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Edited Transcript of ARC earnings conference call or presentation 6-May-19 9:00pm GMT

Q1 2019 ARC Document Solutions Inc Earnings Call

WALNUT CREEK May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of ARC Document Solutions Inc earnings conference call or presentation Monday, May 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Stickney

ARC Document Solutions, Inc. - VP of Corporate Communications & IR

* Dilantha Wijesuriya

ARC Document Solutions, Inc. - COO

* Jorge Avalos

ARC Document Solutions, Inc. - CFO

* Suriyakumar Kumarakulasingam

ARC Document Solutions, Inc. - Chairman, CEO & President

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Presentation

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Operator [1]

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Good afternoon. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Q1 2019 Earnings Report Conference Call. (Operator Instructions)

David Stickney, Vice President, Corporate Communications and Investor Relations, you may begin your conference.

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David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [2]

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Thank you, Sheryl, and welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilantha Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer.

Our first quarter results for 2019 were publicized earlier today in a press release. The press release and other company materials are available from our Investor Relation pages on ARC Document Solutions' website at ir.e-arc.com.

Please note that today's call will contain forward-looking statements that fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on information as of today, May 6, 2019, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

This call will also contain references to certain non-GAAP measures, which are reconciled in today's press release and in our Form 8-K filing.

I'll now turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [3]

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Thank you, David, and good afternoon, everyone. While we had a short quarter to start with, we made the most of it. With 1 less day of sales in the period, we still managed to grow our EBITDA, expand our gross margins and improve our cash flow over last year. Our performance was no accident, considering we did all this on a small decline in consolidated sales and higher SG&A costs.

Our first quarter sales performance featured double-digit growth in AIM and a strong showing in Equipment and Supplies sales particularly in China. CDIM took a small step back from the growth trajectory we established in 2018, but as we have discussed in the past, we don't expect to overcome continuing trend declines all at once. This quarter, macroeconomic conditions, a little bit of weather and, as noted, 1 less day in the period added up to a decline in this part of our business. None of these things were impossible obstacles in themselves, but taken together, they slowed us but did not stop our progress.

Likewise, in MPS, we continue to increase the acquisition of Regional Flyers in our traditional market and explore new industries where offering can make a difference. However, we are not capturing the national contracts we have seen in the past nor do we expect to.

The landscape for larger companies continues to change as a result of the economic and technological drivers, not to mention dramatically increased M&A activity. To put that in perspective, more than 1,000 [ENC] companies were involved in a transaction of one kind or another in 2018, adding up to more than 500 deals in the past year alone. Since the recession, the industry has dropped about 400 annually.

Targeting smaller, regional clients and battling lower print volumes means we must capture more of the different kinds of clients, but our progress in this area has been encouraging.

Overall, I remain positive with regard to our long-term strategy to protect and perhaps even grow print revenue. We are challenging the status quo as the quarters leading up to this one, not only have demonstrated our resilience, but also have proven how agile we have become in capturing new opportunities in markets that are often old.

On another note, our employees are engaged and the morale is high. But as we all know, the employment environment we are working on is challenging. Retention is a constant issue as our people don't have to look for jobs. Instead, they are being sought after as demand consistently outstrips supply.

Throughout last year, we made changes to our compensation plans and our benefit plans to both keep good employees in place through new pay-for-performance initiatives and to make sure all of our employees understand how much we appreciate their efforts. You'll start to see the effect of those changes in the coming quarters.

In the next few minutes, you will hear about our latest technology release and how, as counterintuitive as it sounds, using the technology is to increase our print business. You'll hear about the achievement of private certifications, such as HIPAA, to help us in drive more work into our service centers. You'll also hear about our financial performance that delivered profitability gains this quarter. Also, a new authorization from our Board to consider [share-based] features. This is all activity that has potential to deliver another positive year for ARC and its shareholders and, with these points in mind, I'm maintaining the financial outlook we announced in February 2019.

With this as a backdrop for further discussion, I'll turn the call over to Dilo for some additional color in our operations, and then we will conduct a brief overview of the financials with Jorge before taking your questions. Dilo?

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [4]

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Thank you, Suri. As the quarter was 1 day shorter than last year, we were able to improve our sales on a daily basis throughout the period. We did so even while challenged with a few disruptions from operations in some of the Northern states due to tough weather conditions and pressure from a decline in homebuilding on the West Coast. Our project printing exposure to the residential market is relatively low nationwide, but a cooling market in California after several very strong years affected our service centers there.

In the first quarter, we introduced our new ARC print app to our customers and prospects. Many of our customers travel between their offices and project site and managing print jobs on the go is very challenging. Our new app will help customers to place orders, track them and request quotes through their mobile devices. Also, our app will connect our customers to each of our 190 print centers worldwide. With a few taps on their phone, they can get ARC to print and distribute prints anywhere they work.

Our customers manage their digital documents in multiple cloud platforms, such as SKYSITE, Google Drive, Box and Dropbox. That's why the app features access to virtually any documents stored in the cloud and provide seamless connectivity between the digital documents and our print centers. The habits and demographics of our customers are changing, and in the future, mobile apps will play a significant role in the way customers interact with ARC print centers.

This quarter, we are also pleased to announce that 4 of our AIM production centers were approved as HIPAA compliant. This enables us to start selling our AIM services to companies that have protected health care information. We are currently working on receiving HIPAA approval for our SKYSITE cloud application as well.

We had good growth in sales for AIM services in the first quarter. New revenue from our facilities solution as well as scanning and archiving services are helping us to expand this revenue line. ARC operation teams were the source of our healthy margins during the quarter as they kept a close watch on costs throughout the period. Our ongoing focus is new customer acquisition, selling additional services to our existing customers and managing an efficient production process at our service centers. We know that our customers are busy, and we continue to focus on our efforts on improving our market share to protect print revenues in the future.

With that as a backdrop for operations, I'll turn the call to Jorge. Jorge?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [5]

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Thanks, Dilo. Overall sales for the quarter declined less than 1% year-over-year for the reasons Suri and Dilo outlined. The decline in sales was partially offset by growth in AIM and an increase in equipment sales in China.

Normally, low-margin equipment sales would have a dilutive effect on our margins. But thanks to aggressive measures to reduce our cost structure, gross margins not only remained strong but, in fact, outpaced our 2018 Q1 performance by 70 basis points.

Our adjusted EBITDA also grew year-over-year, turning in a $330,000 or 3% increase from prior year. This is a remarkable achievement considering that we had $590,000 decrease in sales and a $340,000 increase in SG&A as we continue to work through high medical expenses among other items. We anticipate higher medical costs than usual through the end of the year. But to the degree we can predict these things, we expect these costs to be in line with 2018 with a possible moderation as the year progresses.

We ended the first quarter with nearly $19 million in cash on our balance sheet, an increase of $4.8 million over prior year Q1 and paid down our senior debt by another $5 million during the quarter. Cash flow from operating activities were $2.7 million for the quarter or up $4.6 million as compared to prior year. We expect to end 2019 with the strong cash flows reflected in our annual guidance.

As a reminder for those of you developing your forecast, the recent Tax Reform Act would lower effective tax rate to 31% for the year, and our historical operating losses of nearly $80 million remained at our disposal. Therefore, cash taxes will not be material in the foreseeable future.

Two other changes are worthy of note for 2019. First, due to the recent changes in lease accounting rules, you'll see a gross-up on our balance sheet of approximately $50 million. The new guidance now requires us to record on our balance sheet all our operating leases as a right-to-use asset with a corresponding operating lease liability. This new guidance had no material impact to the income statement or cash flows.

Second, our Board has authorized a share repurchase plan that runs through March 31, 2021. We are authorized but not required to opportunistically purchase up to $15 million of our stock through the defined period. As we did in the past, we will use excess cash for both share repurchases and a continuation of aggressive debt pay-down as we deem appropriate based on market conditions. For those of you who are new to the company, ARC had a similar repurchase authorization plan in place from the beginning of 2016 through the end of 2017, over which time we purchased approximately $9 million of our own shares.

I'll wrap up with a reminder that our guidance for the full year remains in place with earnings per share at $0.17 to $0.22, cash flow from operations to be in the range of $47 million to $52 million and $52 million to $57 million for adjusted EBITDA.

With that, I'll turn the call back to Suri. Suri?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [6]

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Thank you, Jorge. Operator, at this time, we are happy to take our listeners' questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from [Glenn Primack of PDT Capital].

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Unidentified Analyst, [2]

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The gross margin, is that -- again, is that based on mix? Or is that more -- you guys really tackled the cost of goods sold line?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [3]

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We really tackled the cost of goods sold line. Actually, the mix was unfavorable since it was overweight...

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Unidentified Analyst, [4]

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For the equipment.

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [5]

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Yes, which usually drops our margin. So hence, why we were pretty happy with the performance from a margin perspective.

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Unidentified Analyst, [6]

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Okay. And then, yes, because now it got eaten some by the SG&A. And that's still -- is that a continuation from last year's medical? Or is it just basic health care in America where you just pay more?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [7]

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Yes. And it's a continuation from last year. We still have those high claimants. I mean -- so it's not increasing over last year, but it's in the range of last year. And then we had a few other little miscellaneous things that are really worth mentioning that caused that $300,000 increase.

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Unidentified Analyst, [8]

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Okay. And then the CDIM, are you holding your share, you think, in California?

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [9]

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I think for the most part, we have...

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Unidentified Analyst, [10]

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Because that was down a little bit, and you mentioned macroeconomic conditions, but like that's one of your power areas. So I'm just...

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [11]

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No. I definitely think we're holding onto our share. You also have to consider we had 1 less business day also impacting that, that with a little softness in the West Coast, as we talked about in the housing. So it's not like we're losing customers. It's just more macro dynamics there.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [12]

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Yes. I'm pretty confident that, [Glenn], in terms of market share, I think we are in a good place there obviously because we have this so many new initiatives. And obviously, from a competitive standpoint, we can pretty much withstand any kind of pressure whether it's pricing or otherwise. So I don't think market share is an issue, but it's just macroeconomic conditions is what it seems like stuffing up a little in certain areas.

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Unidentified Analyst, [13]

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And if you had that 1 more day back, I'm guessing you would've had a little bit more flow-through into EBITDA from gross margin dollars. Is that...

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Jorge Avalos, ARC Document Solutions, Inc. - CFO [14]

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Definitely. As you know, our infrastructure, our facilities, the cost is monthly what it is, our equipment cost is what it is. So when you get that additional revenue in, it comes at a pretty high contribution margin. So yes, that would be a good or correct comment.

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Unidentified Analyst, [15]

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And then last one. The announcement today with the capital equipment over at Riot. Was that spent during the first quarter? Or is that coming into the second quarter?

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [16]

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That's mostly would be in the second quarter.

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Unidentified Analyst, [17]

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Okay. And I'm guessing that gives you maybe some competitive advantage within the whole Riot...

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [18]

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Actually, yes. Yes, the new equipment that we invested is going to give us -- is going to strengthen us in our production centers. Cost of goods sold will be definitely positively impacted as well as securing new markets, new verticals for right color.

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [19]

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So mostly, this, [Glenn], if you think about it, all the point of purchase, all the graphics we do in large offices or businesses, they are becoming very popular now. And we certainly have opportunity to grow our market share there. This is again market share grab. And we want to make sure we the liquid to do that. And we've had really some really good positive results with regard to that. So we continue to do that.

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Unidentified Analyst, [20]

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All right. Just one last one. Like, Dilo, you think the technology that you have in place is underappreciated somewhat by folks like me because it's interesting when you talk about being able to communicate with the print centers and everything's going mobile and you got different ways to get there on the communication front and through different backdrops whether it's SKYSITE, the Google. Just talk about that a little bit because I don't know who else can do it. And if it's like -- you feel like that's some ARC secret sauce, it'd be good to hear.

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [21]

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So the way -- so it's an interesting question, [Glenn]. I mean the way we look at it, we really think, number one, the app is not to have a complicated work order field. That's not what we are thinking about. So basically, the theory is within 2 taps and a swipe or swipe and 3 taps or whatever that is. We should be able to get the information we want.

And interestingly, I don't know whether you know this, but whenever we do studies on this, we are finding much more people use mobile than we think they use. It's very interesting. Think about checking the weather. What do you use your mobile? To check the weather, order your food, get a cab, find out which restaurant you want to go to, listen to your music, get your boarding pass. So the use of app is really exploding. And literally, you do use apps for everything. It is not as predominantly in front of our face, but subconsciously, more and more people are using apps. And app simply means it's simple and easy and a few taps.

So what we have done with ARC app is really emulated that for our customers. So if you really want to know where your order is, just put your order number and hit, boom, we'll tell you where exactly it is. And if you want to deliver something, just press a couple of buttons, we can do that. You want to order something, pull out an order and then you can get do that.

So I think this -- there'll be more traction on this. We are finding more people are accessing the mobile devices these days than ever before.

So I think, again, there's no magic answer. We don't know that. We'll know soon. But for example, I mean, from our DSF, how much business do we get right now? This is customers directly ordering from the web.

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Suriyakumar Kumarakulasingam, ARC Document Solutions, Inc. - Chairman, CEO & President [22]

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Significant.

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Dilantha Wijesuriya, ARC Document Solutions, Inc. - COO [23]

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Significant, right? Significant amount of business comes in through that. So that's -- these are all -- so there are multiple little small pockets through which business is building, [Glenn]. Whether it's [VIM] or whether you do drone services or its visualization services, through the apps, through DSF, a bunch of different channels. But when put together, that's all very positive. And remember, there's no sales reps here. When you do sell like this, people getting used to using our products, anyway. That's a long answer to your short question.

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Operator [24]

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There are no further questions at this time. I would like to turn the call back over to David Stickney for closing remarks.

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David Stickney, ARC Document Solutions, Inc. - VP of Corporate Communications & IR [25]

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Thank you, everyone, for listening today. We appreciate your continued interest in the company, and we look forward to talking to you again next quarter. Have a great evening. Bye-bye

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Operator [26]

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