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American Reprographics Company (NYSE:ARC)

Q4 2010 Earnings Conference Call

February 22, 2011, 5:00 pm ET

Executives

David Stickney – VP, Corporate Communications

Suri Suriyakumar – Chairman, President and CEO

Jonathan Mather – CFO and Secretary

Analysts

David Manthey – Robert W. Baird

Andrew Steinerman – JP Morgan

Scott Schneeberger – Oppenheimer

Matthew Kempler – Sidoti

Brad Safalow – PAA Research

Michael Terwilliger – Bank of America

Operator

Good afternoon. My name is Ryan and I will be you conference operator today. At this time, I would like to welcome everyone to the American Reprographics fourth quarter 2010 earnings conference call. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr. David Stickney, Vice President of Corporate Communications.

David Stickney

Thank you, Ryan, and thanks everyone for joining us today. With me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; and Jonathan Mather our Chief Financial Officer. The company’s release reporting financial results for the full year and fourth quarter ending December 31, 2010 was issued earlier today. We will review and expand on the information contained in the press release and then we’ll open the call to your questions. For your reference, you can access the press release and the company’s other releases from the Investor Relations section of American Reprographics Company’s website at e-arc.com.

A taped replay of this call will be made available beginning about an hour after its conclusion and you can access the call anytime within seven days from today. You can find dial-in information in our press release. As usual, we are webcasting our call and a replay of the webcast will also be available on our 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 22, 2011, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today’s press release and in our Form 8-K filing. With that as a background for the call, I’ll introduce our Chairman, President and CEO, Suri Suriyakumar. Suri?

Suri Suriyakumar

Thank you, David and good afternoon everyone. Well, we have completed another tough year in this unprecedented downturn of our times. The company reported 2010 annual revenue of $441.6 million, adjusted annual earnings per share of $0.03 and annual cash flow from operations amounted to $53.9 million.

Revenue for the fourth quarter of 2010 was $105 million. We recorded a fourth quarter loss in adjusted earnings per share of $0.03, and cash from operations for the quarter was $15.9 million. While our results may not have met our expectations on all fronts, given the difficult circumstances, I’m proud of our performance. If you recall, earlier last year we expected 2010 to be a year of recovery. Although we did feel that the first half of the year was likely to be weak, we certainly expected the markets to begin to recover during the second half. Unfortunately, that was not the case.

The second half of the year turned out to be much lighter from a revenue perspective. The only consolation was the fact that the daily sales were stabilizing month-over-month. What was conspicuously absent were new projects, which are a primary driver of strong sales and healthy profit margins.

However, in spite of all the challenges in the market we have been able to accomplish our main goals. We generated strong cash flow, continued to aggressively reduce our operating cost and maintained a healthy capital structure throughout the tumultuous year. I’m glad 2010 is behind us and I’m excited and looking forward to 2011. I am by no means suggesting that 2011 will be without its challenges.

I have always maintained that considering the depth of the financial crisis we have experienced over the past several years, short-term set backs are bound to be part of any recovery. In that light, we expect this year to be bumpy, especially the first half. But at the same time, there is tremendous reason for optimism. We now have a stable capital structure that will allow us to take advantage of the opportunities ahead of us. As bad as this downturn seems, the longer it lasts the stronger our position becomes in the marketplace.

We are clearly emerging to be the only viable option for large AEC companies that need a single provider of document solutions across the nation. The proprietary technology we have developed is starting to become more of a standard throughout the industry. While other reprographic companies are finding it difficult to stay afloat, given the depth in technology, we have started exploring new but related areas in document management such as Managed File Transfer and Cloud Printing. In 2011, we are focused on five growing initiatives, each with an experienced and savvy Senior Vice President leading the way.

The first is global services, already a strong contributor to our top and bottom lines. Global services added nine new accounts to its roster in 2010 including AECOM, a $7 billion industry giant in design and engineering. These new customers represent $14 million of annualized revenue. In total, global services brought $46.8 million in sales, for 2010. We have exciting prospects in the pipeline for 2011 and we are targeting some of the largest companies in the design and engineering space as well as smaller, regional targets to help fill in the gaps.

The second initiative is our core business aimed squarely at gaining market share from competitors who are floundering or failing. Most of these competitors are 5 million to 10 million companies. In many cases, they are struggling with the loss of more than half their revenues. Armed with new tools, technology and buying power, we are reenergizing our local sales teams to target this market share.

Our third initiative is our onsite services, a direct extension of our facilities management business. More than half of the global services accounts we secured in 2010 were directly attributable to our ability to manage all of our customers print network, not just the reprographics portion. Our intention is to step that effort up and reconfigure a whole suite of services that address our customers whenever they work with their documents.

On-site services will include our traditional FM services. In addition, it will also include our newest offerings in managed printing services, outsource services, black and white and color printing, large and small format production, cloud printing, and the administrative and software solutions required to make these services a seamless part of our customers information work flow.

Our fourth initiative is the expansion of our digital color printing initiative. With 10 new Super Center, RIOT has been successful in capturing new business from customers outside our traditional base. In addition, our new AEC clients have taken a renewed interest in our color services as well. Despite the lack of new construction activity, our AEC customers are continuing to market themselves, taking on projects in the production of interior signage and environmental graphics and more.

Finally, we’ll be continuing to drive our technology licensing efforts to capitalize on the gains we made in 2010. The conversion of customers from document management fees to seat licensing in PlanWell Enterprise has made steady incremental progress since its introduction in the second half of 2010. We have also generated some real excitement among early adaptors with PlanWell Collaborate, as our customers are finding new ways to communicate and work closer with their project teams.

iShip Doc generated more than $4 million in sales in 2010 and several of our larger customers are now insisting on its use over conventional shipping services. A new version of iShip Docs incorporating managed file transfer, storage and sharing services is schedule for the release in second quarter of 2011.

To top it off in 2010, we sold more than 15,000 seats of our print cost recovery tool Abacus PCR. Armed with a focus on these five key areas, we believe there is reason for optimism.

However, should new construction projects remain sidelined for another year our products mix may be affected? For example, we are aggressively pursuing non-AEC color business as I noted earlier. With the activity in the U.S. construction market at its current lows, our equipment and supplies business in China represents a greater portion of our revenues. If activity from these initiatives continue to make up a greater percentage of our overall business, our margins may suffer from their dilutive effects.

On the other hand, when activity returns in the AEC market and our technology services become a more meaningful percentage of our sales, our gross margin should improve especially given our low operating costs due to the cuts we have made during the last couple of years. Going forward, I remain confident in the health and strength of ARC and in our ability to ride out the peaks and valleys we are likely to experience as our economy recovers. Thus our forecast for the coming year is conservative but realistic. We anticipate annual adjusted earnings per share in 2011 to be in the range of $0.01 to $0.15 on a fully diluted basis and annual cash flow from operations to be in the range of $40 million to $60 million.

At this point, I’m going to turn the call over to Jonathan for some commentary on the financial performance of the company during the fourth quarter and full year of 2010, and then we can take your questions after that. Jonathan?

Jonathan Mather

Thank you, Suri. The mix of AEC to non-AEC customers changed just slightly from the third quarter to fourth quarter. 24.7% of our total revenue from the fourth quarter came from the non-AEC segment, with 69.9% coming from non-residential customers and 5.4% from our residential customers.

We saw more significant changes in our product and service, mix with equipment and supply sales taking up a larger portion of our overall revenue in the fourth quarter. Equipment and supply sales made up 14.7% of our sales in the fourth quarter. Facilities management made up 21.3% of sales. Digital services delivered 8.7% and the remaining 55.3% came from our base of reprographic services.

The fourth quarter remains the strongest sales period for our Chinese operation and the lower margins on these sales weighed down our quarterly gross margin. There were 62 working days for the fourth quarter of 2010 compared to 64 days in the third quarter. There were 63 days in quarter four of 2009.

On a regional basis, our year-over-year revenue performance for 2010 was as follows. Southern California was down 10.5%, Northern California was down 3.1%. The Pacific Northwest was down 7.1%, our Southern region was down 9.4%. The Midwest was down 7.5% and the Northeast was down 12.6%.

Our international operations, excluding Canada, are up 48.1%. Once again, this can be attributable to China’s strong performance during the period. We changed our capital structure significantly in December of 2010 by replacing our previous bank loan and revolver with a high-yield bond and a new revolver. We incurred a loss of $2.5 million as we wrote off deferred finance costs related to the previous loan. Since the company’s debt is now financed by a fixed rate bond as opposed to a loan with a variable interest rate, our interest rate swap contract is no longer considered a cash flow hedge.

Due to accounting conventions required by the SEC, the value of the swap agreement that was on the balance sheet as of December 1, 2010 will be now amortized to the P&L under interest expense through December 31, 2012, the original term of that credit agreement. In addition, we are accelerating the amortization of our acquired trade name as a result of consolidating our brand across the country. The value of those names was previously being amortized over 20 years. We now will be amortizing these trade names over 18 months and it will be reported as an increase of $2.4 million per quarter in amortization costs.

In reviewing the balance sheet, we ended the fourth quarter of 2010 with a cash balance of $26.3 million, this is just $3.1 million less that we reported at the end of 2009, despite reducing our debt by more than $34 million. Days sales outstanding or DSO were 45 days in the fourth quarter of 2010, considerably lower than 48 days in quarter three due to our continuing aggressive collection efforts.

Total debt including capital leases at the end of fourth quarter of 2010 was $239.6 million, down from $274.2 million for the fourth quarter of 2010. The ratio of debt to trailing 12-month adjusted EBITDA at the end of the fourth quarter was 3.2. Cash flow from operations was $53.9 million in 2010, which translates to $1.19 per fully diluted share. I think that covers the fundamentals for the moment. So at this point, I will turn the call back to Suri.

Suri Suriyakumar

Thank you, Jonathan. Operator, at this time we are available to take our callers’ questions.

Question-and-Answer Section

Operator

(Operator Instructions) And our first question comes from the line of David Manthey with Robert W. Baird.

David Manthey – Robert W. Baird

Hi. Good evening.

Suri Suriyakumar

Good evening.

David Manthey – Robert W. Baird

Guys, I was wondering – do you track the number of square feet of planned and the pages of specs that you print and if so could you discuss how much those were each down for 2010?

Suri Suriyakumar

No, that’s a metric we don’t track, David, square foot of printing we did on the large format or in the small format. Small format also we don’t sell that by square foot, it’s by page. But we certainly don’t track the large format. We know it’s down because the absence of new projects. New projects is the biggest driver of that large format printing. But we don’t track them.

David Manthey – Robert W. Baird

Okay. But based on your commentary about market share gains, would you suspect that the industry is shrinking faster than ARC in reprographic services?

Suri Suriyakumar

In the reprographic services – well based on – yes. If you look at what FMI projects and the numbers we have seen, if you look at the construction dollars placed it’s pretty clear in 2010, especially in the segments we are focused on; lodging, office and commercial. The drop is pretty substantial year-over-year. However, we have dropped 12% in revenues, but that’s because of the downturn we are experiencing right now and then hopefully when the market comes back then we’ll be able to take advantage. But the whole idea right now is for us to take market share from – by gaining new customers who may be not doing as bigger volume as they would have done in the past, but the idea is to gain the customer’s loyalty so that when the projects come back we’ll get that share of the work.

David Manthey – Robert W. Baird

Okay. And your FM revenue was pretty flat all year. Did you sign up any new FMs this quarter and were they AEC or non-AEC?

Suri Suriyakumar

Yes. For the year we have 100 new FMs. All the FMs in customers’ offices, David, where we find are not being used, or unproductive or not producing the numbers, we will terminate those FMs in conjunction with an agreement with the customer. But the new ones we have installed, we have installed about a 100.

David Manthey – Robert W. Baird

Is that a net number or gross number?

Suri Suriyakumar

Net number.

David Manthey – Robert W. Baird

Yes, okay. And then a final question from me, Suri, thanks. The 2.4 million of higher amortization – did that start in the first quarter of 2011? This might be a question for Jonathan – or was there some impact in the fourth quarter?

Suri Suriyakumar

Jonathan?

Jonathan Mather

Yes, there was an impact in the fourth quarter and the amount is $1.6 million.

David Manthey – Robert W. Baird

Okay and any impact from the change in accounting for the swaps in the fourth quarter?

Jonathan Mather

Yes there is an impact for the – one second, I’ll give that to you. It’s in the press release of the earnings and it is $1.241 million.

David Manthey – Robert W. Baird

Okay. That’s all I had, thank you.

Suri Suriyakumar

Thank you. $241 million?

Jonathan Mather

Yes.

Suri Suriyakumar

Thank you, David.

Operator

Our next question comes from the line of Andrew Steinerman with JPMorgan.

Andrew Steinerman – JP Morgan

Hi there.

Suri Suriyakumar

Hi.

Andrew Steinerman – JP Morgan

My first question was to go over the mix shift points you made, you were saying, I think you were talking about Chinese business – but I might not have got the whole thing. You said that there was a possibility of margin pressure, that there will be a lower margin business or a more nascent margin business growing faster than your core business. Which lower margin businesses do you think could grow faster than your core business this year?

Suri Suriyakumar

Right. What we’re doing and obviously in the absences of new large projects, that’s the biggest driver of the higher margins in our traditional business – because of the fact that there are no new projects and the revenues are challenged. We’re driving hard in two or three different areas. One is non-AEC. We are pushing after non-AEC. We are also pushing color. When we say color, we always had traditional color business in the AEC market, but what we are pushing is non-AEC color, which is also much more competitive. We’ll be competing with regular digital bureaus out there. And the third aspect is our equipment and supplies volumes have gone up, especially because of the involvement in China, where we sell more equipment. So the three of them actually make a bigger portion of our revenue as a percentage. So that is why our margins are getting pressured because of mix has changed. And if indeed when the large projects come back and our technology services become a larger portion, then because the gross margins in those areas are much higher than it should come back and get back on its track.

Andrew Steinerman – JP Morgan

Okay. And then my next question is about the AIA index, the Architect Billing Index. That index actually has moved up for a couple of months now. I would think that would be kind of the front of your food chain in terms of activity level going on, at least the architect side of AEC, but it doesn’t sound like you’re seeing that?

Suri Suriyakumar

No, actually, definitely we are sensing that. Some of the architects are hiring more. But what’s happening is, Andrew, if they had 100 people and now they have gone down to 40, they’re at 50. So that’s certainly good news. They are going in the right direction. And AIA considers 50 to be the activity. Above 50, they say activity is showing which is definitely what we are seeing in the market, without a question, at the early stage. But that’s the design stage. So you are working on schematics and design at this stage. When it goes out for bid is when we really see a real uptick in our revenues. So there is a gap, or period of time, and what is slowing that down is, if you look at the statistics -and I know David showed it to me this morning, where the project cancellations and project hold-ups are much greater than they were before, because of the financial issues. In fact, he is just giving to me right now, project delays are three times normal at 15%, project cancellations are two times normal at 5%. These are FMI numbers I’m giving you, Andrew.

Andrew C. Steinerman

I understand. Okay. No – that helps a lot. Thank you so much.

Suri Suriyakumar

Thanks.

Operator

Our next question comes from the line Scott Schneeberger with Oppenheimer.

Scott Schneeberger – Oppenheimer

Thanks. Good evening guys.

Suri Suriyakumar

Good evening.

Scott Schneeberger – Oppenheimer

First – to start off, Suri could you address how monthly trends were through the fourth quarter and maybe what you’ve seen into the early first quarter? I realize this is the slow time of the year – but just any color you could provide there would be helpful? Thanks.

Suri Suriyakumar

Sure. So the last quarter the daily sales were – our own daily sales seemed like they leveled off. We completely – we always talked about it got leveled off.

The difference there you’ve got all of our new initiatives did kick in as we planned. For example, the color, definitely brought in additional new business. Our global services definitely brought in some additional business, managed print services. We had some come from FM. Large amount of volumes came from, of course, the equipment and sales, which is obviously part of our Chinese business. So all of that actually made up for the loss of revenues in the traditional AEC business. In fact, the December construction put in place is the lowest in 10 years, the December numbers according to the U.S. Census Bureau, am I right, David?

The Census Bureau stated that the new dollars – construction dollars put in place, December is the lowest in 10 years. So that is just indicative of the fact that there are no new projects. So when you don’t have new projects we missed that revenues out of new projects. But when you replace that with all of our new initiatives we talked about early in 2010 which is helping us – keeping our sales up, that is the trend in the last quarter. Going on to the first quarter, needless to say, January started off softly. And you know that is a little exaggerated by weather. Weather didn’t play a huge role, but it certainly slowed down a lot of activity which was going to come online. And then that is kind of what we are sensing going into January and going into February. The best month of the year for any reprographer as you know is, if you see the previous historical numbers, is March. So March will tell us how first quarter is going to go. But starting slow for sure and it’s not surprising us based on what we experienced in December.

Scott Schneeberger – Oppenheimer

Thanks, Suri. And how much visibility do you have? Obviously March is a big month and – do you have any feel for that yet or do you really – not that much visibility into that?

Suri Suriyakumar

No, not much Scott. We are hoping that the pent up stuff which means the projects which have been on hold, which we just talked about in answering Andrew’s question – if those things just get released and things pick up then March will be tremendous. Because March is also from the number of working days perspective, the longest month, very little holidays, Easter is not falling and there are lot of things which will attribute positively to March. But we just don’t have any visibility as to what kind of things can actually come up. There is so many projects in the pipeline but they are held for whatever reason.

Scott Schneeberger – Oppenheimer

Okay. Thanks Suri. Now strategically, kind of longer term, obviously, you’re biding your time with some of these other revenue generating businesses, albeit at a bit lower margin. What is the – for a prolonged downturn, although it sounds like we’re starting to see some favorable early indications. But from a prolonged downturn is it just continue to grow at these new revenue generators and then hopefully layer on top the more cyclical revenues thereafter?

Suri Suriyakumar

I think this year, especially the first half, all of the new businesses we have gotten and we will continue to push that hard, is helping us a lot in keeping our revenues up. Keep the company healthy, generate the cash, we’ll meet our financial obligations. I think the second half there is a lot of hope that the new projects will actually kick in. Now I’m, just citing FMI numbers. If you looked at last year, FMI numbers for lodging, office and commercial – which is largely the sector we play in – lodging was down 30%, office was down 24%, commercial is down 35%. FMI projections for this year, for 2011, is 1, 2 and 5% negative but it is much, much lower.

So, there is going to be a – there is a huge change from this year to next year in terms of outlook and I think it is starting to show. We are sensing that in what customers are doing, that they are hiring back. There is suddenly a lot of optimism. But given the fact that we are connected to construction, I think the first half would be bumpy and then the recovery will begin. But in the meantime we’re growing all that extra business using our existing infrastructure technology and the capacity we have to compensate for the loss we are currently experiencing.

Scott Schneeberger – Oppenheimer

Thanks. Couple more, I’ll ask them both up front. One is what you’re doing with regard to cost controls at this point, I think last we spoke you had basically slowed down your cost reduction and were hoping for the top line turn. Just an update there?

And then the second being it seems a little bit early for you to be opportunistic with regard to doing tuck-ins. But you did mention that you’re putting your sales force aggressively out basically going after those smaller than you that may have struggled more. Is tuck-ins now part of the story there? Or is it more just grab their share directly, without the formal engagement? Thanks.

Suri Suriyakumar

Right. So to address your first question, Scott, obviously cost reductions is always mindful because we are continuing to fine-tune our operating costs. Now when you are talking about cost reductions, we close locations, branches – there can be two approaches. One is we close a branch because we simply want to cut cost, because we are compelled to cut cost, we want to reduce our operating costs. So we would just cut the branches. And we did some of that at the early stage, but we refrained from doing too much of that because we want to position the company for growth. Second reason we would close a branch is because of the technology transition which is going on, combined with the fact that we are becoming more and more with the single identity as one company. There is a lot of savings we can gain by centralizing the back offices, by centralizing some of the branches. So technology is driving that. We are seeing more and more customers employ technology. So we are starting to see benefits of that. So those kind of branch closures or consolidations we continue and we continue to do that aggressively because it actually makes us more efficient and reduces our costs and allows us to actually leverage our existing assets.

So that will continue. We don’t see any reason for drastic cut in branches yet and thanks to the high yield we have we feel like we have a stable debt structure so that we can focus on the growth and investing on technology. With regard to tuck-in acquisitions – absolutely. It’s more and more on our radar screen and we are watching it and we will continue to work on those, because we are constantly bumping into companies – either they are really lost a large amount of sales, finding it difficult to continue to operate, looking for the exit strategy. And most of these are private companies and where we find that we can provide an exit strategy for an existing owner, we will pick them up, because that wouldn’t be like a traditional acquisition, it would be much more attractive.

Scott Schneeberger – Oppenheimer

Okay. Thanks, Suri. I appreciate all the color.

Suri Suriyakumar

Thank you.

Operator

Our next question comes from the line of Matthew Kempler with Sidoti.

Matthew Kempler – Sidoti

Hi, just a follow up on the last commentary regarding 2011. So when you look at your guidance $1.15 and you’re saying a bumpy first half, are you embedding in the guidance the assumption that revenues are flat to slightly up by the second half of the year?

Suri Suriyakumar

Yes, yes absolutely. Absolutely, because gain – we are saying bumpy Matt, because we still like to wait and see how March performs. We might see much more life. There is a chance that we can see life in March, because there are projects which are being held. So hopefully there will be positive impacts of that. But in general I would say your observation is correct. Keep it kind of bumpy in the first half, but more stabilization and better returns the second half of the year.

Matthew Kempler – Sidoti

Okay. And then it sounds like the management services initiative played a good role in helping to expand your global account base. Can you give us some sense of the contract values specifically just for MPN, MPS? And then what are your thoughts around opportunities into 2011? Are you retooling your strategies all around that? Or do you think that current effort, the current approach is the right way?

Suri Suriyakumar

The current effort is going very well Matt and we are starting to see, like I said, definite progress on that. What makes us unique is the fact that we can not only do outsourced work, outsourced work for a customer, but we can also do the on-site. So we do on-site, we do off-site and then we do the Cloud, which means that if a customer wants work done at site or printed at site, we can provide that too. Tied in with the fact that we provide Managed Print Services, color and black-and-white large format and smaller format, we can really be the solution provider for large customers taking all their complete document issues tied with technology.

So that part is really exciting, it’s – as we do it is becoming better for us and we’re starting to see larger companies saying, yes, we want to do that because remember, end of the day, we take their 20, 30, 40, sometimes 50, 60 locations and convert all of their services to a single platform service and give them one invoice which tremendously saves them money. With regard to contract values, because this is a public call, we would like to keep that confidential – it’s also competitive nature. But overall in the global solutions revenue, quite a few of them are – comes as MPS package. That is because for larger customers it is attractive to buy all of the services from us, Matt.

Matthew Kempler – Sidoti

Okay. And then on the color side, it sounds like we’re at the full run rate now in terms of the number of service centers we wanted to have for color. So what are the plans in 2011 regarding that? And then if you can give us a sense of the growth you saw in color in 2011, maybe breaking it out by the impact from the AEC segment, which probably hasn’t declined, versus non-AEC?

Suri Suriyakumar

Okay I’ll ask them to look at the color – Jonathan will, I’ll ask Jonathan to look it up and quickly comment to you on the new revenues we got on color, Matt. With regard to the 2011 – absolutely we’re going to continue to stay on track. Like I said, if we do that and the new projects don’t come online and our AEC customers don’t grow their business – because AEC color is specialized color and it’s not something that you will go and get it down in regular digital color bureaus. So, if that volume of the business doesn’t come back and we continue to expand our non-AEC color, which means all of the work we are doing out in the market now from Adobe to marketing presentations to Ducati to large format posters, building wraps, if you take all that kind of stuff, which will continue to grow, that is the part which actually somewhat keeps our margins down.

And that business will grow anyway, because we already have the equipment, we have the locations, our operating cost is low. One of the other reasons our color margins might be a little challenged at the beginning, Matt – because remember we opened these ten centers and launched RIOT – it’s for competitive reasons. We want to go out there and take business from the competitors. So sometimes when you kick off a business, you want to be really aggressive in taking market share. So those are the things which contributed to slightly lower margins. Jonathan, can you comment on the color volumes?

Jonathan Mather

Sure. So to answer your question based on information that we make available, color year-over-year was almost flat. So compared to 2009, 2010 was comparable numbers, flat. However, when you take into consideration the fact that the color was prior to us getting into the non-AEC and the initiatives – we were servicing the AEC segment. What you are seeing that the decline in the AEC segment, if you took that into consideration, we would have a decline in color. Fortunately, or because of our initiative, we have been able to negate that decline by at least getting into flat and that’s the increase from the new initiative.

Matthew Kempler – Sidoti

Okay. And then last question, EPS guidance, does that exclude the impact for the stepped up amortizations and on the brand trade names and the swap?

Jonathan Mather

Yes. So basically we call it the adjusted EPS, it adjusts for each quarter net of taxes. Because there is the $2.4 million for trade name amortization and then there is about $700,000 a month for the swap cost. But $5.8 million for the whole year, net of taxes, you’re talking about a $2,700,000 adjustment each quarter for those charges.

Matthew Kempler – Sidoti

Okay, thank you.

Operator

(Operator Instructions) And our next question comes from the line of Brad Safalow with PAA Research.

Brad Safalow – PAA Research

Hi, thanks for taking my questions.

Suri Suriyakumar

You’re welcome Brad.

Brad Safalow – PAA Research

Just a couple of factual questions. How many branches do you have at the end of the fourth quarter?

Suri Suriyakumar

I’ll give you that in a second. In the fourth quarter, number of branches – I think it’s no change if I recall right. It’s 271.

Brad Safalow – PAA Research

271, okay.

Suri Suriyakumar

271. Sorry, go ahead Brad.

Brad Safalow – PAA Research

And then just on iShip Docs I want to make sure I understand that number correctly. Is the $4 million was that total revenue for the iShip Docs eco-system versus what you actually generated for ARC?

Suri Suriyakumar

Say that again? I didn’t quite understand the question.

Brad Safalow – PAA Research

The $4 million number you disclosed for iShip Docs in terms of revenues, was that revenues to ARC or just revenues of printing volumes on the platform – across the entire platform? Because I know – obviously, your network participates with our third-parties that also participate?

Suri Suriyakumar

Oh yeah, yeah exactly. So remember in our business model, Brad, everything is done inside ARC – at least 95%. We might actually sometimes use a third party vendor maybe when we are in Poland or Hungary or someplace like that. So this total $4 million is our revenues, out of which about 60% I would estimate to be print revenues. About 40% of that would be related to the digital shipping itself. So it is very attractive in terms of gross margins.

Brad Safalow – PAA Research

Do you have the – I guess I can extract – okay I got it. The total print revenues are simply if I take the 60% I can get to the total print revenues across the -

Suri Suriyakumar

Yeah.

Brad Safalow – PAA Research

Actually, I don’t know the royalty rate, but okay. I can try and work with that. And then just separately going back to your branch network depending on what happens with the construction market you are sitting here at about $1.1 million in revenues per branch. Are you anticipating closing any branches in 2011? Or do you feel like you’d rather wait and see what happens at the market place?

Suri Suriyakumar

We might actually – we might just close a few of those Brad, because we’re increasingly, like I said, looking at technology, how it can help us. For example, very few customers come to pick up from us. Almost all of the work is coming to us digitally. When it goes for bidding and then when it goes to the site, it has to be printed. But customers are comfortable sending the work to us. So we’re starting to see benefits we can draw from that, that’s with regard to closing the branches.

But I still think there will be more consolidation, more from the perspective of rightsizing the company for the way the business is going to come back. We certainly recognize when the business comes back the way it will be configured would be different to what we traditionally had which is largely print volumes related and very local. So there is definitely opportunities for us to consolidate and we will consolidate some branches. But like I said, we won’t close the branch because we want to cut the cost, we will close the branch because using the infrastructure we can still draw the work out of that place.

Brad Safalow – PAA Research

Okay. That’s helpful – and then on the RIOT color side you had 10 at the end of the year. Do you plan to open any more in 2011?

Suri Suriyakumar

We are not planning to open anything dedicated, Brad. But we are realizing the RIOT color has been so well accepted even by our AEC clients, because we created a single brand name, we created marketing materials and in positioning the kind of work we do. We did work for Adobe, we did work for Ducati, we have done work for some prestigious department stores. So the AEC clients we have are saying wow, you guys can do all this stuff. So what’s happening is we are thinking about maybe converting some of the existing color centers with virtually very little cost, maybe into additional RIOT centers if that goes that way. So that’s a thought we have of – you might end up in 2011 a few more RIOT centers. But we are not as dedicated that we have to spend money to open them, so to speak.

Brad Safalow – PAA Research

Okay, understood. And then can you just on the global services, the $14 million of annualized revenue, can you give us an idea of how much of that revenue you actually – I assume your annual contracts, but how much that you saw of that in 2010?

Suri Suriyakumar

Out of the 14 million?

Brad Safalow – PAA Research

Yeah.

Suri Suriyakumar

Jonathan?

Jonathan Mather

About $4 million or $5 million.

Suri Suriyakumar

About 4 or $5 million, Jonathan says. Because they – I think we started some of them in the third quarter, we signed a few and then we signed a few in the fourth quarter. Is that number accurate about?

Jonathan Mather

$3.5 million to $4 million.

Suri Suriyakumar

Around $3.5 million to $4 million

Brad Safalow – PAA Research

Okay.

Suri Suriyakumar

So, we would have the same impact, of course if the market is starting to show life and there is new projects, Brad, we expect that number to go up fast.

Brad Safalow – PAA Research

And just so I understand, does that mean you expect to see an additional 10 in 2011? Or that 14 number you gave us is just what you had in aggregate from when you signed the contracts?

Suri Suriyakumar

It’s an annual number.

Jonathan Mather

Annual number of accounts already signed.

Suri Suriyakumar

Already signed up. So although we had 4 million last year we’ll have that 14 million this year.

Brad Safalow – PAA Research

Okay, understood. And then last question can you talk a little bit more about your monetization strategy on PlanWell. I know this has been something that both you and others in the reprographics industry are kind of trying to figure out. So could you talk a little bit about how you are approaching pricing and how you’ve succeeded in terms of penetrating your customer base in terms of fee licenses?

Suri Suriyakumar

Sure thing. So obviously it’s – from a industry perspective, it’s a major challenge, because almost all of the reprographers and anybody who is involved in the business from early days – this is, I’m going back Brad, six, seven years ago – started having planned rooms. So they are fundamentally, basically storage of documents and retrieval of documents just planned rooms. So at that stage the whole planned room concept was incorporated into the print cost, because print played a more dominant role and we simply stored it because we can get print out of it.

In ARC there was a greater reason why we developed these planned rooms and the technology at the early stages, because we wanted to improve the efficiency inside ARC branches, because we still had at that time nearly 300 locations and we want to include the internal workflow. What has happened in the last two, three years increasingly with the suite of tools we have, we’re making a greater technology impact on the customer. So it’s just not PlanWell Enterprise. We help been bid their projects, we use a tool which is called, Bid Caster. We also released one, which is very new, which is called PlanWell Collaborate. This probably is going to be the most impactful tool we have released because it actually involves the workflow of our customers where they are sharing documents, distributing documents, keeping all the updates, keeping all of the records, so it is a very versatile tool we’ve just released.

In addition to that Brad, we have tools like Abacus PCR which does the tracking on the FM side and then we have MetalPrint and of course then we have series of other things like EWO or Electronic Work Order and so on. So the combination of all this we are providing customer services on many fronts and they are starting to see the technology value we provide. So for the first time, we are starting to see our customers although we had – we did get some resistance at the beginning for selling PlanWell Licenses from some of our traditional customers. More and more customers are saying yeah, we are using this, we would want to use it. And we are going back to those customers who are basically saying, well, we don’t want to pay for seat licenses. We are saying, your print revenues have gone down by almost half. So if you don’t give us seat licenses we would just remove PlanWell and we will continue to provide you very attractive print services like the other reprographers.

But however, if you want to have the utilization of PlanWell to have the access to these documents from wherever you want then you have to pay the services. So we have seen some really good successes and we are starting to sense a change of behavior, especially in larger clients where they say we want the whole thing bundled together, tied in with MPS. So in that aspect, we are actually driving that and we are able to make the difference.

Brad Safalow – PAA Research

So – sorry to put a finer point on this. Can you help us understand in terms of your total installed base or users of PlanWell, what percentage are actually paying any fees for seat licenses at this point?

Suri Suriyakumar

Right now, that’s a low number, because we just started doing many of them. David, do you have a number at all?

David Stickney

I don’t have a number but that’s certainly something we can provide.

Suri Suriyakumar

We can look into that and get some numbers. Didn’t we – but that Abacus licenses we said 15,000 – its new seats we sold, right? That actually that Abacus seat license number is now in excess of couple of hundred thousands in terms of seats.

Brad Safalow – PAA Research

Overall Abacus?

Suri Suriyakumar

Yes.

David Stickney

Overall, abacus is probably not – it’s probably more in the $30,000 to $40,000 range in terms of overall.

Suri Suriyakumar

No, not the dollar, number of seats.

David Stickney

Seats – sorry. But we have those numbers available.

Suri Suriyakumar

So Brad, what we can do is, we can dig into that a little bit more and give you those numbers. We are not sharing those numbers, because we are not making – they are just not meaningful enough to make the difference. But the trend is in the right direction though.

Brad Safalow – PAA Research

Okay, that’s very helpful. I will follow it up. Thank you.

Suri Suriyakumar

Okay. You are welcome.

Jonathan Mather

Operator, I want to make a quick correction to the question that was asked about the adjustment of the EPS in 2011. Third quarter, it’s not $2.700 million as I said, it is $2,400,000. This is for the trade name amortization, swap cost, net of taxes is approximately $2.4 million.

Suri Suriyakumar

I think Scott asked that question.

Jonathan Mather

Yeah, okay.

Operator

(Operator Instructions) And our next question comes from the line of Michael Terwilliger from Bank of America.

Michael Terwilliger – Bank of America

Hey Jonathan. Hey, Suri. Can you guys hear me okay?

Suri Suriyakumar

Sure, absolutely.

Michael Terwilliger – Bank of America

Largely asked and answered, but I wanted to jump one quick question here before we wrap up here. Based upon the cash you have of outstanding – like $26 million and your projections for the year, it looks like 2011, you’re going to have a pretty big cash hoard. You don’t have any pre-payable debt anymore besides tuck-in acquisitions, how can we think about your use of proceeds for the coming year?

Jonathan Mather

So, cash flow from operations as we said, we gave you a range – $40 million to $60 million. But again, we will have our capital expenditure which trends in the $8 million to $10 million for capital expenditure. And then, of course, paying down our leases we have in our debt, we still have capital leases and seller notes that we will have to pay. So between those two, if we are on the low end of that cash flow from operations, we would use up $25 million, $30 million.

Michael Terwilliger – Bank of America

So between capital leases and CapEx, you think it could be as much as $25 million?

Jonathan Mather

Yeah, about $20 million, $25 million.

Suri Suriyakumar

$10 million a couple of million dollars in capital expenditure, Michael and then the balance $15 million is split between -

Jonathan Mather

Yeah – capital leases and seller notes.

Suri Suriyakumar

And seller notes, which will come up for payment, et cetera.

Michael Terwilliger – Bank of America

Okay, great.

Suri Suriyakumar

Sorry – go ahead.

Michael Terwilliger – Bank of America

I was going to say – if you could also remind me what your potential dividend capability is after the issuance of your most recent notes? I believe the basket is under $20 million but I just wanted to know if you knew that number.

Jonathan Mather

I don’t have the number off-hand because that is not something on top our radar.

Suri Suriyakumar

Yes. The way we view it, Michael, is that we are not thinking in those terms yet, but obviously to answer that is what I was going to say – if we do end up hoarding cash meaning if the market is strong in the first – second half – or second quarter and third quarter and we start generating that kind of cash, that is a good problem to have. Of course, I hope I have that problem – then, obviously, we will be looking at various other options of how we can use that cash. Obviously, if that is the case it is likely that the market is coming back and if the market is coming back, we can think about acquisitions, that’s one option. Secondly, there is a fair amount of investment that we can make in order to go after the new segments of the business. So that’s expanding the existing market is another opportunity and of course then we can look at options such as paying dividends or buy back stock or all those things. They are all options available to us but I think our objective now is to make sure – keep the company healthy and strong until the market comes back and when the market comes back, then we’ll have a lot of options.

Michael Terwilliger – Bank of America

So would it be safe to say that 2011, barring some sort of miraculous comeback, shareholder friendly activity looks like it’s off the table for ‘11?

Suri Suriyakumar

In terms of?

Michael Terwilliger – Bank of America

In terms of shareholder friendly activity – either dividends or buying back shares? It sounds like that doesn’t seem like a priority for the coming year?

Suri Suriyakumar

Yeah. I mean unless otherwise something happens in 2011 and then activity picks up and then we end up having a whole lot of cash. Jonathan, would you like to add something?

Jonathan Mather

Again, to answer your question. We give as Suri said at the beginning, conservative but realistic guidance and we gave cash flow from operations low-end $40 million high-end $60 million and as I said, we have our capital expenditure $8 million to $10 million current. If you look at the balance sheet the current portion of our capital leases is about $20 million so just those two would use up the $40 million and leave us with $10 million, adding to our cash flow of course, right? And at a certain point we could have some extra cash that we would consider should as the stock prices go low, of course that’s better than doing an acquisition, buy your own stock back.

Michael Terwilliger – Bank of America

Okay. Well, great; I appreciate the color, gentlemen.

David Stickney

Thank you.

Michael Terwilliger – Bank of America

Thanks.

Operator

And at this time, I’m showing no further questions.

David Stickney

All right. Ladies and gentlemen, thank you much for your attention and your continued interest in the company today. We look forward to talking with you in the future. Have a great evening. Good night.

Operator

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

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