Q3 2019 Earnings Call
On mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press Star then the number 100 telephone keypad, if he would like to withdraw your question first about the key.
Now I'd like to turn todays call over to David Stickney, Vice President Corporate Communications and Investor Relations. Thank you David you may begin.
Thanks Ali and welcome everyone on the call with me today, our Suri Suriyakumar, our chairman President and Chief Executive Officer below Widgets area, our Chief operating officer, and Georgopoulos, our Chief Financial Officer.
Our third quarter results for 2019 were publicized earlier today in a press release.
A press release another company materials are available from our Investor Relations pages on arc document solutions web site at high our Dot E. Tyson a RC dot com.
Please note that today's call will contain forward looking statements that fall within the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such statements are only predictions based on information as of today November six 2019.
And actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual FCC filings.
This call also contain certain references to non-GAAP measures, which are reconciled in today's press release and in our form 8-K filing.
I'll now turn the call over to our chairman President and CEO Suri Suriyakumar.
Sorry.
Good afternoon, and thank you for joining us today.
Our continued to see especially in the third quarter from Mark again see me. They do goes we have seen all year.
They need to southwest declining revenues of four Takeouts those lines.
These results, especially when compared to last the Oh.
Yeah between considered to be a goodbye.
Just to re examine the structure for operations and the services meal.
The purpose was to identify segments hopefully business, that's wonderful bombing and to remove ordinary organize them as required based on all customers got me.
I'm happy to announce that people were very pleased with the outcome of this exercise.
By the end up this year BV level do you like more than $10 million in annualized savings.
They choose the protection or for cash flows and he says the pressure or no margins.
We don't even though we are that we cannot see it will lead to Texas.
He did miss the city that'd be predictable financial <unk> today. So we will have the flexibility in the auctions to take advantage of the opportunities, which may present themselves to more as we move forward.
During this time I think it's widely important to keep in mind that old business is not suffering from a loss of customers.
One of the lack of 11 services or competitive pressures.
As I noted today, you know press release.
We have what our clients want and need.
But they are simply not using our traditional services as much as they have in the past.
The use of technology, the construction space ease and we'll continue to affect open driven revenues.
One days north picked up in revenue is completely disappearing anytime in the future.
We will continue to feel the back on our revenue goes on to be able to offset these particular challenges with some of <unk> I believe this year. It is we have discussed in the past.
Two of these initiatives are not to.
One of the use of technology to differentiate ourselves he says sustain and grow market share, especially the MBS and dotcom business.
And second they increased use of call. It as we discussed in our Q do report, especially important he's oh, we use technology to its 10 aggressively to a broader segment of the do calamarca.
Both these businesses have the potential to help us off said the erosion or decline you know what kind of children.
Needless to say, we haven't been engaged in both MBS and that kind of business for white now.
But both be businesses also you want me.
For example, one the MPS business in the construction space has been somewhat stagnant that emerging opportunities in the non me see speeds for MPS, we're exploring those opportunities very carefully.
Similarly in the broader segment of the beautiful kinda market, we have made significant inroads into what I do your retail hospitality healthcare and other verticals that have shown greater price.
We need to prove to a proven capabilities with these high profile customized and during the past three months, we've entered long lead forward.
Uh huh.
Fewer game, although sales and marketing strategies, a markedly different from the boss.
We are using tools, such as our customized digital storefront and driving sales through a variety of digital marketing channels.
On the imaging side. This includes things such as cooperate team building graphics adaptable office they call indication as classroom.
And comments based messaging.
Any John and no other company called CIT displays.
These niche areas the person to growing market right graphic applications I in high demand and we are well positioned to supply them.
In essence.
Oh pivot to kinda and nontraditional use up often said he says we are help expand our addressable market, while the optimization about sales marketing.
And workforce helps us make the most of what we already have.
[laughter] actually addressed operational needs of the company. We also intend to better leverage although strong cash flows on behalf of all shop with us.
Why did you have been active buyers of our stock in the open market.
Since the second quarter.
I understand that I was shot prices is under pressure.
That's all.
We continue to explore ways to redeem greater value to our shareholders, such as being and your dividend or expanding our current share repurchase program by means other then well open market purchases. We are in discussion with our lender to be done I mean, if such options.
Can be accommodated within our current capacity D or.
I don't want in it.
Well this quarter's financial decides challenge the company's performance, we're maintaining our annual forecast for 2019.
We anticipate earnings but she had to be in the lead jumped 14 to 18 cents.
We expect the IDR cash provided by operating activities to be in the range up 45 million to $50 million.
The annual adjusted EBITDA should be the lead your $49 million to $54 million.
With this as a brief backdrop, they don't really know pick a moment for an operation or did you on the quarter.
Followed by a brief financial update from George and they'd be there for quite some time for QNX Vito.
Thank you sorry.
While there continues to be divide fall the printing so using non traditional areas. The drop in printing services from construction and design companies increased year over year and B C work from home builders dropping as well.
By contrast, we have been able to secure new sales from our MPS business, including new blinds from outside of the construction industry and we continue to make progress with expansions and new location rollouts with our existing customers.
Okay, and archival services continued to appeal to all customers and our facilities customers continue to show interest he never abilities to help them.
It could put that took place sales were affected by a dropping our Chinese joint venture, but the coupon be something the U.S. remains generally flat, but healthy.
In addition to the cost savings we've achieved in the third quarter, we took steps to expand our business and build awareness in the market outside of our traditional channels be marketed heavily in non construction verticals with our new programs targeted towards health care advertising and design agencies as well as sports.
And fitness franchisees.
We used to videos highlighted successful and well known customers had reached out aggressively with email campaigns to qualified prospects.
He suddenly the event Oh website to leverage our experience from these marketing programs to increase our appeal to what it goes beyond construction.
Yeah, not giving up on construction.
It's still provides us with strong sales in traditional print, but we are putting more focus on industries that have made the potential to use more and different kinds of print.
That's already mentioned earlier be made strategic changes in the company to align them all patients with our level of sales. In addition to what dimension. We also closed loop and locations in non strategic markets.
As always we are continuing to focus on the fundamentals of operation by maintaining good customer service in metric control and strong cash collection.
With that I'll turn the call or the George George.
Thanks still.
Overall sales for the quarter declined 6.3% year over year for reasons, our outlined earlier, including another double digit drop and international equipment and supplies sales as China softening economy continues to surprise capital spending.
As a reminder, the China business is not strategic for US and is very low margin, but it did account for 2.6% of our sales dropped during the quarter.
Despite the drop in sales, we were able to maintain our strong gross margins due to cost controls we had in place prior to the third quarter and additional measures we took during the quarter.
These cost saving measures also contributed to the decline if that's your name of nearly $1 million and reduce the impact to EBITDA, resulting from the decline in sales.
It is worth noting that these measures produced a restructuring expense of just over $300000 that appears on our income statement.
Cash flows from operations were $3.7 million higher year over year, primarily due to aggressive inventory management improved a our collection as well as other changes in working capital.
On a year to date bases are aggressive cost management resulted in our cash flow from operations to be at par with prior year.
Our strong cash flows allowed us to pay down our senior debt by another $5 million during the quarter.
Our bank debt is now less than $65 million and our leverage ratio net of cash remains under two times.
We also use a portion of our excess cash to repurchase approximately 200000 shares during the quarter.
[noise] are continuing strong cash management performance and the significant reduction of our debt over the past several years.
Now, providing us with the opportunities to explore returning value to our shareholders as Suri described earlier.
I'll close with our normal reminders for those of you who are new to us or developing your own forecast.
Our effective tax rate will be approximately 30% for the year as a result of the new tax law.
Our historical operating losses, I'm, nearly $80 million remain at our disposal and we'll keep our cash taxes, well under $1 million for the foreseeable future.
And the first quarter's financial statements, you'll see a gross up on our balance sheet of approximately $50 million as a result to the new accounting guidance for operating leases. This guidance had no material impact to the income statement or cash flows.
In that or subsequent quarters.
With that I'll turn the call back to sorry, sorry.
Thank you George Party at this time, they will be available to take all listeners questions.
Ladies and gentlemen, if he would like to ask a question. Please press Star then one and your telephone keypad again that star one for questions.
[noise] [noise] again, if you'd like to ask a question Press Star then one.
[noise] [noise] and our first question is going to come from the lineup Alan Weber ore body advisors.
Good afternoon <unk> can you just talk about you know you talked you spoke about trying to do more businesses. Some of your non traditional channels can you just give like an actual examples of what you're doing again.
And like that.
Sure and we do these both even be MPS peers and also the kind of Spanish the what do you are doing is I mean, not that we have not have non traditional customers before but being increasingly focusing on these segments, because we think that agreed opportunities and probably less company.
And then in the construction space itself. So for example management services. We are looking at other large companies companies insurance companies all.
Energy companies there are companies, who will be a involved say for example in in government 10 States said statistics sector.
You know who would be providing services to.
You know what ideal people in the government, we out who require regularly Clint.
So we're looking at those opportunities and those and getting out a way to tie our managed print services capabilities with our offset what are you gotta offsite printing, which will help us so days a huge amount of work you know opportunities.
That began exploring we're doing that on they'd be a site on the kinda side. We are looking at you know what used to be primarily driven by construction related trending now we're looking at retail hospitality health care.
Like I said, you know data classroom graphics and office. The you know the cooperate graphics and then motivational graphics all kinds of different Traffics I mean, you go to a gym today.
Days no empty walks anymore. They have full of Grafix right I mean that he would we Jim already you go to a big.
Stole a retail store you will find all of this dual wall Sellafield with Grafix. These all new graphic opportunities you have largely known as environmental printing.
And this is relates to either corporate culture, all human resource our team building any one of those efforts. So those are all new opportunities and we are starting to market did that space.
Okay. Thanks, it looks like on the M. P. S is there any like.
Oh.
I don't really need a projection goal in terms of over the next year too in terms of revenue what you really hope to accomplish.
So MPS is a very interesting anybody and we've talked about this previously MPS revenues comes to us in chunks that a years, we will do very well you know depending on the number of contracts, we sign and then suddenly no year or two we might really how very bad revenues and this has been the keys for us largely because most.
I'll probably be as revenues the big ones came from but you referred to as global customers into construction space, but as you know in the last especially five six plus years, there's been lots of mergers and acquisitions in this space. So a customer we have we might have had a long term you know MPS.
As contract with them they get acquired by another customer who doesn't actually how assess their contract. So we lose that customer on the other hand.
There might be another acquisition in which that could be a new customer being added onto our existing contracts. So because of that it has been pretty tomorrow to us for us, especially in PS revenues I think it was in 2016 and 17, we had multiple mergers and acquisitions.
Each worked against us negatively.
But in some years, we have libya's wherever we have growth so we.
We feel good about opportunities, we have Debbie I could need to market NIM.
And you know that I wouldn't be isn't back the us, but these really hard to predict consistently as to how babies grow because of two reasons one number of contracts themselves will be might lose all game number two.
But no matter how big the cost to me is if you sign them today next year, there will be you know declining the revenues for MPS because those customers all printing less use of technology is impacting that number. So it's a fluid none balance so we can consistently predict those numbers, but.
Right.
In a good idea, we largely maintain the previous years MPS numbers and maybe you know add low single digits in terms of growth on a very good idea that might be a little on that but beyond the highest site.
On a bad year, we might lose a few digit seem good. So that's the range. We are talking about but we know constantly we are bringing new customers, we're signing new contracts, but that also.
It has to offset the decline in revenues and any mergers and acquisitions by which we could do come loose these customers.
Okay, great. Thank you very much.
Our next question.
It's going to come from the line up Walter Schenker mass partners, but first I'll remind you if he'd like to ask a question Press Star then one of the telephone keypad. Walter go ahead with your question.
Thank you I've two questions actually the second one be addressed hopefully is given the pressure on the stock in the last quarter, where you're not able why we're not able to buy back more spot, but the other question is the $10 million in cost savings just a little bit more color those a lot.
Actually cash cost, that's and therefore, all other things being equal once that's all implemented it should be incremental to operating profits on annualized basis, starting in the first quarter next year.
That's okay.
So the first plus cushion Walter was on.
I went up by more shares all way would be what might be that okay. That's a that's a straightforward answer that oh water because we had was treated as to how much as we can buy based on the liquidity in the market. So we could only by up to a certain amount allowed by a C C. Depending on the trading volumes we have them.
I know, but David.
So that's that's one it that's the biggest limitation we had other ways. We could have bought more shares and that's that's the standard requirement there.
On the second sight, obviously got to the cost savings I will suddenly up George to give you more kind of but overall if you look at it about 60 button to that is from you know cost of goods.
You know Cogs and about 40% comes from you know GNS. So I mean, that's the base number I mean, we've worn give specific details, but roughly that's what you're looking at Jordan, we looked at some yeah definitely and to answer the question I mean, we made things, where we were able to optimize different things.
As Jerry mentioned in both the car direct cost side as well as our SDMA cause and we do anticipate those caused primarily dropping to the bottom line I mean, there might be some areas where it affects another part of the business and you don't fully realize all the savings that you wanted but all things being caused.
That.
Biggest thing, obviously revenue being constant and you know no blow ups in other areas of the company. Then you would expect that to just flow to the bottom line in 2020.
Does that answer your question.
To be redundant.
So these are actual costs as opposed to.
Accounting course, I see where you're amortizing something which really is non cash goodwill or anything like that.
No no. These are actual costs. These are actual cost coming out of the organization and remember we started this in the third quarter. So it's not like you're going to get a full 10 million year over year impact in in 2020, because we're starting to realize some of those two smaller degree in the third quarter little bigger degree in the fourth quarter, and then you'll get a full year impact.
Next year, and Wallabies anything related to accounting adjustments or whatever will called that out we always do a decent directly which goes down to the bottom line, which is meaningful.
Through our shareholders and investors to now.
Okay. Thank you good luck trying to figure a better way to return cash to shareholders given the large cash flow I think would make everybody pretty happy.
Absolutely I mean, we are definitely focused on that as I said to you in my script.
Exploring all the options and we are determined to make sure that you know we worked towards that goal.
Thank you.
Once again, if you'd like to ask a question press Star then one.
And we have a follow up question on the line of Alan Weber Nobody advisors.
Just quickly when you talk about the $10 million savings excluding that when you look into 2020 do you think you can keep cash flow relatively flat or kind of what do you think about how do you think about the cash flow for next year.
Ics will kind of savings.
Yeah again, a hard number to predict obviously the recon quite project exactly would be doing you know 2020 , we if assuming it's a year like we did this year you know again in terms of revenue. Alan then our objective would be to predict the cash flows we've always done that very well year after year.
That has been the trademark OFAC. So we'll certainly be focus on the cash flows very much like like what we did this year, but very hard to exactly predict what's been happening 2020 without really knowing what our revenues would be 2020, what do you agree judge data out agree with that sorry in the way I look at it say, hey that $10 million ish.
During that.
Protect us in and make sure that our cash flow generation will stay at similar levels that we've seen in 2019 and previously now pay for successful and some some of the venture Suri mentioned or do I mentioned on the sell side well then there's some upside there.
Okay, great. Thank you.
Right.
Thank you at this time, we have no further questions, we'll turn the call back over to you for closing comments.
Thanks Ali and thank you everyone for joining us. This evening. We appreciate your continued interest in company. We look forward to talking with you again soon take care and have a great now.
Once again, we'd like to thank you for participating in today's conference call you may now disconnect.
[noise].
Yeah.