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Executives

David Stickney - VP, Corporate Communications

Suri Suriyakumar - Chairman, President & CEO

Dilo Wijesuriya - COO

John Toth - CFO

Jorge Avalos - CAO

Analysts

Scott Schneeberger - Oppenheimer

Matthew Kempler - Sidoti

Keane McCarthy - Williams Blair

Brad Safalow - PAA Research

Glenn Primack - PEAK6

American Reprographics Company (ARC) Q3 2013 Earnings Call November 6, 2013 5:00 PM ET

Operator

Good day and welcome to the ARC Document Solutions Third Quarter 2013 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. David Stickney, Vice President of Corporate Communications. Please go ahead, sir.

David Stickney

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

Our financial results for the third quarter of 2013 were publicized earlier today in a press release. The press release and other company releases are available from our Investor Relations pages on 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. The dial-in number is in today’s press release. Per our usual practice, we are also webcasting our call today and the replay of the webcast will also be available on ARC’s website.

Today’s call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company’s financial outlook.

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

The forward-looking statements contained in this call are based on information as of today, November 6, 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. Good afternoon. Today I’m happy to announce our third quarter performance especially since it marks the first time in five years we’ve experienced year-over-year growth. While I would not consider this to be an extraordinary feat under usual circumstances achieving growth of that emerging from this current downturn marks a new era in our company’s history. Let me tell you why.

While the financial meltdown and prolonged decline in construction has been brutal to save the least, I must remind you that a downturn is not the only thing we were battling. We were also experiencing significant headwinds from the secular changes the construction industry was going through during this period. Changes in the way AEC customers managed their document made some of our traditional services far less relevant to their needs and wants today.

These changes put reprographics companies in every market under tremendous pressure and in many markets devastated the industry. Had we been less willing to change, the conversations we would be having with you today assuming we would be having a conversation with you at all would be entirely different. Instead, we looked ahead, took bold decisions and made appropriate investments in technology, sale and new services to expand our addressable market during some of the most difficult times in our company’s history.

Today’s conversation is, therefore, about new and vibrant opportunity such as managed print services, archival information management and more. That is exactly why they feel as though we have crossed a crucial threshold and entered the new era. The last five years, however, has also provided us with an opportunity to demonstrate our ability to manage our organization through extraordinarily difficult times. Our execution on these initiatives has been excellent and I’m very proud of what my team has been able to accomplish. We are not out of the woods yet, but I have never been as confident about our future as I am today.

As we highlighted in our earnings release, third quarter revenue was $101.3 million, a 2% increase over the same period last year. Our gross margin was 32.5%, 310 basis points higher than our gross margin in quarter three of 2012. Adjusted EBITDA margin was 16.3%, 320 basis points higher than a year ago and cash flow from operations for the quarter was $20 million or approximately $0.43 a share. Adjusted earnings per share were $0.02 for the quarter.

We are maintaining our annual adjusted EPS forecast for the full year of 2013 to be in the range of $0.06 to $0.09. We anticipate cash flow from operations also to remain unchanged and be in the range of $38 million to $45 million. Our year-over-year growth was led by $31 million in onsite services which once again was our largest revenue line. Onsite services represented more than 30% of our overall revenue and grew by nearly $4 million over the third quarter of last year.

It bears mentioning that Gartner Research now identifies ARC as being the ninth largest managed print services provider in the world. While we expanded our addressable market in a number of areas it is here in onsite services and MPS in particular where the market potential is greatest in sheer dollar volume. Five years ago our offering to the AEC industry, and by that I mean Traditional Reprographics, was driven by construction activity and represented the overwhelming majority of opportunities in that market. But it is also very sensitive to the cyclical nature of building activity.

By growing our MPS offering we now focus on the operations of the companies that build these projects as opposed to the projects themselves. As a result, we can address their document needs, their document distribution needs, their marketing and promotional requirements, their archiving and information needs, their increasing need to collaborate inside their own companies as well as with their vendors and partners. And we are still in an excellent position to reap the rewards of construction projects returning to the market. What I would like to point out here is that at the same time we are far less exposed to cyclicality, far better positioned to deploy our technology solutions and far more capable of providing document solutions for an entire enterprise instead of being limited to the needs of a project team.

It is a position in the marketplace we have worked hard to establish and it is the basis for the most dramatic part of our transformation. In the third quarter, we also saw an impressive increase in Color Services sales as we benefited from some of the operational changes we had instituted over the last few quarters. Color Services delivered $20.6 million which represents a 6.7% increase year-over-year.

Declines in Traditional Reprographics mitigated in the third quarter with sales of $28.9 million, a 6.2% decrease and a much lower rate of decline that we have experienced in the recent past. While we are yet to see a vigorous recovery of non-residential construction activity we do expect to see incremental gain and our traditional repro line will benefit from them.

Digital sales declined slightly for the quarter at 3.2% year-over-year while our biggest technology success story to-date is the enthusiastic adoption of Abacus throughout our MPS engagement. Sales of this popular application are not reported as part of our onsite -- as not reported as part of our onsite services revenue and are not reflected in digital sales.

Finally, equipment and supply sales were lower in the third quarter by 8.6% compared to the same period in 2012. This decrease is due to a challenging year, year-over-year comparison caused aggressive vendor promotion offered to our customers last year along with some large non-recurring sales that made a significant impact on our performance both in the U.S. and in China. Overall, we expect the trends we are seeing in the third quarter to continue in the fourth quarter which is traditionally our weakest period of the year. MPS will lead year-over-year growth in onsite services and color will likely benefit from holiday promotion helping to offset any normal seasonal declines.

Traditional Reprographics will likely be prone to historical weakness in the fourth quarter as weather and fewer working days then to dampen construction activity. As for digital opportunities we have a healthy pipeline in archival information management and we are excited about this opportunity. The fourth quarter is typically the best quarter of the year for our Chinese operations in equipment and supply sales.

As we noted last quarter, we have become more aggressive in our use of cash in the last half of 2013 especially as it relates to our debt. Using excess cash we repurchased $7 million of our own bonds in the open market in July and during the last week in October we repurchased an additional $5 million of our bonds. On a full year basis this achieves an annual interest savings of approximately $1.3 million. Our cash position at the end of the quarter and before the last week’s bond repurchase was $37.1 million which provides us with great confidence as we continue to explore the reduction of our debt obligation and alternatives to further improve our capital structure.

As I mentioned in our release today, the markets are picking up steam perhaps not at the rate we like to see, but it is gratifying to see opportunities grow again in both our traditional and new markets. I expect we'll be able to carry the momentum we’ve established forward into the New Year and I look forward to sharing those results with you in the near future.

With that, I’ll turn the call over to John for a brief review of our financial details and then we’ll take your questions. John?

John Toth

Thank you, Suri. The revenue performance of each of our business line continued along the trends we established in the second quarter of this year as did our gross margin performance. I think it is important to recognize, however, that this trend wasn’t established overnight. Much of what we reported today is the direct result of these steady and ongoing measures we’ve taken and continue to take from the beginning of the recession which were capped with the changes we announced in the fourth quarter of last year. As we predicted, our 2012 restructuring has allowed us to continue making progress in expanding our margin, increasing our cash flow and it has also provided us increasingly favorable options as we consider our capital structure going forward.

With regard to our restructuring, we incurred $700,000 in additional restructuring expenses during Q3 of 2013 bringing our year-to-date restructuring expense to $1.8 million. As a reminder, the initial restructuring expense of $3.3 million was incurred in the fourth quarter of 2012 making our total expense related to our restructuring activities $5.1 million. Year-to-date total cash outlays with regard to our restructuring liability had been $3.3 million including Q4 2012’s outlay of $1.1 million; this brings our total cash outlays on the restructuring to $4.4 million and the remaining restructuring liability of $700,000 at the end of Q3.

Our cash stands at $37 million as compared to $31 million a year ago. This is a 21% increase and this $37 million is after payment of $3 million of year-to-date restructuring charges and $7 million of repurchase of our bonds earlier this year. Without these two additional cash outlays our cash would stand at $47 million.

Net interest was down $1.1 million for the third quarter compared to the third quarter of last year. Some of this is a result of favorable comparisons as our interest rate swap ended in December of last year but it is also due to the reduction of interest payments on the bonds that we repurchased in July.

The result for the quarter was adjusted net income of $795,000 or an adjusted EPS of $0.02 for the quarter. Adding back interest taxes, restructuring expense, and depreciation and amortization to get to our adjusted EBITDA for the quarter it was $16.6 million or 16.3% versus a year ago when our adjusted EBITDA margin was 13.1%. The 320 basis points improvement from our adjusted EBITDA margin falls directly from the strength of our gross margin.

Cash flow provided by operations was $20 million for Q3 2013 versus $14 million for Q3 of 2012. This is a $6 million increase despite the $700,000 in cash payments made in the third quarter related to restructuring. The increase in cash flows provided by operations was primarily due to our strong and improving financial performance.

Capital expenditures were $4.8 million in the third quarter versus $4.9 million in the same period last year. Our drive for a 50:50 mix of buy versus lease for our equipment needs has slowed slightly due to the interest savings from deploying our excess cash as well as a favorable environment, but our intent remains to achieve a 50:50 balance in this equation.

Total debt including capital leases at the end of Q3, 2013 was $213 million down from $224 million for the same period a year ago. This is due to the $7 million of bond repurchase plus the expiration of capital leases.

And as noted in our release today, we’ve also made significant progress on our debt to EBITDA ratio via our bond repurchases and the continuing improvement in our margins. The ratio now stands at 3.3 as compared to 3.6 in the second quarter taking us well below the 3.5 threshold.

In closing, as Suri mentioned, we made an open market repurchase of an additional $5 million of our bonds in the last week of October which will be recorded in the fourth quarter financials. Similar to the earlier transaction the repurchase was intended to reduce our long-term debt and annual interest obligations and made no use of the company’s $50 million revolving credit facility which remains undrawn. This is another step in our longer term campaign to deleverage the company and make more of our EBITDA available to the equity side of our enterprise value. As we’ve said before, we may consider additional steps to further reduce our debt and interest obligations provided conditions favor for the company and as our financial performance and the economy continue to improve.

With this overview as a basis for a discussion of question, I’ll turn the call back over to Suri. Suri?

Suri Suriyakumar

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from Scott Schneeberger from Oppenheimer. Please go ahead, sir.

Scott Schneeberger - Oppenheimer

I guess first thing, Suri, I'm going to ask about the more traditional business in the non-res construction cycle and just what you’re seeing on the street there? Obviously, making great headway in other areas of the business but I'm curious for a more in depth update on that? Thanks

Suri Suriyakumar

Right, so the number is, as I said in my prepared comments, still is yet to take off, you know they had a definitive signs of the improvements and there is activity, there is a lot of green shoes, but we haven’t seen the activity in the non-res as strong as for example, in the residential side we have much strong activity going on in the residential side. And we suddenly think it will start to pick up in the first half of 2014, Scott, but right now there is not a whole lot of activity going on in the non-res, but although we see positive signs coming along. So, we think -- that is the real impact of that non-res growth would be may be second half of 2014.

Scott Schneeberger - Oppenheimer

Again to jump around here a little bit, Suri, the -- I believe you or John had mentioned on the call that seasonally you have a strong quarter out of China in equipment sales in the fourth quarter, and if I recall correctly I'm just checking my model, I don’t think that kicked in as much last year, may be it did, I'm -- but could you -- do you expect that impact again this year and to what magnitude?

Suri Suriyakumar

So last year it was a very strong first quarter and obviously kind of slowly into the first quarter. So that could happen again. Officially, last year we had a very large contract. Am I right, Dilo?

Dilo Wijesuriya

Yes.

Suri Suriyakumar

Dilo is seated right next to me. We have a very large contractor a big enterprise level customer and that kind of also altered the numbers a little bit, but usually the fourth quarter is the quarter we sell a lot of the equipment because many of these large government institutions do have funds available and they want to make sure they are deploying all their funds and they end up investing in equipment. So that’s just the trend in China, am I right Dilo?

Dilo Wijesuriya

Absolutely. So fourth quarter will be slightly better than the third quarter.

Suri Suriyakumar

The third quarter. At least that’s the expectation for now, Scott, and some of that may just flow into next year first quarter like it happened this year.

Scott Schneeberger - Oppenheimer

Okay, thanks. Appreciate that. A couple more, Suri, did the government shutdown have any impact that you could discern on your business?

Suri Suriyakumar

Overall the sentiment I guess was a little soft, I mean people started holding things back a little may be, but we didn’t see any specific -- I don’t have any specific evidence to say the projects were delayed or held back. I think there was general sentiment in the marketplace was that while the economy seems like it’s going to have a starter step but specifically we can’t point to anything below. Dilo or John, can you?

John Toth

Yes, I think that’s with the CFOs I talked to about customers it comes back to the confidence of their customers to make big capital better.

Suri Suriyakumar

Right.

John Toth

And the shutdown impacted again the confidence to make big capital but it’s not as dramatically as prior, but still it caused hesitation.

Scott Schneeberger - Oppenheimer

And then lastly, the Archive and Information Management business could you give us an update on your relative expectation what you’re seeing? What do you see the potential for not only in the long-term but also just comment on over the medium-term? Thanks

Suri Suriyakumar

Right, so that’s actually a very exciting project for us we have started working on it. It’s obviously in the last two quarters we actively got engaged in that and we are starting to see some activity but like anything else, every one of those projects we are selling to lot of customers, there is a lot of inquiries, there is a lot going on in the pipeline.

So by the time we put that together and get it rolling you know it will take a few quarters to, for us to show you real times and momentum, but obviously we are talking about it we are extremely excited about the opportunity. There are lot of activity and people like -- I mean, more and more companies and what do you call customers are looking to digitize their archived material and have the ability to reaching to them, search them and have better use of the archived material.

So, we’re really excited about that and I think it’s another nice growth opportunity equally as exciting as MPS is. Obviously we started MPS three years ago and it’s gained a lot of momentum. I think we’ll have similar momentum picking up in AIM business and we’re very excited about that.

Operator

Thank you. The next question comes from Matthew Kempler from Sidoti. Please go ahead sir.

Matthew Kempler - Sidoti

So wanted to follow-up on the MPS segment here, knowing that you are the ninth largest business in the segment, do you view any adjacent markets outside of it either that make sense or is there a sufficient opportunity in near-term that that’s going to remain on focused?

Suri Suriyakumar

Absolutely. I mean that you the adjacent marketing opportunity that definitely there, Matt, I mean there is any low-hanging fruit we’ll go after them, there is no question about it. But because in the construction space, the reason why we have made significant headway is because in the construction space there literally no other player in our level. All the large players don’t seem to have impacted the construction space because our ability to provide on-site and off-site at the same time combined both of those services makes us you know a much stronger player in that space.

So we have a lot of opportunities in the construction space. So obviously, we are going after the low-hanging fruit and that’s where we dominate. But there are definitely adjacent markets and we are looking at it all the time. For example, we have started working with some other (inaudible), there are some insurance companies, some full district. So, it’s starting to take foothold, so where there is low-hanging fruit we would go after that but it’s not something that we are focusing on specifically because the opportunity inside the construction space is so huge right now.

Matthew Kempler - Sidoti

Okay. And the growth that we’ve been seeing, is that primarily being driven by the large enterprise adoption or are you getting any boost from your regional effort?

Suri Suriyakumar

We are getting some boost from the regional effort I don't think it’s big enough to make show on the radar screen just we have. Dilo, would you agree that we have getting some impact under this?

Dilo Wijesuriya

Definitely no there is local results but the global type of customers are the ones --

Suri Suriyakumar

Otherwise we are making the big difference. So in terms of big numbers, Matt, what Dilo is saying is, it’s a big customers whose making the impact but we are selling at the lower level and at the regional level as well and it’s we are starting to see results there. I would expect latter part of next year we will see more of those customers become impacting the numbers. Am I right Dilo?

Dilo Wijesuriya

Absolutely. And then I think we’ve added almost 200 new contract deal in the last quarter --

Suri Suriyakumar

Last quarter.

Dilo Wijesuriya

From our regional and local customers then that will continue to drive --

Suri Suriyakumar

Drive the revenues as well. Additionally 200 contracts this quarter, Matt.

Matthew Kempler - Sidoti

Okay. And we did see the growth rate accelerate a little for the on-site services. Do you have visibility in the state sustained growth from rollouts at this low double-digit pace?

Suri Suriyakumar

I would think we would be able to sustain that kind of growth throughout next year. Obviously depending on the deployment, depending how fast we are deploying the new contracts coming on, sometimes we get held up only because the customers need more time to prepare or some contracts are coming up for renewal there is sometimes a little bit of gap, but usually based on everything but we know, Matt, we expect to stay on this pace. Dilo, would you?

Dilo Wijesuriya

Absolutely, I -- we can continue to stay in the same levels and from the visibility we have its quite possible for us to maintain the same growth rate.

Suri Suriyakumar

Same growth rate, yes.

Matthew Kempler - Sidoti

Okay. And then moving to color, we’re seeing resurgence there and you mentioned that you’re benefiting from the operational changes over the last few quarters. Can you just revisit what changes you put in place and why that gaining some traction?

Suri Suriyakumar

Sure. And if you recall, sometime back we created this Riot brand which obviously in order to go after more specialist type of point of purchase marketing, high end graphics related work. And that we did sometime in 2012. And last quarter 2012 that is last year we made a lot of changes in the company; given the market conditions at that time we did significant restructuring. During that process obviously Riot got affected too, because of the restructure.

So coming into this year 2013, we streamlined the sales organization, invested more in marketing and pushed the Riot services even more aggressively both in the Riot segment, specialized segment, also through the ARC Color Apps. And what we are seeing now is the result of those efforts coming to fruition. We have nice big brand name clients using us now and we get a lot of the high end graphics work and that what’s driving those efforts.

Operator

Thank you. The next question comes from Keane McCarthy from Williams Blair. Please go ahead sir.

Keane McCarthy - Williams Blair

If we could look a little bit at the on-site services line, just curious if we could break on the components of growth there just specifically thinking about kind of a same-store growth rate. And then if that growth is coming from either at renewal of the contracts or kind of mid-contract with those existing clients?

Suri Suriyakumar

Right. So I’ll ask John to add a little bit more color to that, but fundamentally it’s some of them are renewals. Of course, we have some of the earlier in Managed Print Services customers we have signed three, four, five years ago. So we have had a couple of renewals that’s going on, but in the mean time we are continuing to sign more customers.

So there are two levels in between that one is at the global level which is large national and global customers who are in multiple states. That would mean customers like AECOM or HOK or Gensler or HDR who could have 100s of location and then we have smaller customers at regional level, who have single locations but multiple output devices.

Now we don’t have a same-store comparison or that’s not a metric that we track. We don’t think that’s applicable to this particular product line or service line, because it depends on how customers are getting projects and where the management services are being used depending on what products and what services they have and how much activities they have going on there.

But in terms of the growth, we actually see onsite services picking up more steam because customers are starting to do more work inside the offices using those output devices as against doing off-site work. So that’s just a generic trend. But our management services revenue was onsite services fundamentally shows the revenues we generate for customers inside our customer’s offices and at that the off-site is shown separately right, John? Am I right?

John Toth

You’re right.

Suri Suriyakumar

Yes. is it – does that kind of explain to you give you a snap shot of what’s going on there?

Keane McCarthy - Williams Blair

Yeah, yeah and that’s helpful. And then I guess you had mentioned in the next quarter being particularly strong in China for the equipment sales. Is there any issues or how should we think about kind of the capital deployment from your guys’ perspective around the equipment purchases for the print and the document management services?

Suri Suriyakumar

Sure. I don’t there is a whole lot of impact. John, do you want give a little more color?

John Toth

Yes, there no particular change versus last year’s trend. It’s just the regular seasonality of that business. China tend to close our budgets with purchases. So, if you look at 2012 and capital spend trends we expect it to be the same this year largely in line.

Keane McCarthy - Williams Blair

And then, I know you guys had spoken to the trends in the ADI and what you’re seeing on the street, but could you just remind us again the lag between the index and your guys’ core Repro business, and then if that kind of tie-rate or correlation should look the same going forward as it did previously?

Suri Suriyakumar

Yes, usually, I mean historically it’s 6 to 12 months we see it is a massive projects it could be 18 months depending on the types of projects we’re getting engaged in. If you have a large industrial project which is big then that could be of course a line longer lag. Usually it’s anywhere between 6 to 12 months is the way we look at it.

Keane McCarthy - Williams Blair

And then last one from me, you guys have shown impressive gross margin leverage over the last year. Just curious where do you think about investing kind of that margin improvement, kind of your go-to-market strategy or some more sales efforts? Thanks

Suri Suriyakumar

Well, meaning in terms of investing the money, is that what you are referring to?

Keane McCarthy - Williams Blair

Yes, yes.

Suri Suriyakumar

Yes, so obviously one of things we have done is which is what we talked about in the prepared comments, during this entire downturn there are two things that we consistently did. One is, invested in sales and marketing, we also invested in technology we expect that trend to continue. But the margin improvement and the cash we are generating is over and above that investment we have been already doing because of the gross margin improvement and our efforts in reorganizing and putting the company in its proper structure.

And of course any additional cash we have will go to address our ability to pay our debt down. I mean that’s the biggest challenge we have in terms of how do we continue to reduce the debt so that we can, like John said in his comments, that move all that into equity right instead of it being we’ll be paying out that interest.

So, what you are seeing is, after the restructuring in 2012, we are continuing to fine-tune the operation and make it more efficient and what you are seeing evidence is that although we do have other lines of business which we have expanded into they generate the same level of profitability as we – as we get experienced previously in reprographics or traditional reprographic services. And I think you will see that trend continuing as we continue to fine-tune and become more mature in management services, in color and in archival information management.

Operator

Thank you. The next question comes from Brad Safalow from PAA Research. Please go ahead, sir.

Brad Safalow - PAA Research

Can you guys comment on what level of non-residential construction growth you need in the market to kind of offset the broader trend for your core reprographics business? Is there a – what gets you back to flat?

Suri Suriyakumar

So it’s been declining so the last quarter, John, we had 6.3 right now. It used to be 20 and 15 and 8 and 12 and 8 and it’s now at 6.3. I think it will go to lower single-digit sometime next year, I mean that is my expectation. Would you agree, John?

John Toth

Yes.

Suri Suriyakumar

Brad, it’s really impacted by two things right, one is, the fact that there is some work coming back; secondly, the secular change which is one which is nibbling away in back. And the secular trends will continue but I think what will offset that is the additional work which will show up which we expect to pick up steam by middle of the next year. We think non-res will start to pick up more stream. I mean there is already indication, do you want to add something in there?

John Toth

The only thing I’d like to add is that on a absolute basis, in 2012 the amount of non-residential square footage put in place was at about 40% of the 30-year historic average. So the 30-year historic average is 1.3 billion square feet of non-resi space added per year and in 2012 we added about 650 million square feet. So, the percentage numbers look like because we’re off such a low base.

Suri Suriyakumar

Yes.

John Toth

And one of the things you see in the numbers is a plateauing of activity and we expect what we’re beginning to see is we’re going to move from plateau to another. But from a percentage basis it’s good to look at the absolute dollars in historical perspective because we’re at a very, very low base and we’re not seeing the big city center projects in Las Vegas, we’re not seeing the big casinos built or some of the big that’s that really begin to move the industry. So, I want to be very moderate then how we manage our expectations in terms of percentage growth in non-res impacting our business.

Suri Suriyakumar

Especially because we are starting off such a low base and over a period of time it’s going to improve, but it’s nowhere near we would want it to be just yet. That's the point we are trying to make.

Brad Safalow - PAA Research

Sure, okay.

Suri Suriyakumar

And we are already give the decline have come down to 6.3%. So which says to us that as non-res start picking up that’s going to further pin down fast but it all depends on how fast non-res is picking up. But the interesting part of our business is that while that is where it is and we have these opportunities for us we have actually built other businesses which is continuing to deliver results to us, Brad, in other areas such as Management Services, Color and of course AIM will become meaningful in next year for sure.

Brad Safalow - PAA Research

Understood. And then can you comment on how the bankruptcy of Service Point that represents any opportunities for you guys?

Suri Suriyakumar

So this is being, from my perspective, they’ve been struggling for a while now because obviously they are -- what they consider to be diversifying into other areas; they did not do, we -- our focus was to continue to invest in technology so that we can capture other work from our existing customers and expand our market share. Their strategy was different. They went after different market and they did not necessarily invest in the technology.

So I think it will have some impact on us because in the areas especially in UK and United States where we overlap with them we would benefit by it. But quite a bit of their work has been in finical printing it’s an area where we don’t actually spend a whole lot of time in and other markets and it’s all over the place. So I’m not sure how much of that we’ll get but we definitely will benefit both in the East Coast which is where their big base has been they probably have bout $20 plus million, Dilo?

Dilo Wijesuriya

Northeast, especially northeast segment --

Suri Suriyakumar

Especially Northeast about $20 million they have mostly FMs really long term FMs and then of course in London which is about 25% of their business. So that’s about £50 million maybe. So for probably $75 million with the work there in London. I don’t see a big impact but certainly it will have positive impact to us and I think they are in protection right now.

Dilo Wijesuriya

Where your base growth is.

Suri Suriyakumar

Yes.

Brad Safalow - PAA Research

Okay, understandable. And then there has been a lot of activity in the printing space here. Just have you -- do you expect have you witnessed any change in behavior strategy with Pitney Bowes Managed Print Services business that has been acquired Apollo?

Suri Suriyakumar

No, we haven’t seen, we haven’t run into them at all, I mean, at least in the construction side we haven’t running to them. They are mostly into facilities management and related to mailrooms and they are big into that and they tie printing into that. They don’t approach in, at least from our perspective, they don’t approach managed print services the same way we approach. And we have that combination of onsite and offsite which becomes very critical for our customers because they can tie projects in. Pitney Bowes doesn’t focus on those things. They are managed print services but they refer to as managed print services fundamentally going and taking all mailrooms, big mailrooms and then adding print faculties to that. John would you add here?

John Toth

We have the opportunity to see some of the materials on the offering and the decline rates in that business are significant and unabated. And we don’t see them aggressively in our space. We don’t see them at all.

Dilo Wijesuriya

Yes.

Brad Safalow - PAA Research

Okay. And then last question, what are you guys doing on the kind of on the plan archival front on mobile? I know some people are there, other companies in the reprographics space partnering with third parties who develop mobile apps so that clients can access their plans on mobile devices. Can you just talk about your mobile strategy generally?

Suri Suriyakumar

Absolutely. So we already have some segments of plan already -- facilitated on mobile. In fact, our archival information strategy we can actually provide that viewing on the mobile platform today. That’s the investment we have made. And we're showing customers how we not only actually scan all their documents and put it in the cloud but also give access to them on iPads or tablets, Android tablets and we can even have much bigger larger tablets or tablet equivalent touch screens, screens where customers can pull up their drawings and view them and actually mark them up. So that technology is already there.

What we are doing though, Brad, is we are continuing to invest in the technology because that’s a moving target. We not only have the mobile viewing facility now but we are adding more features to it and making the application much more simpler. Dilo, would you like to add?

Dilo Wijesuriya

Absolutely. So our strategy is to get the entire plan via cloud the platforms that we have into the mobile including the large tablet that Suri talked about where tablets can be positioned at project site, project trailer where digital data can be streamed right into the device for annotations and mark ups and so forth. So our current R&D is primarily spent on much of the mobile workflow and we are working very closely with our customer base because it’s a workflow that they will help us to R&D and build it for them pretty much. And this is going to be a very solid platform for us in the coming quarters.

Operator

Thank you. (Operator Instructions) And the next question comes from Glenn Primack from PEAK6. Please go ahead sir.

Glenn Primack - PEAK6

I actually missed part of the call because I was like coming from a conference in a cab but I heard Suri I heard you at the beginning talk a little bit about the sad story the non-res downturn and the secular changes in reprographics. And then I saw your top line actually grew. So I guess its one of those stories you crying the laugh and the ending always is pretty good. I'm guessing you mentioned the Riot chapter and the onsite solution chapter. My question I think maybe the last guy to ask. I'm wondering what’s happened at John’s ARC mountain chapter division?

Suri Suriyakumar

The Archiving Information Management.

Glenn Primack - PEAK6

Yes and then the like what topic the opportunity, the return profile and are you putting capital into that area?

John Toth

We --

Suri Suriyakumar

Go ahead, John.

John Toth

As you know, Glenn, we are driving very hard into that business. We have a very strong pipeline for the development refined or offering and we’re getting very good attraction, hope to have some good announcements in the next 60 days or so.

We are making capital available but the return profile on that business is 18 months or so. It’s a very high margin business on a blended basis in kind of the 60% gross margin range. So, we’re making capital available but I don’t expect it to be a material drain on our sources of capital. If I'm getting the question right but we’re --

Glenn Primack - PEAK6

Yes, no, you got it exactly right, that’s great. That’s a good story. I can’t wait to keep on reading the press releases over the next coming quarters.

John Toth

All right. Good stuff.

Suri Suriyakumar

Thanks, Glenn.

Operator

Thank you. David, there are no further questions at this time. You may continue.

David Stickney

Ladies and gentlemen, thank you very much for your attention this evening and your continued interest into ARC Document Solutions. Have a great evening and we’ll talk with you next quarter. Bye-bye.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.

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