Q4 2022 ARC Document Solutions Inc Earnings Call
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Good day, everyone and welcome to the Arc document solutions 2022 year end and Q4 earnings conference call. At this time I would like to hand things over to Mr. David Stickney. Please go ahead Sir.
Thank you Lisa and welcome everyone on the call with me today are Suri <unk>, our CEO and chairman.
Our president and Chief operating officer dealer with Syria, and Georgia envelope, So our chief financial Officer.
Our fourth quarter and full year results for 2022 were publicized earlier today in a press release, a 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.
Please note that today's call will contain forward looking statements and are only predictions based on information as of today February 22023, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.
non-GAAP measures discussed today are reconciled in our press release and form 8-K filings.
I'll now turn the call over to our chairman and CEO Suri, Syria Kumar sorry.
Thank you David.
And welcome everyone.
Today, we reported strong results for the full year of 2022 and significant advancements in all meet in meeting our strategic goals.
Our annual sales growth.
Nearly all of our key operation metrics and as I have reported in the past three quarters. Our earnings are impressive our balance sheet is solid.
It is low and our cash generation remains high.
First of all we will continue growing in 2023.
Our sales are not.
Not the only thing really.
The number of industry verticals, we still are growing.
The number of services, we sell in each of these vertical is growing.
The revenue in each vertical is growing.
And.
After more than 50 industries vertical to be so 30 have been purchased more than $1 million of product and services from us in 2022.
I should also make another point.
The diversification of our customer base.
We grew year over year sales in every single one of our design and construction customer verticals in 2022.
Architects Engineers general contractors subcontractors homebuilder and property developers all purchased multiple services from us.
Far from buying blueprints alone these customers purchase environment graphics safety signage onsite fin services scanning services as well as equipment and supplies.
This is a tremendous achievement by itself, but taken together with diversifying sales in all markets, we sell at retail.
Great progress in transforming our business.
To give you an idea of what we went into our Texas in 2022.
And what the future holds I'll now turn the call over to Dino and George for a review.
Thank you Suri.
Our domestic sales momentum from earlier in the continued through the fourth quarter, there were lower sales from our joint venture in China hit some of our progress.
With lockdown constrained spending there and lasted well into December these dragged down overall sales for the period.
North American and UK sales are on track throughout most of the quarter and then softened with the holidays as expected.
Retail office education, and construction segments drove sales for digital color graphics document scanning services will also in high demand for many of the industry verticals, we serve irrespective of their sites.
But even from our print services that our customers location was flat during the quarter. We think similar levels of revenue, we will continue through the coming year.
If more customers return to their offices, we will like to see a moderate increase in print volume.
And for the year the results speak for themselves the increased significantly in every business line, except equipment and supply sales.
The annual sales for 2022 increased 5% year over year and have a margin expansion and profitability, but outstanding.
The strategies, we have put in place will help us continue to grow in 2023.
Our go to market plan for winning new customers and expanding the annual spend of existing customers continue to focus on three <unk> first our demand generation programs have been designed to drive more qualified sales leads to our sales teams second we focus on communicating and educating our customers regarding.
Our new innovative products, such as <unk> flex graphics and standby the box program.
We focus on the account based marketing programs to expand our reach to different buyers within our customer companies.
These actions all support our overall growth strategy I outlined in August of last year.
With the primary focus being on selling into more industry vertical.
Everything we do gets better when we diversify our market.
As already mentioned earlier, we serve is around 50 business verticals now and we continue to increase the types of customers, we do business with us.
<unk> economy conditions soften the diversification of our market. We are hedged funds remain relevant and continue to maintain our sales momentum.
Aqua is prepared to aggressively win new business and continue to increase our market share.
Improving customer service is also a whiter component of our growth strategy.
Lighting customers helps us win repeat business and assist us in capturing referrals for new business.
It is why we incentivize excellent customer service and our employees profit share plans.
And I think of as the high service provider and we excel to deliver on those promises. This is evident with our EMEA a five star rating from 20000 online reviews.
While George will outline more details in a moment I should also point out that our gross margins remained healthy in both the quarter and the year, thanks to our operational efficiency.
Price escalation of print suppliers has moderated Dolby continue to pass on increases to our customers as a normal course of business.
We haven't seen a significant improvement in parts supply chain difficulties.
And we are working with our suppliers.
Mostly for better management of supply in the new year.
In all our operations teams have been vigilant and proactive contributing significantly to the results we have reported today.
We are relying relying on their continuing efforts to help us grow in 2023 at this point I'll pass the call to George for a discussion of <unk> financial performance George.
Thank you delo, our revenue increased three of the four quarters in 2022.
If we adjust for the $800000 drop in our Chinese joint venture during the fourth quarter, we would have posted topline growth for the seventh consecutive quarter.
Without the adjustment, we still posted annual growth of 5% or $13 8 million.
More impressive than our moderate sales growth is how we were able to leverage our overheads cost to achieve exceptional gross margin.
Growth overall, it expanded by 140 basis points, which speaks to the scalability and efficiency of our cost structure.
If you need further proof while revenue grew 5%.
<unk> grew nearly 25%.
As we predicted.
We average more than $10 million per quarter, and EBITDA, despite inflation impact on wages and materials that led to a roughly $1 million drop in the fourth quarter and for the year.
Of note, we expect average EBITDA per quarter to be $10 million or more in 2000.
23 as well.
Cash flow from operations for 2022 grew by $1 $5 million over 2021.
Coming in at $37 2 million.
And narrowed the gap between cash flow from operations and EBITDA.
As we grow earnings.
2023 cash flow from operations, we will also continue to increase.
With regard to investing and financing cash flows payments on finance leases will decline by approximately $2 $5 million.
In 2023.
And our need for capital expenditures remains low.
Our capital structure also continues to improve.
Our debt net of cash is $13 9 million.
Which amounts to an $8 4 million dollar reduction from prior year.
At this pace debt net of cash will be close to zero by the end of 2023.
In 2022, we continue to honor our commitment to return shareholder value share.
Shareholders' return.
Our reached an all time high as we paid more than $8 million in dividends at a 6% plus yield and purchase more than $2 million worth of our own shares taken together, we returned more than $10 million to shareholders in a single year significantly.
Significantly more than we returned in 2021 or any other year in our industry and our history.
Looking forward into 2023, we expect to do more of what we did last year as I said in the beginning.
With moderate sales growth, we can expand our margins.
Increase EBITDA.
Grow cash flow from operations and achieved a double digit growth percentage in EPS.
In closing.
I want to assure you that we remain committed to returning shareholder value at a similar or possibly higher rate than we did in 2022.
With that said I'll turn the call back to Suri sorry. Thank.
Thank you George.
We are now available for our listeners questions.
Thank you, Sir and everyone. If you would like to ask a question. Please press star one on your telephone keypad.
Once again that is star one if you have a question today, we'll pause for just a moment to give everyone an opportunity to sit down.
We'll go to Greg Burns Sidoti <unk> company.
Okay.
Good afternoon.
With the Chinese joint venture how much revenue are you.
Are you generating from that on a quarterly basis, and if we look back historically like how far is it down.
Down from I guess more normal a more normal operating environment.
Joining us today and I can take that yes for the year, our Chinese operations are.
Adding about $7 million in revenue for an annual basis, obviously, you could just divide that by four to give you the quarterly amounts.
Compared to the past if we look back five years days to be $30 million plus so they're truly not a big part of our business our revenue and have not been for the last few years and frankly, we expect that to be the case as we move forward here.
Okay. So there's no expectation for that to rebound meaningfully from here. This is just kind of a new normal level for that business.
Correct.
Okay.
Okay.
And then you mentioned you're still expecting growth.
And the top line.
Your guidance for 'twenty, three or your <unk>.
Inventory around 23 could you just give us maybe a little bit more color by by operating segment on your thoughts on each of those for next year.
The electric yes.
As we as the.
I mentioned in our earnings release.
If you take the primary segment thoughtful if you take a look at the.
Also sprint that commscope printing printing shops, especially for digital printing.
We see most of our customers are continuing to stay strong.
Yes, there will be some slowdown in certain customer segments as the industry makes it adjustments and so forth Hollywood.
With our diversification program that we've embarked over the last three years or so we feel confident that many other customer segments will continue to grow in their marketing activities and so forth that are made.
Any segments in the market is that continuing to grow, especially the manufacturing indication I obligation.
Travel and travel and leisure industry.
The trade show trade show industry lots of companies that continuing to take part in marketing activities Tradeshows regional activities, the large corporate meetings and so forth.
We are continuing to focus on those segments.
Our specialized digital graphics and graphics and so forth. The second area is the.
All site services that we provide our customers, where we provide multiple types of services either IV <unk>.
Provide all of the hardware, we sell hardware, we provide supplies and provide labor that segment. So you will continue to come.
Continue to grow as more customers come back to the offices.
And change their business habits, and so forth, we should see it.
Continued maybe a smaller growth will come from that segment.
<unk> scanning segment has been fairly strong because many of the companies are continuing to digitize their documents and bring their digital content into a workflow that is that can support employees from remote places as well as our focusing on capabilities using mobile as a platform to access.
Information. So overall, we feel good about what we see for 2023.
As the markets not there are certain markets, which are a little volatile certain industries, which are volatile. These days, but however, the transformation that we've embarked in the last two or three years is continuing to take place at the US we are focusing on different verticals, we are focusing on multiple verticals that.
That are continuing to grow we are focusing on growing those customers within those each vertical and also communicating and educating different services that we have to the same customers as well, so 2023 should be or should be a goodyear that.
Our plan in our earnings release.
Okay, and then to the.
The outlook for double digit.
Earnings growth is that coming from.
Improvements in the gross margin or are you going to get operating leverage like where's that that earnings leverage coming from.
And then if it is on the gross margin line.
Is there.
A target that you have on you know where the gross margin can go.
As you continue to.
Scale the business.
So, yes, it'll be twofold as I mentioned on the script with with moderate sales growth, we feel we could achieve growth on most of our key or all our key metrics, including our gross margins and EPS. So we think with moderate sales growth, we will be able to better leverage.
<unk> our overhead.
Depreciation costs as it relates to equipment and frankly, we also don't think we're going to be hampered like we were in 2022 with high inflationary increases we've seen some of that in 'twenty, two but a lot of that benefit or leveraging was taken away by higher labour higher material costs.
We're at a new cost structure now, we don't anticipate that going up in 2023. So when you look at those dynamics than with moderate sales growth you should be able to leverage.
Your cost if you will your cost structure has seen an improvement in gross margin now will we be able to achieve a 140 basis points increase like we did 22 I.
I don't think we'll be at that level, but can we be 50 basis points plus in gross margin expansion.
We think that's very doable.
There is another point to add is that we have enough capacity in our stores. We have 140 stores and we have a quite a bit of capacity to accommodate all of that extra revenue that we plan to bring in disease, So that should definitely.
Support our margin expansion.
Perfect I'll hop back in the queue. Thanks.
Great.
Again it is star one if you have a question we'll go to David Marsh. Thank you Larry research.
Hi, guys.
Could you speak to the pace of business activity that you've realized so far in 2023 relative to prior year.
Below you want to take that yes. So obviously, we've had a nice 5% growth year over year.
We've seen that that COVID-19 related activity that we had in 2000 22020, right and there was a slight repeat of that work in 2021, but <unk> 2022 was a very clean year of all traditional.
Digital printing and services that we provide normally to the customer so the sales growth for last year, primarily came from two specific areas plus first was our expansion of customer verticals, because we were able to expand our services to multiple verticals.
And we were able to grow.
Number of customers using <unk>.
Using us in these verticals and the third one was we were able to sell additional services to the same customer as well so the trend in the in 2023, obviously it was the.
Started fairly strong in this.
<unk>.
First quarter, the second quarter, because you are comparing from the from the previous previous quarters, but going into 2023, we feel that we may not have the same amount of growth as 2022, but we should still have.
Nominal growth in 2023.
And at the end of the day, it's too early to tell I mean, we're still in January and February December is typically our slowest month January is our second slowest month coming out of it from our company. We start seeing the activity slow increase in February and March is really the month that makes the quarter. So it's still too early to.
Give any meaningful comment on Q1 at this point.
Okay.
And obviously, there's a lot of talk on.
In the market about Directionally economy, I mean could you just talk about.
How the business holds up.
Relatively in a recessionary environment as opposed to some.
Some other businesses or other competitors.
Yes so.
Obviously, when the economy is a little weak.
Discretionary spending from customers do slowdown we have seen that in the past couple of recessions that we went through.
But unlike in the past.
A lot of decisions that are coming through this time one of the key.
Changes that we have done in the companies that we have transformed our revenue lines and the customer base right. So.
In 2008 recession, and so forth, we like very heavily onto construction related activities and construction related plain paper plant printing that we used for the customers, but Hollywood today that segment is very very small so therefore.
We feel very.
Bullish about our transformation that we have that has happened over the last couple of years and we feel that even if there is a slowdown in certain segments in the industry. There are certain industries that are going to be continue to do well and also in <unk>.
Down market every company is going to market, but they want to market. They want to get their products out they are going to have lots of trade shows.
We want to capitalize on those markets that we want to focus on.
Those markets to continue to grow our business.
So pre.
Pre promising.
With regard obviously you guys have done a great job.
Cash flow and.
Managing your working capital terms of.
The roll forward into 'twenty three.
Can you just tell us how much capacity you guys have remaining on your share repurchase program.
What other.
Essentially uses of your positive free cash flow you would expect to to employ.
So yes, we still have.
We still have $10 million available in our stock repurchase program that extends out a couple of more years. So there is definitely plenty of availability there.
The second part is with regards to do dividends.
We've kind of made that commitment we're giving 'twenty.
Dividend a year, obviously, that's about $8 million.
Fully plan, obviously with board approval to continue those quarters.
Dividends as we move forward into 2023.
So overall as I said in my script. Those two combined we returned shareholder value of over $10 million in 2022, which was an all time high for our company and we expect to meet that or beat that in 'twenty. Three so hopefully that answers your question.
That's very helpful. Thanks, guys I'll hop back in the queue.
And once again, everyone that is star one if you have a question, we'll pause for just a moment.
We will go back to Greg Burns.
Just had a couple of follow ups.
You're talking about the diversification of your business within the.
AAC verticals can you just give us like what the revenue mix is there like what percent of revenues is that kind of legacy traditional.
Document reproduction.
Maybe some of the other.
Some of the other newer services you are providing to that those.
Those customers.
Yes go ahead, yes, so if you take the AUC.
Architects engineers construction and subcontract verticals that type of work that we knew for those key verticals.
Has that completely changed over the last five years I would say in the past probably about a good 80% 80% of that work came from.
Traditional claims planned printing, but to day to day, probably that's about almost 20, 30% rest of it comes from signage and other services that we provide scanning document scanning.
Onsite services supplies that we provide them.
And digital color graphic services that we provide.
Okay, Great and then.
To the commentary you made around.
Spanning into new vertical markets.
How does that happen is it just.
We're casting a wide marketing net and <unk>.
Companies from new verticals find new or do you have specific programs in place like dedicated programs to go target specific vertical markets like how does that.
Expansion happen.
So a couple of strategies that we've that we end up the first thing is that we have a very strong.
Demand Gen marketing engine that we focus on really well.
The website and the ACO programs, we drive different customers in 12 sites right and Thats due to due to due to since we are able to see the types of customers that get busy in certain paths, we have national data or we have centralized data available to look at and say look at the types of customers that are getting busier.
In a certain PD or types of customers that visit our web site types of customers, who ask for quarters. When we have that data from our central marketing team. We realized okay. There is this particular vertical these three verticals are getting stronger are busier.
Our more active during a certain period of time, then we have good visibility as to what they are buying from US right why are they buying food.
Decision makers, who asked for the court. So we have that data centrally available now because we have a centralized marketing on a data.
The management program within our organization here, so by looking at that and we know okay. These are.
Specific targets that auto vertical that we want to focus. So we then do a little bit more research as to the buyers the bias for Sundance Waterloo, thereby price points and so forth and we interviewed the customers because we had these national presence yes.
To understand what leader lighting manufacturing company in Michigan buy from us and compare it to Whiting somebody buy from Arizona, right. So we'd be able to get that information and then build that marketing programs and really target that specific.
Specific customer vertical.
So half half.
<unk>, we purchase budget, a certain amount of customers customer list in market to that customer list and we continue to churn churn customers that churn the data that is available and we keep on marketing to those customers. So so thats, how we try and select select different verticals, then and continue to monitor.
And expand that opportunities within that vertical.
Okay. So I mean at this.
At this point here.
Completely.
Vertical or industry agnostic right at this point I mean, it's not like it used to be aware.
The business was really levered to the construction verticals like at this point, you've kind of divorce or.
Yes.
Cut that tie now it's now.
More open ended.
Absolutely because because when we train our salespeople when we onboard and train our sales people. There is nothing specific training for flood construction anymore, because even within the construction customers, thereby different services from us than they did they had purchased before so.
Our training is completely different now so we.
We offer we show them opportunities because we have unlike in the past we have multiple buyers is in the same office as well.
Staff versus the HRS HR staff the project managers, they buy different services from us. So the idea is to be continuing to train how to look for multiple buyers in the same office and Thats, where the diversification has been very very helpful to us.
Okay great.
Thanks, a lot.
And the final reminder, everyone that is star one if you have a question.
<unk>.
There appear to be no further questions I'll hand things back to David Stickney for any additional or closing remarks, thanks, Lisa and thanks to everyone for your attention. This evening. We appreciate your continued interest in arc document solutions and we will talk with you next quarter take care Goodnight.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
Please wait the conference will begin shortly.
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