Q4 2021 ARC Document Solutions Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at this time I would like to welcome everyone to the <unk> Q4, and fiscal year end 2021 earnings report call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question at that time simply press star followed by the number one on your telephone keypad, if he would like to withdraw your question again.
<unk> one. Thank you. It's now my pleasure to turn the call over to Mr. David Stickney, Vice President of Investor Relations. Sir. Please go ahead.
Thank you Brandon welcome everyone on the call with me today are series, Syria Kumar, our CEO , our Chief operating officer dealer would you, Syria, and Georgia, Melas, our Chief Financial Officer.
Our fourth quarter and fiscal year results for 2021 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 Dot E Dash AARC Dot com.
In todays earnings announcement arc offered expanded supplemental disclosures to provide shareholders and analysts with additional information in advance of our quarterly conference call.
The disclosures are largely historical and will not be read on today's call.
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 February 23 2022.
And actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.
This call will also contain references to certain 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, Syria Goodbye sorry.
Thank you David and welcome everyone.
2021 was a year of challenges and opportunities.
Looking back.
To say that we overcame the difficulties in a design for a minute and took advantage of every opportunity for growth.
Okay.
The year began with business called under the cloud of Covid.
And our first quarter results reflected both dire circumstances.
But each quarter.
Yes.
Company improved on every front.
Our expansion into new markets was remarkable.
And perhaps.
So pricing to nearly everyone but ourselves.
Even our traditional customers in the construction market significantly increased appetite.
But all it services.
Beyond digital plan currently.
This will allow us to continue to accelerate our revenue streams in growth segments of our business. Unlike the pre pandemic.
Year over year sales grew in each of the last three quarters.
<unk> fourth quarter growth of more than 7%.
Of note Anthony revenue line grew in the fourth quarter, which is typically our softest period of the year.
The bottom line was even more impressive is the fourth quarter earnings for the period delivered 158% growth in EPS as compared to the prior year.
It was an excellent way to wrap up 2021.
You look at it but even more so when we consider how we began.
Cash generation in the fourth quarter and the year.
As expected healthy and consistent with our level of sales.
No better evidence of our confidence in continued cash generation was the 150% increase in our dividend announced in December .
Dino and George will provide more details a little further along in the call.
What I'd like to impress upon you more.
Most is how will our plans.
Transformed the company have been executed while the result of the past year have been enormously gratifying in themselves.
Part of what we have done will be best demonstrated in the quarters and the Esa hit.
Our network of service centers is optimized like never.
Before.
Our people are heavily cross Creek.
We continue to fine tune, our marketing and attract new business.
And the scale and responsiveness of our sales team is proving to be as worked at tile and diverse as our new market itself.
Not only we can meet the needs of our expanding customer base, but we are focusing our creativity and innovation on creating new services and products that leverage our existing scale and.
In infrastructure.
Blink so keeps the cost of developing new offerings, low and assign greater value to the experience and talent of our employees.
As we continue to reap the benefits of our focused strategy and a transformed business model. We are also updating the way we report our results.
We left northeast that the names of two of our primary services.
And aim.
Now referred to as digital printing and scanning and digital imaging.
Given our expanding market. We believe it is more powerful report our services in the language that describes the way they are produced.
Rather than by what any given industry might use them for.
The methods for financial reporting and revenue recognition in our renamed business lines remain unchanged.
The country.
Markets and Ark.
Itself in a very different position today.
They were just 12 months ago.
<unk> remain but I think the current situation favors opportunities for 2022, especially Farc.
I'll turn the call over to Dino and George at this point to filling some important elements of our progress over the past year and I'm sure you can see why I remain optimistic about the coming year.
Hello.
Thank you sorry, as we stated in our comments during our last earnings report our sales momentum continued into the fourth quarter.
As already mentioned, we were pleased to see year over year sales grew by nearly 8%.
The result of our sales customer expansion and product transformation produced good results.
The seeds, we planted through our sales and marketing campaigns in the previous quarters helped us attract new customers and new projects and we experienced year over year growth in every major revenue category.
Continue to position <unk> as a key vendor that fits right in the middle of our customers' digital divide.
Pleased to produce high quality print from digital files as well as our expertise in converting paper documents into a digital environment is a value proposition not many companies can offer.
By bridging the digital divide we have earned the trust of our customers and they are rewarding us with more business.
Over the past three years, our teams have been carefully executing our strategy of growing our customer vertical.
Several years back when we were primarily a reprographics company B, so no more than 15 business vertical.
Primarily in design and construction.
Today, we have successfully grown our customer base and have expanded to serve more than 100.
40 business verticals.
Design and construction customers.
Both are now consumers of our digital print.
Scanning and digital imaging services.
There are also significant purchases of management services and equipment and supplies.
This has been a key success in our transformation strategy Egfr services service centers and essential.
As for any business and our goal is to use them to penetrate all of our new customer vertical.
Newt concentration remains or the following for the following.
Our strategic objective.
Expand our customer base beyond our traditional markets.
Additional growth services to the AC customer base by leveraging the strong relationships, we have built over the past 35 years.
We introduced new growth services that can be performed from the same service center footprint.
Protect high margin planned printing revenue.
Critical to the achievement of this objective is the service we provide to our customers.
During several of our previous calls we discussed the need for a higher level of customer service.
In tough economic times, many clients have moved around due to lack of customer service from their existing providers as a team we have diligently strengthened our service levels and communication to deliver superior value to our customers.
The evidence of our subs.
<unk> can be found in our review.
We not only have received more than 15000 online reviews from our customers, but our average rating is.
In these reviews is 497 out of five stars.
In terms of economic disruption supply chain issues are noticeable in our industry at the end of the year.
We avoided most supply problems earlier in the year, thanks to close inventory management than selling certified used 10 devices with a full service guarantee from <unk>.
Printing hardware for managed print service services incurred delays during the fourth quarter due to our strong vendor relationships. However, we did not experience any delays on the key production material.
Our production management teams.
To maintain good margins and profitability in the fourth quarter despite the issues.
As of now we expect a moderate pushback on the start dates of the two office initiative as many of our customers are grappling with the effects of the omicron variant.
That said, we expect this to be sorted out within the coming months as restrictions are being lifted.
Beyond these challenges our management teams across the country are looking forward to continuing our progress as we embark on the new year and our mission to be the best digital print company in North America.
That I will hand over to George for our financial update George Thank.
Thank you below the year's accomplishments included improvements in nearly every area of our financial performance considering that the economy was emerging from the worst of the pandemic at the beginning of the year common sense suggests we should have struggled throughout the year to get back on track.
But that wasn't the case.
Sales stabilize and then improve quarter by quarter.
Gross margin stayed steady in spite of the Reconfiguring of the company to be smaller more nimble and more appealing to a wider audience.
We compressed our SG&A cost.
<unk> reduced our need for capital spending and finance leases and what's why our operating margins responded vigorously.
To top it off net income and EPS grew by more than 45% for the year and by more than 100% in the fourth quarter.
Most importantly, however is the fact that we achieved all of this on the cash we generated during the year, including the $5 million of value, we return to shareholders with an increased quarterly dividend and stock repurchases in the open market.
At this point it might sound odd to suggest that cash flows from operations declined year over year helped drive our performance.
But in reality that reduction reflects normalized levels of cash generation and collectibles relative to the level of our sales and just as importantly, a solid foundation to build upon.
What's so different is it.
The efficiency of our operations and cost structure. After the transformative steps we've taken over the past two years.
A perfect example of the efficiency. We are achieving is a way we are reducing our capital expenditures and our need for cash at the same time, we have recognized the need for printing equipment in our NPS engagements will be lower in the future due to the permanent adoption of hybrid work model as such.
We're not only acquiring less equipment, but fewer leases for that equipment.
On top of it we're working through existing inventory with our new certified equivalent program to reduce capital spending even further and driving more and more work through our service centers, where we can leverage production grade equipment more capacity and cross trained labor.
We're tackling other issues in a similar way to address improvements from all angles.
The highlights of our financials demonstrate the depth and breadth of this exercise.
We grew sales for three consecutive quarters.
Our operating margins improved 260 basis points for the quarter and 130 basis points for the year cash.
Cash on the balance sheet with nearly $56 million.
At the end of 2021, our debt net of cash was $22 $3 million.
An annual reduction of $20 million.
Leaving us with a debt ratio of less than one times.
We increased our quarterly dividend from <unk> to two <unk> at the end of 2020, and then raised it two five cents per quarter at the end of 2021, providing an annual yield of more than 5%.
Our EBITDA for the year was more than $40 million with a 15% EBITDA margin. Despite the slow start to the year and reduced sales volume are.
Our EPS for 2021 with 22, a year over year increase of 7% compared to 2020.
It's a long list of accomplishments accomplishment and one we're proud of.
But it's also an excellent basis for progress and growth in the near future.
From a revenue profitability and cash flow standpoint, we have created an excellent environment for even more improvements in 2020.
I will now turn the call back to Suri.
Thank you George and operator.
Global to our listeners.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile our Q&A roster.
Your first question comes from the line of Robert Shapiro with singular research. Your line is open.
Hi.
Given the company's transformation that <unk> been working on how would this impact the quarterly seasonal trends.
How does it impact did you say how does it impact the quarterly seasonal trend.
Yes, you did mentioned that usually the fourth quarter is the weakest, but maybe because of holiday season, the fourth quarter might be.
Stronger now than some other quarters, just wondering how that impacts let's say for instance.
The first quarter versus the fourth quarter.
When you started the first quarter to be weaker or stronger than the fourth quarter.
In terms of seasonal trends.
Yes, that's a good point actually the fourth quarter is usually a soft quarter, but obviously given now expansion into other verticals and new services. We are finding that is helping to offset some of the softness which we've previously experienced in the history of the company, but it's also true that the first quarter last year was largely <unk>.
<unk> by the Omicron variant right and that was the.
The one thing, which put a damper on it so last year I mean, it is not a normalized here. So I think as we go forward, we'll start to see a consistent.
<unk>.
The performance with regard to how sales are reacting and will get a better understanding.
But last year was obviously Tom.
<unk> to us given the fact that.
While we still had an impact George would you like to add to that and just kind of too to add onto <unk> points. I mean, I guess in summary, we don't expect to see such a dramatic difference for the first quarter to the second quarter. The third quarter to the fourth quarter are there differences business is typically a little bit better in the in the second and third quarter.
Suri mentioned not as pronounced as it was in prior years there'll be a more muted difference in between quarters. It wouldn't be industry specific let's put it that way.
Okay, and you did mention omicron, Yamaha and variance you didn't feel like that impacted the fourth quarter this past quarter.
No.
The early acquired a dealer would be like yes.
For 2021 yes.
Yes.
The first quarter was while the delta related issues that <unk> had that but going into the fourth quarter. There was.
There was a light slight slowdown because many customers are setting off a lot earlier.
Before Christmas season, due to the variant and so for them.
We noticed that but again from the sales point of view due to the diversification that we've done over the last almost six seven quarters and those results are paying through.
Two positive.
Okay. Thank you.
Again, if you would like to ask a question press Star one on your telephone Keypad. Your next question comes from Alan Weber with robotic Advisors. Your line is open.
Good afternoon, how are you.
Good afternoon.
So just a general question.
Of your legacy business, the architectural engineering and like that roughly what percent of your business.
Isn't that legacy industry now versus say two or three years ago.
Five years at a high level.
Will rule of thumb is you see our digital printing line item.
That encompasses our legacy construction related document printing as well as the new color printing Russ just is it's about 50, 50% of that line item I think thats a good growth from our perspective, we don't report on it nor do we plan to report on it because there's so much overlap between a lot of that work and then also Allen.
I'll add one other point I must mention of that.
All door that you might see just looking at it.
50 50.
The kind of services. They are buying from us are very different now for example base much less planned printing there is much less construction plan our specification related printing because all that does become digitally but what's happening is we are going back to the same customers. We have we already have relationships and <unk>.
Dan I covered that in my.
What do you call the script.
Getting them to buy more digital print and color services scanning services. So so all Google It seems like it's coming from the industry. It's really a different revenue stream, a new revenue stream, which is much more growth oriented as against the previous year. So if you go back to the previous years and look at the revenue regenerated.
From even the AC industry that was a shrinking revenue not anymore.
<unk> is actually a growth revenue.
Okay, and then that's great and then just a follow up.
One of you talked about the number of verticals can you just talk about kind of what are the fastest growing verticals.
Just any general way over what's changed.
Yes so.
As I spoke about the vertical is how we have expanded the verticals over the last probably two years in the organization.
So I.
I wouldn't be able to talk about a specific vertical which is really growing faster than any other vertical the way we.
The way we look at it is we look at the vertical we know what they are.
What they can buy from digital printing scanning and digital imaging services and what we are doing is really focusing on understanding what their pain points and their buyers and understand their personas and really market to that group of customers. So that they know that can provide those services.
So thats what we are that's how we are very.
Very tactically going after those verticals and expanding the services that we sell to those customers. So from the vertical standpoint, whether it's higher education.
Medical medical healthcare government CDN counties.
All of those verticals are very very solid for us whether it's mall malls.
Developers all of those are continuing to stay strong and that they have services that they need services that <unk> can provide.
So one way or another way to think about it is alan that.
And so thinking about the vertical think of all the product lines. So one way to think about it what are the product lines, which are growing fast. So if you think about a deal only agree that we didn't Carla and scanning those are the services, which are really growing fast because ethylene vertical requires those kind of services. So what we are doing is by adding vertical.
We.
Continuing to expand the growth of those product lines, because we are selling to the same products, but more work because now I hope that makes sense. It does makes sense.
A little unrelated any thoughts in terms of.
I don't even know if you can talk about this would you hope to accomplish in terms of buying back stock during 'twenty two.
So it'll be very opportunistic overall, when we look at it obviously, we promised over the last 24 months or so George we have been talking about focusing on returning shareholder value at the debt levels continue to come down.
Come down we focused on returning shareholder value and obviously initially we were largely focused on share buyback and then of course, we shifted to dividends. When you started doing it and we obviously have expanded that aggressively and share back buyback will always be opportunistic depending on where the market is and.
And how the stocks are trading John you would like to add to that.
You hit it on there I mean, we spent $5 million on returning shareholder value in 2020.
Now looking at 2022 with the <unk> dividend that alone is going to give you 8 million.
Returning shareholder value in the form of dividend and as Terry mentioned.
We're not abandoning the share repurchase we're going to be opportunistic and go out there and try to get some more shares. So the way we are looking at an overall return to shareholder value.
Got it Okay and my last question is.
Any.
Thoughts about acquisitions in terms of how much time, you spend or is it really.
If you can just talk about that.
Very little because we don't see anybody around why exactly like.
They have the similar business model as Alan but there might be pockets of little acquisitions, which might be suitable in certain regional markets and again that can be opportunistic if something knocks on our door and we think it's a fit we might go up but thats not our strategy right now right now its just basically organic growth driven by.
Marketing these new services Thats, what we are doing right now okay, great. Thank you very much.
Welcome. Thank you Allen.
Your next question is from the line of Mike Hughes with SGS capital. Your line is open.
Good afternoon, Thanks for taking my questions.
Joe first high level question can you just talk about what pricing will look like for the coming year and then.
Related to that I guess, just talk about the growth potential of the four businesses for this year.
Okay.
The pricing perspective, we don't see pricing pressure as <unk> instead.
Given what's going on around US overall, I think the pricing will be pretty stable, if not days opportunity for us to rates up.
And obviously that depends on supply is supply chains, everything what's going around us, but we are very opportunistic so given our buying power, we're able to keep the prices in check why.
Drawing better prices from our customers, that's what's going on with regard to the core products.
You might have just started the top four products dealing with electric and the top four products. If you look at the.
We performed in the fourth quarter, I mean, all product lines.
And the fairly strong and we feel very strong about each of those product lines as we go through to 'twenty to 2022 as well because the way we are transforming our customer base and the product base.
There are more opportunities for us to continue to market and expand into a higher share of wallet within the same customers as well. So we will continue to do that and we feel strongly about growing also product lines. This year.
Okay, just just two follow ups.
What does pricing look like over the last four five years I assume it's faced pressure is that correct and now now it's more stable is that a is that right.
No no.
No. There is there is not a heavy price specials like that <unk> identified that are pockets in the country. Occasionally we will see some price pressure due to competition and so forth, but but seems we went into the pandemic at our customers.
Clearly wanting services from companies, who are reliable who can get the job done.
Based on the promises that they make because with the pandemic pandemic does so many staff related disruptions material.
Product raw material disruption that goes on in the industry are quite a bit quite a bit.
And we know.
The customers are paying a good fair competitive price to get the job done right. The first time and from reliable companies like ourselves. So we do not have any meaningful price pressures and we hope that will continue to stay the same in the future. So when you talked about I think just to add to that you talked.
About three to five years, if you go back five years, the market has different without a doubt.
And you could see certain areas, David some amount of price pressure, but like Ddos says what's happening in the last year or two especially this year is companies are willing to pay for high quality service.
And reliable service and we are seeing that.
Obviously, that's one of the reasons, we focus on high quality service and get that high level of customer satisfaction with that kind of thing we are able to command better prices and our margins prove that out I mean, our margins have improved and stable steady continuity improve yes.
Okay, Okay, and I understand that the March quarter, you have a really easy comparison, so you should be able to put up year over year.
Revenue growth, but should that be the case for each of the remaining quarters two you're looking at revenue growth for all four quarters on a year over year basis.
Overall, that's what we're expecting we obviously want to grow the revenue.
Every quarter.
Our management team's objective.
Obviously.
As the pandemic settles down and we come back to normalcy will be even more clear, but our expectation is that we'll continue to grow because of.
Organic growth is what we are after and we are driving that hard.
And our last three court proves that out.
Okay Super one just last question for you.
I think in the past you've talked about EBITDA at a level of at least $10 million a quarter is that correct.
Correct, yes.
Okay, So that would annualize to $40 million to your interest expenses around to Capex of maybe $5 million and our cash taxes, one or $2 million is all of that or all of those decent assumptions.
Cash tax is probably lower we're well under 500000, we have historical Nols. So we don't foresee ourselves state taxes for the foreseeable future, but the rest are generally in line.
Okay, So conservatively thats $30 million.
And free cash flow the dividend consumes $8 million to $9 million of that and then your your remainder is about $20 million and I guess this goes back to the last Gentleman's question about the buyback.
Even if you want to expand it.
You're somewhat limited by the risk to constricted payments basket at $15 million is that still the case.
That is still case in our credit agreement.
Okay any thoughts on going back to your bankers and having that change. So you could do a little bit more aggressive buybacks.
While we are not obviously.
Yes, I mean, it remains to be seen we came out of a very dark.
The banks.
Very nellix when the pandemic hit and we completely turn that around and got us into a very very favorable deal just very recently, so we are very happy with the deal right now.
If you all and things become better and become more consistent we certainly have the opportunity to go back.
To the bank and we also want to be mindful of the balance between.
Dividends and the share buyback.
Sure.
Take it as it comes.
Okay, great. Thank you very much welcome.
Welcome.
There are no further questions at this time I will now turn the call back over to Mr. David Stickney.
Thanks to everyone for your attention. This evening. We appreciate your continued interest in arc and we look forward to talking with you next quarter take care and have a good evening.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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