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American Reprographics Company (NYSE:ARC)

Q4 2011 Earnings Call

February 21, 2012; 05:00 pm ET

Executives

Suri Suriyakumar - Chairman, President & Chief Executive Officer

Dilo Wijesuriya - Chief Operating Officer

John Toth - Chief Financial Officer

Jorge Avalos - Chief Accounting Officer

David Stickney - Vice President of Corporate Communications

Analysts

Molly (ph) - JPMorgan

Daniel Aliperti - Oppenheimer

DeForest Hinman - Walthausen & Co.

Brad Safalow - PAA Research

Brandon Dobell - William Blair

Operator

Good afternoon. My name is Joseph and I will be your conference operator today. At this time I would like to welcome everyone to the ARC’s 2011 quarter four and fiscal year end 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 Mr. David Stickney, Vice President of Corporate Communication.

David Stickney

Thank you Joseph and welcome everyone. Joining 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 fourth quarter and fiscal year end financial results 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’s website at www.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. 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 21, 2012 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 results for the fourth quarter and full year came in as expected in 2011 and once again our performance amply demonstrates our ability to perform in the midst of economic and industry uncertainty.

The company reported annual revenue for 2011 of $422.7 million with a gross margin of 31.8%. Cash flow from operations was $49.2 million in 2011, making it the fifth year in a row, where the company has generated more than $1 per share in cash flow from operations. Adjusted earnings per share came in at negative $0.02 and included $0.015 of cost associated with the company CFO’s transition and certain facility closing cost.

We reported revenue for the fourth quarter of 2011 of $101.8 million, a quarterly gross margin of 30.7%, adjusted earnings per share for the fourth quarter of $0.0, while cash flow from operations for the period was $19.7 million. While most reprographers clung desperately to traditional services and struggled to survive 2011, ARC was actively diversifying into adjacent and growing markets and delivering results that strongly indicate the company is finding new ways to apply it’s core competencies to new markets and generate new sources of income.

As I noted in our press release earlier, FM revenues grew 13.5% in the fourth quarter and posted more than 11% increase year-over-year. This performance was led largely by our managed print services and offering that was brand new to us just 18 months ago.

Large-format color revenue grew 10.3% year-over-year, again led by new offerings to new markets under our Riot Creative Imaging brand and while not a new source of revenue for us, annual digital services sales stayed steady at 9% as a percentage of our overall revenue, in spite of the drop in digital services revenue generated by the project related work which we traditionally enjoy.

As you can see, the real story of 2011 was the success of our diversification efforts. When we reported our 2010 results at this time last year, economies were calling for a recovery in late 2011. This year however, forecasts are more tempered by comparison and from what we can see, this is probably appropriate.

The economy is improving bit by bit according to the headlines, but evidence of the best news is difficult to find on the ground. Employment appears to be inching up, the markets have improved and some capital looks like it’s coming off the sidelines. But vacancy rates remain stubbornly high and lending for non-residential construction projects is still very difficult to come by.

Construction related reports from FMI, McGraw-Hill, the AIA and others suggested that improvement in the office market will not experience meaningful growth until 2013 and any growth they expect in 2012 will be coming off a very low base. The outlook for retail space remains anemic too.

In short it appears that the bigger segments of non-residential construction that drive revenue for ARC will remain challenged in the months ahead. In light of these facts, the progress we made in diversifying our business is even more meaningful, particularly in the five areas introduced last February.

First, we will continue to pursue large clients who significantly move the needle on our top line. Large AEC Corporations continue to grow through M&A, but look to aggressively reduce operating cost of the merged entities, given the economic environment. ARC is not only in a perfect position to provide these services because of its national and global presence, but nearly all of our services addresses efficiencies in both, document management cost and document workflow. Being the only full serviced document management company capable of addressing these concerns, we intend to exploit our strengths in this area.

ARC Global Solutions already does business with 15 of the top 100 AEC firms in the country and we are actively hunting for exclusive relationships with the remaining 85. We are also targeting top tier regional companies in the AEC space.

Second, is our growing pursuit of growing strength and growing strength in management services or MPS. As we have reported throughout the past several quarters, we see this market as rich with potential. Gartner identified ARC as the only player in its Magic Quadrant who addresses the AEC market with a comprehensive MPS solution. Our experience over the past 18 months suggests our offering is compelling and difficult for traditional vendors in this space to compete with.

MPS also leads our global solutions value proposition. Every one of our existing customers and prospects can reduce cost and improve efficiency with this offering and we are the only company who can offer both construction document management services and the back office productivity of MPS under a single contract.

Third, is our continuing expansion into digital color imaging, particularly the production of large format graphics. By offering specialized services in multiple locations under the same management, our customers benefit from being able to produce sophisticated graphics close to their ultimate use and eliminate the inconvenience and high cost of traditional print then ship services. This is ideal for high-end retail companies, multi location restaurant chains and product manufacturers that require the regular production and distribution of point of purchase materials.

At the beginning of 2011 we had 10 regional production centers under the Riot Creative Imaging brand. We are at two more in 2011, one in Irvine, California and one in Orlando, Florida. Riot has allowed us to leverage our strength and expertise in this new market and delivered significant year-over-year revenue growth.

We also continue to invest and bring to market new advances in our technology services in 2011. On the product side we upgraded our document logistics application, ishipdocs and recorded more than $7 million in sales via this product. That’s up from $4 million in 2010. We also upgraded our print-tracking tool, AbacusPCR, which continues to provide a compelling value proposition for our on-site service engagements.

On the services side we launched our technology consulting efforts and were gratified to see the interest it sparked outside of our core markets. Large clients such as airline companies, universities, steel manufacturers and others took us up on our offer to reduce cost and bring greater efficiency to their document workflows.

We have known for some time in this industry that document management practices are changing, driven by a growing preference for digital workflows and a corresponding decline of print. Today, both the tough economy and the consultation of the largest companies in the EC market are acerbating this change.

Large companies are forcing smaller companies to adopt digital practices over print to improve productivity and communication with technology and every business is looking for greater efficiency as they chase the cost reductions that come with it. Our customers are hungry for the gains that are coming as a result of innovation and they want them sooner than later. While this behavior will affect our print related revenues in the large format black and white segment, it also plays directly to our strength. It highlights our expertise and technology offering and through their use we can facilitate the revenue growth in other areas of our business.

As I mentioned earlier, the outcome of our work in 2011 is dramatically different from most traditional reprographers. We are making progress because of our willingness to embrace change, to think outside the box and to accept rather than fight the growing evidence that our customers are transforming right in front of our eyes.

Our customers are changing the way they think about the business, changing the way they manage their business and changing the way they do business. We see this as an opportunity since we dominate this nitch market. Our ability to understand and meet our customer’s evolving needs makes our service offering even more compelling than before, allowing us to put distance between us and anyone who competes with us in this space. Like us, our customers are exploring, discovering ways to improve efficiency, reduce cost and deliver more value with fewer resources and we have a tremendous portfolio of services to offer them. We welcome the opportunities this new environment is presenting us.

At this point I’m going to turn over the call to John Toth, our CFO, so he can add more insight to our performance in 2011 with the review of some key financial information. John.

John Toth

Thank you Suri and good evening to everyone, good afternoon. When I joined the company in the middle of 2011, the strength and agility of its management team was apparent to me. Seeing it in action over the past eight months, I am even more impressed and I am eager to enhance the financial function and add to our existing strengths in operational and sales execution during the year.

That said, as enthusiastic as I am about the future, there is a great deal of progress in 2011 that deserves your attention, so for the moment, I will confine my remarks to our recent financial history.

First, I’ll talk about revenue levels and mix and then make my way down the income statement. On a year-over-year comparison revenue for the fourth quarter of 2011 dropped by 3%, while revenue for the full year of 2011 dropped by 4.3%. If we correlate the imitating decline in our revenue losses for both the quarter and the year to the recent industry data Suri presented earlier, this strongly suggest that we are bumping along the bottom of this recent down cycle.

Our customer mix remains largely unchanged from the beginning of the year, with AEC revenue accounting for 77.3% of our revenue and 22.7% of our revenue coming from non-AEC customers. We believe our customer mix is stable, because offsetting the decline in revenue from traditional reprographics from AEC customers, we are selling new products to the same AEC customers in the form of MPS and technology services. Therefore, although we maintain 77% of our revenues from AEC, we are diluting our dependence on new construction projects to drive growth. We believe our steady customer mix represents both, the strength of our relationships in the AEC and secondly, it supports our strategy for diversifying by selling new products to existing customers in addition to exploring new markets.

Our revenue mix for the fourth quarter had reprographics delivering roughly 51% of our overall revenue; Facilities Management or FM delivering roughly 25% of our revenue; equipment and supplies delivering approximately 15% of our revenue and digital services delivering roughly 9% of our revenue. The revenue mix for the full year of 2011 has reprographics delivering approximately 54% of our overall revenue; FM delivering roughly 24% of our revenue; equipment and supplies delivering roughly 13% of our revenue and digital services delivering approximately 9% of our revenue.

The strong showing in equipment and supplies in the fourth quarter reflects the strongest quarter for sales in our Chinese operations. As a reminder, in defining our revenue streams, our reprographics revenue as reported on the financials, includes both color and digital sales in addition to black and white print sales and the FM line includes our managed print services or MPS sales. For your daily sales calculations, I’d note that the fourth quarter of 2011 had 62 days as did the fourth quarter of 2010.

In 2011 we saw mitigated declines in revenue on a regional basis as well as on a national basis. Our year-over-year regional revenue performance for 2011 was a follows: Southern California was down 9%, Northern California was down 6%, the Pacific Northwest was down 0.5%, our Southern Region was down 9%, the Mid-West was up 0.5% and the North West was down 5%.

Our international operations excluding Canada are up 19%. We saw growth in the UK as a major global services customer asked us to extend our services across the Atlantic. Our reprographics business in China also grew and our acquisition there in Shenzhen in September also contributed positively to our performance.

Moving out of revenue into gross margin, I wanted to point out the improvement in our fourth quarter gross margin. For the second quarter in a row, our gross margin improved year-over-year despite a decline in year-over-year revenue. This is largely the result of our cost cutting or Stay Fit measures, which were implemented in the first half of 2011. We believe it is also due to our evolving product mix.

I also want to point out that amortization of intangible assets was up $598,000 for the quarter, as compared to the same period in 2010. It was up $7.1 million overall for the year. As you may recall, this was caused by the accelerated amortization of our trade names, which we initiated during the fourth quarter of 2010. The period of accelerated amortization for these items will be complete in April of 2012.

Net interest expense was $7.5 million during the fourth quarter, compared to $6.8 million in the same period of 2010. The net interest expense was $31.1 million for the full year 2011 compared to $24.1 million for the full year 2010. This year-over-year increase is due to the issuance of our 10.5% high yield notes. The notes were issued in December 2010, so it’s 2011 is the first full year of interest expense under these notes. The notes carry a higher interest rate than the bank that they refinanced.

Before moving on, I want to point out the most recent change to our capital structure. On January 27, 2012 we replaced our previous $50 million revolver, with a far less restrictive, lower interest, non-monitored asset supported facility. As a reminder, the facility includes a $10 million accordion feature that may be used to increase the buying capacity up to $60 million. The agreement carries no financial covenants, unless there is less than $10 million of excess availability under the line. Currently this revolver remains entirely un-drawn.

As we move further into the balance sheet, you can see we ended 2011 with a healthy cash balance of $25.4 million. Day Sales Outstanding or DSO were 48 days in the fourth quarter of 2011. This is down from 52 days in the third quarter.

Total debt, including capital leases in the fourth quarter of 2011 was $226.3 million, down from $238.6 million in the previous quarter and down from $239.6 million at the end of 2010. The ratio of debt to trailing 12 months adjusted EBITDA at the end of the fourth quarter was 3.4 and EBITDA coverage of interest was 2.1 times. We will be filing our 10-K towards the end of this month and I encourage you to review it for further details.

Finally, to reiterate our outlook for 2012, we anticipate annual adjusted earnings per share in 2012 to be in the range of $0.05 to $0.10 on a adjusted, fully diluted basis and annual cash flow from operations to be in the range of $40 million to $50 million.

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

Suri Suriyakumar

Thank you John. Operator, at this time we are available to take questions from our investors.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Andrew Steinerman, JPMorgan.

Molly (ph) - JPMorgan

Hi, this is Molly (ph) for Andrew. I just wanted to ask a question about first quarter in terms of what your seeing so far for trends in January and February and how you expect demand to look versus normal seasonality at the first quarter.

Suri Suriyakumar

Based on what we see up to now in the early part of the year, the trend is very much continuing to be what we had experienced in the last quarter. Say in other words what I would say is that there doesn’t seem to be any major change in the way customers are thinking or the projects are coming along. The good news is we don’t seem to have any more drop. It seems like we are bumping along the bottom here.

And in terms of seasonality, I mean haven’t had any major negatives up to now. It seems like it’s going to be like a regular first quarter. Last year we had issues related to Webair and a variety of other issues. That doesn’t seem to have impacted us a whole lot this year. So it is going to be a pretty regular first quarter based on everything that we know for now.

Molly (ph) - JPMorgan

Okay great. And then looking forward, what kind of revenue growth would you need to see to maintain margins and then to see any lift in margins?

Suri Suriyakumar

You mean to maintain margins.

Molly (ph) - JPMorgan

Right.

Suri Suriyakumar

In terms of revenue growth, John would you like to address that?

John Toth

Frankly we wouldn’t need to see any revenue growth to maintain margins with some give or take around the current level and I would say that we are pretty well geared with our fixed cost, so that revenue growth north of $5 million above where we currently are, you should start to see noticeable margin expansion.

Molly (ph) - JPMorgan

Okay great, thank you.

Operator

Your next question comes from the line of Scott Schneeberger with Oppenheimer.

Daniel Aliperti – Oppenheimer

Good afternoon. This is actually Daniel Aliperti filling in for Scott. I have two questions regarding NRS Construction and I know you touched on this in the prepared remarks. Can you please speak again to what segments would the NRS Construction that is driving your revenue and that is forecasted to remain challenging next year. Thank you.

Suri Suriyakumar

Yes, so the biggest driver of non-based construction which actually drives our revenues, mostly related to office complex, that’s the big one and then of course you have lodging, a little bit of healthcare, educational and maybe a little bit of manufacturing.

So largely commercial office, and lodging. Those are the three big segments, which actually drive us really hard.

And based on everything what we have seen from FMI, those numbers don’t seem to show a lot of promise. I mean they are stabled during 2011, but they don’t see to actually accelerate. For them they really start growing -- I’m looking at the graph as I’m talking to you, in 2013 is when you have a significant difference.

So 2012 is when it will start building up, and it makes sense to think about that like that, because as employment picks up then the vacancy rates are going to go down and then, then you will start the construction process. So that lag I think is going to be there before we see results on the round for our business.

Daniel Aliperti – Oppenheimer

Okay. Thank you.

Suri Suriyakumar

Your welcome.

Operator

Our next question comes from the line of DeForest Hinman with Walthausen & Co..

DeForest Hinman - Walthausen & Co.

Hi, everyone. I have a couple of questions. Can you help us understand the gross margin progression? Obviously the margins increased year-over-year, but they were down succulently. So can you kind of help us understand that and then may be talk a little bit about, the gross margin expectations with heading to 2012 from a directional perspective.

Suri Suriyakumar

Sure. I mean obviously there are several moving parts in that. Obviously, we continue to do what you call the Stay Fit and take house cost. I mean that is the significantly exercise. It has become virtually part of the culture having done that three four years in a row and then the revenue mix keeps changing we well. But I’ll let John dive into that. John.

John Toth

Thanks. I will try and address each of the points. The sequent decline in gross margin between Q3 and Q4 is largely due to a business mix change, where Q4 is the biggest quarter for equipment sales in china and equipment sales is a lower margin portion of our revenue stream. Also seasonality; construction slows down naturally in the fourth quarter due to excuse me. So you’ll see also a decline in the top line between Q3 and Q4. So that speaks to the sequential change.

As Suri mentioned, that year-over-year change is largely the result of the great efforts of our Chief Operating Office and the implementation of the Stay Fit measures. So that has expanded our margin. And lastly on a go forward bases, I would encourage you to look at Q3 and Q4 2011 trended into 2012, because those two quarters show the benefit of the Stay Fit measures that we are implemented in Q1 and Q2 of 2011. So those are the quarters and the margin numbers I would use for 2012 outlook. Did that address your question?

DeForest Hinman - Walthausen & Co.

Yes, that’s helpful. And the charge we took, in the fourth quarter for the CFO transition, the $1.5 million, is that all within the SG&A line.

Suri Suriyakumar

Yes.

DeForest Hinman - Walthausen & Co.

Okay and my last question is on capital management. The outlook for cash flow looks quite good and I know we had originally put an early call provision on a portion of the high coupon senior notes. Was the cash flow expectations that you put out there at this time, that mean do you think its feasible that we could be calling some of those notes?

John Toth

I think, as we disclosed in our 10-K, the company deserves the opportunity to go into the market to repurchase bonds as a market participant. Our first opportunity to call is a little ways off and as you know, there will be a premium involved. So we’re going to look at what the world looks like at that time in terms of interest rate and the cost to call them in. Its something we’ve looked at constantly, the opportunity to repurchase bonds and replace them with lower cost debt.

DeForest Hinman - Walthausen & Co.

Okay, thank you.

Operator

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

Brad Safalow - PAA Research

Thanks for taking my questions. You guys there?

Suri Suriyakumar

Yes absolutely. Go ahead.

Brad Safalow - PAA Research

First question, last year you were nice enough in the fourth quarter to give us an update on where you actually stand in global services in terms of total revenue and total account adds and kind of the annualized impact of those ads. Can you give us a refresh here, where were you in 2011 and how many new accounts that you have in 2011?

Suri Suriyakumar

Brad, let me see whether I can get that information, but basically we have about 15 of the top 100 or the top 50. We always refer to them as top 50. In the past the list is top 100. Obliviously our first target is to go up to the top 50. So our revenues have grown significantly I global solutions from last year to this year. We are up to now -- Dilan what’s the number? Is it up to now up to $60 million?

Dilantha Wijesuriya

$61 million.

John Toth

$61 million total revenue from global solutions and last year we were around, if I remember about $40 million Dilan, $43 million. So I’m just giving those numbers off the cup there, but that’s one of our biggest growth areas. But in that global solutions revenue, included is the MPS, because it’s the global solutions customers wanted MPS insulations in their offices. We did that in our customers officiates, so the MPS revenue is included in that, but that’s the biggest growth we have had in the company.

Brad Safalow - PAA Research

I know those are obviously big numbers relative to your overall growth. Can you give me an update on the total branch footprint you have and what your plans are for ‘12, and the number of branches?

Suri Suriyakumar

Sure the number of branches we have, let me pull that out. So we have 222 is the location of which 200 are in the United States, we have seven in Canada, one in UK, China 12 and India two.

So basically in 2011, if you look at 2011, net we have closed in 2011, 27 or rationalized. What we are doing as you will know, in the areas where we have duplicate branches or overlapping services, we are rationalizing them as we go along as part of the restructuring process. So we are on 222, total number of locations. And we don’t expect to cut any more of this. On this we have a compelling reason to cut, but right now it seems to be pretty optimal.

Brad Safalow - PAA Research

Okay and just on -- one of the things we look at is, the revenue per branch and at least based on my math you actually had year-over-year growth and revenue per branch for two consecutive quarters. I understand you have given some of the changes in your -- the whole way you do business is not as relevant as it once was. But is the 200-footprint in the US, I mean is that sufficiently and do you think you can generate revenue per branch growth in ‘12.

Suri Suriyakumar

Right. The challenge we have there Brad is that’s a metric we don’t follow in the reprographics or in our business growth. Taking into consideration growth store, same store sales as they call it. Dilantha is reminding me the term, it just skipped my mind for a second. So we don’t necessarily -- that’s not the metric we track same store sales. The reason we don’t do that is because we have what you refer to as a hubs-and-spokes configuration in our locations. So if you take every major city, we have a main hub and then you would have surrounding that would be the small location.

Now whenever the customer sends jobs, for example if its down town San Francisco where we have the main location, but lets see, in the financial district we might have a small shop, but a substantial amount of work might be channeled though that shop, but we may not perform that work in that little shop. Instead they are digitally transformed to the main hub and then produced and delivered next day morning though the small hub. So that’s something that we don’t have track.

But another way of answering your question, I think have a sense for what you are looking for is that the four areas we have been focusing on, that’s management services, facilities management color and technology services all four of them are experiencing growth and we certainly expect all four of those lines to growth this year.

Brad Safalow - PAA Research

I guess for me as an outsider its just a way to gauge the efficiently of your fiscal footprint and I don’t really have any other barometer to look at.

Suri Suriyakumar

Sure, sure and I think that’s kind of a challenge at this point of time and the reason being its obviously almost all of the locations we have significantly capacity now. If you think about the fact that at one time was knocking of $700 plus million in revenue. So we certainly have the capacity even though we close the locations, because even when we were doing $700 million, we still had excess capacity.

So right now Brad at this point in time, I think we like for example, lets say for example our business doubled. If our business as based on what it is today, if we double we probably won’t have to do anything in the location to increase the throughput. We’ll simply increase the number of shifts, because right now we are operating a single shit and each of these locations have the capability of working around the clock, which is what we used to do during the Hay Days.

Brad Safalow - PAA Research

Right. And others, other companies that are kind on non-res or office focused. I’ve talked a little bit about how GSA is a sec of their business. How did that affect your business in ’11? I don’t know what percentage of your revenues you generate or have historically from that category. Can you comment on that at all?

Suri Suriyakumar

Are you talking about non-AEC Brad?

Brad Safalow - PAA Research

Government business, so

Suri Suriyakumar

So the one thing we don’t do is we don’t separate the business because it’s not practically feasible for us to do that Brad, because for example our end customers are architects, engineers and construction companies. So when they send documents to us, which we manage for them, distribute them, print them, we don’t necessarily try to identify what segment of the customers they are serving. Meaning, its not possible for us to ask our customers, hey is this job coming because you are doing an expansion project or retrofit, a government project or an industrial project. It’s a very hard thing for us to do that. So as a result, we don’t that separation.

What we know is that revenue is from government or state federal related projects that generally hide in a down turn that’s all we can say.

Brad Safalow - PAA Research

Right, okay, understood. And then you guys commented a little bit on the FM growth. When we look at the full year number 11%, is it possible for you to kind of pass out what came from MPS versus what came from activity actually on site of your clients. Its more the traditionally FM business.

John Toth

We have that in a bucket, but the way we can say is that the number of FMs grew in the year 2011, Dila by 200 …

Dilantha Wijesuriya

250.

John Toth

250, round numbers. 250 new FMs is what we installed Brad. But I don’t have the numbers as to how many dollars were generated out of that. But if you take that FM/MPS configuration, because they are so close, the majority of that revenue was drive by the management services.

Brad Safalow - PAA Research

Okay and then last question. Just in terms of capital allocations, someone else obviously asked about your ability to repurchase bonds. I’m not sure you know exactly where they trade now. But outside of that, one, what are your CapEx expectation for the year and two, what are your capital allocation priorities.

Suri Suriyakumar

Okay, so basically our capital allocation priorities is to see what we need to do in order to invest in the business. Because that’s something that we are starting to think more and more about this year as we continue to see our customers’ behaviors change, which I talked about in my prepared remarkets, Brad. Customers are increasable adopting to MPS, adopting to digital technologies and colors. So we want to actually boost that up. So that’s something, which is under consideration right now.

With regard to exact CapEx and what we need to do, John, would you like to address that?

John Toth

In general we see our CapEx roughly in line with 2011 spend some of Suri spoke to in terms of investing in and developing our technology, technically comes out as expense as we invest in people to further develop our technology offerings. But in general, our CapEx spend, we see roughly inline with our 2011 levels.

Brad Safalow - PAA Research

Okay, I’ll turn it over, thanks guys.

Suri Suriyakumar

Thank you.

Operator

Your next question comes from the line of Brandon Dobell with William Blair.

Brandon Dobell - William Blair

Hey guys, good afternoon.

Suri Suriyakumar

Good afternoon.

Brandon Dobell - William Blair

I jumped on late, so if you addressed this in some way please tell me, I’m not paying attention. But as you are going into the fourth quarter, I think actually in previous quarters you talked a little bit about, lets call it a week to week or month to month trends and I think on the third quarter call you guys talked about an expectation for the reprographics business to kind of stay or put up growth about the same as the previous quarter.

It came a little bit better than that or was there any improvement through the quarter. Was it a particular month, was it the particular kind of time frame that changed that trajectory a bit. I guess the one thing to ask you that would be as you exited December, did you feel better about where you were than when you went into October.

Suri Suriyakumar

Okay, long question. I was trying to keep track of all the things you mentioned?

Brandon Dobell - William Blair

Its kind of a same big question, but just trying to figure out how the quarter trended for and if you kind of felt better as you went through it.

Suri Suriyakumar

Sure I think that largely the quarter staid flat. I mean there was not much inflection during the quarter. I think it was -- the word John uses is bouncing along the bottom. So we didn’t see a whole lot of inflection during the quarter. And you know at the end of it, at the tail end of it we finished strong, because as you know we have China and Chain has a lot of the equipment sales. So that actually in December is generally when they wrap it up is pretty strong there, so that kind of helped pop-up the numbers.

But the way I would describe answering your question, how do you feel about 2011 as you wrap the year. I think the early part of the year like I said in my prepared comments, we expected 2011 latter half to bounce up. I mean that’s what the economy said. But we all know that was not going to happen. But the good news is the year stayed flat. It seemed like everything has flattened out.

So when we finished the year we felt like we met all of our goals. Like we met the revenue mummers, we met the projected numbers, we were so happy we met the cash flow numbers, which always makes us very attractive investment to be able to deal with that kind of cash. So we feel good about that and we just have to wait for the market to recover. But in the mean time what we are doing is, we are investing in the right areas in order to make sure that we’ll experience some growth in this year. That’s what we are hopping for. John would you like to add?

John Toth

No, I think we feel good that our – that we have opportunities to grow outside of our dependence on projects and I think that’s a strong message we’d like to send and that we have the cash flow and the capital access, both cash and revolver to invest in developing, further developing those opportunities. So we are pretty excited about that out flow.

Brandon Dobell - William Blair

Well, to take that answer one step further, is there a way for us I guess to gain some insight into may be the velocity of RFPs or the velocity of potential deals that you are responding to, competing for. Maybe a kind of a just a derivative on what a sales cycle or a sales pipeline will look in that kind of non-project based business for you guys.

Suri Suriyakumar

Right. So what, it all starts with, what it’s starting with right now; better employment numbers, better what do you call, vacancy rates or occupation. When that starts going up, all of those, they are the main drivers right; the three main drivers are actually employment, unemployment rate or employment, how employment is improving. Second one is, how do vacancy rates and third one is private investment and third one is private investment

On the all three fronts, we have seen positive movement, which is the greatest part of it all, which is very, very good. But what we wanted to do was, we wanted to make sure we cautioned out investors that although these metrics are starting to show, we don’t want anybody to think that it will right away impact our numbers, revenue numbers, because they were lagged between these numbers improving and revenue coming into our coffers.

So what will happen is these improved numbers with unemployment vacancy rates and private investment will start impacting and then the projects will get off the ground as the vacancy rates go down and employment picks up and more money will come in for construction.

So it’s just that what we wanted to show was that during the year we may not see most of it if this trend continues. But if this trend continues what happens is then it will start kicking all the metrics, which we traditionally see. Which means that we’ll have more projects coming of and we will have more work down the line.

Does that give you some color?

Brandon Dobell - William Blair

And then one to one final one, maybe taking one of Brad’s quietisms a little bit different direction. You talked about capital sending budgets this year. I guess -- how should we expect or think about the capital that you are using in the existing facilities, especially in the US to replace equipment or do you think you’ve got the equipment that you need and may be its just more in the FM business for CapEx okay, so I’m trying to get a sense of how much you are still trying to upgrade the existing, lets call it the fruitful capacity in advance of when the business comes back.

John Toth

Sure, so in terms of upgrading of faculties or doing things to our facilities, we don’t need to do anything, because we have consistently been upgrading our equipment and most of them are leases and even if we wanted it lets say for some reason if there was a compelling need to upgrade, that there is no reason to now, well its very easy for us to do that because of our relationship with our vendors and we are one of the biggest purchases of these output devices, so that’s a very easy thing for us to do.

But as it stands now, I answered a previous question where we can actually virtually, literary double the capacity and we wouldn’t think that you need to upgrade the equipment. But where the CapEx is going and where we are investing is in the new areas, like managed print services, when we actually put equipment in our customer’s offices or new FMs all the new color facilities, where we expanding the capacity for our right color customers. So some of this equipment is like HP came up with the latest equipment.

So if the customer prefer those prints we might install that equipment just in order to capture that market share. So we are investing in the right areas where we think we can generate additional revenues and expand our market share.

Brandon Dobell - William Blair

Okay. Great. Thanks guys. I appreciate it.

Suri Suriyakumar

Okay.

Operator

At this time there are no further questions.

Suri Suriyakumar

Thank you very much Joseph. Ladies and gentlemen, thank you very much for your attention this evening and your continued interest in ARC. Have a great evening and we’ll talk to you soon.

Operator

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

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