Q2 2023 ARC Document Solutions Inc Earnings Call
Good afternoon, My name is Abby and I will be your confidence operator today.
At this time I would like to welcome everyone to the art documents released since 2023 second quarter earnings report conference call.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star followed by the number one on your telephone keypad.
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Yep.
Mister David Stickney, Vice President of Investor Relations you may begin your confidence.
Thanks, Debbie and welcome everyone on the call with me today are serious area from our our C E O and chairman.
Our president and Chief operating Officer, Dillow, which is Syria in Georgia envelope Archie financial Officer.
Our second quarter 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 our documents solutions website at I R. Dot E Dash a R C dot com.
Please note that today's call will contain forward looking statements and are only predictions based on information as of today August 2nd 2023, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual their SEC filings.
Any non-GAAP measures discussed today are reconciled in our press release and form 8-K filings.
I'll turn the call now I'll turn the call over to our chairman and CEO Siri Ciriaco bar sorry. Thank you David Good afternoon, and thank you for joining us.
Today I'm happy to report a strong quota in terms of net earnings.
Despite the suffering of overall sales driven by the current market conditions.
Business model continues to prove its effectiveness in leveraging sales.
Cash and creating opportunities for future growth.
During the second quarter.
<unk> healthy demand in digital color printing and.
More than 20% means Kenny.
These two service lines continues to show a healthy demand.
Retail markets make a comeback customers in the segment.
Investing more in color to aggressively compete for their share of the business.
While the corporate clients, including state and federal institutions are increasingly using we sure communications to articulate their values to both customers and employees.
Scanning continues to show a high demand as customers continue converting the legacy information to create digital access.
Construction related spending on the other hand <unk> conditions in construction due to interest rate hikes, and we have seen interest rate hikes, creating debate and there are no obvious catalyst to change these conditions in the months, but.
This is the album diversification into new and growing industry segments is allowed us to become less dependent on plan to being revenues.
At this point, we think it's likely that the.
<unk> suffer the same effects are flowing construction activity.
The end of the year.
When the timing of this trend will make it harder to drive what all sales in the last half of the year. We feel strongly that we can maintain strong profitability and cash flows in 2023 and drive sales growth in 2024 with the support of a strong pipeline with some large projects.
You will to ramp up later this year.
As always cash flows remained healthy supporting our commitment to return shareholder value wiring manual dividend and continuing stock purchases.
We have that as a background for the corner I will now turn over the call at the dealer and George for the <unk>.
More detailed review below.
We understand that the business conditions are hit might be challenging, but I want to assure you that V at at Ah well prepared and focused on maintaining a strong fundamentals to do well in the coming quarter, leaving the second quarter, we prioritize key business fundamentals that have proven suck.
For for Us <unk>.
Executed ourselves opportunity as well and we took pride in the lighting a customer with exceptional work to be delivered.
Making it easy and enjoyable for our customers to do business with US has always been at the core probably execution plan.
Despite tough market conditions, we are pleased to report that several several of our key business lines short year over year growth.
<unk>, our digital color graphics services continue to perform there.
Witness rising demand as a a customers recognize the importance of elevating their brand purses and accelerating their marketing efforts.
By assisting them beyond graphic sprinting, we create immersive environments that captivate audiences ultimately expanding their brand percent.
The big Grilled story for the quarter. However is in documents scanning and archiving.
<unk> double digit increase reflecting the confidence our customers have in our services and technology.
With the recent completion of a phase two expansion of a prepaid <unk> email scanning centers via now better equipped to deliver services more rapidly for our customers and has already helped us in addressing a healthy backlog of work.
Onsite printing services remained relatively steady and equipment and supplies sales are down significantly as capital constraints and lending rates remain high.
As a technology driven print and documents scanning company staying ahead of customer trends is crucial for us.
Adapting the latest technology, driven printer allows us to deliver high quality print output.
Apart from the competition and insurers our customers receive the best possible service.
We have been refreshing.
Portions of a digital color equipment in a disciplined way.
To ensure we have competitive advantage of <unk> <unk>.
Market as a market it was.
These upgrades have been factored into a capex and cash flow projections for the year.
Vaughn is higher than last year's.
<unk> mentioned, we have some good projects in the pipeline that will start to ramp up later this year.
Of a focus on operational fundamentals, such as good material and labor management as well as cost. If you shouldn't processes has contributed to a 60 basis point improvement in gross margin.
Our <unk> and online marketing activities are ongoing yielding good customer leaves via our website and socially challenged.
By showcasing Ah completed projects capabilities, yeah successfully attracting new customers.
At <unk>, we believe that our success lies not only never business strategies, but also in the dedication and motivation of our staff.
Recently implemented the program to support our employees, who would engage in community volunteer programs.
This initiative reflects our commitment to making a positive impact in society and fostering a motivated and inspired workforce.
All of these efforts are in support of a strategy to transform our invisible Margaret Mead it needs and delight, our customers with outstanding service.
We are confident that the strategy remains the most direct path for the company's growth as we head to the end of 2023 and approached 2024.
<unk>.
Thank you Dear.
As we've heard overall sales dropped 3% for grew in our most important strategic areas.
Despite the overall sales drop of $2.2 million gross profit was down just $360000 and gross margins improved by 60 basis points.
The margin expansion with achieve do two are efficient and flexible cost structure.
We exerted our usual discipline over SG&A controlling variable costs, which helped drive eight 360000 dollar increase and adjusted net income.
E P. S also increase.
Pay me year over year at nine set ajar.
Adjusted EBITDA for the quarter was essentially flat.
By contrast, cash flow from operations was up more than $2.5 million year today and was assisted by strong performance and our accounts receivable collection.
As many of our investors know are strong cash flows allow us to acquire or upgrade equipment for three primary reasons.
To improve operational efficiencies.
To maintain a competitive advantage.
<unk> increase capacity to serve a new market or an expat an existing one.
Our overall equipment budget for 2023 remains unchanged for the remainder of the year at approximately $3 million to $4 million per quarter.
But with high interest rates, we are choosing to use more cash as compared to finance leases.
As a result lease payments will continue to draw an overall interest expense of approximately $450000 per quarter will remain unchanged.
As we stated repeatedly there.
The primary use of excess cash is to return shareholder value.
And in the second quarter, we paid out $2.1 million and quarterly cash dividends and we use $1.7 million during the quarter to repurchase shares.
If we maintain this trend and at this time. It appears we will we will have returned more than 50% over or just at free cash flow to shareholders by the end of 2023.
In summary.
We are optimistic about our growth prospects based on our pipeline.
While sales me lagging behind the improvements to our bottom line.
The solid EPS and cash flows we expect for the balance of the year will position as well for 2024 with that.
Turn the call back to Surrey, sorry.
Thank you George operated we are now available for our listeners questions.
At this time I would like to remind everyone in order to ask a question star and the number one on your telephone keypad what path for just a moment to compile the question and answer roster.
Your first question comes from the line of <unk>. Your line is open.
Yes, Sir and.
When we look at the digital printing what is the.
Splitting revenue between.
Digital color graphics and construction related print.
Printing and what are the the relative growth rates of those too.
Those two segments I'm, just trying to get a sense of kind of maybe when the the secular growth of the digital printing.
Might be enough to offset some of the <unk> cyclical headwinds you're seeing on the construction side of the business.
So Greg on the digital printing side, 50% of the revenue is from a digital color graphics services and the other 50 per cent is coming from traditional plan printing services. So currently on the videotape the digital color segment that segment is definitely.
Broad segment, and we continue to grow in that in that market in the services and the customers I continue to get busier and that will continue to grow as we've seen in the last couple of quarters plane plan printing services if neatly under.
Some stress with the current market conditions <unk> out there.
And that segment has been has you know that we <unk>, we had a drop and I think that will continue for the next couple of quarters until we see some kind of stabilization in the interest rates and so forth, but when it comes to the.
Growth areas, primarily on the digital digital printing site, we continue to see a good market conditions, good customer interactions with us budgets are still fairly good and there'll be continued will see that uptake in the coming quarters.
Okay, great. Thanks, and then so I'd point about.
The digital market and can you just talk about maybe the verticals, where you're seeing the most growth or if you're saying weakness in.
And any specific verticals and then maybe if you could share.
Any other metrics around.
<unk> the number of lead you generating conversion or any any other kind of.
Pipeline metrics that might give us a sense of the demand environment.
Many of the customer verticals continue to grow days, there's not a single.
You know in a segment of the business that is not really because most of the customers continuing to market continue to take part in trade shows there, but I'm meeting the officers to accommodate the new stuff coming in so some of the significant wins that we've had during the second quarter came from.
Different vertical as you know, we we got a significant large.
A large green from our bank completely renovating their office space office space, We got we got a large a hotel chain renovating their vacation type of.
Hotels significantly lots of school districts are continuing to.
Revamped their internal internal graphics of schools.
So we've seen mini malls mini malls retail malls upgrading their locations to attract new tendons is also protect the tendons there'd be having as well so when it comes to digital color graphics. The types of customers that are engaged with us type of customers, who are spending money or <unk>.
<unk> to be we have a very good very good customer base, continuing to do well with us.
One segment that is continuing to be a little sluggish is the technology company. The larger technology companies, you know coming out of the bad times. Some of the expense expenditure has been curtailed budget. So radios debate, so I think that.
Mmm in the next couple of quarters when conditions improve in the market for you should see the technology companies coming back again, but otherwise the rest of the markets that we are a marketing tool Ah continuing to do well and we are happy about happy with.
The results, we see from a marketing activity I think the second question was about.
Digital marketing campaigns.
As I said look we're really doubling down on the sales and marketing activities four among those customers and V V C cruelty, Nova N inbound lead program as well I mean, just roughed number zero here just to have that meetings last week.
Seen about a 40% growth in our lives.
As well so we continue to perform well in the inbound leads and it is really helping our sales organization to be out there to take in the leaves and.
Converting them into a actual court and then to a fine will be so happy.
Happy with the marketing program as well.
Okay, great. Thanks for that and then just lastly, I know you were kind of in the market buying back stock this past quarter, what what's your.
Alright.
Stock and maybe any other priorities might have.
Yeah, well, we look at the dividend, we've been pretty consistent five cents, a quarter $2 million, a quarter or roughly $8 million a year. So we don't anticipate changing that what we did do this you get more aggressive with the stock buyback as as we communicated today, we used about $1.7 million for stock buy back.
<unk>. So when you crunch the numbers are roughly 50.
50% plus of our excess free cash flows are being used to return shareholder value and as I. Just mentioned, we know the number for dividends at Delta would be on the stock.
Okay, Great alright, thank you.
Your next question comes from the line at David Marsh from Cingular Research. Your line is open.
Yeah, Thanks for taking my questions.
First one to follow up on the on the question about about.
About leads on and your comment dealer about 40.
40% gross and in Leeds year over year.
Talk about you know.
Conversion, what's the typical cycle is for conversion and.
You know what percentage of those leads that you have been successful in converting into new business in the last couple of quarters.
Yeah. So as I said in my earlier come injury. The V. A continuing really doubling down on our digital marketing activity in the Leeds that'd be zero era has picked up as well and it seems we offer about almost 22 23 types of services you get a variety of.
<unk> from from each different type of soil. So our marketing programs really Kita go after the specific segment of buyers with a certain service that survey market. We don't just do one email or one market for all prospect, We tried segment and go after it so the <unk>.
Received very diversified pool of leaves that we get the claws rate for different services and the time. It takes cause before differences very different <unk> example, the let me get a quite a bit of documents scanning leaves and those leads can.
Close within a couple of weeks because we once we inspect they know that you have a standard pricing, we we get that converted real quickly a small digital format type of work for marketing purposes, and so forth <unk> quickly because those are ready to go basically some of the larger projects like <unk>.
Enterprise.
Type of scanning opportunities, we have somebody public Institute Dot a big company has HIPAA related documents those type of leads required a little bit more conversation back and forth inspections and so forth. So they may take maybe a couple of months for us to make that close part of it.
Some of the larger color opportunities that required a complete re all of the office will take a couple of.
Of Vieques, Oh, two a month month and a half for us to close.
And some of the leads that are not that'd be don't wind right. There's some of it is getting pushed back due to the budget requirements ones the customer understands what it what it truly cause they might panty down for a couple of quarters and say, okay, let's pick back up in the new year right. So some of that.
You use that we don't <unk> orange, sometimes it's below about margins and we don't want to perform at that type of work you know some of the local competition probably might go at the at the at the number that we are not comfortable but overall our lead lead that we received the quality of the leaves are good.
<unk> to get in front of a lead is always a good. So overall there'll always we look for ways of improving right. Now we are currently focusing on improving over when <unk>, we <unk>, we want to challenge ourselves to improve.
<unk> so that's.
Third call the challenges that we have we have taken about an hour sales among our senior leadership with the sales side, how do we how do we win win more.
But <unk>.
You know things are going well other marketing site.
That's really very helpful.
George one turned on the balance sheet for a minute I mean, obviously you guys did a great job wasn't working capital from inventory.
Levels are down it you know.
Pretty pretty sparkling low levels for the last couple of years I mean.
Is this a sustainable like inventory level going forward I mean, or do you think that you're going to have to commit perhaps a little bit of capital going forward to to grow inventory if you're so much instruction in particular stomach construction, where it comes back.
The quick answer is this is a new level and it's sustainable I mean in my very a little bit up or down between quarters, but not dramatically.
Mmm, that's certainly very good news from working capital management perspective, and then just touching again on the leases how much exactly do you expect would roll off on the on the finance leases this year.
Roughly we'll pay down roughly.
$12 million worth of leases will probably add somewhere in the six to 8 million dollar range. So if you just do the math, there and that 4 million dollar range.
Okay.
And that makes it.
Yeah, It does and and.
I guess when you mentioned in your remarks, I guess the interest rates being higher your just your interest expense is gonna remain steady.
Yeah.
Okay.
Okay.
If your moderately now use the same interest rate I know, that's the beauty about our company right.
You hear all this Verizon interest rates are doubling but we essentially don't have any bank did cause I use my excess cash to pay down the revolver. So we really just have those capital leases as you just mentioned are dropping so our interest expense will be around 450, a quarter about 1.6 million a year I think very few companies could say that.
In this environment that their interest expense is gonna stay flat year over year, and we anticipate that'd be this year and next year.
Right right now that's that's definitely a very strong.
<unk> points for the company I concur.
Just lastly, just wanted to talk about the the share account a little bit.
The the basic share account picked it up a little bit sequentially.
Sit down a little bit with the share repurchase activity could you just give us a little bit.
Guidance in terms of how to think about that going forward alright, well those two numbers sort of continued to.
To kind of merge merge closer to one another is that the way we should think about that or is there something else Sir.
It's really hard to answer that question because the product of how closely are it's really dependent on what the stock prices.
Depending on what the stock prices.
Will dictate if outstanding options and restricted sharks are deluded or not dilutive when they're dilutive well then they get out of the equation and your basic and your diluted shares are closer together, so like I said it.
From my perspective, I want to stock prices keep going up and up and that [laughter] that delta to be greater but what I could tell you is we're committing to continuing our buyback of shares an open market, we bought back over half a million here in the second quarter. You know, we're gonna keep attacking that number can third quarters.
Fourth quarter and into next year.
Commit on a specific number but what I could commit to you is that we're committed as an organization to drive that number down.
Yeah, It was $3.
$3.
Alright.
Great. Thanks, very much <unk> questions.
No problem.
Again, you would like to ask a question.
Then the number one on your telephone keypad.
Your next question comes on the line of Glyn Hi, Mack.
And basketball group your line is open.
Good afternoon, <unk> a R C.
Couple of quick one.
Really liked that no increase in.
By the way Georgia.
First on the.
Bipartisan infrastructure Bill.
You'll see any projects certain slow on your.
Inbound in the next 12 months.
Yes, definitely we have seen seen the infrastructure funding come back to certain states.
For certain drop project and.
Just give me one good example is that.
Cheaper plan being built in Boise, Idaho. So we have a we have a piece of that so assimilated. We've also seen some of our <unk> our customers like a calm.
Cool, taking part are have been awarded us <unk>.
Significant size projects in the airport.
Renovations, the new infrastructure spending as well so I think these just the beginning things up just trying to roll down from fed, but it's back to the.
Stay at CERN for certain projects. So I think in the next two years there'll be a lot more work coming coming down to those large contractors.
That's great second quick one I don't know if you track trade shows as a market segment.
So is it typically stronger in the first half of the year or the back half of the year.
You.
Usually the first <unk> first got a second car is a big.
Tradeshow period, then again September thru and of October is another period, but those off for the major national shows that takes place in Vegas, 49, or the large organizations, but one of the things that we've noticed since the pandemic.
Regional trade shows are very popular but so they are smaller shows very contains it's market driven and there are more shows regionally dinette at a national level, while the nationals loser picking up so when it comes to trade shows V V V don't typically.
No think about located <unk> strange you'll see some needs every month because every city every region every big Hotel every big Convention said that there's something going on every month every week. So that's that's the way I received good opportunities you just have to hunt for that business, but you know.
In the past, there's more activity happening at the changes in the transfer market.
Okay, and then do you think you're at an advantage in that market just because you have the national presence to.
Print for you know some segment of the economy, that's having a big show, let's say in.
Vegas, and then like some follow up thing in Atlanta.
<unk>.
You know.
Printing of the boards.
Boards and everything else to be consistent.
We believe that we have a leg up but that doesn't mean there is no competition that fee is competition. When he comes with Rachel what because it will establish companies around the country, who has done this work for a long time, but when it comes to a quick turnaround high quality and to get the work done locally in the bind there's nobody no better person company <unk>.
So the market took that to that specific types of.
Features and benefits that we can provide and we feel that you have a good chance.
Alright, and then the last one which I don't know maybe answer or not but does the.
Scanning.
Product line does that have a higher gross margin and I'm gonna reported gross margin.
It seems we performed the scanning work within the same service centers. The number we don't report the.
Gross margin separated by product line, but overall all of all of our product lines have a very similar similar gross margin line. So so we are so that's how we will be able to I would like you to think about the margins.
Okay, great. So I've awesome rest of the week.
Thank you you too.
There are no further.
Questions at this time Mister David.
Kind of call back over to you.
Thanks, heavy and thanks to everyone for your interest. This evening, we very much appreciate your continued interest in the company and its stock and we look forward to talking with you next quarter about it and to tell you about our progress. Thanks, So much take care have a good night bye bye.
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