Q1 2024 ARC Document Solutions Inc Earnings Call
Thank you for standing by my name is Pam and I will be a conference operator today at this time I would like to welcome everyone to the Q1 'twenty 'twenty four arc document solutions.
Pam: Earnings reports.
Pam: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Pam: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.
Pam: If you would like to withdraw your question Press Star one again. Thank you I would now like to turn the conference over to David Stickney, Vice President of Investor Relations you may begin.
David Stickney: Thank you Pam and welcome everyone on the call with me today are serious serious tomorrow, our CEO and chairman, our President and Chief operating Officer dealer would you, Syria, and Georgia, Melas, our Chief Financial Officer.
David Stickney: Our first quarter results for 2024 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 a R C dot com.
David Stickney: Please note that today's call will contain forward looking statements and are only predictions based on information as of today may seven 2024.
David Stickney: Actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.
Speaker Change: Any non-GAAP measures discussed today are reconciled in our press release and form 8-K filing I will turn the call over to our chairman and CEO, sorry, sorry, sorry.
Speaker Change: Thank you David I'm happy to report that our business transformation remains on track.
Speaker Change: With nearly 3% increase in overall sales in the first quarter.
Speaker Change: Along with an increase in earnings per share. We think the year is off to a good start.
Speaker Change: The business conditions continue to remain tough.
Speaker Change: Strategic sales focus drove top line growth, even while operating costs in the first quarter will pressure due to increased material and labor expenses.
Speaker Change: We believe color and scanning and archiving will continue to drive our momentum this year.
Speaker Change: So it's just been pruritus, Teddy bears with some potential upside and continuous cross selling.
Speaker Change: And planned printing any coupon and sales will continue to be pressurized by the high cost of capital.
Speaker Change: Despite some uncertainty percolating.
Speaker Change: Upfront macro events at home and around the world menu for customers and markets.
Speaker Change: Making the only and not waiting for things to settle down.
David Stickney: Whether it is a stronger trade show presence.
David Stickney: Planned expansion of locations are more aggressive local marketing at the store level.
David Stickney: What are the new National campaign, our forward looking customers are engaging in creative and compelling marketing and we're in a perfect position to answer.
David Stickney: Yes.
David Stickney: Is it documents scanning and archiving.
David Stickney: And the desire to continue to converting paper documents to digital remains very high.
David Stickney: In nearly every market we serve.
David Stickney: While the benefits of digital archives are obvious under any circumstances any uncertainty in the economy disruption in business or even natural disasters seem to increase the demand for scanning.
David Stickney: We feel very strongly that would be.
David Stickney: Remain in the early stages of document conversion and retention and then days a very long runway for this service line.
David Stickney: Our solid performance for the quarter shows we have potential to grow in 2020 full but we have to work right.
David Stickney: That said, we are confident that we can continue to produce healthy margins and cash flows and remain committed to our 20% annual dividend and opportunistic share repurchases.
Speaker Change: To help explain some of the details about how we executed our plans during the first quarter of 2020 full I turn the call over to Dino and George for their comments.
Speaker Change: Thank you sorry, we are pleased with our first quarter results, especially in light of some of the economic uncertainty we experienced over the past few months.
Speaker Change: Our strategy of focusing on new key business lines and the efforts of our teams rewarded us with nearly 3% growth in net sales for the period.
Speaker Change: U S Canadian UK and other international locations all had positive sales momentum.
Speaker Change: Every win we achieved was due to relentless focus and well orchestrated the execution by our teams.
Speaker Change: Little of our work was simply handed to US we stayed focused on what we could control and worked hard to win every opportunity that came our way.
Speaker Change: Everyone was focused on delighting our customers.
Speaker Change: And we did so.
Speaker Change: Despite the decline we have seen in capital spending in construction and design many of the new business segment.
Speaker Change: And so we're resilient and continue to make sensible investments to fight for new business.
Speaker Change: They'd shows sports and entertainment events athletic programs in schools retail and many other segments up also in growth initiatives with their marketing and we don't see any customers drawing down in this area.
Speaker Change: Visually compelling color graphics communicated brand promise and add value to their marketing programs. So demand for these services remains high.
Speaker Change: As a result, our position in the visual marketing industry is getting stronger.
Speaker Change: Unlike the past, we are selling into more and more customer vertical with services and production solutions that deliver outsized benefits in a marketing budget.
Speaker Change: When such customer spend with us they know they're getting greater value, whether they are spending a lot or a little this is a true testament of our transformation.
Speaker Change: Our story is simple and defines our strategy.
Speaker Change: To help our clients grow their brands and marketing activities with customized color graphics.
Speaker Change: And we help optimize their document related workflows with scanning and once onsite print management services as a result, our addressable market has grown tremendously.
Speaker Change: Looking at our individual business lines digital print services grew three 3% and color led the way.
Speaker Change: 140 digital print centers, we're well placed to help our clients to get what they want done wherever they are needed.
Speaker Change: Competitive cost and with a single point of contact.
Speaker Change: In 2024, we improved our production capabilities and capacity with prudent investments in equipment and labor and those investments are already showing returns in new business.
Speaker Change: Meanwhile, we are taking mark.
Speaker Change: Market share from vendors, who print and ship from one location.
Speaker Change: <unk> key parts of production or require outside expertise to get the job done.
Speaker Change: Customers, who work with us get everything they need in one place at a fair price and without having to manage multiple vendors.
Speaker Change: Planned printing that is directly tied to the construction and design verticals. However continued to be pressured.
Speaker Change: While there is still activity future planning has slowed significantly.
Speaker Change: The architectural billing index was down for all three months of the first quarter and we saw a billing decline of more than 10% from our architecture our clients for the period.
Speaker Change: Until interest rates start to come down we will not see growth in this revenue segment.
Speaker Change: That said, we are protecting our share of plant printing and expanding our customer base where possible.
Speaker Change: We fought back hard with color and scanning so that this business line did not dragged us into a revenue loss.
Speaker Change: Onside print services sales continue to decline, but the offering demands are attractive to many of our customers. We continue to add new customers as well and we expect to moderate the first quarter's drop over the next few quarters.
Speaker Change: By contrast, our document scanning revenue segment increased significantly in the first quarter growing 23% year over year.
Speaker Change: The growth remained steady throughout all three months as we sped up clearing the backlog.
Speaker Change: In our production centers with the new capacity, we've added last year.
Speaker Change: Our contract backlog for future quarters is promising.
Speaker Change: There isn't a customer vertical that does not have intentions to improve access to their critical information whether that information is private or public all clients are improving their digital workflows and getting paper converted to digital documents and the market remains robust.
Speaker Change: As a result, there are many scanning companies in the market.
Speaker Change: But we are continuing to create more and more distance between us and them.
Speaker Change: Documents GED scanning is easy, but few companies are creating processes to capture information efficiently and that our scale as well as building technology to access information on demand the arc is.
Speaker Change: We use webinars and customer white papers to both educate customers on how to organize and prepare to digitize large volumes of documents and how to select a responsible vendor who will not abandon them in the middle of a project complexity and size.
Speaker Change: Equipment and supply sales a defensive revenue source for OXXO or dropbox, 3% year over year.
Speaker Change: Construction printing, we will see moderation in this revenue segment as rates begin to ease.
Speaker Change: Our marketing activities are continuing to help us to secure new leads for our sales reps.
Speaker Change: Email marketing online advertising, Google based SCO keyword searches and positive online customer reviews are helping us to open more doors.
Speaker Change: Our focus has been on organic marketing results and creating long term opportunities.
Speaker Change: With regard to profitability most of our investments in hardware have been completed.
Speaker Change: During the last two quarters. We've also filled most of our sales vacancies and upgraded key positions in our color production team.
Speaker Change: Our scanning operations also added additional head count to get ahead of the production backlog and prepare for our existing contract backlog.
Speaker Change: These moderate but important investments decreased our first quarter gross margin by a little more than 1% and may continue to put mild pressure on our profitability throughout the year.
Speaker Change: We are now focused on improving the skills of our newer employees as the cross train them to performing several departments.
Speaker Change: Very focused on employee retention and building a better future for them. So we can ensure a better future for arc.
Speaker Change: These are very important strategy for our company as we continue to invest in training community diversity and wellness programs.
Speaker Change: At <unk>, we know exactly where we are headed and how we will remain relevant to our customers, while improving our long term performance.
Speaker Change: This past quarter, you witnessed several positive results of our strategic execution and foresight in an environment that certainly wasn't bad.
Speaker Change: <unk> had its share of challenges no.
Speaker Change: No matter what lies ahead of our management teams.
Speaker Change: Around the company continue to be focused on becoming the best digital print company in the U S. While delivering significant value to the company shareholders.
Speaker Change: Now I'll ask George to give you an update on our financial results George.
George: Thank you Dale as we've pointed out we continue to transform the top line of the company, while things like interest rates a slowdown in the economy and global event can mute general progress none of that stopped us from maintaining our forward momentum.
George: As <unk> outlined a moment ago during the second half of last year, we began to make the prudent and necessary investments to drive future growth and secure a competitive position in the markets we serve.
George: Equipment acquisitions were a part of that process, but hirings and ongoing inflationary labor cost were the driving force behind the 110 basis point decline in our gross margins.
George: The nature of the investment as long term, but ultimately our increase in expertise efficiency and productivity will pay dividends in the future.
George: Looking ahead at the rest of the year, our current labor expenses will not rise in a dramatic way at all but we don't expect to reduce them significantly either.
George: As always we will continuously look for ways to improve efficiencies and ways to reduce material and overhead costs.
George: We may not be able to match last year's gross margins, but we do expect a decline in margins from the first quarter to moderate for the balance of the year.
George: SG&A for the quarter fell slightly due to reduced professional service expenses, partially offset by labor cost increases, even though operating income increased by $300000 or eight 6% outpacing our growth in sales.
George: Earnings per share were a penny higher than prior year and EBITDA was essentially flat.
George: We continue to maintain a rock solid capital structure, our cash balance is more than $50 million. Our net debt is less than $10 million our leverage ratio net of cash is under five times.
Speaker Change: Our cash flow from operations came in at $3 7 million for the quarter roughly in line with the prior year consistent.
Speaker Change: Consistent with historical trends Q1 is our lowest quarter as cash flows from operations ramp up as we progress through the year.
Speaker Change: For the fourth year in a row, we plan to issue an annual dividend of <unk> 20.
Speaker Change: And we will continue to purchase our own stock in the open market our commitment to returning shareholder value is firmly in place.
Speaker Change: To sum up the quarter, we are very happy with the start we had to 2024.
Speaker Change: Our strategic business lines are growing our pipeline is robust.
Speaker Change: We made the necessary investments to strengthen our operations and sales force and are taking steps to mitigate the impact of increased labor and material costs.
Speaker Change: At this point I'll turn the call back to Suri suri. Thanks.
Suri: Thank you George operator, we are ready for any questions from our listeners.
Suri: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to Asia and joined the queue. If he would like to withdraw your question simply press Star. One again, if you are called upon to ask a question and you are listening via loud speakers.
Speaker Change: Device, please pick up the handset and ensure that you're following it is not on mute when asking your question.
Speaker Change: Press Star one to join the queue and your first question comes from the line of Greg Burns of Sidoti.
Gregory John Burns: Sidoti Company.
Gregory John Burns: Please go ahead.
Gregory John Burns: Good afternoon.
Gregory John Burns: The.
Gregory John Burns: The color printing.
Gregory John Burns: A portion of the business can you give us any.
Gregory John Burns: Color around.
Gregory John Burns: Customer types.
Gregory John Burns: Are you, having more tracks greater traction with enterprise type customers.
Speaker Change: Where were you seeing the growth in that market and then.
Speaker Change: Yeah, maybe we could just start there.
Speaker Change: Yes, you would like yes, thanks, Craig so the nice part about the color of growth that we're seeing we saw in the first quarter is that there is no one special category of customers.
Speaker Change: The good part is that virtually almost all the verticals are continuing to grow but if I summarize outside of what we are doing why why these customers are doing it's all related to market activities marketing activities.
Speaker Change: Trade show business.
Speaker Change: Sports stadiums sports centers events are continuing to.
Speaker Change: To flourish and almost all of those events are all directly tied to large format color graphics and on the advertising and theyre, making those events lot more beautiful we add we had so many opportunities in the sports arena stadiums as well during this quarter. So overall there is no one specific segment.
Speaker Change: Obviously, there are some very high profile job set we did for sports stadiums and so forth. While we were almost all the verticals are doing very well.
Speaker Change: Okay, and then can you just maybe give us an idea of.
Speaker Change: Y O y.
Speaker Change: Why maybe a customer choose zero over over some someone else in the market. I know you highlighted there is definitely a competitive market, but why does arc wind.
Speaker Change: And then maybe can you talk about.
Speaker Change: Your pipeline of opportunities there and your win rates are you happy with.
Speaker Change: <unk> been performing thank you.
Speaker Change: Yes, so one of the things that wild days spending from marketing activities from various customers one of the things that we clearly see is that every client is very focused on making sure that the spend is valued properly that that they get the get the best.
Speaker Change: Value. Unlike in the past right. So one of the key.
Speaker Change: Benefits that this we've seen the customers getting from argue the fact that our operating expenses, we keep it very very low and that we are able to price it very very.
Speaker Change: Very competitively, especially when these customers have worked in multiple parts of the country because they may be designing from one area, but the project or the trade show it might be in another city completely for auto it from where they were.
Speaker Change: And many of them in the past.
Speaker Change: Used to print from their local print provider and that they would ship it across the country and get it installed by someone else. So there was a lot of cost built into those type of projects. So with US we have been able to completely eliminate that shipping expenses and some of the project management times and cost as well so we've been able to win.
Speaker Change: Some of those work bye bye.
Speaker Change: Being very smart in the way, we price and also adding value to.
Speaker Change: <unk>.
Speaker Change: Workflow. So therefore, we are able to win some of the newer projects, especially on the largest larger projects by being able to produce that work right close to where the event is with.
Speaker Change: With regard to the pipeline.
Speaker Change: Pipeline is continuing to grow and we have a very good mixture of local work regional work and some other projects on national as you know we've been always focusing on trying to drive up our sales organization from very local business to more regional and then to go after some of the national work as well. So we're continuing we're seeing.
Speaker Change: Some opportunities our sales reps are getting trained marketing activities are bringing good opportunities at a regional and national level as well for our sales team so from a pipeline backlog.
Speaker Change: Visibility, we see for the rest of the year is very very good for the company.
Speaker Change: Okay, and then just lastly, you didn't buy back much stock in.
Speaker Change: In the quarter.
Speaker Change: I know you have an authorization, but what's.
Speaker Change: Holding you back and maybe how do you how do you view your your buyback.
Speaker Change: And how you look to deploy that thank you.
Speaker Change: Yes during the first quarter, we ran into the same issue we ran into last year. If you see the numbers. We also didn't buy any back in the first quarter and it's a timing issue we file our 10-K at the end of more in the beginning of March.
Speaker Change: Our window closes a week before the quarter ends just doesn't give us any time to buy back shares how do we look at it for a full year, we're still committed to it we're committed to.
Speaker Change: Matching or exceeding what we did last year it'll just be back loaded in the second half of the year same as it was last year.
Speaker Change: Okay. Thank you.
Speaker Change: Your next question comes from the line of Glenn Primack Oskaloosa investments. Please go ahead.
Glenn Warren Primack: Hi, good afternoon guys.
Glenn Warren Primack: Two questions.
Glenn Warren Primack: First one have you seen over the past like I don't know 12 to 15 months any jobs come through in relation to the.
Glenn Warren Primack: Infrastructure investment jobs Act.
Speaker Change: Do anything so.
Speaker Change: We have been.
Speaker Change: We don't we Havent seen much work four color digital color services, but when it comes to plan printing some of the chip chip manufacturing plans that.
Speaker Change: Getting built around the country, we are very close to them to me have been enjoying some of the construction related printing work.
Speaker Change: Okay great.
Speaker Change: Again, I would say those transformations gone pretty well so.
Speaker Change: Good job to you CRE and dealer.
Speaker Change: And the whole team.
Speaker Change: As you look forward.
Speaker Change: Do you have any let's just call it artificial intelligence tools or services that you can begin to offer to the customer base or use internally.
Speaker Change: We can use tools like that plane in now for example, scanning services and so on and so forth. We are exploring some of those we introduced under the tools.
Speaker Change: But obviously in anything related to printed printing days not a whole lot to do but in terms of scanning and imaging and actually extracting information from their days some amount of activity there.
Speaker Change: Sure. So like you might not see it from that customer perspective, but.
Speaker Change: Need this stuff scan donor to like.
Speaker Change: Get.
Speaker Change: The data to run models at their businesses.
Speaker Change: Sir.
Speaker Change: Yes, exactly yes.
Speaker Change: Right.
Speaker Change: Okay go ahead.
Speaker Change: Ahead and put the artificial intelligence on the left side of the Cup.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Again, if you would like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the line of.
Speaker Change: Oh I apologize he has withdrawn his question.
Speaker Change: So Pam were saying Robert Paul.
Pam: Yes, yes.
Pam: Yes.
Pam: Yes.
Pam: Okay. So he.
Pam: Your next question comes from Robert Maltbie from singular research. Please go ahead.
Pam: Hi.
Robert Maltbie: You can tell.
Robert Maltbie: You mean for Dave Dave March couldn't join us today.
Robert Maltbie: Okay.
Speaker Change: On commodity here is.
Speaker Change: Thank you.
Speaker Change: So.
Speaker Change: Congrats on the solid quarter. It looks like you beat the estimates on the street.
Speaker Change: I know that's not the game short term, but.
Speaker Change: It looks like a pretty good ramp so congratulations to the team.
Speaker Change: Thank you.
Speaker Change: First question I had was gross margins were flat sequentially and down year over year can you explain why.
Speaker Change: What can you do to expand them going forward.
Speaker Change: Yes, I mean from a year over year perspective, I mean, we've talked a lot about the investments we did in the second half of the year to bolster not only our operating capabilities, but our expertise and also adding.
Speaker Change: New sales.
Speaker Change: <unk> to the organization. Some of these paid quick dividends those out were more in the production area. Some of these investments are more long term or just trying to gain more expertise getting more efficient over a period of time as we become more proficient more knowledgeable and doing scanning and doing the color graphics.
Speaker Change: That coupled with inflationary pressures on material and labor costs drove our costs up.
Speaker Change: We were able to leverage our overhead.
Speaker Change: With the increase in revenues, but ultimately, resulting in a decline year over year in margins now.
Speaker Change: First quarter is usually our softest quarter, and we started off the year slower with their margins. So we fully expect on a sequential basis for our margins to increase. Additionally, we're doing other things to try to improve efficiencies internally.
Speaker Change: Looking at various vendors to reduce material costs.
Speaker Change: Looking at some other overhead costs. So just to name a few there are some initiatives we have in place to hopefully mitigate the increase of the inflationary pressures in.
Speaker Change: Our year over year return in our margins with that said do.
Speaker Change: Do we expect to match last year's gross margins when we look in the balance of 2024 year over year, probably not but we also expect to them for them to moderate if you do not expect them to be a 100 basis points below prior year as we as we progress through the year hopefully that answers your question.
Speaker Change: Yes. Thank you and do you think the positive sales momentum realized in Q1 Q1, rather will continue throughout the year.
Speaker Change: Yes, we hope we hope to continue that obviously our legacy.
Speaker Change: Planned printing segment will always be challenged is very hard to predict during the year, but how we well as strategic services that we've embarked on several years ago.
Speaker Change: <unk> seen in the last quarter, we'll continue to do well for us for our company.
Speaker Change: Yeah, great and could you.
Speaker Change: Perhaps remind us a little bit about your I guess calculated on share repurchases as a.
Speaker Change: Capital cost of capital.
Speaker Change: Yes.
Speaker Change: There's other opportunities when would you choose to repurchase shares.
Speaker Change: I mean, we're opportunistic opportunistic or we buy them on the open market. What we've kind of said since last year. We were holding the same we spend about $12 million last year on returning shareholder value.
Speaker Change: $8 million of that roughly was coming from dividends and the other balance roughly $4 million was stock repurchase or repurchasing our own stock in the open market.
Speaker Change: And by and large we plan to stick to that mantra coming into this year 2024, if you look at that as a percentage of our adjusted free cash flows we spent over 75% of our adjusted free cash flows and returning shareholder value in 'twenty three and we.
Speaker Change: We'll be in that similar range as we look at 24 for the full year as I mentioned earlier slow start to the year, just because timing wise, we really didn't have an opportunity to repurchase shares. When you look at the timing of when we filed the K and when our window closes.
Speaker Change: Thank you and finally.
Speaker Change: All this talk about AI and <unk>.
Speaker Change: The benefits from various perspectives in terms of your operations are you utilizing any AI or planned June and are realizing any any strategic benefits.
Speaker Change: So like I said in the in the previous.
Speaker Change: Person, who asked me the question.
Speaker Change: <unk> AI.
Speaker Change: We used the AIA largely is basically in the scanning business, where we not only can these documents in many of the customers when they want to extract information from these drawings and be able to do that using AI and.
Speaker Change: Really AI driven optical character recognition that what we do.
Speaker Change: So for our facilities customers, we do that quite a bit in order to really extract billing information from growing and then be able to delivery to them, but that's all in the scanning and facilities related business.
Speaker Change: In the printing business, we don't utilize a whole lot of AI.
Speaker Change: AI is part of the back office and trying to improve stuff, we use it in some of our marketing and so on.
Speaker Change: Im exploring some ways to use it in the finance and accounting. So I guess the quick answer is yes, we are using AI and just like everybody else. We're we're exploring.
Speaker Change: We are analyzing it.
Speaker Change: On a monthly quarterly basis, and see where we can utilize it to make us make ourselves more efficient.
Speaker Change: Terrific.
Speaker Change: Thank you gentlemen for taking my questions and then I'll go back in the queue.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: There are no more questions I will now turn the conference back over to David for closing remarks.
David Stickney: Thank you Pam and thank you everyone for joining us. This evening. We appreciate your continued interest in arc and encourage you to reach out with any questions or request for information.
Speaker Change: And.
David Stickney: We look forward to speaking with you here next quarter and anytime in between thanks, So much have a great evening Goodnight.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
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