Friday, May 13, 2011

ARC has ….. “Explosive Growth Potential on (upon) Economic Recovery”

On May 11th, 2011, ARC participated in, and presented at, RW Baird’s “Growth Stock Conference,” which was held in Chicago, IL. In conjunction with that conference, ARC updated its Investor Presentation PowerPoint document.

You can use this link to access ARC’s May 2011 Investor Presentation Powerpoint document:

On page 6 of the Powerpoint file, ARC provides these comments:

“Current Extraordinary Headwinds:”

- Cyclical drivers: unemployment and vacancy ratesboth are improving but still high

- Credit constraints due to financial crisisimproving but still difficult

Two of the definitions of the word “extraordinary” are …..

1. beyond what is usual, ordinary, regular, or established.

2. exceptional in character, amount, extent, degree, etc.; noteworthy; remarkable.

While I would agree with ARC that the word “headwinds” is a very appropriate word, I’m not sure that I would agree with the use of the word “extraordinary”, given the definition of that word and given what all reprographers know, from past experience, about the cyclical nature of the A/E/C reprographics business and industry. As all reprographers know (perhaps with the exception of younger reprographers who are only now learning about the true meaning of the word “cyclical” as it applies to the design/development/construction industry and to the reprographics industry), the A/E/C industry goes through up and down cycles. To me, those up and down cycles are not “extraordinary,” they are “ordinary.” We know that they WILL happen. It’s just that it’s very hard to predict exactly WHEN they will happen, and it is nearly impossible to predict HOW LONG THEY WILL ENDURE (meaning, predicting how long an “upside” cycle will last or predicting how long a “downside” cycle will last, is virtually impossible.) Other than a minor blip in 2000-2001, the A/E/C industry, and the reprographics industry, experienced, from 1993 to 2007, one of the longest, strongest “upside” cycles those industries experienced in my lifetime (and, at 64, I’m old.) Hopefully, the next “up-cycle” will, when it finally begins, be another very long, very strong up-cycle.

And, while “credit constraints” are certainly a “headwind”, they, too, are (in my humble opinion) “ordinary”, not “extraordinary.” They (changes in the availability of project financing) happen from time to time, as lenders raise and lower interest rates and as lenders tighten and loosen up credit and equity requirements.

To me, the extraordinary “headwind” A/E/C reprographers face at this point in the history of reprographics “vis a vis” the A/E/C industry, is not the cyclicality of design / development / construction, nor the cyclicality of financing for A/E/C projects, but, rather, the headwind that’s represented by the single-most extraordinary change the reprographics industry has ever, in my lifetime, experienced. And, I’m speaking about the ‘headwind” that “A/E/C business process automation” represents. More and more A/E/C customers are finding ways to reduce the need to print. More and more A/E/C firms are moving to BIM. As the use of BIM grows, the need to print A/E/C documents will decline. As the use of electronic estimating software programs increases, that, too, will have an adverse impact on “print. Historically, traditionally, virtually all reprographers generated most of their “large-format” revenues from printing “bid sets” (that typically takes place once or twice for each project.) As I’ve pointed out in previous articles on this blog, A/E/C customers are not reducing print quantities because they want to be green, they are reducing print quantities because developments in “business process automation” are enabling them to print less than they printed before. In addition to that change, there has been a very dramatic shift in “where” printing is done. Reprographers who I speak to (and I do speak to a lot of reprographers all over the country) are complaining that, nowadays, they aren’t getting as many “buik” (high-volume) print orders as they used to get and that they are seeing more and more customers, especially GC customers, “send files” to project participants, rather than send “prints.” This typifies the shift from “centralized” printing to “decentralized” printing. As a reprographer, would I rather receive an order for 50 sets of printed plans and specs, or would I rather receive an order for 50 CD’s or, worse yet, would I rather receive an order to put documents (plans and specs) in my plan room with instructions from the customer who placed those files with me to permit “file downloads” to project participants who need the documents? Some will point out, and rightly so, that just because files are transferred, rather than printed “centrally”, does not mean that those files won’t be printed. Most who receive the files will print them (or order prints from the files.) And, this is why reprographers have offered “FM” programs, even down to the sub-contractor level. (Quite frankly, any reprographer who still does not offer “equipment for customer offices” is completely missing the boat.) Offering FM programs allows a reprographer to capture at least some of the revenue from “distributed” printing. But, the main point I’d like to make about this particular issue (the morphing of centralized printing to decentralized printing) is that the highest margin A/E/C print jobs reprographers have traditionally done were the “centralized” high-volume bid set jobs they did. Maintaining that same margin of profitability will, at best, be tough to achieve.

In Investor Presentation Powerpoint document, ARC points out, under the “key investment highlights” on page 7, that it has the ability to acquire more companies to expand market share. ARC certainly has strong experience with that, and, in past articles on this blog, I believe I’ve stated that ARC’s “industry roll-up” was an outstanding, and well-executed, growth strategy. Many reprographers who did not sell to ARC when they were first approached by ARC (prior to the start of the current recession) are remorseful that they did not sell-out to ARC. It is quite likely that those reprographers are looking forward to the resumption of ARC’s reprographer-acquisition initiatives. Personally, I think that “right now” would be a good time for ARC to re-start its acquisition initiatives, for there are likely to be companies available at a price less than half of what ARC would have paid before the recession started. As in the real-estate foreclosure market, if you have the financial wherewithal to buy, the bargains are there to be had. ARC has the knowledge and experience to quickly consolidate acquisitions into its existing business, and there are, most certainly, economies of scale to be gained. Unfortunately, one negative outcome will likely be a further decline in the total number of reprographics industry employees. Anyway, during the past couple of quarters, if not a bit longer, ARC’s been talking about renewing its acquisition activities. We’ll just have to sit back and see if that actually happens.

Also in Investor Presentation Powerpoint document, ARC points out, under the “key investment highlights” on page 7, that it has “explosive growth potential upon economic recovery”. In order to achieve that, I think ARC’s going to have to figure out a) how to rapidly grow its FM/MPS business, b) how to rapidly grow its Riot Color business, c) how to grow its market share(s) in each and every market in which it competes (whether by acquisition or by smart deal-making), and d) most of all, how to effectively deal with the most severe headwind that all reprographers face (I’m speaking about the one I mentioned earlier in this post). And, ARC has to keep its fingers crossed that the A/E/C industry’s recovery will come sooner than later.

ARC also indicates in the Investor Presentation Powerpoint document, under key investment highlights, that it has had solid financial performance. ARC incurred net losses in 2009, in 2010, and in Q1 2011. (per numbers for ARC published by Google Finance.) Given past performance, prior to 2009, ARC does have the ability to generate significant profits, but whether ARC has the ability to grow its business back to, or, or that matter, over and above, what it was before the recession started remains to be seen. So far, 2011, for ARC and for all reprographers, is shaping up to be yet another difficult, stressful year.

I’ve got four “growth” recommendations for ARC’s management team:

a) acquire ABC Imaging

b) acquire Service Point Solutions’ USA subsidiary

c) acquire “LINK DSG” and the companies that formed LINK

d) later on, acquire the remaining ReproMAX companies that you did not purchase prior to the recession.

If ARC follows these “suggestions” it will likely increase its revenues to in excess of $ 1 billion …. and really wind up with “no competition”.

ARC also says in its Investor Presentation Powerpoint document that it has “unmatched ability to serve national/global customers.” In my opinion, that’s absolutely not the case in Europe, where OCE (which does provide reprographics services to A/E/C firms in Europe, even though OCE does not do that in the U.S. market) has a very, very large presence, and, since OCE combined forces with Canon, OCE has very deep financial resources and unmatched geographic coverage in Europe. In addition to OCE, SPS has a significant presence (and network of locations) in Europe. And, in the U.S., ABC Imaging, in spite of the fact that it is a lot smaller than ARC, has, over the past 18-24 months, managed to pick-off at least four prestigious, well-respected, large “national” accounts in the U.S. (Parsons Brinkerhoff, PBSJ Corp, Dewberry, and Perkins & Will.)

Back to the Investor Presentation Powerpoint document, the graphics and numbers on page 16 are both impressive and intriguing. However, the graphics and numbers on page 19 are depressing. Since “the industry goes as ARC goes,” let’s all – all of us - hope that ARC finds a way to make page 19’s graphics and numbers more enjoyable to read … when they are published in future presentations!

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