ARC shares closed at $8.22 the afternoon of January 26th, 2011, and I noticed, just this morning, that Sidioti, a financial analyst firm (that evidently follows and reports on ARC) issued a “downgrade” on ARC’s shares the morning of January 27th.
JANUARY 27, 2011, 10:08 A.M. ET
American Reprographics Cut To Neutral From Buy By Sidoti
So, Sidoti issued its downgrade on January 27th when ARC’s shares had closed the day before at $8.22, and, this morning, February 7, 2011, I see that ARC’s shares are trading at right around $8.41.
I did not recall hearing the name, Sidoti, but, when I went back and read one the transcripts from an earlier conference call about ARC’s Q2 2010 results, I found that Matthew Kemper of Sidoti was one of the analysts who participated in that conference call (date of that conference call was August 3, 2010.) Here are the questions that he asked and the responses that he got.
(Before I forget to mention it, the “earnings transcript” reports that are published on http://seekingalpha.com are fantastic; seekingalpha is a great web-site!)
Operator
The next question comes from Matthew Kempler with Sidoti & Co.
Matthew Kempler – Sidoti & Co.
Hey, good evening.
Suri Suriyakumar
Good evening, Matt.
Matthew Kempler – Sidoti & Co.
So, a couple of things. First a follow up on MPS, it is great that you have the first new contract wins. I was wondering if you can share a little bit more about the terms of this contract, and how we can affect MPS as you sign these two affect the model. So are these multiyear contracts, and then, you know, what should the margin impact be from these business to be in line with what you see in some of these management and then finally, if you can talk little bit more about (inaudible) with these formal RFPs or these transactions that ARP actually went in there and tried to derive a solution for it.
Suri Suriyakumar
So I will take them, one at a time, Matt; and hopefully I won't forget any of those questions. So the first one is that you were talking about the multiyear. So fundamentally, most of these MPS are three to five year engagements. Generally they are three years. We try to get five years where we can, so that is actually a five-year contract or a three year contract depending on the customer.
Number two, the margins are somewhat not exactly, we cannot say it is very, very high of any height compared to an FM margin. The FM margins are always on the higher side compared to outsourced work we do. MPS would be slightly challenged, because then answering another question you have, we often have to, you know, there are RFPs out there. In some instances, these particular two plans we were referring to, both of them were our existing customers, large national customers who actually had contracts with other equipment manufacturers. So often, when we compete with equipment manufacturers, because they sell equipment on a different basis altogether, those prices are much more competitive, and we need to compete with them. With regard to the general MPS business itself, when we compete in this segment, we often have RFPs and often we compete with other manufacturers of small format devices.
Matthew Kempler – Sidoti & Co.
Okay. Let us clarifying on the margins side, understanding that it is a little bit lower than the absolute management, would you expect overall that when you look at your corporate average, to be positive on the corporate average or to drag it down slightly?
Suri Suriyakumar
I think it will be positive for now. If MPS becomes a very large portion of our business, then it could have a slightly lower impact. For now, I do not think it is going to be substantially down, Matt, but if you know, two years later, we had $250 million in MPS, now to gain that kind of market share and fight equipment manufacturers, we might actually have to satisfy some margins, which I think is fine, because this segment of the business is ours to gain.
Matthew Kempler – Sidoti & Co.
Okay. And then, I missed it on color. I guess the commentary over there was that it is going to be a driver for the business. But was it in the – what average did it total in the quarter and then maybe you can talk about what areas you are seeing as (inaudible) on the color side.
Suri Suriyakumar
Okay. I will let Jonathan in a second to answer that. He is looking for the numbers to give you a little more color on the color business. But fundamentally, what we have been able to do, Matt, is bring a clear focus as to how we are selling color. Because we have acquired companies over a period of time, they always operated at separate divisions. So the color capacities and capabilities, kind of substrates we used, kind of trades we serviced, kind of the marketing and collateral material we used, were not consistent across the company, because in the west coast, we would have full graphics, have a brand name called Colorwise, and in New York, we might have a different brand name, and different kind of collateral.
What we are trying to bring is consistent in terms of collateral, in terms of services, in terms of substrates, in terms of products, and that is bringing about a greater level of focus. So we tell color at two different levels, one at a national level, and secondly, at the regional level in the local markets, because at the regional level, we already have a big sales team, who is already selling to AEC and non-AEC. So we enhanced that sales team to go sell color. At a national level, we have just kicked off that initiative. We wanted to make sure that we had all of our centers in place. Now that we have six or seven centers, we have brought in a few salespeople and we have kicked off that.
So overall, there is a lot of excitement about color, and we are already starting to see color numbers are tracking very positively quarter over quarter. And I will let Jonathan add a color to that. Jonathan?
Jonathan Mather
No pun intended, he is adding color to it, but the color revenue year-to-date is about 16% to 17% of our total revenue. In the prior year, in 2009, it was approximately 15% of our total revenue. The good news is, the incremental color revenue is coming from the non-AEC segment too. So we are seeing growth in revenue quarter over quarter as I mentioned by 10%. The overall, as a percentage, it is also picking up, and the mix is again to the non-AEC side of the business.
Matthew Kempler – Sidoti & Co.
So, it was up 10% sequentially, you said.
Jonathan Mather
Yes.
Matthew Kempler – Sidoti & Co.
Okay. And then, finally, I know everybody has been trying to pin down, just to make sure we understand the cost reductions that you were talking about, and yes, what I want to understand is, talking in the second half, should expenses be down on an absolute dollar basis in the second half versus the first half or are these savings going to be reallocating to some of the areas of investment that you have been talking about?
Jonathan Mather
So as I said, of the $10 million reduction that we will realize in 2010, a higher percentage will be realized in the second half of the year, offset by some of the additional investments that we have been doing in the other new initiatives, but those are to a much lesser extent.
Suri Suriyakumar
In most of those dollars, I would add with regard to the new investments are already in place, but you know, new salaries, additional salaries are things which will still have some impact, but I don't think they will largely take anything away from the cost savings. And also, the reality of cost savings is incremental, because we are constantly fine tuning it. So we call that the stay-fit program. So our Senior Vice President of Operations is constantly monitoring, and every time there is a reason to reduce cost, whether it is employees, whether it is locations, or consolidations, and then on the financial side, that calls for office consolidations, and then improvements and consolidating our benefits plan, all those dollars, I think what will happen is, it will take, it will come into full impact the second half of the year, as against the first half. So we are fairly confident that it is going to actually benefit us substantially.
Matthew Kempler – Sidoti & Co.
Okay, thank you.
Suri Suriyakumar
You are welcome.
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