ARC Document Solutions Inc (ARC) 2008 Q1 法說會逐字稿

Greetings, and welcome to the American Reprographics Company first quarter 2008 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Stickney, Vice President of Corporate Communications. Thank you, Mr. Stickney, you may begin.

Thank you, Mannie.

I'd like to welcome everyone to our call today. Joining me are Suri Suriyakumar, our President and Chief Executive Officer, and Jonathan Mather, our Chief Financial Officer. Our call will of course provide you with some more insight into our first quarter, the financial results of which were publicized earlier today in a press release.

You can access the press release and the Company's other releases from the investor relations section of the American Reprographic Company's website at www.E-ARC.com. A taped replay of this call will be made available beginning about an hour after its conclusion. It will be accessible for seven days after the call. You can find the dial-in number for this replay in today's press release.

Please be advised that we are webcasting our call today. A replay of the webcast will be available on our website for 90 days from today on the Company's website.

This call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the Company, including the Company's financial outlook. Bear in mind that such statements are only predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today, May 8, 2008, and except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release and in our form 8-K filing.

At this point, I'll turn the call over to our president and CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon, everyone. I'm very pleased to share our first quarter results with you today. Delivering results which exceed market expectations, I suppose, is always a pleasant experience for any CEO. However, it is even more rewarding when you are able to produce such results in a market which is in turmoil and riddled with uncertainty.

While the indications of a slowing market are unmistakable, our continuing focus on sales and improving operational efficiencies while implementing cost-cutting measures should continue to serve us well throughout the year. The operational controls and sales initiatives we put in place in late 2007 helped us get off to an excellent start in 2008 with a 17% increase in revenues over the same period last year.

Our sales force is especially tuned in to the need for aggressive new sales activity and strict accountability. From a sales management standpoint, our incentive programs have been revamped and they revolve almost entirely around capturing new businesses.

As the markets tighten, this kind of sharp sales focus will keep us deeply engaged in all of our markets, regardless of business conditions. While we were pleased with the way we perform relative to the slowing non-residential construction market, we expect the overall economy to remain soft, and the construction market to continue to slow down.

As we have stated before, we will aggressively seek to protect our market share and grow it where possible using our superior position in the industry.

Our first quarter results are as follows. We achieved sales of $187.4 million in the first quarter, resulting in a 17% increase over the same period last year. During this first quarter, we saw growth in both new non-AEC business as well as digital services.

While I expect our primary base of business to remain strong, I also expect these new business trends to continue throughout the year. Revenue growth from acquisitions for the period was approximately 14.8%, and the organic growth for the quarter was 2.2%.

Gross margin for the first quarter was 42.5%, up from 42.3% during the same period in 2007, and the Company's EBITDA margin for the quarter was 26.3%, up significantly from 25.1% in the same period last year.

This is clear evidence that we can manage our business aggressively during downturns. We are not without experience here. We went through similar conditions during the last turn between 2001 and 2003, and as the results showed then, we know the steps we have to take in challenging market conditions.

Net income for the first quarter of 2008 was $18.5 million, or $0.41 per diluted share. This is the best testament to our strength and ability to perform in a tough marketplace. This also provides an excellent platform on which to operate throughout the remainder of the year.

Giving a bit more detail on how our first quarter sales broke out, 68.8% of our revenue came from our traditional reprographic services offering. Our FM program contributed at 15.8% of our revenue this quarter, as we ended the first period with more than 4,850 placements.

Equipment and supply sales came in at 8.2% of our revenue, and as we noted in our press release earlier today, digital services produced 7.2% of our revenue, up significantly from the same period in 2007.

Given what we have been able to accomplish in the last two quarters, I am confident that the Company should be able to perform very well throughout the year, and that we can capitalize on opportunities that are specific to a down market.

As such, we are reaffirming our guidance for 2008 revenues to be in the range of $720 million to $760 million, and that earnings per share will be in the range of $1.50 to $1.60 on a fully diluted basis.

While we all know that an economy which is strapped for cash and mired in uncertainty is not conducive for business. We also see this as an opportunity. Armed with a strong free cash flow and a recently refinanced debt structure, we remain opportunistic about acquisitions and growth. During the first quarter, we acquired four small businesses and expanded our presence in Omaha, Nebraska, central Michigan, Philadelphia and Gainesville, Florida.

As the market becomes more stable, we will look to expand aggressively, both in enhancing our reprographics footprint and our technology offerings. I should also note at this point that we have placed our stock buyback program on hold, given the current state of the credit market.

Before I close, I want to point out a few relevant facts relating to our business and the current economic conditions. First, our size and geography coverage help us thwart some of the ill effects of a down economy. While some of the regions which were expanding rapidly previously have significantly slowed down, several other markets are expanding.

Our national scale takes the sharp edges off the peaks and valleys that would otherwise make our business much more prone to volatility.

Second, while new construction is slow to come by in this market, we must not forget that renovations, tenant improvements and other construction activity continues to occur in existing buildings and is a substantial part of the non-residential business.

Third, millions of dollars will be spent by the city and state governments in the next few years on infrastructure improvements which were previously approved through ballot initiatives.

Fourth, there are several mega-projects being done internationally by our customers in countries like Dubai, China, and the United Kingdom. All of this will amount to increased activity from a reprographics perspective.

Fifth, while the non-residential construction may be affected in the short term, mainly due to the cash crisis and uncertain economic conditions, there's no overcapacity built in like we see in the residential segment in the business.

Finally, because we are large, because we have so much depth in our management team, because the organization is as focused on sales as it has never been, and because we are so close to our customer base, I believe we will continue to deal with solid performance throughout 2008.

With that as a background on the Company's operations and expectations, I'll turn the call over to Jonathan for some color behind the financials. And then we can get to some of the details during Q&A.

Jonathan?

Thank you, Suri, and good afternoon, everyone.

Allow me to provide you with more depth to the numbers we disclosed in the first quarter earnings release today. Beginning with revenue by product categories, in quarter one 2008, reprographic services grew 19% compared to quarter one in 2007.

Digital services, which are included in our overall reprographic services grew 50.5% year-over-year and contributed 7.2% of total revenue in this quarter compared to 5.6% over the same period last year.

[Facilities] management grew 12.1% compared to the same period in quarter one of 2007 while revenue from equipment and supplies grew 9.3% over the same period last year. Revenue and revenue trend by geographical segment in this quarter was as follows.

Southern California, $43.5 million, down 8.6%. Northern California, $25.9 million, up .9%. Pacific Northwest, $12.7 million, up 40.2%. South, $51.4 million, up 49.6%. Midwest, $26.5 million, up 35%. And finally, Northeast, $27.4 million, up 14.9%.

As noted in the earnings release, gross margin for the first quarter was 42.5%. This compares to 42.3% in the first quarter of 2007, and 41.2% in the fourth quarter of 2007.

Compared in the first quarter of 2008 with the same period last year, gross margins were favorably impacted by approximately 100 basis points due to a change in our product mix, price increases and production efficiencies. However, we were negatively affected by the diluted impact primarily from platform acquisitions completed in the last 12 months.

The dilution from these acquisitions amounted to approximately 80 basis points of margin in the first quarter of 2008. Our SG&A expense as a percentage of revenue decreased to 21.1% during the first quarter of 2008, reflecting Suri's earlier point of closely watching costs in this difficult environment.

This compares to 21.4%, or the 0.3% reduction from the first quarter of 2007. Despite an increase in (inaudible) reserve of $0.8 million, primarily due to recent financial conditions of some of our customers.

Stock-based compensation is included in the SG&A expense. In quarter one 2008, stock-based compensation was $0.9 million compared to $0.6 million in quarter one, 2007, and $.9 million in quarter four of 2007.

In the first quarter 2008, total depreciation, amortization and interest was $19.3 million, made up of depreciation at $8.9 million, amortization expense at $3.2 million, and interest expense at $7.2 million.

This compares to quarter one 2007 of $13.5 million, with depreciation at $6.6 million, amortization at $1.7 million, and interest at $5.2 million. EBITDA for the first quarter was $49.2 million, or 26.3%. This compares to 25.1% in quarter one, 2007, and 25.8% in quarter four, 2007.

At this point, we will briefly look at the balance sheet. We ended the first quarter of 2008 with working capital of $15 million, or approximately 2.1% of trailing 12 months' revenue. This compares to $4.7 million for December 2007, or approximately .7% of trailing 12 months' revenue.

Day sales outstanding, or DSO, were 51 days in the first quarter 2008 compared to 52 days in the first quarter of 2007. Total debt, including capital leases at the end of the first quarter 2008 was $379 million, down from $390.3 million for the first quarter of 2007.

The ratio of debt to trailing 12-month EBITDA at the end of the first quarter was 2 compared to 2.2 at the end of the first quarter, 2007. Cash flow from operations was $20.3 million in 2008, or $0.45 per fully diluted share. This compares to $11.4 million in the same period of 2007.

2008 payments for acquisitions and payments associated with acquisitions, including (inaudible) amounted to $4.8 million compared to $22 million in the same period last year.

That concludes our financial discussion. At this point, I will turn the call back to Suri.

Thank you, Jonathan.

Operator, at this time we are available to take our callers' questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions)

Our first question comes from Edward Yruma with JPMorgan. Please proceed with your question.

Thanks very much for taking my question. Your organic growth trends are running a little bit stronger than your guidance had suggested in 4Q. Is this sustainable, or do you still expect for organic revenue to be down year-over-year?

It's hard to specifically state that. It's definitely running much stronger than we thought in our guidance. Built into that the organic growth we had in mind was anywhere between negative 3.5% to 4.5%, that's what we had in mind, that's what we had built into our guidance. So to be able to produce 2.2% is good.

But I'm not sure how long we'll be able to sustain, that totally depends on the market conditions, Ed.

Got you. And you address pricing a little bit. Can you talk about the pricing environment and if you've seen some irrational pricing from some of your competitors, given the soft environment?

Right. We haven't seen any of that come up just yet, Ed. What we are seeing in the marketplace is obviously given the high gas prices, the fuel prices, we are starting to actually push the prices up for particularly transportation costs and so on and so forth, and where we have an opportunity to increase pricing because our suppliers are starting to push their prices up and this is an overall effect of what's happening to the gas prices, we are starting to pass that on to our customers so that it doesn't impact our business.

So in general, we're being very quiet, selectively have been pushing the prices up in order to accommodate increased prices from our suppliers, and we have been able to do that. We have not seen price erosion just yet.

Got you. And my final question, I know you touched a little bit upon your customers' credit. Have you had to tighten terms, and have you done that Company-wide? Thank you.

Not really tightened terms. As such, what we have done is we're being a little more proactive than usual, given the market conditions. Obviously, we know the market is in turmoil and there are credit issues floating around in the marketplace, so therefore we are taking a close look at all of the receivables and the payment habits of customers, and we are required -- Jonathan is making the appropriate allocations.

Great, thank you very much.

You're welcome.

Thank you. Our next question is from Michael Schneider with Robert W. Baird. Please proceed with your question.

Thanks, and good afternoon, gentlemen.

Good afternoon, Michael.

Maybe first we can start with the digital business. Suri, it looks like it was up substantially year-over-year, but also sequentially. Was there some new initiative launched during the quarter, or is this the effect of the sales force revamp? Just some color would be helpful.

Sure. It's a combination of multitude of things. Number one, obviously, our customers are looking at process improvement and efficiencies during this period of time, and usually during downturn, that happens. That certainly has an impact.

Secondly, we have been, in order to encourage our customers to use digital services, traditionally we have been encouraging them to use our digital products without necessarily charging them for all of it. Now we are starting to say okay, we need to charge for all these services, which is very critical for our digital transition. So that's part of it.

And then the other aspect is there has been a fair number of companies which have joined us during last year because of the acquisitions, and many of them didn't necessarily push digital as much as we do. And selling digital services there also increases that segment of the revenue.

So it's a combined effect of doing all of those things.

Okay. And the sales force changes that have gone on to the incentive structure, I guess I'm surprised to hear you say they're more focused than ever, Suri, because the sales force has been out gaining market share for some time. What's changed, why now, and truly, on the margin, what's changed for the typical salesperson?

Right. So fundamentally, we've all -- since I took over as CEO, one of my biggest drives has been convert this Company to a sales-driven Company. We've been talking about it, we've been putting several measures in place little by little, and it certainly became much more aggressive during the last quarter of last year, Mike, when we realized that obviously the market was turning back.

And since then, we have kept that focus on, so there is a variety of initiatives that we have done. Number one, we have put together what we call an [aspire-22:08] program, and that program is is it's a competition between sales reps. We have a single database for all of the sales reps in the Companies to see how they are performing.

We celebrate the sales reps who are very, very successful. We also identify the sales people who have not met our expectations. In the past, we would leave them to individual presidents, divisional presidents. Now, we are identifying those sales representatives, and then raising the question at the BOO meetings, that is the board of operations meetings, as to what should we do different to help these sales people to actually enhance their sales.

We have started several sales-related programs -- we call them webinars, they are basically seminars on the web -- consistently. And then in addition to that we have taken a look at the competition programs and the commission structure and actually have increased commissions for new sales, again, in order to drive additional sales, organic sales from the existing customers and new customers. Instead of they're focusing on customer maintenance, they're focusing on growing sales. The combination of all this is what we are doing right now.

Okay, thank you again.

You're welcome.

Thank you. Our next question is from Scott Schneeberger with Oppenheimer. Please proceed with your question.

Hi, this is [Ella] for Scott Schneeberger, thanks for taking my question. First, Suri, can you -- I know that in January you have 65% in res and 15% res. Can you break out the res/non-res exposure by each region?

We don't have that information by region [Ella], but what has happened is obviously that percentage has started changing with the residential business going down significantly, so we do a test, like, every quarter in order to find out where our percentages are. Currently, we are about 70% non-residential and about 10% residential.

The combination of non-residential and residential, which we refer to as the AEC business, still remains same -- about 80%. And about 20% is in non-AEC.

Okay.

We don't break them down by region.

Well, if you do not have an exact number, can you just give us more color, though? Which region maybe is more res exposed versus no res? Just a general color on that would be helpful.

Okay. Hard to break it down by region, but what we have, obviously, from the numbers, evidenced by the numbers, Ella, is that Southern California, particularly the Orange County market, has been growing very, very aggressively because of the residential marketplace. And that segment, in that area, we had more than 15% in non-res business during the good times. And obviously, that has significantly impacted the marketplace.

But if you just overall look at, again, very generically looking at the marketplaces, Orange County, Atlanta, Florida -- these are the areas where there's been fair amount of housing, residential activity, and those have just tapered off. And that's reflecting in a soft market in all these areas.

Okay, that's helpful, thank you.

Sure.

And also about your sales force, can you just talk more about do you still go into grow your sales force team, and what would be the focus? Would it be focused more on the traditional reprographics, or more on the non-AEC projects?

Right. In terms of growing the sales force, each of the divisions employ a sales force as required for that region. So we're not thinking of -- obviously with increased acquisition, if we continue to buy companies our sales force will grow relative to those new acquisitions.

But what we are doing, Ella, is that -- putting a bigger and a better focus on the sales force, training the sales force. And then in terms of what business we go after, obviously, you know, traditional business is AEC business, and we'll still go after that business using our superior position in the industry.

In other words, areas like premiere accounts, national accounts, those are very unique to us. We are the only people who can provide services across the nation on a single platform.

So in the AEC side, we'll go after businesses like that. We are also starting to focus more on non-AEC business -- color business, business outside like the Boeing business, which we can do with the same core competencies, but not necessarily in the AEC marketplace.

So we are focusing more on that because there are greater opportunities to get those businesses.

Okay, thanks. And third, let's talk about the repo that you said you're putting on hold for now? Can you just give us more color on why and when do you think you would start repurchase again?

Okay. On the stock repurchase plan, obviously we got the board approval; we got the banks lined up for the credit required and so on, so we figured out a way to do the stock repurchase. However, because the credit markets got into a turmoil and turned down so sharply, we decided that it was not a good idea for us to do stock purchase, repurchase, in a down market, particularly at a time when credit is difficult to come by.

So we decided that we will preserve the cash, because we want to make sure we are able to do whatever acquisitions or technology acquisitions or reprographic acquisitions, or for that matter any investments we may have to do. We want to be able to be ready for that.

As a result, you know, fundamentally we decided we'll preserve cash at a time when there is a credit crisis out there. And as to when we might reconsider that is subjective to the market conditions. If the credit conditions in the market change, then we can certainly reconsider that.

Okay, thank you.

You're welcome.

Thank you. Our next question is from Piyush Sharma with Longbow Research. Please proceed with your question.

Good afternoon. This is (inaudible) calling in for Piyush Sharma. Could you give us some color on your pipeline of premiere accounts?

Oh, obviously, we have a fair number of accounts we are working on. We don't name them by accounts, obviously for confidentiality reasons, because with this call, many people, many of our competitors could be listening in this call.

But in terms of the premiere accounts, in general what we can say is that we have been working with several large accounts, and mostly large accounts, it takes a while for you to sign a large account. For example, when we worked on Boeing, it took us six months to get to Boeing, sign the contract, and then kick off the account.

So generally, they take a long period of time for us to work on, but we are working on several large accounts, and we certainly expect to have a few signed up this year.

Okay. And do you still expect minimal gross margin improvement this year?

We already have experience on gross margin, which I think is phenomenal given the market conditions and where we are. Jonathan, would you like to add some color?

Yes, again, in quarter one we are pleased with our gross margin, but again, what Suri said earlier about the revenue going forward to the second half of the year based on the market condition, us seeing a potential slow-down, etc., we are being cautious in not projecting improvements in gross margins.

And again, we don't provide guidance in gross margin. I would suggest that if we achieve it, that's great.

Okay. And Suri, you earlier talked about that you're not witnessing any price erosion just yet, but could you provide some color on what kind of assumption that you're baking in for pricing for your guidance for this year?

In our guidance, we have taken into consideration there might be slight price erosion in the latter part of the year. But that's a very minimal impact we took into consideration, given the fact that if the market continues to deteriorate, there's a chance that the price can get affected. But we haven't seen that just yet.

Okay. And my last question is about your facilities management services. Could you talk about what you're seeing in terms of your existing clients, the values that you're generating for client basis, and whether your existing clients are renewing the contract?

Right. We have actually no trouble in getting the customers to renew their contracts. Generally, that is the case with most FM analysts, otherwise we have service problems. So the renewal of the contract doesn't seem to pose any problems at all.

But what we are seeing in general that the volumes that clients are doing are lesser, and that's typically indicative of a softer marketplace. So if the customers are not as busy as they used to be, then the volumes we would be billing for would be lower, and that -- we are noticing that a little bit with our customers.

Okay, great. Thanks for taking all the questions.

You're welcome.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, one on your telephone keypad.

We have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Thanks very much, this is David Stickney again, for joining us today. We appreciate your attention, obviously, and your continued interest in American Reprographics Company. Have a great evening, and good night.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.