This report was originally published on 5/6/09.

We had the opportunity to speak with a three-decade veteran of the reprographics industry to get a better sense of his views on the state of the marketplace, the competitive landscape, consolidation opportunities, and the transition towards digital solutions. This executive’s former company was sold to ARC, and he now serves as a consultant in the industry. Here are some of the key takeaways (Note that people from within the industry refer to ARP as ARC – American Reprographics Company):

On the state of the marketplace:

• The overall mood among reprographers is “glum”. Attendance at the International Reprographics Association (IRgA) Convention (April 29-May1) was the lowest that he can remember
• The fourth quarter of last year was “a shock” to the industry; many projects still in the planning stages were put on hold, and some projects already under construction were also put on hold. However, since that time things have improved.
• The first quarter has been “a mixed bag”. Some reprographics firms have witnessed a sizeable decline in activity YOY, while others have actually seen improvement. No firm has yet to achieve the levels of activity in late 2007, although overall it appears that volumes have reached some sort of stability in the past two months
• A recovery to prior peak levels could take 3-5 years, but cash flow generation for larger players should remain relatively strong, provided that larger players do everything necessary to “right-size” their businesses.

On the competitive landscape and consolidation:

• “ARC is the dominant force in the industry….[the company] has one of the smartest management teams in the industry” and they are best positioned to take advantage of the current economic climate
• A number of independent reprographers who did not sell their companies during the most recent economic expansion now wish they had sold-out when acquisition activity was high
• It appears likely that Thomas Reprographics, ABC Imaging, NRI and ServicePoint (the next four largest players in the reprographics industry in the US) are likely to stay on the sidelines for the foreseeable future when it comes to acquisitions until there are clear signs of a recovery

On the transition to digital solutions:

• The industry continues the shift from a “print and distribute” model to a “distribute and print” model
• Growth in facilities management contracts should continue (ARC has more than 5,600 facilities management contracts) as architecture and engineering firms buy into the convenience that FM arrangements offer and as contractors look for ways to increase convenience and reduce printing costs
• Among industry competitors, ARC’s Planwell (an Internet-based plan-room solution) is superior to ReproMax (an Internet-based plan room solution), one of the other platforms used by reprographics firms. Planwell is better from a customer-user functionality perspective and from a reprographer operability and maintenance perspective.
• Over the next 5-7 years (and potentially sooner), building industry modeling (BIM) could emerge as a disruptive technology with respect to the volume of plan printing done by the reprogrpahics industry. The adoption of BIM industry-wide will likely be delayed due to the current economic environment

On ARC specifically:

• “If anyone can navigate this current economic environment successfully, these guys will”
• ARC started cutting back in the summer of 2008, and then substantially ramped up that process during the last quarter of 2008. The company’s rapid consolidation strategy, in some cases has left it with an unnecessary layer of management, which in some cases has been removed in the past 3-6 months.
• ARC’s ishipdocs.com initiative could gain traction on a global basis and may eventually become a direct competitor of InnerWorkings (INWK 5.53 ↑2.41%). iShipDocs is not just targeted at the reprographics industry, but at the broader printing industry as well
• “Why didn’t Fedexlook at ARC instead of Kinko’s? It’s hard to believe Fedex (FDX) paid more than $2 billion for Kinko’s when Kinko’s has never been even close to as profitable as ARC” (As a reminder, ARP’s enterprise value now stands at $560 million)

ARP is the dominant company in the space, with great free cash flow characteristics and trading at a trough multiple on what might be trough earnings.

As always, please act accordingly….