ARC Document Solutions Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 7 speakers on the call.

Operator

Good day. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the ARC Document Resolutions Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a quick question and answer session.

Operator

Simply press star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question again, press star followed by the number 1. Thank you. Vice President of Investor Relations, David Stickney, you may begin the conference.

Speaker 1

Thank you, Jordan, and welcome, everyone. On the call with me today are Suri Suriyakumar, our CEO and Chairman our President and Chief Operating Officer, Dilo Widysuria and George Avalos, our Chief Financial Officer. Our Q3 results for 2023 were publicized 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.earc.com. Please note that today's call will contain forward looking statements and they are only predictions based on information as of today, November 2, 2023, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

Speaker 1

Any non GAAP measures discussed today are reconciled in our press release and Form 8 ks filing. I'll turn the call over to our Chairman and CEO, Suri Suriyakumar. Suri?

Speaker 2

Thank you, David, and good afternoon, everyone. Overall sales for the quarter dropped 3% or about $2,000,000 Adjusted for one working day this year, less this year than we had last year, the top would have been just 1.3%. This puts us in a very similar situation to the sales we posted in the 2nd quarter and it is not surprising in the light of the continuing trends we identified in Q2. Sales in digital color and scanning, our strategic areas of growth remain robust as new customers continue to heavily invest in visual communications and the demand for digitizing files is coming from every industry we serve. Volume in back and white printing made up largely of reproducing fans and other construction based documents fell as we projected It would during our Q2 report in August.

Speaker 2

This was primarily due to the sustained increase in interest rates, Consulting in uncertain and volatile economic conditions in construction. That said, our margins, AARTC. Earnings and cash flows were resilient despite the drop in sales, and they remain more than capable of supporting our commitment to our shareholders value via annual dividend and continuing stock purchases. Using these comments as framework for further discussion. I will now turn the call over to Dilo and George for a more detailed review of the quarter.

Speaker 2

Dilo?

Speaker 3

Thank you, Suri. I'm pleased to provide you with an update on Art's recent performance and strategic direction for the Q3. While higher interest rates, reduced investment and cautious spending by many customers made for challenging market conditions, our company has demonstrated resilience and adaptability. Despite these challenges, our strategic business lines are improving. Our digital color services and document scanning divisions have delivered continuing growth largely due to our diversification efforts.

Speaker 3

We have secured large digital color projects in a wide variety of markets, including events, trade shows, schools and sports stadiums. These projects are characterized by the use of multiple graphic products and services across various locations, generating positive customer reviews and strong demand. Our digital color success extends to smaller venues as well with numerous satisfied customers further validating the demand for our services. Document scanning also experienced high demand from municipalities, cultural institutions and Historical Archives along with smaller ongoing projects. Midway through the year, we expanded our document scanning capabilities and increased capacity at key locations.

Speaker 3

This expansion has enhanced our efficiency and throughput for document scanning projects. Our reputation for complex and detailed work continues to attract referrals from previous and existing clients underpinning our growth in this segment. Our on-site services revenue declined year over year as return to office initiatives continue to fluctuate. However, we have successfully renewed several large on-site service agreements using our certified equipment program, enhancing client satisfaction and improving our margins. Additionally, our service center network has attracted overflow Work From Customers, further contributing to higher operating margins.

Speaker 3

In the construction based plant printing business, we faced challenges due to Low construction activity, including commercial and residential construction and fewer office remodels. Despite this, planned printing remains a profitable service line and we continue to streamline operations and control capital expenditure to keep costs in check. We have cross trained our employees and leveraged our footprint to maintain efficiency. Our efforts in production management have been fruitful, resulting in an improvement in our cost of goods sold this quarter. We remain vigilant in managing material, labor and production expenses efficiently.

Speaker 3

Our pipeline, especially in color graphics and Canning remains robust. Our service centers increased capacity and efficiency position us well into capitalized on these opportunities. Our win loss ratio for new business is improving and our marketing efforts are yielding higher quality leads. In summary, our team is highly motivated and actively securing new business to offset declines in the plant printing segment. Our focus remains sharp on the top line, while maintaining the financial discipline that has been a hallmark of AARQ's bottom line.

Speaker 3

We are committed to leveraging our experience and expertise over areas we can control, remaining undistracted by external factors beyond our influence. We look forward to sharing our continued progress in the coming quarters. Thank you for your trust and continued support. With that, I'll turn the call over to George. George?

Speaker 4

Thank you, Dilo. While quarterly sales fell 3%, our overall gross margins were up 10 basis points. Our ability to leverage our sales at any level remains a key characteristic of our business model. SG and A was essentially flat Despite inflationary pressures, the quarterly earnings felt the impact of lower sales and EPS fell 0 point 0 $2 AARTC. Cash flow from operations of $8,700,000 for the quarter is suffering from a difficult comparison to prior year.

Speaker 4

Due to the timing of collections and payables, the first half of twenty twenty two started out extremely slow and momentum built significantly in the second half of the year to make up for it. Given its tendency to fluctuate throughout the year, we have always encouraged an annual perspective when reviewing cash flow from operations.

Speaker 3

As a

Speaker 4

case in point, our year to date cash flow remains very healthy at $23,000,000 and fully capable of supporting our annual $0.20 dividend and continuing repurchasing of our shares. Year to date comparisons not only better represent our performance in cash generation, but also in operating income, net income, EPS and EBITDA. Year to date, operating income for 2023 is slightly higher than 2022, and Net income and EPS are essentially flat on a year to date basis. EBITDA, while down 10% in the quarter, is down just 5% year to date. Obviously, this performance does not reflect the expectations we had in January, business.

Speaker 4

But faced with the larger issues affecting the economy and constraining capital spending, we are in a much better position to resume our growth that we would have been prior to the diversification of the business and the reconfiguration of our cost model. With regards to the balance sheet, we continue to maintain more than $50,000,000 in cash, which we typically use against our revolving debt on an intra quarter basis to save on interest costs.

Speaker 3

Net debt at $11,600,000

Speaker 4

and our leverage remains well under one times, both very low numbers. We also paid out $2,100,000 in quarterly cash dividends, and we used slightly more than $1,000,000 during the quarter to repurchase shares. Via these methods, we expect to return more than 50% of our adjusted free cash flows to shareholders by the end of 2023 and well on our way to exceed $10,000,000 of shareholder returns in 2023. Our top line may continue to fluctuate for the remainder of the year, but we remain confident that we are focusing on the themes that matter most at Arc. And as a result, we continue to generate opportunities for growth, cash generation and a reliable return of shareholder value in the coming quarters.

Speaker 4

With that, I'll turn the call back to Suri. Suri?

Speaker 2

Thank you, George. Operator, we are now available for all listeners' questions.

Speaker 5

AARTC. And

Operator

Company. Your line is live.

Speaker 5

Good afternoon. When we look at the 2.5% decline in digital printing this quarter, Could you give us the breakdown of what the growth was from color printing and what the decline was from your AEC markets?

Speaker 2

Yes. Good afternoon. George, would you like to answer?

Speaker 4

Sure, sure. So as we've always said, roughly 50% of that line item is our legacy plant printing, I. E. Blueprinting type of business. The other half is color, graphics.

Speaker 4

In regards to The legacy traditional Reprographics, that revenue was down between 6% 8%. Color was up in that 3% to 5% range.

Speaker 5

Okay. All right. And then, for scanning, it was down a little bit sequentially and Grew less than we were expecting. Is that business just project based? I'm just trying to get a better feel for how to think about The growth profile of that business going forward.

Speaker 2

Dieter?

Speaker 3

Yes. So last year, actually, no, The scanning revenue of the billing rates are continuing to be the same. It's continuing to grow. One of the issues that we had Well, that last year during the Q3, we had a one significant customer project that we completed and built as a digital service that it was not there this year. So that's why you see a year over year The growth rate has declined, but if you look at from the scanning services otherwise, we are still in that 9% to 10% growth rate.

Speaker 4

Yes. So if you really look at it from our day to day scanning, the opportunity we go after all the time, we were really growing at that 15 plus percent mark. As Dylan mentioned, that one job that was kind of an oddball last year, roughly $500,000 that we booked in Q3 of last year, It's skewing the year over year results, but we feel very confident about that 10 plus growth in the scanning business.

Speaker 5

Okay. And then when you look at the opportunities for growth in colors and scanning, do you have Maybe it's difficult now, but do you have a line of sight on when you might when you think you maybe Get back to a little level of growth here or offset the declines, I guess, that you're seeing in kind of that more traditional plant printing.

Speaker 2

Art. Yes. So if

Speaker 3

you look at our revenue lines, as you know, there are 4 buckets of primary revenue. So When we look at the revenue lines that are currently challenged, it's primarily the plain paper printing market as well as the equipment sales. That segment of the business is directly connected to the construction industry, Right. So as we see the interest, obviously, one of the primary reasons for that challenging situation is the increased interest rate that had totally reduced the opportunities for brand new construction and tenant improvements and so forth. As we see going into the new year, interest rates probably stabilizing, there might we will see some increased activity in construction.

Speaker 3

As soon as we see some stabilization in that construction market, We would definitely see some growth within our organization. So when you take the other our strategic growth line when it comes to digital color. The market opportunities are continuing to be very strong. Marketing activities are of bringing us a lot of new leads. Some of the projects that we execute are very significantly sized project.

Speaker 3

Many of the top brand organizations are continuing to bring us sizable work. Really, they're focusing on rebranding of their marketing activities. They are doing a lot of trade shows. Trade shows we see have got a lot of activity there as well and lot of fair amount of office renovations that takes place revolving around color graphics. So the future opportunities, the pipeline, they are very good and very, very, very strong for our company.

Speaker 3

Document scanning side is continuing to grow, is bringing us a lot of opportunities, leads through marketing activities. Pipeline is very strong. Booked revenue, revenue that the contracts that are already booked to be scanned is also at a healthy level. So therefore, going into the new year, we continue to be very bullish about those two lines. And as soon as we see Art.

Speaker 3

J. Muse:] Stabilization in the construction market. As a company, our hope is that we will continue to see some positive growth overall.

Speaker 5

Great. Thank you.

Operator

Your next question comes from the line of David Marsh from Singular Research. Your line is live.

Speaker 6

Thank you. Hey, guys. Thanks for taking the questions. During the quarter, did you guys have any significant customer wins that you could talk about? And if so, could you talk about sectors that those may have been in?

Speaker 2

Go for it.

Speaker 3

Yes. So I wouldn't David speak about a specific customer per se because remember as a company, We don't necessarily focus on one big job, right, because as you know, we have 100 sales consultants that sells out of 140 locations and Obviously, we focus on the 53 verticals. So our customers come from all segments, all types of jobs from very simple jobs locally that we do versus regional type of campaigns as versus national campaigns as well. So I cannot pinpoint to one specific area when we look at our color growth. It's coming from all segments, all types of customers, all size of jobs as well.

Speaker 3

With regard to what I can see From the wins that we get on the digital color side is that the brands that we are continuing to sell to and getting Excited about working with ARC is continuing to be continuing to grow. There are some top brands. We have renewed a couple of Sizable contracts for digital printing in the last quarter. So whether it's things happening in the UK, whether it's Things happening in Canada or with the things going on in the U. S.

Speaker 3

Market, we can see some really potential and good opportunities as we go into the next quarter and they are all revolving around our ability to satisfy and promote our customers' brands through visual graphics.

Speaker 6

Got you. And do you guys get any kind of uptick at all from political activity? Are you realizing ARC. Any revenue from increased advertising in political spaces or is that not really a big AARTC driver for you guys.

Speaker 3

David, that market is not a significant market at all for us. Yes, we do have occasional political banner or 2, But that work that you see, where people have they stick in front of your garden and all those are very cheap printing. They are on very cheap material, cheap long runs. And we don't necessarily play in that market because the margins are extremely thin And that's we don't concentrate very much in that market.

Speaker 6

Got it. Just turning a little bit to the balance Could you talk about the share repurchases? What was the average purchase price per share?

Speaker 4

Roughly for the quarter, we spent about $1,000,000 on share repurchases for the quarter. Average price on those, it will come out when we distribute our 10 Q here in the next day or so, But roughly in that $3 range.

Speaker 2

Okay.

Speaker 6

And could you refresh me on Remaining authorization there, George?

Speaker 4

We have about $9,000,000 left.

Speaker 6

$9,000,000 authorized. Okay.

Speaker 4

Yes, it was authorized $15,000,000 Obviously, we've been buying shares, but we have about $9,000,000 left.

Speaker 5

Right.

Speaker 6

And then I did see that the interest expense ticked down in the quarter. I appreciate your comment that you used cash throughout quarter to bring the revolver down. Is there anything further you could do there to continue to drive that lower. And is that something that you're considering at the moment? Or is it pretty comfortable with where things are?

Speaker 6

I mean, obviously, leverage is not a big issue for you guys, but I thought that was a nice point there, dollars 50,000 improvement in interest expense in the quarter.

Speaker 4

Yes. And really what we're doing is I think I've Said the comment multiple times that, I kind of view this as not having any bank debt because as I said in my script, The cash we have on hand, inter quarters, we're just using that cash to pay down that revolver to 0, Which means I'm incurring 0 interest expense there. So kind of your comment of Could we bring it down? Well, as you said, right, if you look at our net cash number, we're already at $11,000,000 I mean, how much lower can we go? And quick correction on the average share price that we bought back on the shares for the quarter, it was actually 3.40

Speaker 6

Got it. Thanks. I appreciate it. I'm going to

Operator

There are no further questions at this time. I will now turn the call over to David Stickney for closing remarks.

Speaker 1

Thanks very much for your interest this afternoon. As always, we very much appreciate your continued participation and our progress forward here. We look forward to talking with you again in February. Thanks very much and have a great evening. Good night.

Operator

Group. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
ARC Document Solutions Q3 2023
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