David Stickney - Vice President of Corporate Communications & Investor Relations Suri Suriyakumar - Chairman, President, and Chief Executive Officer Dilo Wijesuriya - Chief Operating Officer Jorge Avalos - Chief Financial Officer.

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

Good day and welcome to the ARC Document Solutions’ Fourth Quarter and Fiscal Year-End Earnings Report Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. David Stickney, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Matt, 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 fourth quarter and fiscal year-end financial results for 2016 were published earlier today in a press release.

The press release and other company materials are available from our Investor Relations pages on ARC Document Solutions website 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 February 21, 2017 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. I'll now turn the call over to our Chairman, President and CEO, Suri Suriyakumar.

Suri?.

Thank you, David, and good afternoon everyone and thank you for joining us. As most of you are aware, behind the midst of a 24- to 36-month transition to both accelerate our technology services revenue and protect our core business, which is largely driven by print.

The challenge, as I’ve described in my previous calls, is to setup a solid technology solutions team while minimizing the organic erosion in print solution by capturing new market share.

By taking a measured and thoughtful approach to these objectives, we are maintaining the health and well-being of the company and minimizing the negative impacts of change. This is best demonstrated by the fact we delivered on our revised financial expectations for 2016. Revenue and adjusted EBITDA for 2016 remained within our expectations.

Adjusted EPS was at the high-end of our guidance and cash flow from operations exceeded our expectations returning well over $1 per share. The need for more focus in each of our business lines drove much of the management activity in sales and operations during the second half of 2016.

While we continue to experience growth in technology sales, the fragmentation in technology adoption in our market is undeniable. Therefore, in order to growRevPas this segment of the business, we need to better understand our customer’s specific needs and develop a solid team to support sales, operations, and customer service.

At the same time, the construction market remains active and a substantial number of projects nation-wide are starting each quarter. With all the talk about infrastructure development, it appears likely that we will see construction stay robust.

In such an environment, continuing to improve our print and document solutions business makes perfect sense for our customers, and supports our sales objectives.

We remain the largest print solutions provider to the construction industry and our technological and competitive advantages protect the print revenues that supports the company and provides us the resources to transform the company.

Managed print services increased its momentum in 2016 while the sales suffered from a difficult year-over-year comparison, we threw our net wider to capture larger regional accounts to help offset their headwinds in our enterprise market bringing in 100s of new clients at the local and regional levels.

Archiving and information management services grew 6% year-over-year driven by new customer engagements. This market for service is extremely diverse and we are excited to have discovered new applications and new clients for its use. If you look closer at the bottom line, we made the majority of the changes at ARC with a net decline in expenses.

Our margins were healthy, we continue to reduce our debt, and we generated healthy cash flows. Our capital structure is sound, we easily met our financial obligations of the year, and we purchased more than $5 million of ARC shares. Considering the changes we made in 2016, our performance, I would say, was respectable.

That said, I’m most enthusiastic about the progress we made to position the company for growth in the future. While we did not add headcount to our RevPas sales and operations on the ground, the focus on technology and print is generating new excitement within our teams that I’m confident will support new revenue growth for ARC.

During the fourth quarter of 2016, we recruited new leadership and expertise in sales and did the same in marketing during the first few months of 2017. We will be adding new inside sales force to support the demand generation within the first two quarters of the year.

With these new resources, we have taken a fresh look at our markets, our client base, and our competitors and identified new potential in facilities management business. We also have simplified our product offerings to make it easier to market to our existing customers.

SKYSITE remains at the heart of our technology solutions and continues to attract interest as a standalone product. But SKYSITE is also an integral part of complete turnkey solution to customers that include archival, facilities, and project management capabilities.

All of this is tremendously exciting, but I expect the changes we are making will temporarily soften sales in 2017, especially in the first half of the year.

With that in mind, our adjusted annual forecast for 2017 is for diluted annual adjusted earnings per share to be in the range of $0.24 to $0.29; annual cash provided by operating activities is expected to be in the range of $49 million to $54 million; and annual adjusted EBITDA is expected to be in the range of $58 million to $63 million.

At this point, I’m going to ask Dilo to provide some color on the specific points on our operations during 2016 and then Jorge will walk us through the financial.

Dilo?.

Thank you, Suri. As much as we drove change throughout the organization, we were just as active in emphasizing fundamentals. The print sales team targeted onsite and offsite opportunities primarily in our construction oriented markets supported by operations teams, who have been recruited to supplement sales from within our service center.

Construction activity remains strong and this gives us an opportunity to sell all services across all aspects of a job site including the job trailer and the back office.

While customers continue to print less and move more toward digital communications, our market studies indicate there is still opportunity to capture more print business and protect our core revenue through the acquisition of new market share in every market we serve.

We took advantage of advances in production equipment that improves both the quality and the speed of construction printing. It also increases our capabilities to produce construction documents in color at competitive cost. While overall print volume is declining, printing construction documents in color is increasing.

The use of color on a construction plan increases clarity and adds the information that can’t be achieved in black and white. With regard to non-traditional color, we opened a new Riot center in Denver to address the Mountain States market.

Like our other Riot centers, we did so by consolidating existing capacity and keeping capital spending to a minimum. No one in our traditional print market has more capability, more pricing power or national presence than ARC and we are making the most of it in our local markets.

Our local and national MPS teams were also very active throughout 2016 and indentified opportunities for consolidating regional customers into exclusive contracts. This frequently increases both the volume of existing work and provides us the opportunity to cross-sell into other areas.

In all, we brought in more than 400 new local managed print services accounts in 2016. With regard to technology sales, Suri mentioned our progress in AIM and we continue to generate interest in SKYSITE as a standalone application for document management and distribution.

Consistent with 2016, we will be releasing several enhancements to the application in the coming year. In the midst of changes, management is minimizing distractions and building accountability and responsiveness throughout ARC’s sales and operations teams. I look forward to reporting on their progress throughout 2017.

I will turn it over to Jorge at this time for a look at our financial.

Jorge?.

Thanks, Dilo. As discussed earlier, sales were affected by management’s reconfiguration of sales teams as well as a number of previously disclosed non-recurring events.

The drop in sales challenged our gross profit, but thanks to our cost containment effort, we still delivered strong gross margins of 30% for the fourth quarter and nearly 33% for the year.

We were also extremely diligent in our management of SG&A resulting in a reduction of $3.4 million or 13% for the fourth quarter and $7 million or 6.5% for the year. We remain focused on containing costs in other areas of the company during 2017 even as we make prudent investments to support our future growth.

Managing costs were only the part of our story as our cash flow performance was impressive in light of reduced sales. Cash flow from operations were more than $19 million for the fourth quarter and more than $53 million for the year.

This was especially meaningful considering our annual adjusted EBITDA was $62.3 million, a decrease of $9.8 million from prior year. Assisting in our cash flows was a near absence of cash taxes in 2016, thanks to net operating losses of nearly $80 million from prior years. Cash taxes will remain minimal for the next several years.

As we mentioned in our last call, we were mindful of maintaining a healthy leverage ratio to take advantage of our tiered interest rate on our senior debt and therefore paid down $22 million on our term A loan in 2016. In total, we have paid down $54 million on the loan over the past two years and reduced our debt-to-EBITDA ratio to 2.5 times.

We chose to use our excess cash to keep our interest rate in line rather than repurchase stock in the latter half of the year and investors should assume a similar stance in 2017.

The effectiveness of our cash allocation strategy was evidenced by our 2016 net interest expense of $6 million, which amounted to a reduction of $1 million or 14% year-over-year.

While sales in 2017 will not be burdened by comparisons to non-recurring events in 2016, the continued decline in print volumes and our investments in transforming the company will challenge our performance.

I have every confidence we will meet these challenges by continuing to focus on managing our cash flow, reducing our debt and positioning ourself for growth in the future. At this point, I will turn the call back to Suri.

Suri?.

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

[Operator Instructions] We do have one question in queue. This will be from Alan Weber with Robotti & Company..

Good afternoon.

I may have missed something, but did you give what you – the projected revenues for 2017?.

No, we don’t give revenue guidance as a practice, so we did not give a revenue guidance, so you didn’t miss that..

I thought you mentioned something, okay.

And then I guess the other question is with the reduced SG&A, can you just talk about kind of what you are actually doing? I’m little unclear on the sales force in terms of whether you are adding people or when that – we are going to add people and whether you expect SG&A to be declined again in 2017?.

Sure, absolutely, absolutely. Okay. So, the SG&A reduction, one-way to look at it. So, I will give the big picture Alan, if you want any specifics then Jorge can add a little color. So, if you look at the organization, as you know we are a legacy organization, have been largely in the print business for a long period of time.

So as the company evolves and as we continue to use technology for not only just technology services, but also for print related services, we use quite a bit of technology. So many parts of our company, we are changing things in order to make sure the company is truly being able to serve the customers today. I will give you a simple example.

For example, we use to have huge pickupRevPas and delivery fleet to serve our customers. In today’s context, there is literally no pick-ups, because nobody asks us to come and pick-up their documents for copying. 99% of those documents are actually sent electronically to us.

So we have deliveries, we have customers who want hard prints or hard copies, but we don’t necessarily have pick-ups. So similarly there are areas where – like for example, we don’t have a large customer service table in each of the locations because the walk-in clients are limited.

So, what you are doing is over a period of time, given that we have 180 locations, we are looking at all these locations and really removing all the parts of the organization where it’s not adding meaningful value anymore, but investing in areas where we need to.

For example, inside sales is a critical part of selling process today and then we use technology for tracking or for driving output devices or to have a digital storefront.

So where we don’t find any more value in an existing structure, we are removing that and continuing to upgrade where we really need to have services or solutions to support our existing customers.

In terms of sales, what we did is when we reorganized or reconfigured our organization; we added to a group of people more specific focus in not losing the value of the print services.

So we rearranged and reconfigured our territories in such a way that we are not losing the sales in the print revenues and then we are hiring, where required we are hiring some sales professionals, some consultancy people, customer support people to strengthen the technology services.

For example, in the technology area, the marketing we do is much more extensive than we would do marketing on the print side. So we would have demand generation director – director for demand generation or product marketing, so inside sales.

So those are areas we need to invest on to make sure we have successful technology – bring success to the technology sales team. So overall what’s happening is that, if you step back and look at it as an organization, we are continuing to modernize the organization to meet our customers’ needs going forward.

Jorge, would you like to add any more color to that?.

Yeah, just in regards to the cost structure, when you look at SG&A, as Suri mentioned, we made those additional investments, but at the same token we reorganized our operation side of the business, made it a more flat organization, so that caused us to have some reductions there in cost.

Likewise, as we’ve historically done in our history, we’ve been prudent with other cost cutting initiatives be it from travel, legal expenses, consulting, so these are other areas of the organization where we were able to garnish some cost reductions.

Does that answer your question?.

It does. Thank you. Next, my other question was somewhat unrelated.

So when you look at it though in terms of the competition, the kind of the smaller mom and pops that you competed with for many years, is there – why does it not appear that you’ve – I would assume that some of those have closed up, but yet it doesn’t appear that you’ve gotten that business?.

So, interestingly, that answer is correct. If you look at the industry as a whole, we use to describe it as a $5-plus-billion with over 3,500 companies and we don’t have that level of companies anymore. What we have though, these small mom-and-pop print shops.

All of them other than ourselves are private companies, small private companies, very regional, $3 million in revenue and $2 million in revenue and they are very local, right next to project sites or customer sites. So those – that competition is there. Overall for larger customers, we create a different value of proposition.

For customers who are in multiple locations, like they stay in Sacramento or San Francisco, San Jose and Milpitas, so in multi-cities or multi-states, when we are the central print services provider that’s very valuable.

But for local projects, they keep – they compete with us pretty aggressively because they can sell it at a much lower price and they are local. Now, the benefit we have though is we have technology to support our print shelf, they don’t have, so they can’t provide effective managed print services, that’s number one.

Number two, they also don’t have the same buying power we have. So, if necessary, on big jobs, if you want to compete, we are able to be more price competitive, but the local competition in local markets are still very aggressive.

Really small shops, $2 million, $3 million, and, you know, they are mom-and-pop, the dad is driving the shop, the wife is running the accounts and there are few front counter people, that’s sort of uncommon for us to run into competition like that. They are more like coffee shops but they are focused on providing construction and printing..

Okay. Thank you very much..

You’re welcome..

[Operator Instructions] We’ll now move to Chris McGinnis with Sidoti & Company..

Can you hear me? Sorry about that..

Yes..

Thanks for taking my questions. I guess I was talking the revenue maybe pressures in the first half of the year.

Can you talk about the ideas behind MPS, do you expect that to get back to the growth stage this year as you have used your comparisons versus what happened last year? And then maybe can you just talk about your expectations for AIM and maybe some guidelines for us to look at thinking about that successful transition away from maybe the legacy business to new technology?.

Sure, Chris. On the MPS side, there were couple of things which affected us last year, one is obviously is a one-time event which is loss of a large client and we certainly don’t expect that in 2017, that affected our MPS revenue.

And the other thing is that, in general, we said large clients, enterprise clients who are our MPS customers, were in the E&C space all affected by the impact on oil and that still continues. So we expect that to remain challenged.

There is a lot of mergers and acquisitions and consolidations going on in that space and that bring about lot of turmoil there. But what we did reasonably well was with the smaller and regional MPS clients. I mentioned that in my script, definitely we added about 400 new customers, clients last year and we expect that to continue to be the case.

So we’ll certainly see more positiveness in the MPS space because of the fact we won’t have that one-time event. But as you know, as customers print less, we would always have even though we don’t lose customers they’ll print less, that’s the phenomena we see on the print side.

So you’ll always have less printing year-over-year because that’s the trend we’re experiencing with either because customers want to be environmentally responsible and reduce their print or because they want to reduce the cost or because they want to use technology, all of those things impact print.

With regards to the technology itself, because we have made all the changes in terms of really positioning ourselves, our idea is to, in 2017, build the teams and be able to start driving the technology revenue such as AIM and facilities and projects in these areas.

So fundamentally the way we are thinking about is taking the sky site and building solutions around it and delivering to customers like what I said is fundamentally in my script, turnkey solutions.

So it’s just – it has a software component, it’s got a hardware component and professional services component where we would helping customers giving them turnkey solutions, dashboards and iPads in order to drive the facilities or projects or archival projects.

So that’s the part we are in the process of creating better demand generation, better marketing to increase the revenue. So we expect that to have a positive impact – start showing positive impact in latter part of the year.

And that’s the 24 months to 36 months periods time we really need to develop to offset some of the shrinkage we are having in the print business..

Okay.

And so if I can just talk a little bit about the change in marketing, it sounds like maybe along with the sales force, you’re hiring more around the marketing to get the name out there and the new products [indiscernible] ?.

Exactly, yes. So it’s very interesting. When you have a print sales cycle when you sell print, it’s mostly a transactional sale and it relate to ship oriented, and we would actually have sales people who have been there for a long time, who know the customers and is basically relationship oriented and its transactional.

But when you have a technology sales, it’s more consulted in its nature and which means that we have to inform the customers of the solutions we have, understand the challenges they have and we consulted it in nature to sell multiple year contracts to either maintain their facilities or to do their archival work or to do their project work.

So that kind of technology sales require a different kind of a marketing which means web marketing plays an important role. So things such as really demand generation is an important segment so we could have automated email tools and be able to reach out to customers and inform them of the products we have because customers use the web quite a bit.

And then product marketing, really get the marketing out there, so customers know we have a solution for AIM or we have a solution for facilities and this is comparatively better than the other solutions we have and be able to access and start the sales process well in advance before our field sales reps really get to the client.

So we are investing in that segment, so which is customer on-boarding and support, inside sales and then product marketing and demand generation. Those are things that – those are components of marketing that we didn’t have before, we didn’t have a need to have them before. We have been much more structured now going forward..

Great. Thanks for taking my questions and good luck in 2017..

Alright. Thank you, Chris..

You have one more question in the queue. This will be from Glenn Primack with Promise Asset Management [ph]..

Hi, Suri..

Hi..

Couple of questions. On the market share front, within your print business, could you take share as the year progresses since you can have better buying power and you’re probably you could still have operating leverage if you just fill up the shops with maybe some of the stuff that locals are giving? And….

Absolutely, absolutely..

Should we expect to see maybe some of that, that your share increases as the year progresses?.

Yes, definitely. So that’s our strategy. In fact, I’ll let Dilo share some specific numbers as to how we are comparing ourselves from last year to this year.

In fact for the first six months to the second six months how our shrinkage has somewhat reduced Glenn because we are pushing this market share concept, right because we are saying, look, we have the shops, we have the buying power, we are local, so let’s focus and drive that hard and buy ourselves more time to develop our technology because the adoption as it comes along we want to make sure we are gaining more market share.

So that’s exactly the plan. Dilo would like to give a little color..

Hi, Glenn. .

Hi..

If you look at it, in Q2, our CDIM segment which has the large components of printers part of that CDIM, we are off by about minus 7%. But if you look at quarter four, the last quarter, we were down to minus 4%.

While it will be extremely hard for us to get over zero, what our print teams by segmenting, they are completely focused on going after every construction client, every engineering architectural front in the local market and wining their onsite and off-site work including project work right because the market strategy is to sell to these different customers and projects are very different.

So we have totally engaged our operations team and the customer sales organization to protect every client we have in hand by giving them top class service so we get recurring business from these customers while the sales reps are focused on aggressively winning new market share from new projects and new customers and consultants who work around that project.

And we are seeing some early results, we’ve seen very happy sales reps who knows the job, who’ve done this for a long, long time have freed them from some of the other technology related training they had to undergo in the past, they are focused on attacking the onsite and off-site print.

So things are going quite well for us and we feel that we will little by little capture market share in different parts of the country, and every city has competition from medium, small competitors out there but we feel with our network of technology that revolves around print, our ability to get jobs in and out from our print shops using the technology means very fast with high quality print and turnaround times, I think we have a great chance of increasing the market share in 2017..

Super.

And can those reps sell the color as well to the clients?.

Absolutely, absolutely. They are able to sell all types of print services whether its black and white reprographics, color, marketing work, it could be specialized color work at construction sites, project sites, whether it’s scanning work that goes in project, they are all part of that – their portfolio.

And also we have built some very nice referrals where project – a sales rep will under see an opportunity for technology, they will call their partner and say, look come and sell the cloud components, component to my client because we want to make sure that every client we are able to sell our cloud services so that the customers are lot more stickier and the content comes into our platforms all the time.

So if the content is there in our platforms, whenever they want to print, it’s going to come back to work..

Right.

And is the color for the construction site a higher margin than the black and white reprographics just out of curiosity?.

Yes, color margins at construction would be definitely slightly higher, marketing slightly higher, and even black and white color components we talked about some new investments we’ve done in the last four, five months they are all higher margin services..

Okay.

The new team member you have hired to lead the AIM facilities management hunters, have you guys put a SWOT team together yet?.

Yes, we obviously have an existing team, Glenn. We are strengthening that with people who are capable of doing more consultancy, who position themselves as technology consultants. So that’s what we are adding on, yes, absolutely that’s a very important component.

So we don’t approach it the same way we approach the print sales but we are approaching it from a technology perspective..

Are you able to track like activity within the queue and not necessarily a booking of a project or potential but how big is that potential pipeline that they’re going after because I just figure – I don’t expect anything this year but like with all the rhetoric going on about potentially projects for infrastructure related stuff, probably sometime in the middle of 2018 and I don’t know when someone would like come to your desk saying, hey, this kind of makes sense if you were to go through project x, y, z.

This seems like there is more stuff that’s starting to let right now but there is not like a maybe as much as the public would think would potentially coming your way, and that’s probably more of an 2018 phenomenon..

Sure. So in terms of the addressable market itself, the opportunity is there. It’s how fast customers adopt technology. There is no question the addressable market is there and the sales activities, Glenn, we typically track them – the activities using sales force.

Obviously we use sales force so we will know all the activities and that’s one of our – that’s the bread and butter so to speak actively on the ground with regard to sales people, we track them all the time. There is good activity and the market is active, there is no doubt.

It’s just a matter of getting the momentum going like you said and building it up over a period of time so that we would have consistently, $10 million, $15 million, $20 million worth of business coming our way from technology which is actually getting loaded from print.

That’s the first step to offset all the erosion we have print to technology revenue and then go from there because once you get that ball rolling, the addressable market is as big if not bigger than the print market..

Sure. I mean I read the latest newsletter you have on your website from February and it seemed pretty interesting endorsements in some of the project work that you’ve been getting on the acronym BIM, some IT Guru at northwestern thinks it’s good stuff to deploy within the industry.

So all of that seems like things potentially coming your way looking at I don’t 12 months to 18 months?.

Sure. That’s exactly our plan. I think over a 12 months to 18 months period of time and that’s why we kept on saying, look we really need 24 months to 36 months to get this built out and I’m confident we can do that in that timeframe for sure..

Super.

And what do you do with all the cash that you generate in the interim?.

We know we are paying our debt down aggressively, that’s our top priority now. We want to obviously kept the leverage ratio completely under control during these times of uncertainties because we want to be – we want to make sure we are not getting carved out there, we are staying on top of that.

And once we got blessed, our options open up Glenn and we’ll probably consult you what to do it there..

I see the potential of the ARC Document double kiss as things get better. You’re buying stock at low prices before the market realizes I think what you can generate looking out a year or so. And then last year is more, earnings that’s kind of cool..

Yes..

Alright. Appreciate your time..

Thank you, Glenn. Appreciate it..

At this time, we have no further questions. I’ll turn it back over to management for any additional or closing remarks..

Thank you everyone for joining us this evening. We appreciate your support and your interest in ARC Document Solutions. We look forward to talking with you on our first quarter call come May. Thanks very much and have a good evening..

That does conclude today's conference call. Thank you all for your participation..