Wednesday, February 23, 2011

Comments about American Reprographics Company’s (ARC’s) recent earnings release and results

Just a “few” comments about ARC’s Q4 2010 and Full-year 2010 results. And, a few questions.

This is going to be a fairly long post, so please kindly bear with me. These comments are based on the numbers ARC reported and on my knowledge of, and experience in, the reprographics business and industry. So, yes, you can consider these comments to be my own personal opinion(s) about the numbers. Certainly, others in the reprographics industry may disagree with my opinions. And, I’m sure that financial analysts who follow (and/or report on) ARC may have opinions that differ from mine.

In the blah, blah, blah that follows, I’m not going to talk about earnings or earnings per share, EBIT, EBITDA, or cash flow. I’m going to talk about “sales”; well, at least mostly. I started writing this post before I read “the transcript of the earnings call” (on, and perhaps I should have held off on starting to write this post until I read that transcript…. to see what was said, what questions were asked, and what responses were given. Anyway, by now, I’ve read the transcript of the earnings call, and I’ve edited this post to take into consideration some of what I read in that transcript.

· On a year/over/year comparative basis, F/Y 2010 vs. F/Y 2009, ARC’s Total Sales were off 11.93%. That’s a very visible number, but, later on, I’d like to get “a bit more inside” the numbers.

I don’t think that (an 11.93% overall sales decline) should be a shock to anyone in the reprographics business, for, even at the beginning of 2010, conditions and trends were not pointing to 2010 being a year of recovery, just a year when, hopefully, things would begin to bottom out, so that a recovery could, at some point, begin.

But, just having said that, it does not look like things have yet bottomed out, at least for reprographers, and maybe not even for ARC. And, I say that in spite of signs that are pointing to 2011 being a year when the recovery for reprographers (resumption of growth, that is) will finally surface. As to the “signs”, there have been reports, already this year, that CMBS financing is happening again, that vacancy rates are dropping in some markets, that the AIA ABI Index has been +50 in recent times, and even economists at AGC and ABC are predicting that 2011 will show at least a plus over 2010.

Reprographics services are still the most significant contributor to ARC’s total sales and “reprographics services” are the heart and core of every reprographics company’s sales revenues.

· On a year/over/year comparative basis, F/Y 2010 vs. F/Y 2009, ARC’s Reprographics Services Sales were off 15.96%.

· On a quarter/over/quarter comparative basis, Q4 2010 vs. Q 3 2010, ARC’s Reprographics Services Sales were off 7.66%. Note that the decline in ARC’s “Total” Sales (QtoQ) was only 4.07%. What helped prevent ARC’s “Total” Sales from a worse percentage decline was the fact that ARC’s FM Sales decreased only slightly (1.06%) and ARC’s Equipment and Supply Sales increased by 9.65%.

· On a quarter/over/quarter comparative basis, Q4 2010 vs. Q 4 2009, ARC’s Reprographics Services Sales were off 11.46%. Note that the decline in ARC’s “Total” Sales was only 5.99%. What helped prevent ARC’s “Total” Sales from a worse percentage decline was the fact that ARC’s FM Sales actually increased slightly (.53%) and ARC’s Equipment and Supply Sales increased by 13.83%.

Before I get back to my “discussion” and “comments” about ARC’s Sales numbers, I want to first mention several things I’ve posted on the blog during the past 12 months; this, to give better perspective to some of the comments I’m going to later make, and some of the questions I’m later going to pose, about ARC’s Sales numbers. Please bear with me…..

In a post on November 2nd, I mentioned this…..

“ARC’s Q3 2010 press release said this, “Management noted that the Company acquired six new Global Services accounts since June, which are projected to generate more than $9 million in sales for 2011. The accounts were won primarily on the strength of ARC's managed print services offering.””

In a post on July 25th, 2010, I mentioned this…..

“By now, most of the Fed stimulus money is in the AEC marketplace, not sitting on the sidelines waiting to be committed. ARC should benefit at least somewhat because of that.”

“ARC indicated in past Press Releases that it was going to be pushing hard into the “non” AEC reprographics marketplace. ARC established a sub-brand, “RIOT COLOR” and has been pushing into the color imaging marketplace. By now, I’m guessing that ARC has experienced at least some growth in revenues due to its non-AEC reprographics initiatives.”

“ARC has interests in businesses in China and India. ARC’s market share (of the total reprographics market) in those two extremely large nations has to be very small, considering the very short period of time that ARC has established its interests in those two countries. Which gives ARC the opportunity to grow its revenues in two large countries with enormous populations and huge demand for housing, hospitals, schools, universities, retail, office buildings, infrastructure improvements, etc. I’m guessing that ARC’s revenues and EPS will benefit from its interests in China and India.”

In a post on July 18th, 2010, I mentioned this…..

“ABC Imaging and PBSJ agree to FM print services deal

Washington, DC—July 16, 2010—ABC Imaging announced today it will provide on-site print services for PBSJ, a leading infrastructure engineering and architecture firm.”

“PBSJ operates more than 80 offices in the U.S. The Florida-based company has considerable expertise in a wide variety of engineering and architectural services in both the public and private sectors. PBSJ's projects have included everything from theme parks to toll booths and its services range from hazardous waste management to structural engineering for bridges.”

Joel’s comment: PBSJ is a major-size Engineering firm, national in scope. ARC did business with PBSJ prior to ABC cementing a deal with PBSJ.

In a post on July 14th, 2010, I mentioned this…..

“ABC Imaging acquires Graphic Reproduction, San Francisco area industry leader

Washington, DC—July 12, 2010—ABC Imaging announced today that it has acquired Graphic Reproduction of Concord, CA. “

“Founded in 1959 Graphic Reproduction has a long tradition of being in the forefront of digital printing and reprographic technology. Like ABC Imaging, Graphic Reproduction combines innovative technology with core philosophies of high quality and rigorous customer service.”

"We are pleased to have the opportunity to be the new owners of Graphic Reproduction," said Medi Falsafi, President and CEO of ABC Imaging. "Our two companies are very similar—we both value quality and we both want to provide our customers the best possible service with every job."

“For ABC Imaging, the acquisition adds three production hubs in the San Francisco area. The largest Graphic Reproduction location, in Concord, CA, includes extensive production capability. The facility can print a full range of products using small, large, and wide format digital printers; 3D printers; and specialty printing and graphic arts equipment.”

Joel’s comment: ARC has significant operations in the San Francisco Bay Area; ARC started with Ford Graphics (San Fran) and then added BPS Reprographics to its fold (BPS was the largest reprographics company in the San Fran area and had been the market leader for many, many years.) ARC has also completed additional acquisitions in the San Fran Bay Area. ABC Imaging isn’t the only “larger” reprographics industry firm that’s established operations in the San Fran Bay Area within the past year or so; NRI, one of the largest reprographers in the Eastern part of the U.S., also established operations in the San Fran Bay area within the past 12-14 months. That adds to the “competitiveness” of the San Fran Bay area market.

In a post on May 12th, 2010, I mentioned this…..

“For those of you who like to follow what the larger players (in the reprographics industry are doing), here's a press release ABC issued last week:”

Washington, DC—May 6, 2010—ABC Imaging announced today that HNTB has extended its contract with ABC Imaging to provide comprehensive printing services enterprise-wide for another three years.”

Joel’s comment: I would venture a guess that ARC and ReproMAX competed for HNTB’s big national FM business. Yet, ABC Imaging prevailed, renewing an important FM relationship with one of the country’s largest, national engineering firms.

In a post on May 12th, 2010, I mentioned this…..

“ABC Imaging wins Parsons Brinckerhoff FM contract for on-site print services

Washington, DC—November 25, 2009—“

“ABC Imaging announced today it has signed a letter of intent with Parsons Brinckerhoff (PB) to provide on-site print services at 16 PB offices in the U.S.”

“Parsons Brinckerhoff (PB), based in New York, NY, is one of the world's oldest and largest engineering firms. The company specializes in the planning, design, and maintenance and operation of infrastructure world-wide.”

Joel’s comment: I have no idea who PB’s FM vendor was before ABC announced its deal with PB. I think, but am not positive, that PB was formerly an FM customer of ARC, perhaps coming over to ARC when the Louis Frey Company went BK several years ago. So, I guess the big question is, “prior to ABC announcing its deal with PB, was PB an ARC customer?”

“ABC Imaging awarded Perkins+Will firm-wide reprographics contract

Washington, DC—December 24, 2009—“

“Perkins+Will (P-W), an integrated design firm, serves clients from 21 offices around the world. The firm practices "architecture, interiors, branded environments, planning + strategies and urban design. Its clients include the aviation + transit, corporate + commercial + civic, healthcare, higher education, K-12 education, and science + technology markets." Perkins+Will has chosen ABC Imaging to provide on-site in-house reprographic facilities management as well as off-site support to its architects, designers, and staff.”

Joel’s comment: As is the case with Parsons Brinckerhoff, I have no idea who P-W’s FM vendor was before ABC announced its deal with P-W. Was ARC the prior vendor at P-W?

Going a bit further …..

An industry acquaintance (who owns a reprographics company in a major market in the U.S.) recently said this to me, “we had a solid 2010, sales up over 15%!, and we did that in spite of the fact that construction is still way down in our market.” This company competes with an ARC division. How is this company growing its sales revenues when “total demand” for reprographics services is actually down in its market area? The big question is, who is losing market share to this competitor? For sure, someone is.

So, by now, perhaps you’re wondering, “why in the heck did Joel bring all of that previously posted blah-blah-blah into this post?”

Here’s why:

I am disappointed by ARC’s Sales numbers the past year and, even more importantly, I am disappointed by ARC’s Sales numbers the past 6 months.

First, consider the comments made by Suri, ARC’s CEO, in the earnings release just issued:

In the Q4 2010 earnings release announcement, Suri (the CEO) said…. "Our focus for 2010 was to generate strong cash flows from operations, aggressively reduce costs, and maintain a healthy capital structure. We were successful on all fronts," said K. "Suri" Suriyakumar, Chairman, President and CEO of American Reprographics Company. "While revenue for the year was lower than expected, the economy continues to show signs of recovery and industry opinion seems clear that we are at the bottom of the cycle. However, non-residential construction continues to lag the general economy, and as recently as December, industry spending was at its lowest level in a decade. Therefore, we can expect the road to recovery to be bumpy, especially during the first half of 2011."

"Yet that recovery opens up tremendous opportunities for the company. With a dominant position in the industry, significant operating leverage, strong cash flows and a stable capital structure, we are well-positioned to take advantage of growth in our end markets. In addition, our industry-leading technology solutions combined with the lower cost base we currently enjoy will allow us to augment our EBITDA margins. I remain confident in the health and strength of ARC, and its ability to thrive as the U.S. economy comes back."

Second, take a quick look at this table:

A quick look at ARC’s Sales Results

and Sales Trend (in millions) (source: Google Finance)

Total Sales Revenues, by quarter

Q4 2009 - $ 111.66

Q1 2010 - $ 112.16

Q2 2010 - $ 115.09

Q3 2010 - $ 109.42

Q4 2010 - $ 105.00

Total Sales Revenues, by year

2006 - $ 591.84

2007 - $ 688.35

2008 - $ 700.99

2009 - $ 501.55

2010 - $ 441.60

Third, remember, and please consider, the “previous stuff” that I brought into this post from earlier posts on my blog.

And, fourth, consider:

1) When it comes to keeping costs in line with revenues, ARC, without question, earns (at least it does from me) an “all-star”, top of the rank, ranking. ARC is the probably the best “cost management” company I’ve ever come across in the reprographics industry. ARC’s management team is obviously focused on running a lean ship and knows exactly how to do that. Personally, I am aware of several cost cuts ARC made during the later part of 2010 to reduce compensation expenses. When a company grows by acquisition, it is common for the company, right at the time the acquisition is completed, to enter into extended employment agreements with certain management team members joining the company from the acquired companies. In Florida, several former management team members, from at least one company ARC acquired in 2007, left ARC’s employ during 2010. This has definitely reduced ARC’s expenses for higher-compensated people. It is likely that the same thing has happened elsewhere in the U.S.

2) By now, I expected to see some real traction from ARC’s RIOT COLOR business. Given the continuing decline in ARC’s “reprographics services” Sales revenues, either RIOT is not gaining much, if any, traction, or, if RIOT is gaining some or good traction (sales, I mean), then perhaps ARC’s Sales revenues from A/E/C Reprographics Services continued to deteriorate during the course of 2010? ARC’s Q2 2010 Sales were $115.09. ARC’s Q4 2010 Sales came in at $10 million less. While A/E/C business typically declines in the latter part of each year, non-A/E/C business (such would be the case with RIOT’s business) is generally less affected. When will RIOT sales begin to offset declines in A/E/C sales? As the old lady for Wendy’s said, “where’s the beef?”

3) By now, I expected to see some traction, even if only some, from ARC’s MPS sales initiatives. Given the continuing decline in ARC’s “reprographics services” Sales revenues, either MPS is not gaining much, if any, traction, or, if MPS is gaining some or good traction (sales, I mean), then perhaps ARC’s Sales revenues from A/E/C Reprographics Services continued to deteriorate during the course of 2010?. Sounds just like my comment about RIOT? Well, it is. Beyond that, if ARC is such a dominant player in the A/E/C reprographics business, how did ABC Imaging manage to score three very big “national” “FM” deals over the past 12-14 months? All three customers mentioned are very high-profile, well known A/E firms. Why did ARC not win those deals? Has ARC won any large FM or MPS deals in the past 6 months? If so, why no Press Releases about those deals? Service Point almost always issues Press Release’s about its big scores. Likewise with ABC Imaging. I did note that ARC scored a deal with AECOM. That’s a major score, for sure, because AECOM is huge. But, is AECOM’s business “all new” business to ARC? One of AECOM’s companies, this particular one located in Miami, has been doing business with the company ARC bought in that market for over 30 years. Another of AECOM’s companies, this particular one located in Los Angeles, has been doing business with another ARC-owned company for years. So, when Suri talks about the ARC Global Solutions team picking up (should I say, gaining) a huge customer (or several customers like that), is the revenue he mentions all “net new business”, or is some that revenue not new?

4) Over the past two years (maybe more) ARC has been continuously “right-sizing” its business. In the process of doing that, ARC has closed “stores” that were deemed non-essential and ARC has let go (I think) over 1,000 employees. Some of those employees left on their own, some were terminated. At one ARC division that I’m very, very familiar with, ARC regional management appears to have introduced a very different business model (for management and sales) than was previously employed by that division when it was an independent non-ARC-owned company. For example, the company’s “branch managers”, apparently, manage customer service and production operations and they also manage the sales team members who work out of that branch. Simply my own personal opinion, for this model to be highly effective from a “sales perspective”, the “branch manager” has to be a sales strategist, has to have an excellent understanding of the business and the market, and must understand how to support sales team members, especially with regard to bids, proposals, etc. Prior to changing to this business model, this company (should I refer to it as, this division) had a “Sales VP” who led and managed sales team members ‘cross market’ and had a “Chief Business Strategist” and had a “CEO”, all of whom were directly and heavily involved in sales strategy, relationship development, and, yes, sales. ARC paid a lot of money (a lot of money) for this division, but, today, this division is, from a “sales program, sales initiative perspective”, apparently operated completely differently from the way it was when it grew to be the largest reprographics company in Florida, and it is managed by completely different people, none of whom had previous ownership experience. ARC said many times, during its acquisition run, that it was important to its mission that it acquire and retain the owner/managers who built their companies into market leaders. I’m certainly not saying, nor am I implying, that former owners can’t be replaced by people who can pick up the baton and run with it, for certainly that ‘can’ happen. The big question, in my mind, is …… “can the new people assuming management roles replace the experience and savvy of the ones who departed?” And, “without losing anything?” If, previously, ARC felt it vitally important to retain the services of the former entrepreneurs and savvy people who built the companies that ARC bought, and if some or many of those people have been replaced by people who did not build those companies or own companies, then is ARC at risk on the “sales-side” of its business because of that? Has that been part of the reason that ARC’s sales of reprographics services have declined, or is the “recession” the only reason why ARC’s sales have declined?

5) Related to the paragraph above, I am positive that Medi, the CEO of ABC Imaging (and who is based in Washington, D.C) is absolutely “lovin-it” competing with the ARC owned company in that market, considering the fact that all of the previous former owners are gone from the scene (meaning, gone from the ARC owned company in that market area.) I would imagine that Bryan Thomas, Pres of Thomas Repro feels the same way about ARC in his “home” Dallas, TX market.

6) ARC conducts operations in India and China, and both of those very-huge countries are experiencing good A/E/C industry activity. When will ARC’s numbers begin to reflect the significant Sales revenue opportunities that both of those countries offer?

7) Stimulus-funded projects are on the wind-down. All reprographers have, to at least some extent, benefitted from the “reprographics work” required for those projects. As those projects wind-down, will ARC’s reprographics services revenues be adversely affected?

It basically boils down to this. The reprographics business has been affected by “depression like” conditions in the A/E/C industry. This has not been “just” a recession. Everybody knows that. Being the largest reprographics in the U.S. (and in the world), ARC’s sales have, quite obviously, been affected by the slowdown in the A/E/C industry. Everybody knows that as well. But, when I look at ARC’s Sales numbers (declines), quarter to quarter and year over year, I do wonder, …..”are the declines in sales totally attributable to the horrible conditions in the A/E/C industry, or is there something else going on, within the sales-side of ARC’s business, that’s contributing to, or exacerbating, the problem?” Is there a “sales strategy” problem at the division level, at the branch level? Is there a “sales execution” problem at the division level, at the branch level? Or, is the “recession” the only problem … and everything else is great?

If I can get around to it, I may do another post – related to this one – where I present a list of “the questions” that analysts should, in my opinion, have asked during the earnings call.

I welcome any comments about this post.

1 comment:

  1. Joel,

    As a former employee of American Reprographics after their acquisition of my company,I saw and experienced first hand the leadership, management, sales team,tools,demands, rewards and overall philosophy of the founders of ARC.

    Your view and study of ARC is dead on target in my humble opinion.

    Good job stay with it.