we get through summer and you're coming close to where your cash flow is. I mean I think you need to signal more the market that you really actually want to drive shareholder value by purchasing more stock through a Dutch tender or something that can be far more meaningful than buying 20,000 shares a day 40 days in a quarter.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [39]

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I agree. I agree. I mean that's certainly that we can look at. We just have to push those strategies through the goal, which I think we can do.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [40]

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Yes. I mean whether the...

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

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Especially if we have the excess cash.

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

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The near-term focus is just keep delivering the strong cash flow, focus on the core business.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [43]

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Okay. And just on the core side, you mentioned facilities management revenue streams in the AIM line. What's the split between, let's just say, product-oriented archiving work and the, let's say, more recurring FM piece at this point?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [44]

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Jorge, any ballpark idea?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [45]

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I mean we have numbers out there. It's -- we haven't broken out the facilities expenses in our plan to do that now. I mean, they are growing, are they significant to our overall sales consider were $400 million, not quite there. I will tell you that our growth in AIM, we grew over a year, $1 million. That was definitely driven from the new facility solution. We are gaining traction, getting new customers, some nice big logos. I can't say on this call but yes.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [46]

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Yes. The thing is, Brad, the challenge we have, which you know because we know the quite -- business quite well is because our traditional print-related business is eroding. It's not like we don't grow, we grow. But unfortunately, none of the growth shows up because the lack of our drop in print volumes is the one which gets affected. But we certainly think that those things will continue to be good. It's just that it doesn't show in the numbers the way it should show because of the fact that the erosion has been there. And hopefully, the ocean won't continue to be there, and the market remains strong, like 2018, we could have another good year easily.

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Bradley G. Safalow, PAA Research LLC - Founder & CEO [47]

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Okay. And then just in terms of a macro framework through which you set this guidance, what kind of non-res environment have you assumed? Is it low single-digit growth, mid-single-digit growth, flattish, high single-digit growth in terms of construction?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [48]

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I would say all of the above. I mean, obviously, you've seen what we did with our Q3 restructuring. And one of the things that we always pride ourselves is that we're going to optimize our cost structure to optimize the sales that we can get. So if we're seeing sales grow 1%, 2%, great. That really drives a lot to the bottom line. If we see it come down a couple of percentages, then we'll do the need for on the cost structure to protect our cash flows and our EBITDA. And hence, that's why we're saying it's a similar year to last year. Can we go a couple of percent? Yes. I mean I think that's in the realm of possible we're looking at. Is it possible to stay flat or drop a couple of points? Yes, that could happen as well. Suri, anything to add to that?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [49]

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No. I think that's pretty much the same. Obviously, we would like to grow that part. That's one part we think we can grow. There are more project-oriented that they're not account-oriented, these large collar jobs, they just come in chunks. You get a project and then that project finishes, and we have to get another project. That doesn't mean that we can't continue to attack that space, but that's what we are doing right now, and we have been getting some good brand names. We just have to continue to push that hard.

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Operator [50]

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(Operator Instructions) There are no further questions at this time. I'll now turn the call back over to the presenters.

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David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [51]

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Thank you, Chantel, and thanks, everyone, for listening this evening. We appreciate your interest in the company, and we look forward to talking with you in the next quarter. Take care. Bye-bye.

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Operator [52]

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