Q3 2023 ARC Document Solutions Inc Earnings Call
Participants
David Stickney; VP, IR & Corporate Communications; ARC Document Solutions, Inc.
Suri Suriyakumar; Chairman & CEO; ARC Document Solutions, Inc
Dilo Wijesuriya; President & COO; ARC Document Solutions, Inc
Jorge Avalos; CFO; ARC Document Solutions, Inc
Greg Burns
David Marsh
Presentation
Operator
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. (Operator Instructions) Thank you. Vice President of Investor Relations. David Stickney, you may begin the conference.
David Stickney
Thank you, Jordan, and welcome, everyone on the call. With me today are Suri Suriyakumar, our CEO and Chairman; our President and Chief Operating Officer, Dilo Wijesuriya; and Jorge Avalos, our Chief Financial Officer.
Our third quarter results for 2023 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, and they are only predictions based on information as of today, November 2, 2023, and actual results may differ materially, as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings. Any 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 Suriyakumar.
Suri Suriyakumar
Thank you, David, and good afternoon, everyone. Overall sales for the quarter dropped 3% or about $2 million, adjusted for one working day, this year less than we had last year, the drop would have been just 1.3%. This puts us in a very similar situation to the sales we posted 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, our strategic areas of growth remain robust, as new customers continue to heavily invest in visual communications. And the demand for digitizing files is coming from every industry we sell.
Volume in black-and-white 20, made up largely of the reproducing [fans], and other construction based documents fell as we predicted it would, during our second quarter report in August. This was primarily due to the sustained increase in interest rates, resulting in uncertain and volatile economic conditions in construction.
That said, our margin, earnings, and cash flows will (inaudible) despite the drop in sales, and they remain more than capable of supporting our commitment to our shareholders value via annual dividend and continuing stock purchases. Using these commences framework for further discussion, I will now turn the call over to Dilo, and Jorge, for a more detailed review of the quarter. Dilo?
Dilo Wijesuriya
Thank you, Suri. I'm pleased to provide you with an update on ARC's recent performance and strategic direction for the third quarter. While higher interest rates, reduced investments, and cautious spending by many customers, made for challenging market condition, 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 us diversification efforts.
We have secured large digital color projects in a wide variety of markets, including events, [trade shows], schools, and sports stadiums. These projects are characterized by the use of multiple graphic products and services across various locations, generating positive customer reviews and strong demand.
Our digital color success extends to smaller venues as well, with numerous satisfied customers further validating the demand for our services. Document scanning also experienced high demand from municipalities, cultural institutions, and historical archives, along with smaller, ongoing projects.
Midway through the year, we expanded our document scanning capabilities and increased capacity at key locations. This expansion has enhanced our efficiency and throughput, for document 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 on-site services revenue declined year over year, as our return to office initiatives continue to fluctuate.
However, we have successfully renewed several large on-site service agreements, using our certified equipment program, enhancing client satisfaction, and improving our margins. Additionally, our service center network has attracted overflow work from customers, further contributing to higher operating margins.
In the construction based plant printing business, we faced challenges due to low construction activity, including commercial, and residential construction, and fewer office remodels. Despite this plant printing remains a profitable service line, and we continue to streamline operations, and control capital expenditure, to keep costs in check. We have cross-trained our employees and leverage our footprint to maintain efficiency. Our efforts in production management have been fruitful, 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. Our service centers increased capacity and efficiency, position us well into 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 plant printing segment. Our office -- of focus remains sharp on the top line, while maintaining the financial discipline that has been a hallmark of ARC's bottom line.
We are committed to leveraging our experience and expertise over 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 Jorge. Jorge?
Jorge Avalos
Thank you, Dilo. While 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.
The quarterly earnings felt the impact of lower sales and EPS fell $0.02. Cash flow from operations of $8.7 million for the quarter, is suffering from a difficult comparison to prior year. Due to the timing of collections and payables, the 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 encourage 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 $0.2 dividend, and continued repurchasing of our shares.
Year to date comparisons not only better represent our performance in 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, down just 5% year to date. Obviously, this performance does not reflect the expectations we had in January, but faced with the larger issues affecting the economy and constraining capital spending, we are in a much better position to resume our growth, than 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 inter-quarter basis to save on interest costs. Net debt at $11.6 million, and our leverage rate or leverage remains well under 1 times, both very low numbers.
We also paid out $2.1 million in quarterly cash dividends, and we used slightly more than $1 million during the quarter to repurchase shares via these methods, we expect to return more than 50% of our adjusted free cash flows to shareholders by the end of 2023.
And well on our way to exceed $10 million of shareholder returns in 2023. Our top line may 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'll turn the call back to Suri. Suri?
Suri Suriyakumar
Thank you, Jorge. Operator, we are now available for all listeners' questions.
Question and Answer Session
Operator
(Operator Instructions)
Greg Burns, Sidoti Company.
Greg Burns
Afternoon, when we look at the 2.5% decline in digital printing this quarter, could you give us a breakdown of what the growth was from color printing, and what the decline was from your ARC markets?
Dilo Wijesuriya
Yes. Good afternoon, Jorge do you like to answer?
Jorge Avalos
Sure as we've always said, roughly 50% of that line item is our legacy plant printing, high blue printing type of business. The other half is color graphics. In regards to the legacy traditional reprographics, that revenue was down between 6% and 8%. Color was up in that 3% to 5% range.
Greg Burns
Okay, and then for scanning, it was down a little bit sequentially, and grew less than we were expecting. Is that is that business is project-based? I'm just trying to get a better feel for how to think about the growth profile of that business going forward?
Dilo Wijesuriya
Yeah, so last year, actually know the scanning revenue, the billing rates are continuing to be the same. It's continuing to grow. One of the issues that we had was that last year during the third quarter, we had one significant customer project that we completed and billed, as a digital service that was not there this year.
So that's why you see year-over-year, the growth rate has declined. But if you look at it from the scanning services, otherwise, we are still in that in 9% to 10% growth rate.
Jorge Avalos
And 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 mark, as Dilo mentioned, that one job that was kind of an oddball last year, roughly $500,000 that we booked in Q3 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.
Greg Burns
Okay. And then when you look at the opportunities for growth in colors, and scanning deals. Maybe it's difficult now, but do you have line of sight on, when you might -- when you think you maybe get back to a little level of growth here, or offset the declines, I guess that you're seeing kind of the more traditional plant printing.
Suri Suriyakumar
Dilo, you would like to answer?
Dilo Wijesuriya
Yeah, so if you look at our revenue lines, as you know, there are kind of three or four buckets of primary revenue. So when we look at the revenue lines that are currently under challenged, it is primarily the plain paper printing market, as well as the equipment sales. That segment of the business is directly connected to the construction industry. Right?
So as we see the interest, obviously, one of the primary reasons for that the challenging situation is the increased interest rate, that has totally reduce the opportunities for brand new construction, and tenant improvement and so forth. As we see going into the new year, interest rates probably stabilizing, and there might be -- we might see some increased activity in construction. As soon as we see some stabilization in that construction market, we would definitely see some growth within our organization.
So when you take the other, -- our strategic growth line, when it comes to kind of digital color, the market opportunities are continuing to be very strong. Marketing activities are bringing a lot of new leads. Some of the projects that we execute are very significant, significantly sized projects. Many of the top brand organizations are continuing to bring us sizable work, really focusing on rebranding of their marketing activities. They're doing a lot of trade shows.
We see a quite a lot of activity there as well, and a lot of fair amount of office renovations that takes place, revolving around color graphic. So the future opportunities, the pipeline. Yeah, very good, and very, very strong for company.
Document scanning side is continuing to grow, is bringing us a lot of opportunities, leads through marketing activities. Pipeline is very strong, booked revenue that the contracts that are already booked, to be scanned is also at a healthy level.
So therefore, going into the new year, 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, our hope is that we will continue to see some positive growth overall.
Greg Burns
All great. Thank you.
Operator
David Marsh, Singular Research.
David Marsh
Thank you. Hey, guys. Thanks for taking the questions. During the quarter, we did not have any significant customer wins that you could talk about. And if so, could you talk about sectors that those might be in?
Dilo Wijesuriya
So I will stop there to speak about a specific customer per se, because remember as a company, we don't necessarily focus on one big job. Right? Because as you know, we have 100 sales consultants, that sales out of 140 locations, and obviously we focus on the 53 vertical. So our customers come from all segments, from all types of jobs from very simple jobs locally that we do, versus regional type of campaigns as, versus national campaigns as well.
So I can I cannot pinpoint to one specific area, when we spin, we look at our color growth, it's coming from all segments, all types of customers, all sizes of jobs as well.
With regard to what I can see from the wins that we get on the digital color side is that, the brands that we are continuing to sell to, and getting excited about working with us, 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, whether it's things happening in the UK, whether it's things happening in Canada, or whether things are going on in the US, US 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.
David Marsh
Do you guys get any kind of uptick at all from political activity? Are you realizing any revenue from increased advertising in political spaces, or that not really a big driver for you guys.
Dilo Wijesuriya
David, that market is not a significant market at all for us in US. Yes, we do have occasional political banner or two, but that work that you see where people have they stick in front of your garden and all those are very cheap printing. They are they on every chip material, cheap long runs, and we don't necessarily play in that market, because the margins are extremely thin, and that's that we don't concentrate very much in that market.
David Marsh
Got it. Just turning a little bit to a balance sheet, could you talk about the share repurchases? What was the average purchase price per share?
Jorge Avalos
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 10-Q here in the next day or so. But roughly in that $3 range.
David Marsh
Yes. And can you refresh me on remaining authorization there? Jorge?
Jorge Avalos
We have about $9 million left.
David Marsh
9 million authorized. Okay
Jorge Avalos
Yes, it was authorized $15 million. Obviously, we've been buying shares that we have about $9 million left.
David Marsh
And then I noticed that the interest expense ticked down in the quarter. I appreciate the comment that used cash throughout the quarter, to bring the revolver down, is there is there anything further you could do there to continue to drive that lower?
And is that something that you're considering at the moment or is it -- are you 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, a $50,000 improvement in interest expense in the quarter.
Jorge Avalos
Yes. And really what we're doing is I think I've said the comment multiple times that I kind of view us as not having any bank debt, because as I said in my script, the cash we have on hand in our 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, you know, kind of your comment of could we bring it down?
As you said, right, if you look at our net cash number were already at $11 million. I mean, how much lower can we go. And a quick correction on the average share price that we bought back on the shares for the quarter, it was actually at $3.40.
David Marsh
Got it. Thanks. I appreciate it. I am going to pause there and see if anybody else wants to jump in.
Operator
There are no further questions at this time. I will now turn the call over to David Stickney for closing remarks.
David Stickney
Thank you 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. Good night.
Operator
This concludes today's conference.
David Stickney
Yes, and our progress forward here, we look forward to talking with you.
