Q3 2022 ARC Document Solutions Inc Earnings Call

Increases for materials and supplies continue to be passed onto our customers.

As a result.

Our operating income rose more than 16% and our operating margin was up more than 100 basis points and our diluted EPS.

EPS was a penny higher than the prior year.

As expected cash flows from operations accelerated in the third quarter.

And we remain confident we will meet or exceed last year's cash flows of $36 million.

Adjusted EBITDA was affected by higher labor and other inflationary increases.

But we're still over $11 million and resulted in a healthy margin of 15, 3%.

We remain confident that sales will continue to grow within the normal constraints of seasonal performance.

Q4 is usually the softest quarter for us given fewer working days in the period.

But we're still seeing sales of $70 million or more are within our reach and.

And we are maintaining our annual EBITDA expectations of an average of $10 million or more per quarter.

As we look at our capital structure.

Our net debt to EBITDA ratio remains well below one.

Cash on our balance sheet is once again above $50 million.

More than offsetting the $42 5 million.

Outstanding on our revolving line of credit.

During the quarter, we continue to use available cash to manage our interest expense.

As a result, we don't think are don't think of ourselves as having any bank debt or exposure to variable interest rates.

As projected finance lease payments for equipment continue to fall as our need for equipment declines.

The third quarter finance lease payments of $3 8 million.

Resent, a $600000 or 13, 5% decrease from prior year.

All of this makes it easy to return shareholder value through our annual dividend of <unk> 20.

Which based on our current stock price is yielding more than a seven 5% return.

As I've stated before.

I would like the new company, we have created <unk>.

Sales continue to grow month over month quarter over quarter, and our opportunities and pipeline remains strong.

Our optimized and scalable cost structure allows us to maximize profit and grow margins.

Cash outflows continue to drop as the need for new Mpls equipment has decreased and we leverage our existing production fleet to accommodate growth in digital color printing.

All of these increases have funds available to return shareholder value.

Arc and its investors are in a great position as we look forward to the end of the year and.

And even better one when considering our prospects for 2023.

Sorry.

Thank you George operator, yes.

<unk> two <unk>.

All of our listeners question.

Hi, I would like to remind everyone.

Ralph a question.

Hi, Dara.

<unk> on your telephone keypad.

Well I'll start.

Youre welcome Sir.

Your first question.

Your first question comes from the line of David Marsh from singular research.

While any new locations. When we are looking for acquisitions, we wanted to be very.

Strategic about it and because we have the locations we have the equipment. We have the staff. So we don't need another location.

Another set of equipment and so forth. So we are mostly looking for acquisition of customer lease and so forth.

Enzo.

<unk> portfolio and really.

Get a good healthy margin from those acquisition. So so that's our strategy, but we always look for them.

Based on the opportunities that are available in the market.

And you added a key point there that our leverage is really good right now.

Thing that we're not willing to do or the company to highly lever ourselves in this environment.

No that makes a lot of sense with costs going up.

Capex continues to be very very modest are you, having any supply chain delays on any equipment or any parts or anything that you need for for any repairs for your equipment.

No there are no delays with regard to equipment requirements.

It has improved a lot.

However, our equipment requirements for large production centers and so forth. We are very well equipped in the last probably three or four years, we've done a good job in.

Modernizing our fleet of hardware in the past so we don't see much.

Our requirement for equipment in the coming maybe a year or two but we always look for newer technology when it is required.

But they are all.

Well under control.

So would you say that the current run rate Capex is kind of a maintenance level for your business.

Yes, we think the current level is definitely our maintenance level.

Okay that sounds good.

And then just again with regards to the cash I mean any opportunities around potentially.

Potentially.

Reducing leverage or other ways of perhaps returning funds to shareholders.

Through incremental.

Equity repurchases or perhaps a higher dividend.

Yes, so basically it's opportunistic.

We are going to see all that.

Marketing was what the stock price is and you know.

How much cash we have left and depending on that.

How do the three different types of three areas right. Obviously dividends is one buying back stock is the second one and then of course, reducing the debt.

Yes, George clearly said based on a whole lot of debt to be reduced so integration of opportunistic.

Buying back shares and also dividends and depending on the conditions and we had the stock prices.

The need for us to make sure we can do to maximize shareholder value. That's our focus that has been the focus of the last two or three years and as you heard on my script, we have $50 million in cash we have a very flexible revolver that you could draw on it or payback at any time, which is at $52 million. So we've kind of question.

Of delevering or to paying down debt.

From our perspective, we look at it is we don't have bank debt, we kind of offset those two and use available cash to reduce our interest rate.

Our interest expense, hence, we look at ourselves as not having exposure or exposure to variable debt.

Ill jump back in queue, and let someone else have an opportunity. Thanks guys.

Okay.

Again I'd like to ask a question press Star then the number one on your telephone keypad.

Your next question comes from the line.

Gil Zimmerman your line is open.

Hi, guys. Thanks for taking my call.

Sure.

We're just wondering so it looks like you have really strong free cash flow and cash flow from operation do you think you guys can grow that over the next year or two is that a possibility any color there would be helpful.

Yes, we definitely think we can grow it over the next couple of years to fold. Our EBITDA is increasing and we would expect our cash flow from ops to increase as our EBITDA increases then the other important fact is right now we're still saddled with capital leases that we entered into kind of pre pandemic four years ago five.

Years ago, those are getting paid down hence why you see the big drop in capital lease payments as I mentioned in my script. This quarter, we paid three point.

$7 million or $3 8 million in capital lease payments last year that number was $4 3 million. So you combine those two factors increasing cash flows with the decrease in cash outflows, that's only going to make your free cash flows become bigger.

Okay. That's helpful and margins of the combination so just want to make sure we understand that it.

It looks like your net debt is only like $18 million and it looks like it could be debt pretty soon are we understanding that correctly.

There is two fold the way kind of like I said before we don't view ourselves as having any bank debt because the cash we have on hand.

More than offsets the revolver, we have outstanding.

The other that we have in our books is roughly $25 million on capital leases.

Those are there is no there is.

As a prepayment penalty on those better said so.

Would you kind of get paid off as the year has progressed, but every year, we're entering into new capital leases to the tune of roughly $8 million a year, but we will repay down from historical leases is a much larger number. So you will see that number drop just as we make the required principal payments.

Seen a drop in the last 12 months, probably about $6 million to $8 million, you'll see a drop in that range again for the following year does that makes sense.

Yes that makes sense, thanks for the clarity there.

Those are those are only two questions. So thanks, guys and congrats on the quarter.

Yes. Thank you.

Again, if you would like to ask a question. During this time press star followed by the number one on your telephone keypad.

There are no further questions at this time, Mr. David Stickney.

I turn the call back over to you.

Thanks, Savi and thanks, everyone for joining us today. Thanks for your ongoing interest in arc document solutions and we look forward to talking with you again next quarter. Thanks, So much bye bye.

Yes.

This concludes today's call you may disconnect.

Yes.