Q4 2023 ARC Document Solutions Inc Earnings Call
Participants
David Stickney; Vice President, Corporate Communications & Investor Relations; 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; Analyst; Sidoti & Company, LLC
David Marsh; Analyst; Singular Research, LLC
Presentation
Operator
Good afternoon, everyone. Welcome to the ARC Document Solutions report 2023 fourth quarter and year-end results conference call. At this time, I would like to hand things over to David Stickney, Vice President of Investor Relations. Please go ahead, sir.
David Stickney
Thank you, Lisa, 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 fourth quarter and full year results for 2023 were publicized earlier today in a press release press release and other company materials are available from our Investor Relations pages on ARC Document Solutions website at ir.e-arc.com.
Please note that today's call will contain forward-looking statements and are only predictions based on information as of today, February 28, 2024, 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 filing. I'll turn the call over to our Chairman and CEO, Suri Suriyakumar. Suri?
Suri Suriyakumar
Thank you, David. If there was a year that validated our efforts to transform the company, 2023 might have been it. The challenges were easy to see, but silver opportunities that balance them watching the progress we made in offsetting declines in our all the business lines with our more contemporary services, namely color and document scanning was extremely gratifying.
I can see a time in the not too distant future when our strategic business lines will come to dominate our revenue business conditions were fairly predictable for us after the first quarter of 2023, capital spending was constrained due to interest rate hikes. Market activity was strong, but focused on short term return to office initiatives lost much of their momentum.
And while the country and the general business environment seemed like it was improving, sentiment was muted as much as we prefer bigger long-term projects, seasonal and event driven marketing work helped us spur growth in our color services throughout the year. The trend for converting paper documents to digital information that began with the pandemic continued to gain momentum throughout the year and dramatically increased demand for scanning historical documents from the office and from warehouse storage.
While the short-term growth of these services gratifying the volume of such information and the compelling need for it to be converted are bought both enormous and likely to last for decades, while we have seen declines in our on-site services as employees' continued work-from-home sales in 2023 began to stabilize, and we had significant success in the fourth quarter. You will hear more about that from bill later on this call. In this economic environment, construction projects were much more difficult to justify as for the purchases of large equipment.
So it wasn't much of a surprise when construction plant printing got off to a sluggish start and the equipment and supply sales followed suit, but our ability to adapt to changing market conditions drove an increase in fourth quarter revenue limited declines in annual revenue to less than 2%.
And our skill and experience in managing costs held gross margins steady for the year. We had higher hopes, of course, but the continued progress we made in identifying new markets, launching new and exciting products and finding new partners and making the necessary investments to take promising services to the next level, positioned us well for 2024 and beyond.
To help explain some of the details about our efforts throughout the last quarter and to help with the entire year in perspective, I'll turn the call over to Dilo and Jorge for their comments. Dilo?
Dilo Wijesuriya
Thank you, Suri. In the fourth quarter, we achieved encouraging results, particularly in our strategic revenue lines, as Suri mentioned, despite facing a decline in plan, printing revenue successfully offset this loss by growing our document scanning and digital color revenue stream.
Notably, our sales in document scanning services were 34% higher than they were in 2022 and our digital color services saw a surge in demand driven by significant projects supporting year-end promotional activities across various business verticals.
Beyond the holidays, our consistent focus on expanding retail tradeshow and mall and mall operations, coupled with increased tourism activity in the hotel's vertical contributed much of the business that led to our growth in digital color printing, leveraging our premier digital print services brand Riot. We continue to attract major brands across North America, positioning ourselves as a leading provider of on-demand, high-quality color printing solutions in all major markets in the US in North America.
Few companies offer anything close to me achieving this level of service demands, meticulous planning and a cohesive dedicated production team qualities that define our operations over the past three decades. We honed these capabilities with planned printing, resulting in a dominant market presenting in construction. Now we are applying the same expertise and core competencies to our digital white format color services, ensuring consistent quality and efficiency to our clients.
The demand for document scanning remains robust as businesses prioritize moving their critical content to digital platforms, hybrid work models and the growing trend of office space reduction, further propel the adoption of document digitization projects. Among other clientele, our teams conduct thorough site audits and collaborate closely with clients to tailor solutions to their specific requirements.
Our scan by the box program caters to smaller clients seeking efficient and cost-effective scanning solution for a file cabinet or two. And our success in securing enterprise-level scanning contract in the past few months with several contracts exceeding six figures has significantly improved our production backlog through targeted marketing campaigns. We are actively educating clients on the advantages of digitizing documents and our performance is solidifying our reputation as a trusted nationwide provider of document scanning services.
Additionally, our continuous enhancement of technology tools enables us to streamline project management, elevate quality standard manage labor costs and provide improved accessibility via cloud-based solutions for our valued customers. By contrast, we have yet to observe any significant improvement in plant printing from new construction projects our assessment indicates that positive momentum in this revenue stream hinges on a substantial decline in interest rates, which we have yet to witness.
Nonetheless, we remain proactive in showcasing and promoting other services offered by ours to diversify our revenue streams. Our long last long-standing relationships with construction clients serve as a valuable foundation for introducing and expanding our new services within their accounts as office customer behaviors evolve. We've also noted a decline in on-site print services along with equipment sales.
However, for the past year, we have made a concentrated effort in renewing our on-site service contracts with three key clients. I'm pleased to report that we've achieved successful renewals for multiple years with several major MPS customers. Their continued satisfaction with our service and confidence in our comprehensive on-site service solution bode well for maintaining revenue in this service line moving forward, our revenue performance in the fourth quarter serves as a clear indication of the positive direction our company is headed.
Our emphasis on scanning and digital color printing is driving overall company expansion. And our management team is -- every market is 100% onboard. Our strategic investments, ongoing staff training initiatives and targeted marketing and selling strategies are all directed towards advancing these primary objective.
Key areas of focus for our management teams include production management, customer service margin optimization and planning capacity. We are also doubling down on our online and social media marketing efforts to generate new customer leads while maintaining a steady sales representative headcount.
I encourage our investor community to follow us on LinkedIn and other social media platforms. Creating and sustaining a fun and secure workplace environment for the employees remains a top priority for management.
We consistently implement initiatives to support our team members, including various employee assistance programs and a profit-sharing bonus plan as we further establish ourselves as a prominent presence in digital color printing document conversion and more fostering a dedicated and inspired team is crucial to our success. I look forward to sharing our first quarter results. So at this point, I'll hand over to Jorge for more and more on the financials. Jorge?
Jorge Avalos
Thank you, Dilo. While sales of equipment and supplies, on-site services and construction plant protein were soft during the first three quarters, we saw signs of stabilization in the fourth quarter, combined with strong sales in color and scanning, it led to incremental sales during the period. As Suri and Dilo noted, our work in 2023 has created a favorable environment for new sales opportunity with rates forecasted to come down a limited chance of recession and confidence building in the resilience of the economy.
We're in a good position to capitalize on them in 2024. Gross margin held steady for the year. Both fell in the fourth quarter as a result of our fourth quarter mix of business, high margin plan printing decrease as it normally does during the fourth quarter.
But unlike last year, we did not have a drop in the low margin equipment sales throughout the year, we kept a tight leash on cost in light of softer sales, reap the benefits of lower depreciation costs that that reduced our equipment purchases on site services and even higher labor costs associated with increase in scanning and revenue and inflationary pressures were not enough to put a dent on our gross margin.
SG&A for the year was down benefiting from a lower level of sales, commissions and bonuses, which left us with net income and earnings per share relatively stable year over year. The decrease in adjusted EBITDA for the year was attributed to our lower sales and an increase in labor costs.
While cash flow from operations was affected by the same things, the decrease was mitigated by strong cash collection efforts in the second half of the year. Our DSO dropped a full four days, which helped keep 2023 cash flow from operations in line with prior year and drove the [$2.9 million] increase in the fourth quarter.
We are happy to report that for the full year, we returned $12 million to shareholders in the form of dividends and share buyback. This was the most we have ever done in the history of the company, and we plan to do it again in 2024. Our liquidity and capital structure continues to improve. Even after the $12 million spent on shareholder returns, our cash balance decreased by $3.5 million. Our net debt was only [$6 million] representing a $7.7 million decrease. Our leverage ratio stands at only 0.3 times adjusted EBITDA.
Finally, before we end our remarks, we need to address the obvious outlier on our P&L for the year. The site remediation expense, the expense stems from an acquisition we made in California during the 1990s that included property that had been used for a gas station before we purchased it. The gas station has long been demolished and its storage tanks removed well before our involvement several years ago, ground monitoring detected petroleum on the property.
And we were asked to create a remediation plan for this site. We did so and the plan was approved, but further monitoring in the fourth quarter of 2023 turned up additional grid and now requires a much more extensive plan. Three points are worth emphasizing about this expense.
First, none of this has to do with our operations. Second, this is the only service center property we own. And third and most importantly, this expense will extend over a long period of time time, but accounting rules require us to establish the liability. Now, we don't expect it to hamper our operations or our cash flows in a meaningful way in any given year of the project.
Turning our attention to 2024 we are seeing encouraging growth in our strategic services and our pipeline of opportunities and backlog is robust. The economy is benefiting from anticipated declines in interest rates and the variety of industries and customers we serve continues to grow, and we've also made prudent investments in people, marketing, and equipment to drive future growth. With that in mind, we look forward to what lies ahead in 2024 and sharing our progress with you in the coming quarters. At this point, I'll turn the call back to Suri. Suri?
Suri Suriyakumar
Thank you, Jorge. Operator, we are now ready for questions from our listeners.
Question and Answer Session
Operator
(Operator Instructions) Greg Burns, Sidoti & Company.
Greg Burns
Hey, good afternoon. In the construction plan printing market, I guess you noted you saw some signs of stabilization in the fourth quarter as you look into '24, I know interest rates going down would be a potential catalyst to get that part of the business higher, but borrowing interest rates going down, do you feel like that business has stabilized at a lower level or how should we think about the potential for further declines in that side of the business?
Suri Suriyakumar
Yes. Like you said that if actually the interest rates go down is definitely going to kick-start some of the construction business and it will be helpful for the planned drilling segment of our revenues. However, if the interest rates don't move, which I think is unlikely, you know, probably it's going to be stable. And it's going to just be muted. I don't think it's going to do any different. Dilo would you agree?
Dilo Wijesuriya
No, I agree. I think the other thing to do is even if the interest rates go down in the second quarter, it's going to there's always a six to nine month lag to see new designs, new construction put in place. So just wanted to keep that timing in mind as well.
Operator
We'll go to our next question --
Suri Suriyakumar
Hang on, Greg, do you have another question?
Greg Burns
Yeah, sure. Just one more around your capital allocation priorities. I guess if the cash flow remains strong this year, you'll probably be in a net cash position. What are your thoughts on maybe increasing the dividend or accelerating buybacks? How do you think about the capitalization and share return for the business?
Suri Suriyakumar
Yeah, both of those opportunities, Greg. I mean, obviously, based on everything what we did last year, which is an amazing year from a shareholder return point of view. I mean, you know, it's targeted to 33% of our cash flow from operations went back to the shareholders. I would is that. So I mean so that it's already pretty good.
And if it continues to improve, then, of course, depending on the market conditions, we will decide what to do as to whether we should buy more buy back more shares or how we deploy that cash. Our cost of operating the business is also going up. So it's something that we want to bear in mind, we might choose to make some investments in the business. Jorge would you like to add to that?
Dilo Wijesuriya
Yeah, I mean, we don't see us reducing the level we did in '23. I mean, we think the cash flows we generate obviously stay pretty stable and will allow us to do that. And more like I mentioned on my script, I mean, even with everything we did and returning shareholder value, we still we still grew cash by almost $4 million after all that. So future's bright for us. We have options, which is a good thing.
Greg Burns
Good. Thank you.
Operator
David Marsh, Singular Research.
David Marsh
Hey, guys, thanks for taking the questions and congrats on the year. So it looks like it is a little over [$600,000] on repurchase equity in the fourth quarter. Could you just give us an update on where that puts you with regard to your share purchase program and give us a sense of kind of what the average --
Suri Suriyakumar
Sorry, could you repeat that question? It is not very --
Jorge Avalos
I think it's about share repurchase. And if I don't answer the question right, just clarify, but I think you were saying the repurchases we did, we did $3.5 million worth of share repurchases. We still have another [$9 million-ish] available under the Board's approved plan. You know, every quarter is a little different. Sometimes there's more opportunity to buy more in a certain quarter versus another.
When I think about the first quarter, the open window doesn't open until March. So we have two, three weeks to buy shares, very truncated period of time. But overall for the year, we expect to be in that $3.5 million range for 2024 borrowing other opportunities, as Suri mentioned earlier. Did that answer your question?
David Marsh
Yeah. I was just asking the other part of that was could you just give a sense of what the average price per share was of that repurchase?
Jorge Avalos
The repurchase is under $3, it was in that [$2.80 to $2.90] range. Don't quote me exactly, but it's pretty close to that.
David Marsh
Got it. That's helpful. And then just turning to more kind of the is this fundamental side or are there particular industry verticals that have started to show incremental strength here in the back half of '23, early '24 that maybe you didn't have as strong of a performance from during the earlier part of '23?
And are there any other particular verticals that are away from the construction side, which obviously we know is it changes a little bit on interest rate movements, but are there any other verticals that you could talk about that you have particularly strong expectations for in the coming year?
Suri Suriyakumar
Yeah. And so I mean, obviously, based on the market sentiments right now, it sure looks like we're going to have a positive, you know, impact on the market going forward. Nothing shows that the market is going to deteriorate. It's going to it. Sure seems like it's stabilizing. And if that is the case, obviously, the other segments of the business is going to be much more active. And we are thinking that that will be a positive. Dilo, what's your perspective on that?
Dilo Wijesuriya
I think if you look at the business segments of the company, no, there wasn't one or two specific business segment there that really helped us in Q4 because different seasons, different customer types, get there getting busy, obviously, if not towards the holiday season, retail, retail mall, mall operations, those of our customers are very, very strong in the fourth quarter.
But overall when we track all our verticals, as you know, we track about 53 verticals in the organization. We see we see a bump in almost all categories because one of the things that that we see is that every company is marketing, they are marketing. They're trying to get that extra market share.
A lot of tradeshow work is continuing to bump up. So I think that's a positive sign that we see pretty much in all of all all business verticals and everybody is looking for that new business. So that's we have a digital marketing and digital color graphics services bode well with those customer verticals.
David Marsh
That's very helpful. And then just last one for me. Just another kind of housekeeping type, Jorge, just looking at the liability side here, balance sheet looks like it kind of looks like the operating leases bumped up a bit. The debt and finance leases kind of bumped up a little bit on long-term. Can you just talk about what's going on there and what your expectation is for the next 12 months?
Jorge Avalos
I'll start with the easy one in regards to the finance leases that actually went down. 2022 end of the year, we were at [$26 million]. We ended the year at [$22 million]. So I foresee that kind of staying either in that range or potentially dropping a little bit more. So not a big shift there from a balance sheet perspective.
In regards to the operating leases. This is just a product of facility renewals of our annual rent expense is going to stay pretty stable. But the new accounting rules say, okay, if I'm going to build the sales. One of my bigger buildings and a renewal in December now have a seven year lease for the next seven years that all shows up as a liability on my books, but my annual rent stays the same. So it kind of just like a balance sheet gross-up on your financials there, nothing that I would be worried about from a -- this is going to have an impact on my P&L. Does that make sense?
David Marsh
Yes, makes a lot of sense. Thanks very much. I appreciate your time.
Operator
(Operator Instructions) And we'll go back to Greg Burns.
Greg Burns
I just wanted to follow-up on your outlook for for 2024. If construction plan printing is stable, do you foresee the strategic growth areas driving net growth next year for the business?
Suri Suriyakumar
Well, yeah, we definitely feel so, especially given the activity we have been having with the customers. I think it will be going in the -- it will definitely improve. Dilo, do you like to add to that?
Dilo Wijesuriya
Yeah, I mean if you take a look at the Q4 as a proxy in our strategic business line growth overtook the drop in-plant printing. So if the plant printing stabilizes in 2024, definitely we'll see that see that growth. But we are and I'm fully focused on building our strategy, building our push behind those specific growth initiative. And that, as I said in our call, all our management teams are fully behind that. Over the last two years, we've been we've been putting certain things in place and now we are enjoying the benefits of that.
David Marsh
Okay, great. Thank you.
Operator
And at this time, there are no further questions. So I'll hand things back to Mr. David Stickney for any additional or closing remarks.
David Stickney
Thanks, Lisa, and thank you, everyone, for your attention tonight. We appreciate your continuing interest in ARC and encourage you to reach out to us with any questions about our progress. In the meantime, we look forward to talking with you soon on our first quarter call in early May. Thanks and have a good evening.
Operator
And once again, that does conclude this conference. Thank you all for your participation. You may now disconnect.
