Q3 2023 ARC Document Solutions Inc Earnings Call

[music].

Okay.

Good day my name is Jordan.

And I'll be your conference operator today at this time I'd like to welcome everyone to the arc document.

Solutions Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a quick question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press star followed by the number one.

Vice President of Investor Relations, David Stickney, you may begin the conference.

Thank you Jordan and welcome everyone on the call with me today are series Surya Kumar, our CEO and chairman, our President and Chief operating Officer dealer, which is Syria, and Georgia envelope, our Chief Financial Officer.

Our third quarter results for 2023 were publicized earlier today in our press release, the press release and other company materials are available from our Investor Relations pages on arc document solutions website at IR Dodge E hyphen, a R C dot com.

Please note that today's call will contain forward looking statements and they are only predictions based on information as of today November 2nd 2023, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

The non-GAAP measures discussed today are reconciled in our press release and form 8-K filings.

I'll turn the call over to our chairman and CEO Suri serious Mark sorry, Thank you David and good afternoon, everyone.

Overall sales for the quarter dropped 3% or about $2 million I.

Adjusted for one working day.

DCF less this year than we had last year the drop would have been just one 3%.

This lets us.

In a very similar situation to the salespeople are still in the second quarter.

And it is not surprising in the light of the continuing trends we identified in Q2.

Sales in digital color and scanning.

All our strategic areas of growth remain robust as new customers continue to heavily invest in Shaw communications and the demand for digitizing files.

Coming from every industry we serve.

What are you in that can by Cindy.

Large deal.

The producing pads and other construction these documents so.

As we predicted it would during our second quarter report in August.

This is primarily due to the sustained increase in interest rates. This has been an uncertain and volatile economic conditions.

Construction.

That said our margins earnings and cash flows.

Despite the drop in sales and they remain more than capable of supporting our commitment to our shareholders value.

Our annual dividend and continuing stock purchases.

You will see using these commenced this framework for further discussion.

Now I'll turn the call over to deal and George.

A more detailed review of the quarter.

Thank you sorry, I'm pleased to provide you with an update on our recent performance at strategic direction for the third quarter.

While higher interest rates reduced investment and cautious spending by many customers made for challenging market conditions. Our company has demonstrated resilience and adaptability.

Despite these challenges our strategic business lines are improving our digital color services and document scanning divisions have delivered continuing growth largely due to our diversification efforts.

Secured large digital color projects in a wide variety of white goods, including events.

Jos schools and sports stadiums. These.

These projects are characterized by the use of multiple graphic products and services across various locations generating positive customer reviews and strong demand.

Or these digital color success extends to smaller venues as well with numerous satisfied customers further validating the demand for our services.

Documents scanning also experienced high demand from its about these cultural institutions at historical archives, along with smaller ongoing projects.

Midway through the year, we expanded our document scanning capabilities and increased capacity at key locations. These expansion has enhanced efficiency and throughput four documents scanning projects our reputation for complex and detailed work continues to attract referrals from previous and existing clients.

Underpinning our growth in this segment.

Our onsite services revenue declined year over year as return to office initiatives continue to fluctuate. However, we have successfully renewed several large onsite service agreements using of a certified equipment program enhancing client satisfaction and improving our margins.

Additionally, our service Center network has attracted also withdrawn customers further contributing to higher operating margin.

In the construction based <unk> printing business, we faced challenges due to low construction activity, including commercial and residential construction and fewer office remodels.

Despite this planned printing remains a profitable service lines and we continue to streamline operations and control capital expenditure to keep costs in check.

We have cross trained.

Employees and leverage our footprint to maintain efficiency.

Although efforts and production management have been thoughtful resulting in an improvement in our cost of goods sold this quarter, we remain vigilant in managing material labor and production expenses efficiently.

Our pipeline, especially in color graphics and scanning remains robust.

Service centers increased capacity and efficiency position us well in to capitalize on these opportunities.

Our win loss ratio for new business is improving and our marketing efforts are yielding higher quality leads.

In summary, our team is highly motivated and actively securing new business to offset declines in the planned printing segment.

Our focus remains sharp on the top line, while maintaining the financial discipline that has been a hallmark of ox bottom line yes.

We are committed to leveraging our experience and expertise or areas. We can control remaining undistracted by external factors beyond our influence we look forward to sharing our continued progress in the coming quarters. Thank you for your trust and continued support with that I'll turn the call over to George George Thank.

Thank you delo, well quarterly sales fell 3% our overall gross margins were up 10 basis points.

Our ability to leverage our sales at any level remains a key characteristic of our business model.

SG&A was essentially flat despite inflationary pressures.

<unk> earnings felt the impact of lower sales and EPS fell to set.

Cash flow from operations of 8.7.

$7 million for the quarter is suffering from a difficult comparison to prior year due to the timing of collections and payables.

First half of 2022 started out extremely slow and momentum built significantly in the second half of the year to make up for it.

Given its tendency to fluctuate throughout the year, we have always encouraged an annual perspective, when reviewing cash flow from operations.

As a case in point our year to date cash flow remains very healthy at $23 million.

And fully capable of supporting our annual <unk> dividend and continuing to repurchasing of our shares.

Year to date comparisons not only better represent our performance and cash generation, but also in operating income net income EPS and EBITDA.

Year to date operating income for 2023 is slightly higher than 2022.

And net income and EPS are essentially flat on a year to date basis.

EBITDA was down 10% in the quarter is down just 5% year to date.

Obviously this performance does not reflect the expectations we had in January.

Faced with the larger issues affecting the economy and constraining capital spending we are in a much better position to resume our growth that we would have been prior to the diversification of the business and the reconfiguration of our cost model.

With regards to the balance sheet, we continue to maintain more than $50 million in cash, which we typically use against our revolving debt on an intra quarter basis to save on interest costs.

Net debt at $11 $6 million and our leverage ratio leverage remains well under one times, both very low numbers.

We also paid out $2 1 million and <unk>.

Quarterly cash dividends, and we used slightly more than $1 million <unk>.

During the quarter to repurchase shares.

These methods, we expect to return more than 50% of our adjusted free cash flows to shareholders by the end of 2023 and.

And well on our way to exceed $10 million of shareholder returns in 2023.

Our top line, we continue to fluctuate for the remainder of the year.

But we remain confident that we are focusing on the things that matter most at arc and as a result, we continue to generate opportunities for growth cash generation and a reliable return of shareholder value in the coming quarters with that I will turn the call back to Serge sorry.

Thank you George.

Yes, now available for our listeners questions.

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.

And now for our first question is from Greg Burns from Sidoti <unk> Company. Your line is live.

Good afternoon.

When we look at the two 5% decline in.

Digital printing this quarter.

Could you give us the breakdown of what the growth was from color printing and what the decline was from your AUC markets.

Yeah. Good afternoon, George really sure sure. So as we've always said roughly 50% of that line item is our legacy plant printing I blueprinting type of business. The other half is color <unk>.

Graphics in regards to the the legacy traditional reprographics that revenue was down between six and 8%.

Color was up in that 3% to 5% range.

Okay.

Okay.

Alright, and then.

For scanning.

It was down a little bit sequentially and grew grew less than we were expecting is that as that business is project based and I'm just trying to get a better feel for.

How to think about the the.

The growth profile of that business going forward.

Yes.

Last year actually the scanning revenue of the billing rates are continuing to be the same it is continuing to grow.

One of the issues that we had was that last year during the third quarter. We added one significant customer projects that we completed at build.

As a digital service that that it was not there this year, so thats why youll see a year over year.

The growth rate has declined but if you look at from the scanning services otherwise we are still in that 9% to 10% growth rate.

So if you really look at it from our day to day scanning the opportunities. We go after all the time, we were really growing at that 15 plus percent Mark as Dylan mentioned that one job that was kind of an oddball last year.

Roughly half a million dollars that.

That we booked in third quarter of last year, it's skewing the year over year results, but we feel very confident about that 10 plus growth in the scanning business.

Okay.

And then when you look at the opportunities for growth in color and scanning.

Do you have.

Maybe it's difficult now, but do you have line of sight on when you might.

When do you think you maybe could get back to a little level of growth here or offset the declines I guess that youre seeing and kind of the more traditional.

Planned printing.

Hello, Yes, so if you look at our revenue lines as you know that.

Four buckets of primary revenue so when we look at the revenue lines that are that are currently challenged is primarily the plain papers printing market as well as the equipment sales that segment of the business is directly connected construction construction industry.

Brett so.

As we see the interest obviously one of the primary reasons for that.

The challenging situation is the increased interest rate that that totally reduce their opportunities for brand new construction and retail.

And improvements and so forth as we see going into the new year.

Interest rates, probably stabilizing there might we will see some increased activity in construction as soon as we we see some stabilization in that construction market.

I would definitely see some growth within our organization.

So when you take the other our strategy strategic growth aligned when it comes to color digital color. The market opportunities are continued to be very strong marketing activities.

Bringing us a lot of new leads some of the projects that we execute a very significant significantly sized project. Many of the top brand organizations are continuing to bring us bring us sizable work really.

Focusing on re banding rebranding up there.

Marketing activities, they're doing a lot of good.

Trade shows Tradeshows, we see a got a lot of activity there as well and a lot of fair amount of office renovations that takes place revolving around color graphics. So the the future opportunities. The pipeline. They are very good and very very very very strong total company documents.

Scanning side is continuing to grow is bringing us a lot of opportunities leads through marketing activities pipeline is very strong booked revenue revenue that to the contracts that are already booked to be to be scanned is also at a healthy level.

Therefore going into the new year bring in the new area. We continue to be very bullish about those two lines and as soon as we see some stabilization in the construction market as a company I would hope is that we will continue to see some positive growth overall.

Alright, great. Thank you.

Your next question comes from the line.

David Meyers from singular research.

Your line is live.

Thank you Hey, guys. Thanks for taking my questions.

During the quarter.

Do you guys have any significant customer wins that you could talk about and if so could you talk about sectors.

They have been in.

Yes.

David to speak about a specific customer per say because remember as a company we don't necessarily focus on one big job right. Because as you know we had 100 sales consultants that sales out of 140 locations and obviously for <unk> focus on the 53 vertical so our customers come from all set.

<unk> in all types of jobs strong from very simple jobs locally that we do versus <unk>.

Oss regional Dep camp.

Campaigns as well as this national campaigns as well so I can I cannot pinpoint to one specific area. When we when we look at our color growth, it's coming from all segments. All types of customers all size of jobs as well with regard to with regard to.

What I can see from the from the wins that we get on the digital color side is that the brands that we are continuing to come.

Continuing to sell to and getting excited about working with arc is continuing to be a continuing to grow there are some top brands. We are we have renewed a couple of sizable contracts for digital printing in the last quarter.

So with a related things happening in the UK with existing company in Canada, or whether things are going on in <unk> in the U S U S market.

We can see some really potential and good opportunities as we go into the next quarter and they are all revolving around our ability to satisfy and promote our customers' brands through visual graphics.

Gotcha.

Guys get any kind of.

Ticket all from political activity are you realizing any revenue from increased advertising and political spaces or is that not really.

A big.

Driver for you guys.

David that market is not a not a significant market at all for us in us ESV dual vocational.

<unk> manor, our tools, but that work that youll see.

Where people have.

In transfer garden, and all of those are very cheap printing.

<unk> achieved material cheap long runs.

And we don't necessarily play in that market because the margins are extremely thin and that's.

We don't concentrate very much in that market.

Got it.

Just turning a little bit for a balance sheet could you talk about.

Share repurchases what was the average.

The purchase price per share.

Roughly for the quarter, we spent about a million dollars on share repurchases for the quarter.

Average price on those it will come out when we distribute our or our 10-Q here in the next day or so but roughly in that $3 range.

Russell.

And can you refresh me on remaining authorization there George we.

We have about $9 million left.

9 million authorized.

On the left it was authorized 15, obviously, we've been buying shares, but we have about $9 million.

Right.

And then.

We did see that the interest expense ticked down.

In the quarter I appreciate the comments used cash throughout the quarter to two.

We are bringing revolver down.

Is there is there anything further you can do there to continue to drive that.

Lower.

And is that something that youre, considering at the moment or.

Is it pretty comfortable with where things are I mean, obviously leverage is not a big issue for you guys, but.

I thought that was a nice point there $50000 improvement.

Interest expense in the quarter.

And really what we're doing it I think I've said the comment multiple times.

I kind of view us as not having any bank debt because as I said in my script.

The cash we have on hand inter quarters, we're just using that cash to pay debt pay down that revolver to zero, which means I'm incurring zero interest expense there so.

Kind of your comment of could we bring it down as you said right. If you look at our net cash number if we're already at $11 million.

Lauren can we go and quick correction on the average share price that we bought back the shares.

<unk> for the quarter it was actually.

$3 40.

Okay.

Got it. Thanks I appreciate it I wanted to pause there and see if anybody else wants to jump in.

There are no further questions at this time.

I'll now turn the call over to David Stickney for closing remarks.

Thanks very much for your interest this afternoon as always we very much. Appreciate your continued participation in our progress forward here and we look forward to talking with you again in February thanks, very much and have a great evening.

This concludes today's conference call you may now disconnect.

Okay.