David Stickney - VP, Corporate Communications and IR Suri Suriyakumar - Chairman, President and CEO Dilo Wijesuriya - COO Jorge Avalos - CFO.

Chris McGinnis - Sidoti & Company Alan Weber - Robotti and Company.

Good day and welcome to the ARC Document Solutions Third Quarter Earnings Report Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. David Stickney. Please go ahead sir..

Thank you, Denise 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; and Jorge Avalos, our Chief Financial Officer. Our third quarter financial results for 2016 were publicized earlier today in a press release.

The press release and other company materials are available from our Investor Relations pages on ARC Document Solutions Web site at ir.e-arc.com. Please note that today’s call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements are only predictions based on information as of today November 2, 2016 and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

This call will also contain references to certain non-GAAP measures, which are reconciled in today's press release and in our Form 8-K filing. With that out of the way, I'll now turn the call over to our Chairman, President and CEO, Suri Suriyakumar.

Suri?.

Thank you, David, and good afternoon everyone. As you can see from our earnings release this afternoon, the third quarter was a tough one for us. As I had stated previously in our release, given our revised guidance earlier in the year and the transformation we are going through, this is not unexpected.

From the beginning of the year, we have consistently maintained that we need 24 to 36 months to implement the changes required to put the company back on the growth track.

That is exactly where our focus has been making the required changes to our sales and operations teams, to accelerate our growth in our new offering, in technology services while protecting our revenues in the print segment. Revenues in the print segment of our business are continuing to shrink and we aware of that.

However, our size and strength in this business, a greater focus on gaining market changes segment, will allow us to minimize the decline and generate additional sales while we build our new technology services placements.

While revenue declines in the third quarter were largely driven by our print based services, they are mainly due to the changes we've been making to transform the company. These changes have caused disruptions both in sales and operations. Transforming from a traditional print business to a technology services business is the challenge.

In the past our revenue growth has been driven largely by acquisitions. Today, we’re looking for organic growth to accelerate our revenues. Additionally, our sales in the past were mostly transactional in nature while today they are consultative in nature.

As a result, we are reconfiguring the sales organization by assigning new roles, shifting responsibilities and creating better alignment between our sales force and our product lines.

These changes are having wide ranging and overall significance on our organizational structure and behavior and they are disturbing established patterns and expectations. But they are necessary for us to capitalize on our potential. With legacy services like ours, we cannot disrupt our customers without disrupting ourselves first.

Therefore, it is important to recognize that we will continue to implement necessary changes until the new business lines start to experience revenue growth on a consistent basis. That is the challenge that comes with transformation of this magnitude.

In the face of all this, the good news is our financial performance remained healthy during the quarter. Despite weak year-over-year comparisons and lower sales, we delivered solid cash generation and EBITDA and our capital structure remains a significant source of strength.

We have continued to pay our debt down on an accelerated basis to manage our leverage ratio and our interest expenses. This quarter we used $7 million from additional payments on our term A loan reducing the balance to $127 million. We also continue to be on track to deliver a dollar of cash per share as we have done over the past several years.

Our vigorous approach to cost containment kept our gross margin well above 30% and our SG&A cost were nearly $1 million lower than they were a year ago. In spite of the year-over-year decline, the financial health and the well being of the company is excellent and remain the key management priority through all the coming years.

This will allow us to focus on extending our new and exciting technology solutions, develop additional growth in our addressable market and build out our solid financial performance. The industry we serve is vast, over $1 trillion in size. The opportunities created by technology transformation therefore are remarkable and extraordinary.

Having dominated the document management space in this industry for decades, we are of the belief that ARC can play a significant role in this transformation.

We have the industry knowledge and the experience to develop and deliver technology services and solutions which are second to none and needless to say we’re excited about the prospects ahead of us. At this point I’ll let Dilo explain some of the changes we've made in more detail and then we’ll do a summary financial review with Jorge.

Dilo?.

Thank you, Suri. As mentioned we understand the importance of our traditional print revenues especially in light of our ongoing transformation. Over the past several months we have taken significant measures to protect our traditional revenues and give ourselves the necessary time to build up our technology sales.

The changes we’re making within the organization focus on three primary areas. First is our sales organization, second our operations and the third addresses strategic management deployment. In sales our focus since the end of the second quarter has been to segment our sales force aligning specific talent with a specific type of solution.

Those of you who have followed us in the past know that much of our success came from a sale force that was well versed in everything we do.

The requirements of selling technology solutions however require more specialization and benefit from domain specific knowledge prospecting list of specific buyers and incentives based on closely targeted expectations.

In a similar fashion, those executives with expertise and long experience in more traditional print-based services of our portfolio have been assigned to hunt aggressively for construction document printing and related services.

The reconfiguration of our external sales force has been largely completed and the remainder of the year will be devoted to building our internal sales development team.

Even with the disruptive nature of these changes, the sales team delivered some significant wins expanding our MPS contract count by more than 600 locations year-over-year uncovering the new market trend for large format color used in construction signage and interior wall graphics and securing an impressive MPS and reprographics win in the United Kingdom.

We signed a 10-year contract with Hinkley Point nuclear power plant, a joint funded project by the British, Chinese and the French governments. Their commitment is an expression of confidence in ARC's ability to help manage large construction projects over the long term.

Our operations have required less configuration but more focused on the support role they play in backing up our new sales specialists.

We have a lot of expertise and depth in our service centers and we're ensuring the right people with the right skill play a more active role in getting a new customer comfortable with a new product or anticipating the needs of a long-standing client.

Our strategic initiative involve both cost management issues as well as close attention to specific sales segments. For example we want to make sure our branch network is optimized for the markets they serve. While this has been an ongoing exercise we're setting new criteria for success and sharpening our pencils on profitability metrics.

On another area our AIM centers needs more and faster access to documents that are under contract to be archived in order to avoid the issues that produce the disappointing results we saw in the third quarter.

We continue to have a strong backlog of work and we’re focusing primarily on segments such as facility management, city agencies and school districts. Likewise, we need to focus right centers on more repeatable projects if not with the same customer then at least within the same market so we can build on strength we already process.

These and other structured improvements will help drive sales momentum, extract more productivity from our existing operation and help to maintain the financial health that supports the entire company. While we're in the early days of these efforts I look forward to explaining more in the future quarters.

I now turn the call over to Jorge for a financial review.

Jorge?.

Thanks Dilo. Sales in the third quarter were down 5.6% year-over-year or $6 million due to the changes we're going through as a company that Suri mentioned earlier.

Consolidated gross margin for the quarter were 32.6%, and SG&A expenses dropped 3.6% year-over-year, both represent how closely we control costs and expenses to minimize the effects of lower sales on our profitability.

Given our EBITDA guidance for the year, we were mindful of maintaining a healthy leverage ratio to take advantage of our tiered interest rate on our senior debt. As such, we chose to use excess cash to pay down an additional $7 million on our term A loan, rather than buyback a material amount of stock.

We do not expect the significant shift in our strategy during the balance of 2016. But as previously noted, we will continue to address on a quarter-by-quarter basis, the level of debt repayment and stock repurchases.

We have paid down a total of $48 million or nearly 30% of our term A loan since its inception in December of 2014 and reduced our debt to EBITDA ratio to less than 2.5 times. As a result of our accelerated debt payment, interest expense for the quarter was $1.6 million, down $100,000 relative to the same period last year.

Year-to-date interest expense was $4.5 million, down $1 million or 17.2% year-over-year. As most of you know cash taxes for ARC remains very low thanks to $80 million of net operating losses from previous years we recommend using a pro forma tax rate of approximately 40% for your projections for the rest of 2016.

Adjusted EBITDA for the third quarter was $15.1 million as compared to $17.9 million for the same period last year. The decrease was due to the decline in sales partly offset by our cost containment efforts.

Cash from operations was $12.2 million in the third quarter, the drop from $21 million in the same period last year was driven primarily by timing differences in working capital. We are confident that we will meet our annual forecast for cash flow from operations along with our adjusted EBITDA and earnings per share for the year.

As Suri pointed out earlier, the changes we are making in the Company has short-term effects on our performance that come from assessing the threat and opportunities of the business and addressing them head-on.

But in so doing, we are ensuring that the future performance of ARC takes advantage of our industry knowledge, our understanding of our customer needs, the depth of our operational experience and our strengths in technology development. At this point, I’ll turn the call back to Suri.

Suri?.

Thank you, Jorge. Operator at this time we’re happy to take our listeners questions..

[Operator Instructions] And we'll take our first question from Chris McGinnis of Sidoti & Company..

Good afternoon. Thanks for taking questions.

So can you just maybe dive in a little bit about the change in the sales structure and maybe - it sounds like you did it pretty quickly, just how many people were [entailed in that][ph] and it sounds like it’s already being positive, but to be announced in the quarter it sounds a little early to see those kind of gains and maybe if they already are winning contracts, what’s the difference with the sales force?.

Sure, this is something - this we have been contemplating for a while now, because as the Company continues to transform and we started addressing this newer technology solutions we felt we were not getting the acceleration we should get with these services. So one of the things we've been looking at is what kind of sales teams should we have.

We obviously had a very large sales team but all of them largely sold everything. They sold the print related services or what you referred to - what we refer to as the print driven services.

So all of the services have some technology implication, but there are quite a few services we sell to customers, which we refer to as print driven, which are largely bought by customers who buy the traditional services. These are the procurement people. Those are transactional sales.

And then we have this technology solution, the customers who buy that, it's not the same people in our customer's offices, they’re different people. They could be a CIO or they could be an IT person, who is buying technology services, and these services are consolidated.

So what we have done is we have segmented the sales force in a way that we have a group of people who actually fundamentally sell technology driven or other print driven services. And then we have a group of salespeople who actually sell the technology driven services which are technology services like AIM, BIM, FIM, CDIM.

So that's the fundamental change we have made. We saw a need to do this, however we knew that if we make changes like this, it will be disruptive.

But you know after a while when we realize our print business is continuing to shrink and our technology driven business is not growing as fast as we wanted to to offset some of the shrinkage or decline that we realized we got to make these changes and that's what we did..

Okay. And then just to touch on the segments and the revenue pattern.

We start with MPS that still just really due to that contract, though loss contract and that hasn’t really changed at all, I guess has anything else changed in the segment at this point?.

Not really, so like Dilo said, we’ve had 600 new placements. That's always good. So that means we continue to place new placements to expand that and that's something that we had continuously do because we know print people's behavior are towards reducing or optimizing print.

So that's something we'll continue to do and as we continue to place more placements like that, then it will help us sustain that revenue models in management services..

Okay.

AIM being down, is that just kind of timing of revenue I guess or I know it's very small still and - but can you maybe just walk about or talk about the decline on a year-over-year basis, and small…?.

Sure. Yes, yes. So I mean you're actually answered the question yourself. The percentages might look big, but it’s off a very small base. That’s number one. And number two, if you think about the AIM jobs, they are actually archival projects given to us by a variety of customers. So every month or every quarter we would be acquiring new customers.

These are very thin sliver off that which is recurring revenue, which is the technology which drives that service, but large portion of that revenue comes from getting new projects. So it’s fundamentally we've had less projects in this quarter, obviously because the sales team was disrupted, but it's off a small balance.

But I must add exactly like you said it doesn’t always come consistently, over the year it should be growing, because we should be getting more clients as we get maturity in this service. But in this particular quarter we had two things, one is we didn’t have enough projects, second thing was the fact that we disrupted the sales..

Okay. And just with that change in sales, are you picking them with the technology background, so they - I guess the ramp time or the time before they become productive is shortened and can you maybe just talk about that a little bit. If you talked about this, I apologize already..

No, I mean that's a very valid question, and there is - absolutely the reason why we had to separate the sales teams are that we have a lot of legacy sales people who are very conversant with the print driven business.

And if we try to get everybody to sell everything one of the negative effects of that is the print driven sales people, our sales people who traditionally sales print, get distracted trying to sell technology, which is not their cup of tea, which is a question you didn’t ask but very related to what you're suggesting.

And then if you try to get - tell technology using non-technology skilled sales people that's not the best advantage as well. So the sales people we have identified for the team are people who have construction experience but have technology skills and knowledge and we need to continue to develop that sales team.

The difference though, Chris, is that in addition to having the sales people on the ground, we also need to build a fairly strong inside sales development team that's something that again we're doing it, instead of having a large number of people on the field, we have selected number of technology salespeople on the ground, which are field account executives, but to support them, we are building an inside sales development team and those people are mostly technology people who understand technology and have the ability to develop leads.

So it’s completely different sales structure, which we are in the process of building, it will take some time but it is the right way to sell technology..

Great. And then just last question, just on the CDIM.

Improvement on a year-over-year basis or not improvement but quarter - sequentially an improvement in the decline I guess? Are you seeing a little bit of stabilization in that market or still little too early to tell?.

Absolutely. So this quarter we did see a little more stabilization compared to what we had in the last quarter and that again that depends on the quarter, depends on a number of projects we got. It's hard to judge it by a quarter, but certainly our efforts will help to offset some of that as well.

So we are hoping we can continue to reduce the shrinkage, what we had experienced earlier in the year Chris..

Great. Thanks for taking the time today..

And we’ll take our next question from Alan Weber of Robotti and Company. Please go ahead sir..

Good afternoon.

I kind of have two questions, one is - as an outsider, what should we look for to see that all the change you’re making are actually kind of getting in the right direction?.

Okay. So that's the first question, absolutely. So one of things - the way I would answer that question is in the subsequent quarters as we continue to make these changes. And this is how we measure ourselves and that's what I would encourage you to look at is our traditional revenue that is the print related revenue, is it moderating in decline.

It used to be accelerating and we were hoping that it will stabilize in the earlier part of the year. It sure seems like that is starting to stabilize, can be maintained that level of stabilization, keep the shrinkage to 3%, 4% Jorge, would I say, instead of letting and slipping to 7 and go further up.

Can we keep it around 3%, 4% shrinkage by aggressively selling and getting market share in that space, and growing the technology sales. Growing the technology sales, we have grown, but as I answered my previous questions, they are all for small base. So therefore growth is potty from our perspective.

We want to have consistent growth in AIM, in FIM, in Information Management, in project information management CDIM in every one of those segments. We are hoping to spur that by putting the right sales structure in place, which is dedicated to selling only those technology services which is not the case before.

So what you will be looking for in the quarter, in the future quarter is whether there is a trend of that revenue starting to stabilize and starting to accelerate in growth..

Okay. And then my other question is, you talk a lot about the changes in the sales force and it's disruptive and expensive and yet you’ve done a really good job on the core side, so SG&A is down.

How much of that SG&A being down is actually the selling side so we could kind of contradict the idea that you're kind of restructuring that expense?.

Okay. So I’m going to let Jorge dig into it a little deeper, but I want to first answer the overall strategy in that. So when we actually reconfigure the sales, what happens is the certain amount of shrinkage in the sales teams.

What we used to traditionally have is because of the acquisitions we have had, we had a fairly expensive in a large sales force and when we stop carrying the sales teams down and breaking them up we are able to save some amount of money where we can remove layers of management.

For example we would have a regional sales structure and then we would have regional managerial structure, so we would have a Senior Vice President Sales and then we would have Regional Sales Manager and then we have a Sales Manager who will then have sales people.

To by reconfiguring the sales team and pairing them down in different buckets, there are two thing we can accomplish, one is remove a layer of management which comes obviously from SG&A and then also reassign some sales people who might be on the field because we might have shrunk the field sales team and those people might be assigned or those assets or that money we are spending we could spend it now on developing an inside customer sales team Because for the technology sales it is just having a very large field force in itself is not the best solution.

The way you would structure technology sales is a combination of inside sales development force which will develop leads because mostly these are driven by Internet sales and web leads and so on and so forth. And then passing that on to the field sales representative,.

So we have reconfigured that and in doing so the number of reps on the ground are less but then a centralized sales force is a sales team is being built.

Today is a fair amount of changes which takes place, but overall I would say the expenses have gone down, am I right Jorge?.

Yes, that's exactly right. I mean you explained it well there so in the sense that what we say is the disruptiveness was on the actual topline sales, but from an SG&A perspective for all the reasons Suri mentioned we made it more efficient and more focused on our bigger opportunities..

Okay. It 's just my follow up is - my follow-up is so like where do you stand today in terms of when you look at the sales force how much of this change has actually - do you think is actually taking place.

In other words, are you basically done and now it's a matter of them just getting better and gaining more business or is it still lot of changes to that?.

Okay. So I'll answer that question two ways. With regard to the traditional sales teams - to step back, the first thing is when you make exchanges of this magnitude it actually disturbs the normal. In other words the addressable territory, who your customers are, what's the allocated quota all those changes.

So that's the disruption which was caused, which actually creates the biggest disruption. Once we have done this there are two components; the traditional sales team will get settled down and should be able to continue to perform fairly, efficiently. There'll be some impact on that in the next few quarters, but not as much.

The changes will continue to happen is in the technology sales where we would have to continue to work on improving that, that's uncharted water for us. And we are going to have a new head of sales, who is going to be coming in. We are going to work towards building that sales team both inside sales team both inside sales team and the solutions team.

Now many of those people we've had in our service but we have not had a focused sales effort in that space.

Would you - anything to add, Dilo?.

No, I think you explained it quite well. Some of the changes that - most of the changes that you said are done and completed. We'll continue to fine tune the way we use our sales talent and the way we hunt down the right kind of opportunities going forward. So those things will continue.

We'll learn as we go and we'll put them into place and we're very confident of the new roll out that we've put in the company..

Okay. Thank you very much. I'll hang up.

But can you just address on the traditional side whether you think you've actually gained market share that was unclear to me, you talked about it getting closer to stabilize and with declining less, do you think you've actually gain market share on the traditional print side?.

So overall the big picture is that print driven revenues overall in the industry you can't roll you know that, why because customers are using technology and for reasons other than technology because they want to be sustainable, they want to be environmentally responsible, so all those things work against print.

So in general the use of print is declining that's a given. Our strategy after this quarter we have been talking about given of experience and knowledge in that space we are the biggest print provider for the construction space in terms of traditional services.

So what we are saying is we're going to focus a group of people and really go after that business and try to gain that market share and that's what we have started doing.

Now needless to say this quarter we had a fairly good quarter compared to the previous quarter in terms of traditional revenues but I won't attribute that to market share gain just yet. Now if that happens three quarters in a row then I would be more confident in telling you now we are starting to gain market share.

Will you agree Jorge?.

Yes, definitely a great. I mean we see signs of it, but quarter doesn't make a trend..

Exactly. So we're going to have to work on it. We are confident we can do that why because we are the largest player. We have a lot of capacity. Most of our expenses are paid for. So we think there is an opportunity for us to aggressively go after that market and get a little greater market share.

But I wouldn’t like Jorge said a quarter doesn’t make a trend. We'll report on that consistently and hopefully we'll see a good trend..

Okay, great. Thank you very much..

[Operator Instructions] There are no questions at this time. I'll turn the conference back over to Mr. Stickney..

Thank you ladies and gentlemen for your interest in ARC Document Solutions, this evening. We look forward to talking to you again in the near future. Thanks very much. Good night..

That does conclude today's presentation. Thank you for your participation. You may now disconnect..