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American Reprographics Company (NYSE:ARC)

Q4 2012 Earnings Conference Call

February 28, 2013, 5:00 pm ET

Executives

David Stickney – VP, Corporate Communications

Suri Suriyakumar – Chairman, President and CEO

John Toth - CFO

Analysts

(Andrew Steinerman)

(Alan Webber)

(Brandon Dobell)

Operator

Good afternoon. My name is (Matthew) and I will be your conference operator today. At this time, I would like to welcome everyone to the Arc Document Solution’s fourth quarter and full year earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to your host, Mr. David Stickney. Mr. Stickney, you may begin.

David Stickney

Thank you, (Matthew), and welcome, everyone. Joining me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; D. Wijesuriya, our COO; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer.

Our fourth quarter and fiscal year-end financial results for 2012 were publicized earlier today in a press release. You can access the press release and the company’s other releases from the investor relations section of Arc Document Solution’s 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. You can find the dial-in number for this replay in today’s press release.

We are also webcasting our call today and the replay of the webcast will be available for 90 days on Arc’s website.

This 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.

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

The forward-looking statements contained in this call are based on information as of today, February 28, 2013, 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.

At this point, I’ll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Suri Suriyakumar

Thank you, David, and good afternoon. Our fourth quarter and year-end performance for 2012 reflects the results of an aggressive and ambitious restructuring plan we initiated in October in response to a dramatic shift in our customers’ behavior which has been accelerating over the past year.

While the construction market appeared to begin its slow recovery in 2012, we saw clear evidence in the third quarter that traditional reprographics revenues would not recover at the same pace due to the adoption of technology by our customers.

Therefore, we moved very quickly to ensure that our costs and resources were in line with the current portfolio of production services and that our primary offerings were tied to growth markets so the company remains on sound financial footing.

Restructuring the company was critical to our long-term objectives. The steps we took to position the company as the document solutions provider of choice, in our industry we are not only important for the future sales efforts but we’re also tailored to deliver strong earnings at current revenue levels.

The actions we took to better manage our cost structure and the speed with which we took them bolstered our performance in the fourth quarter. We delivered results few could have expected given our position at the end of third quarter.

The company recorded annual revenue for 2012 of $406 million with a gross margin of 30.4%. Cash flow from operations was $38 million in 2012 even after cash payments of $1 million related to our restructuring efforts. This equates to $0.82 per share for the year.

Our balance sheet remains strong. Our revolver remains undrawn and adjusted annual earnings per share came in at negative $0.04.

While I can’t admit to being satisfied with our EPS performance, given that we were able to avoid further deterioration of our earnings during what is normally the weakest quarter of our industry, provides me with enormous confidence that our restructuring efforts were targeted in the right place.

Our gross margin and our EBITDA, adjusted EBITDA margin both improved sequentially from the third quarter to the fourth quarter for the first time since we became a public company and it’s continuing testament to the execution skills of our management team.

The changes we made in the fourth quarter, in addition to efforts throughout 2012, will allow us to achieve significantly better performance in 2013 even without a full recovery in the (AEZ) industry.

For your reference, the revenue for the fourth quarter of 2012 was $96.9 million. Our quarterly gross margins was 29.6%. Adjusted earnings per share for the fourth quarter was negative $0.02. And cash flow from operations for the period was $6.7 million.

As some of you may recall, at the end of 2011 I drew your attention to our diversification as (what) a proactive step in our evolution as a document solutions company and also as a hedge against the possibility of project printing remaining constrained due to the impact of technology.

We have known for more than 10 years that digital methods of document production and distribution would eventually take hold and begin to impact traditional printing. That is exactly what we have – why we have invested heavily on the technology center and developed our own software in the first place. Now, we are finally seeing what we have been anticipating for so long.

We were well prepared for the transition and that is why we have been able to move so quickly to refine our business model, address new sources of revenue and fearlessly attack the cost that no longer support our business in the same way they have in the past.

Not only have we optimized our geographic footprint, paring down the number of locations and our headcount, but we have more closely aligned our operations to the natural work we are doing today.

While our customers (really) have continued to change with regard to how they view, manage and distribute (lines) and documents, their needs for services such as managed print, document archival services and document retrieval tasks continue to expand with this increasing use of technology and tools such as building information modeling.

Simply put, the industry we serve and the customer we serve remains the same. And our relationships are stronger than ever before.

While our customers may not be printing as much, they are generating more documents resulting in a critical need for a service provider who is technology enabled and capable of storing, managing, distributing, archiving and retrieving their documents.

Our managed print services offering along with services such as archival information management and digital shipping further adds value to the services we have been providing these customers for decades.

All of these attributes combine with our deep (inaudible) knowledge makes us a unique service provider in this space. Our portfolio of services cannot be matched and it allows us to remain the dominant document solutions company in our space.

Our services are becoming more deeply integrated into our customers’ workflow and more sales opportunities are available inside the offices rather than inside of our shops.

While our traditional service centers remain important for offsite work, during periods of peak document production in our customers’ offices, and of course project related work when required, we don’t have the same space requirement for our shops that we had in the past.

Not only are we reducing the number of our service centers but we are also reducing the sites of each of these service centers as we renegotiate our leases.

The emphasis of our technology, which was previously focused on managing project-related documents, has now shifted towards capturing the entire ecosystem of documents generated in our customers’ offices.

Our general flagship application, planned (element of) surprise, remains deeply relevant and very used to support construction projects. However, by providing many print services and making our services available throughout every one of our customers’ offices, we are now managing every document they produce.

Where our services were once primarily devoted to construction project documents, we are now using tools like (Abacus) for managing, distributing, producing and archiving documents related to legal, contracts, human resources, accounting, financial and more for our customers.

Today, (Abacus) has more than 50,000 users who have tracked their printing every day on nearly 10,000 machines all over the company. They (inaudible) more than 30 million impressions a year are collected and consolidated into a single invoice for more than 70 enterprise-level customers.

In some cases, such methods are uploaded automatically into customers’ ERP systems to help maintain real-time billing and management reporting.

(Abacus) employs (low) based printing features that keep the cost down, follow me printing that keeps their efficiency up and (inaudible) that allow the users to archive their documents as different, three or four operations dashboards that fully (inaudible) team of any business to see not only activity by department, device and service level but also compare such metrics to companies similar to their own to help benchmark their performance across the industry.

On the very near horizon, (Abacus) will integrate into our collaboration platform, our digital and shipping managed file (trans) applications and more.

These integrations are, in turn, critical to the advancement of our archive and information management initiative called AIM, or AIM as we call it.

It is a service designed to move both legacy and active documents traditionally held in a warehouse storage to the cloud. No longer held captive in boxes or delivered by trucks and (boxes), we are now beginning to campaign for documents or even capture documents as they are being printed and store them in a scalable archive supported by Amazon cloud services.

Our new services, much of our existing technology and all of our new solutions are designed to address the shift in our customers’ behavior. These tools will assist us in building back the revenue typically associated with traditional reprographics that have been lost during the construction downturn and from the (secure) changes that have emerged as an industry leading service hub.

Early signs are evidenced in the growth of global services sales, steadily increasing revenue from management services and more.

Given the work we did to address our cost structure, more of this revenue will drop to the bottom line, which in turn will help our margin performance.

The changes we have made and the early (inaudible) signs we are seeing as a result support a brighter picture in 2013 than we have seen in several years. As a result, our group efforts have been outlooked for any registered earnings per share. It’s in the range of $0.03 to $0.07 on a fully diluted basis and our outlook for (earning) our cash flow from operations is in the range of $38 million to $45 million.

Finally, you will note that we have changed the formal name of our company to Arc Document Solutions. As I have predicted in the past, we have emerged from these difficult years as a new and a different company than we were prior to the recession and throughout (inaudible) to reflect these changes in our name going forward.

At this point, I’m going to turn the call over to John Toth, our CFO, to review key financial information from 2012. John?

John Toth

Thank you, Suri. There are three topics I’d like to cover on this call. First, I’m going to review the changes we’ve made to the sales reporting presentation in our financial statement.

Secondly, I will review in summary the restructuring charge we’ve taken in the fourth quarter and finally I will quickly review key items in our fourth quarter and full-year financial results per past practice.

Starting with changes to our sales reporting presentations, as we’ve said on previous calls, Arc Document Solutions has different business lines that are responsive to different drivers.

In an effort to increase your visibility into the nature and changing dynamics of our consolidated business, we are increasing the level of granularity of our revenue reporting. We will now be reporting on five revenue categories due to the schedule’s footnotes and narrative of our 10-K, whereas historically we reported three revenue categories which were reprographic services, facilities management and equipment and supplies.

First, the equipment and supplies sales line is unchanged in the new format. Second, the facilities management sales line has been renamed onsite services. But the makeup of that line item, i.e. the sales that go into it is unchaned.

We changed the name of this revenue stream to reflect the fact that those sales include revenue from both large format project related machines placed on customer sites known as FMs as well as small format machines placed in customer offices, known as MPS’.

This revenue line is driven by the ongoing print use of the customer and is less exposed to the episodic large format printing needs associated with construction projects.

The third revenue line, reprographic services, has been broken into the following three line items: traditional reprographics, which as the name indicates is primarily the printing and distribution of construction-related documents at Arc locations; next color, which consists of specialized digital color printing and finishing services executed also at Arc locations.

This includes work done under our (Riot) color brand. And third, digital services, which consists primarily of digital document management services and our guiding as well as software licensing.

In our 10-K you will see much more detailed discussions of these line items as well as a five-year history of the sales categories. We believe this presentation of our revenue more accurately reflects the drivers of our consolidated revenue and will provide you greater insight into the opportunities and risk diversification provided by our portfolio of business lines.

As this may cause changes to any models you have of the business, please feel free to contact me with questions and clarifications. The presentation of our balance sheet and cash flow statement remain unchanged.

Now I’ll briefly review the financial impact of the restructuring plan we undertook in the fourth quarter.

As noted in our earnings release earlier today, we recorded a restructuring expense of $3.3 million. This is the result of the aggressive initiatives Suri discussed, specifically the closure of 33 service centers, streamlining middle management and the reduction of the company’s workforce by approximately 300 employees.

Of this $3.3 million, $800,000 is for employee termination costs, which are cash costs paid in the fourth quarter. Another $2.2 million is for property lease exit costs associated with our footprint reduction, which is also a cash expense but most of the cash will be paid out in future periods.

And the balance of $400,000 is for other expenses, including non-cash items associated with the restructuring plan.

We have already paid for the majority of these restructuring expenses with cash generated from the business and without having to draw on our revolver.

With those two notable items out of the way, now I want to address the financial results themselves.

Beginning with revenue, our consolidated net revenue for the fourth quarter was $96.9 million, resulting in full-year 2012 net revenue of $406 million. This is a 4% decrease from the prior year.

For your daily sales calculations, 2012 had 254 working days as did 2011. The fourth quarter of 2012 had 63 days versus the fourth quarter of 2011 which had 62 days.

We believe the number of working days in a period has a greater impact on our traditional reprographics and color business lines than it does on our onsite services business.

Moving on to the revenue mix by product line and using our new found revenue categories, for the full year, traditional reprographics was down 13% on a year-over-year basis while onsite services were up 8%.

It should be noted that for the fourth quarter, sales from traditional reprographics was $28.4 million or 29% of total Q4 net sales while sales from onsite services was $27.6 million or 28% of Q4 net sales. This is less than a $1 million difference in the quarterly run rate of these two businesses.

As Suri pointed out, it’s a growing indication of both the shift of our customers, both the shift our customers have taken with regard to where and how they want their services as well as how quickly we are responding to fulfill our customers’ evolving needs.

Breaking out each product line as a percent of consolidated revenue for the full year 2012, traditional reprographics delivered 31% of our revenue versus 34% in 2011. Power services made up 19% of our revenue in 2012 versus 20% in 2011.

Digital services made up 9% of our 2012 revenue, essentially even with 2011 and onsite services delivered 27% of our total revenue, an increase of three points as compared to 24% in 2011.

Equipment and supply sales delivered 14% of our overall revenue in 2012 compared with 13% in 2011. With regard to customer mix in 2012, revenue from AEC customers accounted for 76% of our total revenue with 24% coming from non –AEC customers.

This consistency in customer mix is due to the fact that we continue to leverage our strong relationships in the AEC space with our new services.

As for sales by geography, our year-over-year regional revenue performance for 2012 is as follows. Northern California was flat for 2011; Southern California revenue was down 8%. The Pacific Northwest was down 9%. The revenue in our southern region was down 8%. The Midwest was down 2% and the Northeast region was down 8%.

Our international operation, excluding Canada, was up 23%. This strong growth was led by our China operations.

Moving down our income statement, our consolidated gross margin for 2012 was 30.4%, as Suri noted, and it compares to a gross margin of 31.8% for the full year 2011.

AS we noted earlier this year, the drop was primarily due to lower sales activity in business lines executed at our shop locations, most notably, traditional reprographics.

As a results, fixed costs consumed a greater portion of the revenue. The decline in traditional reprographics have combined with equipment and supply sales resulted in a mix of equipment sales, which have higher material costs and a lower gross margin than our other business lines.

All of that said, in 2012, our gross margin increased 20 basis points between Q3 and Q4. Historically, we have seen a sequential decrease in gross margin between Q3 and Q4 and that decrease has been between 160 and 340 basis points dating back to 2008.

The fourth quarter improvement this year speaks to the success of our aggressive restructuring efforts in the fourth quarter as well as our normal year-round vigilance with regard to containing costs.

Our SG&A for 2012 was approximately $93 million, which was down more than $8 million from SG&A in 2011, again due primarily to the aggressive steps taken to restructure and right size the business’ fixed costs.

Net interest expense was $28 million for 2012 compared with $31 million in 2011. This expense consists primarily of $21 million of annual interest on our 10.5% high yield notes issued December 2010.

The results, inclusive of goodwill impairments taken in Q3 and the restructuring expense taken in Q4, was a net loss for the full year 2012 of $32 million.

Adjusted to exclude these charges and other non-cash charges, we have a net loss of $1.7 million and an adjusted earnings per share of negative $0.04 for the year.

As you know, the fourth quarter is historically our weakest quarter of the year. However, our restructuring efforts taken in October and November has resulted in significant sustained savings for our business.

To summarize the ongoing financial impact of our restructuring, we estimate the following: headcount reductions accounted for more than $8 million in annual savings; administrative consolidation accounted for an additional $2 million in annual savings; closure of underperforming branches contributed an additional $2.5 million in savings; and an additional $3 million of savings were generated from other margin expansion activities.

I should note that it’s difficult to track the dollar amount of these savings through our P&L in 2013 if sales fluctuate. But the impact of these measures should be seen in an expansion of our gross margin over time.

And as you would expect, we are far from finished. We have several initiatives in place today to drive growth in our new business lines and, thereby, growth in our consolidated sales. And we relentlessly continue to work to expand our margins.

Moving now to our cash flow performance, our adjusted EBITDA for 2012 was $60.5 million versus $66.5 million in 2011. We ended the year with an adjusted EBITDA margin of 14.9% versus 15.7% for the year in 2011.

It is worthy to note that our adjusted EBITDA margin for the fourth quarter of 2012 increased sequentially by almost 200 basis points versus the third quarter and this metric most clearly demonstrates the improvement in the quality of our earnings.

Cash flow from operations was $37.6 million for 2012 versus $49.2 million for 2011. Our free cash flow was $17.2 million versus $33.6 million in 2011. Note that in 2011 results were helped by approximately $15 million in tax refunds received by the company.

Excluding the impact of this refund, our cash flow from operations would have been higher in 2012 versus 2011 despite lower sales.

Closing out with the balance sheet, we ended 2012 with a cash balance of $28 million, the highest amount of cash we’ve reported for December 31st since 2009.

Day sales outstanding, or DSO, were an aggressive 48 days in the fourth quarter of 2012, more than fulfilling our commitment to reduce DSO to under 50 before the year end.

Total debt, including capital leases at the end of 2012, was $222.5 million, down from $226.3 million in 2011, a 2% decrease on a year-over-year basis.

And as noted, our $50 million senior revolver we put in place in January of 2012 continues to remain untouched.

The ratio of net debt to trailing 12-month adjusted EBITDA at the end of the year was 3.2 times and adjusted EBITDA coverage of interest was more than two times.

As our margin, cash flow and balance sheet key metrics show, we continue to execute strong management of our capital base. With the steps we have taken in Q4, we have positioned the company for much greater success going forward.

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

Suri Suriyakumar

Thank you, John. Operator, we are ready to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of (Molly McGarrett).

(Andrew Steinerman)

My question has to do with digital services, which is still 9% of revenues. John, you took this opportunity to break out increased disclosure. Why not make digital services a category that has disclosure like that on a consistent basis? Could you remind us what’s in digital services besides (Plan Well)?

And then the next question is why, given the increased adoption of digital services, did that not become a higher percentage this year?

John Toth

Digital services is still a little bit of a mixed bag of different drivers. The two dominant revenue streams in there is (Plan Well) and services related to reprographics, including saving plans onto discs and flash drives, et cetera. And that revenue really moves with traditional reprographics.

The other side of the coin is what often you think of as technology services software (length). It is archival services, et cetera. That’s a growing business line for us and those two elements tend to offset and are mixed in that line.

I’m optimistic that over the course of 2013 we will see our growing line begin to dominate and you’ll see the expansion you’d expect but at this time it’s a mix of two business lines that tend to offset.

(Andrew Steinerman)

And if you could say, is the mix shift existing?

John Toth

Directly, yes.

(Andrew Steinerman)

And then also, did you break out how much managed print services was? You told me within that category but how big is managed print services now as a business?

John Toth

It closed out 2012 – onsite closed out as $109 million. Are you –

(Andrew Steinerman)

Just managed print services within that.

John Toth

As opposed to facilities management?

(Andrew Steinerman)

Right.

John Toth

MPS would be about 50%, 55% of that number.

(Andrew Steinerman)

Perfect. And what’s the growth of MPS in general?

John Toth

MPS in general moves with the global solutions growth, which for the year was – let me just pull up that number. For the year, it was about – it was over 20%.

Operator

Your next question comes from the line of (Alan Webber).

(Alan Webber)

Can you talk about – you gave the cash flow projection. Can you talk about even the direction, what you expect in terms of EBITDA and also direction, if not specific, within those on the revenue side within five categories how you see 2013 at this point?

John Toth

So I’m going to answer delicately because we don’t provide guidance on a revenue basis or an EBITDA basis. Directionally, again because we had the decline of traditional reprographics and the rapid growth in our managed print services, directionally, revenue we see as relatively flat give or take a few percentage points either way.

EBITDA we expect to see considerable margin expansion on our gross margin. We also identified savings in our G&A, so we expect to see significant margin expansion in EBITDA margin as well.

Material – and, again, I want to stay away from forward-looking guidance specifically on those two metrics.

(Alan Webber)

And also I think you made a comment. How many incentives did you close the year at and how many incentives do you think you might have at the end of 2013 or ’14 as it sounded like coming off of service center leases or like that?

Suri Suriyakumar

So we right now have 192, that’s the total number of locations after restructuring. It breaks down to 167 in the United States, 70 in Canada, one in the UK, 12 in China, two in India.

In terms of 2013, we haven’t specifically identified how many more locations we will try to close. What we’re doing now is we are taking a careful look at how these service centers actually help our customers.

What we are doing is most of the work has shifted into our customers’ offices and these service centers are largely now used for any project-related work which can come up or the overflow work which comes out.

So we are able to consolidate these and make them smaller and more efficient, so we are looking at that. But there is no specified number as to how many service centers we will close but we will certainly continue to look at smaller cities and where there are too much of concentration of service centers, we will consolidate them together, again, in order to gain better margins.

(Alan Webber)

And I guess my final question is I appreciation your comments. What is your channel view of your end markets on the construction side as you put together these projections?

Suri Suriyakumar

So there are two sides to that. So if we generally look at the construction market, obviously they started a slow recovery. There are definitely signs of a lot of activity which is starting to happen in many areas related to what we saw in 2011 and certainly in 2012. So it’s definitely in the right direction.

Will it fully recover in 2013? We don’t think so. I think the full recovery is further ahead. 2013 will be definitely better compared to 2012. But in terms of our numbers, what would be different is the fact that because we offer – the services we offer are now shifted towards management services and archival information management and work which goes on inside our customers’ offices, especially as related to the larger customers, we will grow our revenues inside the customers’ offices significantly by offering managed print services.

If you take our global services revenue, most of the revenue is growing inside our customers’ offices. In other words, that’s a new segment of the business that we have started capturing in the last two to three years now growing in double digit numbers.

John gave some indication in the previous question as to how global services are growing. That’s growing at 20 plus percentage year-over-year, so we expect that growth to remain throughout 2013, so that’s where our – most of the growth is going to be coming for us as we see it.

And any project work which comes up because the construction market is recovering, albeit it will be at a slower pace, we’ll be able to capture that as well.

(Alan Webber)

My last question was I realize that the traditional is obviously a lot smaller part of the company than it used to be. When you look out, do you just look out at the market’s rebound, it’s going to be continued decline on that line item year by year or sometimes you see it flattening out?

Suri Suriyakumar

I think it will flatten out and the reason being because there is some erosion and this is the erosion that’s going on in that segment because of the secular changes which are taking place no doubt.

But there is – construction is also a huge industry and it’s being deeply affected because of this recession. So when the market comes back, (inaudible) these people are printing less. The amount of print services we are allowed to provide our customers will certainly outweigh the secular impact it’s going to have on that $130 million plus worth of business we have right now.

So as the market recovers, we expect that number to be flat and it might have modest growth on that number, especially if the market recovers at full speed, there are still a lot of customers who want printing.

We aren’t experiencing that right now because the number of projects we are doing are still not a whole lot.

Operator

Your next question comes from the line of (Brandon Dobell).

(Brandon Dobell)

Maybe focusing on the transition from Q4 to Q1 for a second, what surprise either good or bad for the fourth quarter in terms of segment growth rates? And as you started ’13, did those same kind of things keep going, i.e. a growth rate in one part of the business was better in fourth quarter than you thought and it kept going or – I’m just trying to get a sense of the pacing of the growth rates, the different segments now that we have?

Suri Suriyakumar

So in terms of the surprise in the fourth quarter, it’s more in the third quarter. After the second quarter we went through the third quarter. We saw the impact of the secular change. I often classified our – I talked about it inside the company. It’s almost like a Blockbuster story, if you know what I mean.

You start to see a significant change occurring. We had to react fast and we realized that the significant changed, pronounced significant change in our customer (inaudible).

So that’s what we did in the fourth quarter. So the surprise is we surprised ourselves how fast we were able to actually pull this off after getting the third quarter resolved. The amount of work we did was enormous body of work because we had operations spread across the country. We had to identify which of those operations had to be restructured, what kind of headcount reduction, how do we change the management, what do we do with those customers, how do we transition those customers to other service centers.

So there was a tremendous amount of work done in the fourth quarter to actually change direction of the company because if you recall what we had in the fourth quarter, if you are heading that way, we would have gone into double digit negative numbers in terms of EPS performance.

We were able to reverse that in terms of getting the company restructured to the full (fully offered) services we now provide our customers which makes a meaningful difference.

Now having done that, in terms of where the business is headed, that does not change a whole to in the fourth quarter. In fact, it continues to stay on track. In other words, in the fourth quarter, actually in third quarter we saw for the first time our MPS revenue overtook the traditional reprographics revenue line for a month for the first time.

So we are starting to sense that kind of change in the way our business is evolving and we expect that to grow because our managed print services offering continues to grow with large customers and also small customers as we install more FMs and MPS’ in our customer’s offices.

So we expect this secular change to take control. That’s why we are focused on positioning the company properly. And in that space, we are very dominant because the kind of services we can provide, as I said in my prepared script in the call, to these customers we are unique in the space where we can do onsite service, offsite service and services based on cloud and tie everything together to capture the entire ecosystem of the document solutions for our customers.

(Brandon Dobell)

I want to get back to the comment John made. It’s about I think the previous question about install a different kind of broad segment growth rates or directional growth rates this year.

John, when you mentioned you thought traditional reprographics was going to be down this year, is that in total, so traditional color and digital as you’re now segmenting the middle or is it just that $28 million, $29 million chunk of revenue in the fourth quarter, that part’s going to continue to struggle where you see color and digital, maybe seeing some growth this year?

John Toth

When you talk to the financial officer, you’re talking to the glass-half-empty side. When I made that comment, I think Suri articulated the outward view and I agree with that. But I was speaking to that $29 million of traditional reprographics which has different stresses on it.

And right now, early days in 2013, we definitely see the non-res construction market as healthier than it’s been in the past but the vote is out as to how that’s going to impact that line and our trend has been trailing historically.

Suri Suriyakumar

And the way to think about it, Brandon, I would add, the way to think about that is if you talk about that, the statement John talked about, it’s work done in our shops. Think about it like that. It’s project-related work done in our service centers. That’s what – and that’s mostly (inaudible) work and that’s one which is getting affected.

And when construction starts putting its head up, which we are definitely – we are starting to see signs of that both in residential and non-residential, that number will pick up a little. And it won’t pick up at the same pace as it (inaudible) in the past because of the secular change but that number will pick up.

But the way to think about that revenue is we talk about reprographics, traditional reprographics revenue is the way to think about it is the work we did in our service centers, our shops, as we call it, previously, all project-related work, which included some digital, which included some color, which largely included large format, black and white and small format black and white for project documents.

(Brandon Dobell)

And then as we think about capital needs in the business this coming year, so you’ve spent a decent chunk of money just on regular capital spending and also capital leases on the cash flow statement, how do we think about those two numbers for ’13 relative to what you guys posted in 2012, again just back to your comments about operating cash flow, just trying to get a feel for what kind of free cash flow the business can generate this year?

Suri Suriyakumar

I think the free cash flow generation will continue to remain healthy. That’s one of the characteristics of our business. You saw that even in 2012. We did very well. Our revolver remains undrawn and we want to continue to maintain that for sure.

I’ll let John give you more color on that but in 2012 we did some things differently. For example, we used our cash to buy some (inaudible) in order to test a few different options out because there were leasing companies (inaudible) manufacturers (will lease).

And then we also realized that we can buy with our cash because we were generating a fair amount of cash so that we can actually help our margins a little bit. So we did that in 2012.

Looking forward, what we see is the most number of (inaudible) devices we buy are from small format, which are referred to as multifunction devices. We do buy large format devices but the big, large format devices are becoming less and less. They are smaller, much more efficient than large format devices, what we refer to as low volume, large format devices, which we are placing in our customers’ offices. So that’s one aspect.

And the large (measurable) devices we are buying are actually multifunction devices, which as I described in my script, we are placing them in customers’ offices because now we are capturing their entire ecosystem’s of document management which means legal, accounting, HR, contracts, all that kind of stuff.

And in that space, what’s good is there are a lot of manufacturers. There are over 25 plus manufacturers, each of them are billion dollar manufacturers. We are taking the approach that we want them at least to buy (inaudible) the manufacturer.

So overall, we don’t expect the landscape to change a lot. John, would you like to give a little more color on that?

John Toth

Yes, just to add further color, the acquisition of machine and combination of CapEx and capital leases in total, we expect to be relatively stable. We’re largely in support of the growth of our global solutions customers, which have large rollout and large equipment needs. It’s really not for our shops.

And as Suri pointed out, in 2012, we were fairly aggressive in purchasing machines to – as a vehicle negotiating with the lease market, if you will. We fill like we’ve got our lease relationships where we want them to be, so in 2013 I expect to see the balance shift towards leasing as opposed to CapEx and move in that direction. But again, we will always maintain a balance between those two.

(Brandon Dobell)

Then finally, I may have missed in the prepared remarks, maybe from John, the new revenue granularity and segmentation, are we going to get historical, so looking back in the first three quarters of 2012 or 2011 numbers either in the 10-K or in a separate disclosure?

John Toth

Oh, yes. Yes, in the K you’re going to see five years of historical. And if you need more, you’re welcome to call us.

Suri Suriyakumar

And one other point I would add to the cash discussion, John I thought I’d add, is that last year we had some tax refunds. So we mentioned that and you mentioned in the statement $14 million.

So if you think about it like that, we actually outperformed cash with lower sales this year in terms of cash performance. So again, that I think is notable, again, goes to our ability to manage our cash and this might be relevant to your thinking in that sphere.

John Toth

Yes, our cash flow, if you normalized our refunds from the IRS, our cash flow from operations would have been greater this year than prior years.

Operator

Your next question comes from the line of (Alan Webber).

(Alan Webber)

Just a quick follow-up from the previous question, so on this target, the capital spending and cap leases for 2013, what should that be?

John Toth

We don’t give specific guidance on CapEx for 2013 but the guidance we’re giving is that we expect to use less of our own money to buy machines and use more of the lease market going forward.

In total, the machine acquisition in 2013 we think will be in line with 2012 and really tracks the growth rate of our global solutions business with the MPS growth of about over 20%.

David Stickney

(Matthew), at this point do we have anybody else in the queue?

Operator

No, sir, we do not.

David Stickney

All right, well, thank you, ladies and gentlemen, for your continued interest in Arc Document Solutions. We appreciate your participation in the call as usual.

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