Dave Stickney - VP Corporate Communications, IR Suri Suriyakumar - Chairman, President and Chief Executive Officer Dilo Wijesuriya - Chief Operating Officer John Toth - Chief Financial Officer Jorge Avalos - our Chief Accounting Officer.

Brandon Dobell - William Blair Scott Schneeberger - Oppenheimer Alan Weber - Robotti & Company Matt Blazei - Lake Street Capital Markets.

Good day and welcome to the ARC Document Solutions Third Quarter 2014 Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Dave Stickney, Vice President of Corporate Communications and Investor Relations. Please go ahead, sir..

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

Our third quarter financial results for 2014 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 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, 2014, 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 in mind, I'll now turn the call over to our Chairman, President and CEO, Suri Suriyakumar.

Suri?.

Thank you, David. Good afternoon everyone. As I mentioned on our last call, momentum is building here at ARC and I am pleased with our continued growth and progress in the third quarter.

While I am happy with the results we have produced in the quarter, the most we have done over the past several years to reposition ARC from a reprographics company to a true document solutions provider has been nothing short of that really [ph]. Many of our friends and observers have wondered what if anything it might produce.

Throughout this year, I believe we have provided ample floor that the new configuration of our business is not only viable, but vibrant and meaningful to our market. Our three primary solutions today deliver unprecedented value to all of our customers.

I think the success we have achieved year-to-date is just a preview of the success we will achieve in the future. At more then trillion dollars in site, the industry we serve is one of the largest in the world and the pace of change within it continues to increase.

We are fortunate to be in position where we can help our customers make a meaningful difference in nearly everything they do. By supporting those customer as the key player in distributing construction documents and information in the cloud, and providing secure mobile access to any kind of data they might produce.

We think the possibilities of our future business are endless. In terms of specific progress during the quarter, our net sales grew 5.5% year-over-year during the period. Our gross margin improved by 140 basis points and we were able to translate those improvements into solid earnings, continue growth in adjusted EBITDA and strong cash flows.

Once again, we used our cash to aggressively reduce our senior debt in the third quarter much in the same way we did in the first two quarters of this year. In so doing, we further improved our capital structure and accelerated our plans to refinance our senior debt at a significantly lower interest rate as we noted in today's release.

In fact, S&P issued an upgrade to both our debt and recovery rating for the second time in four months shortly after we announced our results today. The ratings are, of course, based on the completion of our refinancing. I will let John provide you with the details shortly.

Other highlights on the quarters include, renewal and new customer acquisition in our management services program, significant wins in our Color business, both here and abroad, continuing progress in archiving and information management, and growth in construction document hyperlinking, building information modeling project and the placement of PlanWell SmartScreens.

These achievements along with other internal initiative led us to revise our annual guidance for 2014. First we increased our fully diluted and annual adjusted earnings per share outlook from $0.19 to $0.23 to be in the range of $0.24 to $0.27.

Second, we narrowed the outlook for 2014 annual cash provided by operating activities from $51 million to $56 million to be in the range of $52 million to $54 million. Finally, we increased the outlook for the annual adjusted EBITDA from $69 million to $73 million to be in the range of $71 million to $74 million.

With that as a background, and to give you more details on our achievements for the quarter, I'll turn the call over to our Chief Operating Officer, Dilo Wijesuriya.

Dilo?.

Thank you, Suri. Once again quarterly growth was led by sales in onsite services which grew 12.8% year-over-year.

Since we last reported to you, we have acquired new MPS customer, agreed to an expansion of our services with Eastern Health [ph] in 2015 as they acquired a competitor and we renewed several large MPS engagement, including the one we announced several weeks ago with Parsons Brinckerhoff.

In all we added roughly 300 new onsite service contract during the third quarter. Color grew strongly again at 10.8% in the third quarter driven by new sales acquired in the UK earlier in the year.

In the US, we also won signature projects for Rice University, Stadium Graphics, Southwest Airlines, re-branding campaign and some pilot work for Starbucks as they experimented with mobile coffee shop on selected college campuses.

Year-over-year sales for equipment and supply were relatively flat with decreases in China driven by the softening economy there. This decline was partially offset by sales improvements in our US business.

It is worth noting that quarterly improvements in the equipment and supply sales are largely driven by the timing of the placement of customers ageing equipment fleet. Year-over-year, digital sales rose about 1% for the second quarter in a row, primarily on incremental gains in archiving and information work.

While we are primarily targeting our AEC customer, AIM continues to attract city, municipal and state agencies. Most recently we won contract to digitized and archive infrastructure documents for the department of general services in the state of Hawaii.

The department is responsible for managing and supervising a wide range of state programs and activity through its communication and information services division, the state public work division and others. The diversity of our early wins in AIM are providing an excellent environment in which to refine our service and improve our operations.

Thinking of operations, we have specifically configured thick of our existing service centers across the country to cater to AIM work, all of our locations are capable of scanning and uploading documents to the cloud, but we've used the existing infrastructure of these thick facilities to specifically address large, ongoing AIM activity.

In other digital news, we recently received a second order for our MetaPrint software from the China Architecture Research and Design Group, as a reminder, we provide the software to drive their new digital blue printing machines.

We saw increased demand four hyperlinking service, which allows customers to navigate construction document set as easily as they do on a website. The adoption of building information modeling otherwise known as BIM continues to gain traction throughout the industry and we are noticing increasing demand for our services in this area.

And finally, interest in our PlanWell SmartScreen continue to remain high, both inside and out of the construction market. These large touch-enabled LCD screens assist our customers to communicate share and work in a highly collaborative, entirely digital environment minimizing the need for paper.

As we have mentioned in the past, our addressable market has expanded dramatically with our new services and product. These are new opportunities and new challenges but we remain committed to leveraging all of our ARC trends and to look at new ways to take advantage of them as we move forward into the future.

At this point, I will turn the call over to John Toth, our CFO for a prospective on our finances.

John?.

Thank you, Dilo. Last quarter I spent some time developing the thesis that our financial performance accelerates as we move to our P&L. By that I mean, that the rate of growth of the profit line items in our income statement increases as you move down the P&L from revenue to earnings and than out through free cash flow.

As anticipated, our Q3 results show a continuation of this trend. In Q3 our revenue grew 5.5% year-over-year. However, our gross profit and adjusted EBITDA dollars grew by more than 10%, almost doubling our revenue growth rate. And continuing down to the bottom of the P&L, our earnings grew by more than 260% year-over-year.

Some of this acceleration is driven by sales growth which leverages our fixed cost.

For example, while the rollout of a new MPS customer such as Cardno or EXP or CH2 [ph] have a dramatic affect on our top line, renewals of existing agreements like the ones we signed this year with HOK and Parsons Brinckerhof can have a significant impact on our expanding margins.

This is because there are far fewer contract implementation cost on an NPS renewal than in initial sales and when combined with an existing equipment fleet that is being optimized on an ongoing basis rather than replaced all once, these renewed engagements contribute to the growth of an already expanding gross margin.

In addition, our mix shift towards higher margins sales, as well as our targeted margin improvement initiatives combined to expand our gross margin 140 basis points to 33.9% from 32.5% and increase our adjusted EBITDA margin from 70 basis – increase adjusted EBITDA margin 70 basis points from 16.4% to 17.1%.

We did not see an increase in free cash flow in Q3 the way we did last quarter, but that was due almost entirely to two timing issues related to changes in levels working capital. First, in 2014 we were paying – we are paying interest on our Term B Loan on a quarterly basis as opposed to last year when we paid interest on semi annual basis.

This change in cadence from semi annual to quarterly skews the quarterly year-over-year comparison by approximately $3 million. Second, the collection of receivables from the increase in third quarter sales will happen primarily in the fourth quarter as we achieved much of those sales later in the quarter after summer vacations had ended.

These two timing issues amount to a swing of more than $8 million and therefore our free cash flow did not expand in the third quarter. However, we expect to see the impact of these timing issues largely reversed out in the fourth quarter this year plus – our cash flow from operations guidance of $52 million to $54 million.

Simply put this high degree of visibility into our numbers is driven largely by the rapid growth in the recurring revenue lines of our business, as well as the very focused intangible nature of our margin expansion initiatives.

And we have emphasized in the past, we have been using our cash flow to invest in technology development, invest in sales training and to aggressively deleverage the company. In the third quarter we paid down another $7.5 million of principal and in the month of October we paid down an additional $3.5 million.

This is positioned us well to accelerate our plans to re finance our long-term debt. We are very please to report that ARC has entered into a commitment letter with our long-term and much appreciated commercial banking partners Wells Fargo to refinance the company's 6.25% Term B Loan with a Term A senior facility funded by the pro rata bank market.

We issued our Term B loan last December with the cost specifically contracting that there would be no pre payment penalty to the company, no call premium if we were able to refinance the loan into the Term A market.

While the details of this agreement remain subject to approval by ARC and our lenders, we expect the interest rate on the new five year Term A to be LIBOR plus 250 basis points excluding the cost of any interest rate protection we put in place.

This deal will take the interest cost of our long-term debt from six and quarter to roughly two and three quarters, a 350 basis points savings on a $175 million of principal were more than $6 million per year of savings excluding the cost of any hedging.

Assuming a satisfactory conclusion to the agreement, we expect to announce the execution of the new loan facility before the end of the fourth quarter.

As Suri mentioned, the S&P issued another upgrade a few hours ago taking our debt rating up one notch from BB flat, the BB plus and our recovery rating from two to one, which is the highest recovery rating. In closing, the acceleration of our performance with the P&L continues with a healthy pace.

Sales increased by 5.5% year-over-year, gross profit and adjusted EBITDA dollars both grew by over 10%, earnings grew by over 250% and although free cash flow for the quarter contracted due to timing issues, we expect to see free cash flow growth for the year be north of 30% as the timing issues reverse themselves out.

That concludes the highlights for the quarters. So at this point, I'll turn the call back to Suri.

Suri?.

Thank you, John. At this time, we are available to take our callers questions. Operator, please go ahead. .

Thank you. (Operator Instructions) And we'll take our first question from Brian Dobell from William Blair..

Thanks. Good afternoon guys. .

Thank you, Brandon..

How are you?.

I am not so bad. John, maybe first for you, should we expect any seasonality in the cost of services line heading the fourth quarter.

I guess, just trying to figure out quarter-on-quarter how that cost of services should look and I guess from a longer term perspective, do you think the gross margin leverage year-on-year you've seen it should be sustainable for next handful of quarters going through 2015?.

Taking the seasonality first, we do still see seasonality in Q4. We see it in two forms, we see just with this activity in the US as winter kicks in, and we see equipment sales in China tend to be higher, those two tend to be seasonal events.

But for the last year and the prior year the seasonality continues to be muted as those portion of our business is contracted as a percent of the total. So you will see some seasonality in our sales, you will sales in the US be a little bit lower, sales in China be a little bit higher, little bit more equipment sales.

On a margin basis, you'll see that the year-over-year comparison will be probably muted be a little smaller in Q4 because of the seasonality…..

Okay..

All of that said, kind of transitioning into the second part of your question, going forward in the 2015, we expect to see this continued trend of faster growth, deeper in the P&L. Our margin expansion initiatives will be less dramatic, but our revenue growth and our mix shift should be stronger next year than what you've seen this year.

Does that answer – speak to your question..

Yes, that does. I think in the past you guys have talked about you know, have being make, or having made or continue to make some pretty decent investments in sales and marketing.

And I guess trying to get a feel for on a dollar basis forget percentage of sale for second, but just on dollar basis, should we continue to expect you guys to you know, to add headcount, to continue to push the pedal on marketing and get your name out there, travel and all kind of stuff for sales guys or do you think you got the right kind of scale of the sales and marketing operations going and there is more about better utilization of those people?.

All right, so Ben, this is Suri. We – yes, I mean, you touched on most literally on those plans and all of those are very key points and we will actually expand.

For example, we already have in plan, in place a plan to actually you know have a business development unit in place which we didn’t previously have, so there will be additional headcount for each one of our service solutions.

We would have a head of business development and then we'll have solutions consultants across the nation for each of those segments.

In addition to that, we are going to beef up our training because as we pick up momentum and we find that our customers are starting to look forward, so this is we want to be able to you know provide these services across the board and this is training for both sales and operations.

And as part of this, you know, training and also increase activity on the sales side, we would be organizing during next year significantly more number of conferences with regard to our sales teams on a regional basis bringing sales operations together and really bringing them up to speed on some of the new products we are leasing and what impact we can have on our customers businesses.

And obviously to wrap all of this up, you know we would also be investing more in that marketing area.

We already started that process you know, looking at our website, you know how is the new company positioned, so that you know, customers understand what we are doing, what other key segments of our business and what's our message, we are looking at the messaging.

We are also looking at some of the marketing materials and of course some new marketing materials for the construction document that information management segment where we are releasing new software.

So all that would be included and that’s not – we don’t have a define number John, Dilo, would you like to comment on that?.

Not a define number, we don’t have a define number, but….

But those are all the areas. So we think significant investments will be made during the 2015. We have already started many of those programs, Brandon, because obviously we expect our sales to accelerate in order to facilitate that we need to actually make all these investments..

Right, okay. And then with the visibility you guys have on the refinance here in the near term, kind of a two part question. How is the level of debt leverage, is there any kind of hindrance for you as a company going out and getting new business i.e.

are people, you know, saying I like the idea, but you know maybe its – I am not quite sure about your sustainability.

And the second, just the lower interest rates are the better situation and I guess, change the lease versus buy decision over that process for you guys in terms of acquiring equipment for customer contracts?.

Right, so the first part of the quarter Ben, you know we have had every now and then people ask questions about our sustainability, you know, how is your business doing, where are you, its somewhat we never thought of that as a major roadblock for any major accounts, they would always ask us and we would answer those questions confidently and have always been able to convince the customers.

But I think you know, given where we are today and the progress we are making its certainly makes it even more compelling for our customers to look at us in different light, that indeed that our strategy is changing.

And in fact, I think mostly even the Window, our Windows large supplier are starting to see how our business strategy is working and that we are making in roads into the construction pay significantly. So I think that’s really part of it.

With regard to lease versus buy, I think its going help us more now that we've got such attractive situation with regard to the cash generation and the refinance, its going to help us further drive the cost down of the leasing rate because the leasing companies are always interested in leasing to us.

We are very large customer for them from that perspective because we buy a lot of equipment or we lease a lot of equipment on behalf of our customers. So as a result, we are very attractive you know customer for the leasing companies and I think it will allow us to further negotiate our leasing.

John, would you like to add to that?.

No, that’s exactly what I think, it gives us more ammunition to bring down the lease rate. So I wouldn’t anticipate a shift in the balance of lease versus buy, you just you know Ken Gini and Steve, Bryn Mawr already dialing up the lease companies to tell them what our new cost of funds is in terms….

Right….

To move that cost down..

Got it. Okay, that make sense. Great, thanks guys. I appreciate it..

All right..

Our next question comes from Scott Schneeberger with Oppenheimer..

Thanks. Good evening, guys..

Good evening..

In traditional reprographics, I imagine you are seeing some signs of non-residential construction improvement, just curious what you're seeing on the stream with regards to the traditional business and customer interaction there? Thanks..

The traditional business Scott, is you know, in the – from a industry perspective it’s definitely picking up. There are signs of new buildings coming and activities up, there is no question you are big on reporting the ABI yourself.

So as you can see the market is coming alive, its not going full blown in terms of non-residential, but its certainly coming alive. You can see lot more green shoots popping up.

However, remember this is the, you know, we are hitting into the last quarter which is now at least starts picking in, so that kind of slows down the activity from a traditional perceptive.

We don’t see a whole lot of that in the managed print services area, but in the traditional and reprographics areas there is a little bit of softness for this quarter coming up..

Thanks, Suri. And is there you know, obviously management services is a focused and the company going forward for multiple strategic reasons, is your allocation of sales resources the same in traditional reprographics services change, your strategy there relative to some of the other business areas? Thanks..

So, basically Scott the way you think about our business going forward is we have three major segments of businesses, right and those three fall into management services, that’s one, and the other is MTS, we call the other one AIM which is archiving and information management.

And third one is called CDIM, which is construction document and information management. That exactly is the successor to the reprographics business. We don’t necessarily refer to that as the reprographics business because what we consider the reprographics business is distribution of information and documents, using print as the medium.

But what customers are doing is they use in cloud and actually mobile access to distribute the information.

So our third segment is we refer to as CDIM construction document and information management and so all three segments are equally powerful we just happen to have made significant in roads into management services but we have the same level of investment and sale people and the infrastructure attached to all three of this solutions we provide, these what we refer to as the three key solutions in the three segments and we have the same level of investment in all three of the areas.

For what you referred to as Reprographic, which we now refer to as CDIM, we have a brand new product coming out, when is the product released Dilo?.

January..

January, and this really exciting, this is distribution of documents and information using a really sleek web program we have, its on the cloud, its got super mobile access, its already being tested with about how many customers Dilo?.

30 customers..

About 30 different customers acceptance is exciting Scott and you know by the end of the year we will actually release that full speed, its going to be really exciting. So we are going to see that segment grow, it’s just that we won't call it reprographics because we'll call it CDIM..

Excellent. Thanks, Suri. And you know, that’s prior good segway [inaudible] I know as you highlighted the SmartScreen in the press release and certainly an exciting tool because you're elaborating your DO1 [ph] and how progress is coming, what customer reaction is and just a little bit around new development there? Thanks..

Okay. I'll give you the first part of the quarter, I'll let Dilo answer, he knows most specific on the smart thing.

So what we basically do is Scott for all three of these solutions management services, AIM and CDIM, especially on CDIM, which is construction document and information management and AIM, we actually tie in the SmartScreen into that solution.

So what happens is customers are able to see the documents not on just tablets or on their computers, but they can see this in large SmartScreens. So we'll place them strategically in the project teams, in work sites, in construction sites and in some time offices.

And this is very exciting because if you just hold the SmartScreen, SmartScreen are not difficult to find, you know, similar screens are available you can buy them anywhere.

But the combination of SmartScreens with the software which has hyperlinking and which has the ability to search large from a document and distribute document makes it really, really powerful for that same reprographics you talked about, its not reprographics anymore, its CDIM, construction document and information management used in cloud and the tablets.

But it’s really exciting and there is lot of interesting to screen, Dilo, would you like tell him what's going on the ground?.

Exactly. So, Scott, mentioning to what Suri mentioned, the SmartScreen that we offer are for the construction industry. There are lots of different brands and models that are available. They are primarily for the education industry, right.

But for construction we need very powerful SmartScreen with lot of computing power to look at large files like CD models and so forth. So what we manufacture in China and bring it over here is exactly for the AEC construction industry.

So that’s one big differentiation of our mission and again because we are able to combine our software right into the SmartScreen customers can very quickly bring documents from the cloud and view it on the SmartScreens, make a notation, mark ups, push it back into digital work flow and similarly all these smart screens are connected through our software, to printers and scanners at the job site than at project site.

So customers have a seamless workflow, so they don’t have to buy these different pieces and put them together themselves. Our software clearly combines the workflow from the cloud to from their desktop to the smart screens and to the hardware devices..

Great. Thanks for the color. And then lastly, just touch on a bit throughout, but could provide an update on any – and just seminars and trends you're seeing there? Thanks..

Dilo?.

Yes. So AIM as we reported in the earnings call today, we are continuing to get win from different organizations. They are – earlier we thought we will get lot of AIM work from architects or maybe construction companies.

What we see is the AIM solution is required by everybody, anybody who has infrastructure document, complex document as viewer document that have been produced and saved on paper very valuable information, everybody wants to digitize them and this is that everyone wants to bring that paper into a digitize format, save into a cloud and able to move it and also pass that digital information to their general contractor or to an architect to start rebuilding or do renovation, right.

So therefore we are seeing different customers coming our way for archiving solutions. And the operation we had in Hawaii that was basically a opportunity we pitched to the local public work, all the buildings in Hawaii that are owned by State of Hawaii is they are getting digitized and uploaded into our cloud.

Because earlier Hawaii did not have a solution to keep all their valuable paper documents in a digital format. So they have gone into that, they have funded the project, they have – we have started the project, all the buildings owned by the government will be on plan well archive system. So are getting nice win.

They are not – they are like in the mid 50,000 range, it could be slightly higher than that. Architects are coming on board, general contractors because every project that we see today they have – their documents are in digital format, but they also receive so much of paper documents that are part of the workflow.

So the customers should truly in a digital workflow, they got to keep digitizing their paper documents that comes to them as an – when the project is underway. So it’s a nice good blend because ARC is the only solution provider that can handle the local scanning, as well as the cloud with the equipment provided on site through our MPS program..

Excellent. Thanks a lot for taking my questions guys..

All right..

The next question comes from Alan Weber with Robotti & Company..

Good afternoon..

Good afternoon..

When you look at the company, you look out you know, I don’t know early there was question about investment in marketing and I guess more trade shows and like that, that you're going to continue invest.

So when you look out you know, five years you put the timeframe, can you talk about how you view the market and how you view kind of you know the market share that you think you could get if you did get what the size of the company would be?.

So, that’s really a interesting question. So one of the things which we are starting to position ourselves now, are basically a company who can provide total document solutions for the AEC space, so which means we can actually handle their projects related work and all the documents in the project space.

We can handle of their work in their offices which is the managed print services component, which is all the marketing, all the sales, all the contracts, all the HR documents, legal documents, finance document, all those documents and then finally we only have area those companies would have other documents would be in storage, like Dilo referred to earlier.

So if you capture all those documents, we have the ability to provide what you referred to as document solution in its entity for a company. So what has happened is off to this downturn in repositioning and investing in these new segments of business we have actually quadrupled our market – addressable market size.

Previously we did only what we referred to as Reprographics which is largely revolves around project work, that’s what we did.

Now, we have a situation where we not only to do the reprographics part of it which is success of the Reprographics business which we call CDIM, construction document and information management, we have the MPS segment of the business and we have the archival business.

So earlier addressable market was about $4 billion to $5 billion, now we have a addressable market about $16 plus billion, so therefore addressable markets has expanded substantially.

Over the next three to five yeas we will continue to invest in these areas, that’s why we consider this investment to be very critical before the downturn we were about$750 plus million in terms of revenues, I think that real number 740, we were doing run rate of almost $820 million and after that you know, currently we have $400 plus million.

So we have the opportunity to reach to the previous levels of revenues very easily because of addressable market has expanded and the market is recovering and then from there onwards, we think we'll be a bigger company than we were previously because of addressable market is much bigger.

So in order to get there, we need to invest in sales and marketing and training and attain all these conferences and make our presence known and reposition and re-brand the company. I am not sure Alan, you know, but in the past we grew by consolidation, so we were the largest consolidator in the Reprographics industry.

That era is gone, we don’t acquire companies for the purpose of growing, our growth is going to come largely from the organic growth and that’s largely driven by the technology solutions which we have, whereby we distribute our customer’s documents and information from the cloud using mobile access.

Does that answer your question?.

It does.

I just have one more question, so when you look out though compared where you were on the – we use to call the traditional reprographics business, is the focus now more towards larger clients? That $8 or $900 million of revenue, would there be a bigger percent of larger clients than what you had previously when you were doing more of a roll up?.

Absolutely. So one of the reasons for that is not because we are now concentrating on larger clients because how our customers are evolving. Our customers are becoming bigger, there is a lot of M&A activity going on in the construction space.

You might have heard recently AECOM acquired URS, it’s a $10 billion company acquiring an $8 billion company, WSP acquiring Parsons Brinckerhoff $1.5 billion.

So this trend M&A trend is continuing to increase and this large customer who are actually spread across the nation and the globe are looking to reduce the number of suppliers they have, it makes logical sense when they grow and become bigger to reduce the number of suppliers and weighing a perfect position to say, you know serve that market because nobody else can do because we have 200 plus locations on the ground and we can help our customers become that – reduce the number of suppliers by becoming the single source supplier.

So that is a great opportunity we have not that we didn’t have big customers before, we had them before, but we would serve a large customers let say in 20 or 25 or 30 locations and that customer would have decentralized operations.

Increasingly customers are acquiring becoming bigger and centralizing their operations and streamlining their operations in order to gain those benefits primarily driven by this downturn you know people are starting to save money and think about suppliers very differently.

So its puts us in a perfect spot to be able to be the most suitable candidate to actually accomplish that goal. So now its one of our top focuses to go after the top hundred ENR companies which you already call engineering news record, they always identify the top hundred construction companies there. That’s our primary state.

In fact in the management services space, if you take the top hundred companies, we are by far the largest player there, not any manufacturer simply because we can deliver value which nobody else can..

And so just, and I don’t know if this is easy to answer, John you talked about the management services, if you got to I don’t know, a 10% market share with the top hundred customers, what would that mean in revenues?.

That’s a hard number to put together John, do you know any idea if….

Yes….

If you take the – did you say top 10% of the customers?.

Yes, just assuming you under with the 10% market share, that hundred customers on the management service, what that would roughly mean from where you are today?.

The manage, sorry John, do you want give it a shot?.

I'll try and give you a shot, so try and be helpful, its very hard number. But I think the top one hundred now includes the URSA kind of being number one which is a mega company.

So if you – if we take the top 10% of that I think that’s a 50% expansion of where we are 50% to 100% and those probably conservative given how big WSP Parsons Brinckerhoff gets and Fleur [ph] and these other guys.

Another way to look it is that the depending on whose risk that you are rating, whether you are looking at Veroxis [ph] numbers, our HPS numbers, [inaudible] market across the United States is suppose to be $20 billion to $25 billion.

Now if you segment out AEC out of that it could be $3 billion to $5 billion easily and if you take 10% of that, that’s another way to look at it. But its not something we have put our arms around all these….

The answer is if you can gain market share and continue doing what you're doing, and the financials looking to you know leveraging that revenue growth, five years out, cash flow and all those good things will be much higher..

Absolutely, because the other thing is….

Obviously just trying on many of the magnitude, okay….

Okay.

I mean, the other thing to just keep in mind is, the while we are doing the management services, we'll add on the AIM because it’s a same customer, same relationship and the same issues, right, because they would be now storing documents in 50, 60 locations and you know today they may not want to digitize everything, but in three years if you are talking 3 to 5 years, more people will want things digitized that’s for sure.

And nobody is going to do distribution of documents without going – using the cloud.

So what happens is technically, you know, the rate of growth will accelerate and that’s why it’s important for us to invest in our marketing and in our sales in order to get the penetration we need with the customers in one segment and the other two will literally be automatic over a period of time..

Okay. Great, thank you very much for the answers. Thank you..

You're welcome..

(Operator Instructions) And we'll go ahead with Howard Rosengrant with BA [ph].

Yes. Hi, guys all sounds very encouraging.

Just a quickly book keeping question, you guys went from 6 to 275 and that’s sound about $200 million and what is the term on that?.

5 years..

5 years, okay.

Can you – does it give me the flexibility to buy back stock or do you have to just pay on debt or do you have to be under some of sort of leverage ratio?.

We have the flexibility to buy down stock at different levels debt, but we have the ability out of the gate, subject to completion of the documents..

Okay. And – level of [inaudible] you going into and you know, expanding the addressable market and et cetera, et cetera. But let me ask you about the sort of legacy, I don’t know if we can call that, the legacy business pretty much used to be 300 something million dollars, it now was 100 something million not much over on a run rate business.

As the industry gets better, you can tell me what we're talking '05, '06, '07 or whatever level you want to say, as the business gets better where do you see that part of the business returning to or you just going to migrate the digital and what we – that’s what I am trying to understand?.

Sure. So the way you think about that, is that you know simple answer is, when the market recovers, meaning then numbers essentially is kicking into full gear, that segment of the business will grow, no questions because construction is there, the customers are there, the documents are there, they need to be distributed and they need to be stored.

So the question about the number of documents have gone up, customers are saying they need the documents and that is a trillion dollar market segment, its not going anyway, its going to grow. So the short answer to your question is it will grow. But the key….

I don’t mean to be harsh and pinning it down, but just wondered is that when we get that growth say peak of cycle, is that a $200 million business as opposed to us, instead of $300 million or is that really, is that $150 million, where do you think peak of the cycle of that business grows so far….

Okay. Okay, so when we did $300 million that was 15% of the reprographics industry, does that make sense of the reprographics industry. So of that industry we did 15%. We were 15% of that market size and we actually had about 300 plus million dollars in the tradition of reprographics business when we did $740 million.

So if you were to have the same business that revenue generated out of that work which is called reprographics, probably about - will be about 40% or 50% if you know what I mean, because that won't come in the form of traditional print, it will come in the form of digital, digital distribution.

Does that make sense?.

Sure. Absolutely.

The digital business sort of stole us and really seem to be going up in a trajectory, is that sloppy or that’s coming longer, I think it’s been fixed and starts for years?.

Yes. There are two issues here. One is its coming along really strong. We can feel it and we can sense it. One of the reasons is not reflected in our numbers is the way we categorize our numbers.

We have been traditionally categorizing numbers in different buckets and we looking at each other and smiling here because we are hoping by next quarter we will be able to in 2015 or by next quarter we'll be able to change that category to show where really this digital growth is coming. Right now it’s not accurately showing.

For example, we have lot of revenues coming our of Abacus which is actually, which we use for management services, but that’s not reflected in the digital revenue. But its largely driven by technology. So I think see those numbers reflected accurately going forward..

And one more question which is three parts I mean, a bundle all into one, are you concerned about one, any of these having a negative impact in your business, one the consolidations that you highlight going on in your business, number two, is the stadium work possibly closer to finish than began, and I think the stadium work maybe Minnesota and Atlanta was pretty important.

And three, are you concerned – what portion of your business is energy and are you concerned with the – do you think your customers are really starting –going to start to get impacted by the precipitous fall off and price there? Thank you..

Okay. So the consolidation is very attractive for us. It makes us even stronger because that company is consolidate like perfect example is URSA comp, they are looking to reduce cost. We are in a better position to deliver that to them than anybody else.

So acquisitions like Parsons Brinckerhoff with the WSP we have a better chance of you know, giving a shot at the WSP, this is which we didn’t have all these days. We have some parts of its but we don’t have the centralized business. So, consolidation is very good for us.

Every time they consolidate we target those customers aggressively because as part and parcel of the merger or post merger, e can be a significant part in helping them to streamline and reduce cost in their facilities by putting it together. With regard to….

Since that got figure and that you may going to use their leverage against you and say, you know, sorry we're cutting rates and that sort of thing?.

Yes, they'll always try to that, every company does that and that’s obviously I guess, you know, any mergers and acquisitions falls in that, its up to us to show them yes, you can do that, you can reduce our cost, but we can do is help you find more dollars that you can't otherwise find yourself. That’s our strategy.

So we were kind of function almost like consultants in the industry going and saying, look if you are a $5 billion company, do you know how much we are spending, you are spending on documents and most of the time the answer is they don’t know and we help them find out and then we help them reduce, that’s the idea in management services.

So that’s work to our favor. However, every time companies come together they would ask us for a better price and we would actually find a way to mitigate that and expand our margins by giving them other creative solutions.

For example, then we extend the contract after 5 years, if a new person comes in, they have to replace all the equipment because the equipment is ours.

When we extend the contract, we'll help them actually replace them over a period of time without trying to replace all of them right away which will give them a cost benefit and give us a better margin benefit.

With regard to the stadium work, the stadium work we do unlike in the past does not generate our you know, several million of dollars, the generation of revenues that goes, the stadiums are lower and we will have new stadiums and new projects come up, I am right Dilo?.

Absolutely. Our project work is continuing to pick up, there may not be new stadiums coming up. But the projects are getting diversified; our customers are getting busier than ever before..

You can literally see in almost every city you fly into, you can see cranes up. So and we know [inaudible] not even kicked in.

So we are looking at the future and saying this is going to get really exciting Lastly, on the energy side, we actually did not have a whole lot of work with our energy customers and we are marketing to them because they are bit AIM customers.

Energy companies AIM is very important and their requirement to store these documents are much more stringent and we are starting to work on the energy companies and in fact recently I think we had a Dilo, did you have press announcement on the product engineer?.

Yes..

Okay. So, we actually got some deals with the energy companies. We are moving in the right direction, but traditionally we did not do a whole lot of work with them..

Thank you for all the color..

You're welcome..

Our next question comes from Matt Blazei with Lake Street Capital Markets..

Good afternoon, guys. Most of my questions have answered, I think I kicked to the back of the queue. But – one of things just wanted follow up on was on the use of the cash flow and the debt repayment, you've been aggressive obviously in 2014 paying down that debt maybe as much as – hopefully as much as $25 million or $30 million year, this year.

But with the refinance I am curious if you're going to continue with your plans to use the free cash flow to pay down the debt is aggressively as you have, I think you originally thought you might down much as another $30 million or $40 million in 2015, but obviously with much more attractive rate, is that still your overall strategy?.

So, you know, I'll let John give a little more color, but fundamentally Matt the way we look at it is obviously you know we have got a whole lot of debt, I mean, there was time that, you know, that debt looked very big.

It doesn’t look very big to us now simply given the direction we are ahead of the cash, we are generating and all of the new things we are doing the debt doesn’t – its not to worry something, but having said that, we want to bring the debt to a very, very manageable price and at that point of time then we look at the alternative and then options.

So - but we will be paying down the debt because there is no point even paying at you know, whatever percentage we are paying, we are paying a percentage so we want to bring the debt down.

John, would you like to add some color?.

Yes. I think that’s the plan going forward for the foreseeable future and it drives more of our enterprise value into our equity, it gets our debt to more manageable level and allows us to free up cash flow for other uses in the medium and longer term..

Absolutely..

And John, they are still going to be about 1.5 times EBITDA as sort of target level…..

Yes, directionally. Yes, directionally I think that’s a reasonable assumption, yes..

Secondly, I know this is tougher question to answer because its little bit more subjective. But you know, you talked about your end markets in your AEC customers particularly you know, showing some – starting to show some sign to strength there that you think is a term green shoots.

Obviously Q4 is not a great time for that, but do you think there is a chance that you could actually show positive year-over-year growth in the traditional reprographics line in 2015 for the first time in 7 years?.

In 2015 that’s possibly, its hard for us to say depending on how is progressing.

Like I said, Matt, if you remember, so again, this is part lot of people find very difficult to understand because when the traditional reprographics business comes, which simply means distribution of documents are increasing, right because you have more projects, but when you have projects, more documents have to be distributed.

But it won't come in the same form because its not coming in printed form, right. So it will come now digital form and that’s what we call CDIM. So you know, sometimes people ask me, are you out of the reprographics business, and I would explain by saying no I am not out of the reprographics business per se.

The reprographics business has evolved, distribution of documents using print as a medium was referred to as reprographics. We are doing….

But – are these markets strong, are the end markets strong enough to actually increase the paper, the paper usage?.

Whether the paper usage will, I mean, that’s a hard question to answer depending on how much customers are transitioning.

As long as the used paper Matt, what happens is the period, the time they are going to take to construction is going to be taking a long time, right because somebody has to make a change, take it to paper, put it on paper, make multiple copies, distribute the paper.

What increasingly customers are seeing is, they can take the change, take it to digital, post it on the web, get others to go to the web and download it, and what is – what we are doing is we are hyperlinking them, all what they do is they just download the document, double click on the hyperlink, they got the change order.

So what's happening is if you look at the construction industry, one of the things which delays construction progress is the distribution of documents and change orders and the amount of changes which take place.

What's digital doing, is making it fast and people are loving it, its just that they were not comfortable with technology before, the sub-contractors and general contractor with these tablet and all the new apps they have, they are getting really comfortable and the new product we are releasing which Dilo just talked about is making it even easier.

So that part of the business will grow, we will get the same revenue of course that – that whatever revenue we'll get we'll get it at a much higher margin, now with all technology revenue which had much margin. But if you look at the end market, are they becoming stronger, yes, are they building more, yes, will the documents increase, yes.

But they won't be printed as much so therefore the dollars which come because of printing would be less and how much it will grow I am unable to predict, I would be guessing too much on that.

But the number of document is getting stored and distributed would increase, Dilo?.

Absolutely. I'll give you slight, you may have probably seen of the southern region like the Texas region, they are reprographics print related revenue picked up year-over-year because there are lot more projects happening in the Texas southern region and lot of paper printing is taking place with distribution, right.

So the countries we feel have a year-over-year downward shift because till its project activity has not grown as much as in the Texas area.

Hopefully in the next year or next couple of quarters more customers, more projects will come along, there will be print component to that, we will get it but again as so we said, we will not be able to predict, is it going to be over the previous year. But whatever the customers ask we will get that work..

Okay. Thank you, guys. Nice job..

Thank you..

It appears there are no further questions at this time. Mr. Stickney, I will like to turn the conference back over to you for any additional or closing remarks. .

Thanks, Hanna. Ladies and gentlemen, we appreciate your attention and your continued interest in ARC Document Solutions. Have a great evening. Bye-bye now..

That concludes today's conference. Thank you for your participation..