ARC Document Solutions Inc (ARC) 2009 Q3 法說會逐字稿

Hello, my name is Dawn and I will be your conference operator today. At this time I would like to welcome everyone to the American Reprographics third quarter 2009 earnings call. (Operator instructions) I will now turn the call over to David Stickney, Vice President of Corporate Communications. Please go ahead.

Thank you Dawn, and good afternoon. Today I'm joined by Suri Suriyakumar, our Chairman, President and Chief Executive Officer and Jonathan Mather, our Chief Financial Officer. Earlier today we summarized our third quarter results in a press release. We'll be adding further commentary on the quarter on today's call and then as usual we'll take your questions after our comments.

For your reference, you can access the press release and the Company's other releases from the Investor Relations section of American Reprographic Company's website at E-ARC.com. We are webcasting our call today. A replay of the webcast will be available on our website for 90 days from today and you can get there by, again, going to www.E-ARC.com. A taped replay of this call will also be accessible by phone for seven days. The dial-in number for the replay is in today's press release.

For the record, 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. 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, November 5th, 2009 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 Chairman, President and CEO. Suri?

Thank you David, and good afternoon everyone. ARC continues to perform well in response to the challenges posed by this economy. This is clearly demonstrated by the results we have posted today. Once again our aggressive stance in cost control, the speed and responsiveness with which we have right-sized the company and our focus on preserving cash and profitability have served us very well.

On today's call, Jonathan and I will be drawing your attention to the important details of our financial performance and sharing our thoughts on the opportunities we are pursuing during this downturn. After that, of course we will address your questions.

Our revenues of $119.4 million and we delivered $0.06 per share in the third quarter of 2009 on an adjusted basis. At the end of quarter 3, ARC produced $75.4 million in cash flow from operations this year. This translates to $19.6 million just for the third quarter. This extraordinary performance in generating cash is a clear reflection of the underlying strength of our business. As we announced in October, our strong cash position has not only allowed us to comfortably service our existing financial obligations, but also provided us with the means to favorably restructure our debt agreements and substantially reduce the leverage we carry on our balance sheet.

When we combine the October prepayment on our amended debt agreement of $36 million, the $11 million we have prepaid on capital leases in the second quarter and our scheduled debt payments, to date we have addressed nearly $92 million of our debt obligation during one of the worst economic periods in the history of our company. Even more impressive is that in spite of the 31% year-over-year decline in revenues, our gross margins remained a healthy 34.5%.

During our last call I mentioned that having largely right-sized the company, we are now identifying opportunities to create new revenue streams. Needless to say, the substantial revenue drop has produced additional capacity and this is the perfect time to employ in areas where we can generate new sales. Today I'm happy to report that we are making progress on all these fronts.

First, our focus on technology has intensified, given the environment. More than ever, our customers are looking to improve efficiencies and their return on investments. In a highly fragmented industry like construction, the right technology can create substantial process improvements and in that light, we have continued to invest and further develop our portfolio of technology products during this downturn.

Since our last earnings call we have made significant upgrades to Abacus, our flagship product in the prints packaging category. We have introduced PlanWell DataBridge, a brand new product to synchronize information between PlanWell and construction project management software. We also acquired RCMS, a building information modeling services company. We now have the ability to partner with our customers to provide groundbreaking consulting and outsourced technology services to improve their workflow.

This recession is compelling the industry to increase efficiencies dramatically. While BIM, which is referred to as building information modeling, has been waiting in the wings for some time, few technologies have the potential to offer such tremendous gains in process improvement. With the addition of these new services we are ready to serve the industry like no other company.

We're also continuing our efforts to build a national digital color printing platform to address the large and growing color graphics market. Using our existing infrastructure and expertise in color production, we are in the process of setting up color service centers in strategic locations across the country. We expect this effort to add to our non-AEC revenues in late 2010.

In addition, we continue to focus on our strategy to expand our service lines and offer managed print services to our large national accounts across the country. Combining our domain expertise in all areas of print management, our enormous technology services and our national footprint gives us a substantial advantage over our competition.

Finally, our smart FM efforts are finding billing partners with vendors and suppliers. As you might expect, working on the concept of high volume placements of smaller, more convenient machines is largely dependent on reliable supply chain management and creating this infrastructure has been where the majority of our time has been spent in preparation.

As you can see, creating opportunities for sales has been an area where we haven't cut, but instead increased our investment, much like we have done in our technology initiatives. Where others would simply conduct business as usual and look to limit their exposure in market conditions like this, ARC is exploring new ways to invest its resources to expand the market share. Our Management team is committed to finding new opportunities and acting on them to build the future for ARC, regardless of the current circumstances.

With that summary I will turn the call over to Jonathan now for a closer look at some of the financial information. Jonathan?

Thanks Suri. To begin with, our customer mix stayed roughly the same from quarter to quarter. Of our total revenue for the third quarter, 21.6% came from the non-AEC segment, with 72.3% coming from nonresidential customers and 6.1% from our residential customers.

Our product and service mix remained stable as well. Facilities management made up 19.6% of our revenues. Digital services delivered 8.6% of our sales; 11.7% of our revenue was from equipment and supplies and the remaining 60.1% came from our base of reprographic services.

There were 64 working days for the third quarter, just as there were 64 days in the second quarter. There were also 64 days in quarter 3 of last year.

On a regional basis our year-over-year revenue performance was as follows. Southern California continues to be the hardest hit by the economic downturn, as it is down 38.8%. Northern California was down 33.3%. The Pacific Northwest was down 22.1%. Our Southern region was down 33.2%. The Midwest was down 31.1% and the Northeast was down 35%. On a very positive note however, our international operations, excluding Canada are up 153.6%.

Days sales outstanding or DSO were 48 days in the third quarter of 2009, consistent with 48 days in quarter 2. Total debt including capital leases at the end of third quarter 2009 was $317.6 million. This is down from $329.5 million for the second quarter of 2009. The ratio of debt to trailing 12-month EBITDA at the end of the third quarter was 2.8 compared to 2.5 at the end of the second quarter 2009. That covers the basics.

Before concluding our financial comments, I want to point out that in today's press release we made reference to recording 2 impairments and a possible one-time charge associated with our amended credit agreement. Based on our annual goodwill assessment, we recorded a $37.4 million impairment as of September 30, 2009. We also recorded an impairment charge of approximately $781,000 against certain of our long-lived assets.

Finally, we made a note of a possible one-time charge in the range of $700,000 to $1.3 million related to the Company's interest swap transaction related to the Company's amended credit agreement. The impairment and possible one-time charge will be reflected in the Company's form 10-Q for the third quarter of 2009.

At this point I will turn the call back to our Chairman, Suri.

Thank you Jonathan. Operator, I think we're ready for the question and answer session.

(Operator instructions) Our first question is from Kevin McVeigh with Credit Suisse.

Suri, I wonder if you could just expand a little bit on the comment in the press release suggesting that you're seeing a stabilization in daily sales trends and what you'd expect as we work our way and obviously the fourth quarter, the seasonal impact in the fourth quarter and how are you thinking about more recoveries as we think about 2010 relative to prior cycles or is it still a little early to think about kind of a pick up, and if so, how long will we be on the stabilization trend, if you will?

Obviously when we are referring to the stabilization, Kevin, if you look at it from the early part of the year, month over month, our revenues were dropping in the region of 5 to 6% at early part of the year; January, February, March. And it has been diminishing little by little and actually as of this quarter, actually last month, we are down to less than 1%. In fact, I think it was last month we were up slightly and then we are back to just under 1%. So that's a clear indication that the erosion or the drop in sales is diminishing. So we are feeling very good about that, based on all the trends we are seeing.

Now, having said that, the general prediction for 2010 is that nonresidential will have some negative impact and we understand that. As far as ARC is concerned, there are a couple of things which actually works to our favor. Number one, all of our efforts to actually start building our revenues in some of the areas that we have not worked previously, especially things like non-AEC, color and our managed print services areas, we are starting to see incremental benefit from that. So that's actually allowing us to offset some of the erosion which is going on.

Secondly, for the first time we are starting to see there is significant pain at competitor levels and we are starting to gain market share, because there are in many markets we are seeing companies falling apart and that's understandable. I think this will only get worse during next year. So from ARC's perspective, I think we are seeing leveling off of this erosion. So I think there is going to be stabilization of revenues from our perspective. These are hard things to predict but based on what we know, that's how we see the marketplace.

Got it. And in terms of given the cost actions you've taken already, do you see any more based on the current revenue run-rate? That, number one. Number two, is the benefit from the previous actions already fully reflected in the financial statements? And then number three -- I know I've got a lot of questions here, but Jonathan, just your thoughts on the capital structure now, will there need to be any other amendments to the facilities or anything like that?

If you talk about the cost cutting efforts we have taken, cost cutting efforts we started obviously early this year. Actually we started last year. All of those benefits, as you keep fine tuning, will start impacting our numbers as time goes by, as long as we are not in an expansion mode and we are not incurring any additional expenses, is still going to benefit us to reduce the cost. So you'll see some of those flowing into the last quarter and then flowing into next quarter, because all of the cost cutting efforts don't immediately impact the company, especially things like building leases and some of the long-term efforts we have made. So overall we think we have largely right sized the company, like I said, we don't see any reason to have major cost cuts. We can do that if you want although there's no reason to, because we remain very healthy.

We think the benefits of those costs we have taken out will still incrementally come to the bottom line as we go along, especially given the environment and the careful attention we are paying to numbers. I think that's going to continue to benefit us. So that will continue to go on and given what we have right now, we don't expect to cut any further. There is no reason to, unless otherwise something totally unexpected happens in the marketplace that is not our expectation given that. Now Jonathan, would you like to answer the last part?

Yes. Just one little addition to what Suri said. While we don't expect to do cuts, we continue to look for efficiencies every area we're continuing to do cost efficiencies. So you aren't going to see big structural reductions, however, we are continuing to improve our profitability through efficiencies in our operations.

The question regarding the bank; we did the amendment, as you know, in the first week of October that was concluded and we believe, we felt we got a pretty good amendment for us where the banks have worked with us with covenants, giving us adequate room, even if the revenue continues to decline. So we protected ourselves, we believe as we set these covenants, giving us reasonable room to proceed without going back for an amendment.

(Operator instructions) Your next question is from Scott Schneeberger from Oppenheimer.

I guess first off could I ask, what was the organic growth in the quarter?

We have declined in the quarter 32.9%.

Thanks. Any granularity there by segmentation, AEC, non-AEC, a little more color on the detail, guys?

Not really, Scott.

We don't have that detail of AEC, non-AEC for that. What we can say is most of it is from clearly the AEC; substantially all in the AEC.

Okay. So that's more of the decline; a little bit more stable in non-AEC, but still down?

Yes.

Okay. And then since we last heard from you guys roughly a month ago, Suri or Jonathan, how are things trending since we last talked to the extent you can share?

We just mentioned, Scott, the general trend is that we think the revenues are leveling off. Like I said, early part of the year 5 to 6% month over month was the revenue erosion, but that has substantially reduced and for this month it's less than 1%. And of course don't forget the industry we are in is traditional and we expected to have lower revenues this month. So we don't see that to be a surprise. So therefore we have concluded, it's my opinion that revenues are pretty much flattening out.

For the trend going forward, although 2010 is still expected to be a challenging year, what I think will offset some of this erosion would be the fact that -- there are two elements; one is these new initiatives that we've been pushing now for the last quarter or two we have initiated such as color, such as non-AEC, are starting to show some life and we are getting some results out of it. And the second thing is we feel like we are getting a little more traction on market share simply because many of the competitors are really finding it difficult to carry on. So the combination of both of that and our continued efforts to drive our sales, I think it'll be pretty flat. It's hard to predict anything these days, but we feel confident about where we are right now.

Suri, it sounds like a very good sign, because you're talking flattish, down 1%, that's on a sequential month over month basis?

Exactly.

Okay. And typically Q4 is a tougher quarter than Q3. Is October typically a tougher month than September seasonality wise?

Yes generally. Also, year to year it varies. Last year of course was a complete wacko so it's hard to go, but generally if you come to October, November, December we generally sense that those, you know, much more holidays, the weather kicks in, so generally there is a tendency for reprographers especially in the industry to loose money in the last quarter. Of course ARC has never done that in the last so many years because we've been able to manage it through. But generally the last quarter is supposed to be a challenging quarter. So we feel like so far it's stabilized.

Okay thanks. Just one more if I could. We haven't heard an update on Boeing in a while and maybe some other larger non-AEC business relationships you have. I imagine just kind of strained in the environment as well, but anything you can add on those fronts?

You know, all the large accounts we have, we are continuing to get the work we are getting but the revenue dropped. There is a revenue drop in almost every one of the customers, to the extent of what the economy is reflecting. So we don't have any particular customer we can say who is defying the economy, so to speak, because in general all customers are slightly down. Where we are getting additional revenues are when we get new customers, so there are a few new customers who come on board and obviously any revenue we get from them is a positive impact.

(Operator instructions) Your next question is from Franco Turrinelli with William Blair & Company.

Suri, I want to beat a dead horse here.

It seems like everybody is doing it these days.

So let's go back to this kind of commentary on sequential trends improving which is what I interpret your comment about the plus or minus 1% relating to. I'm not assuming that you think that your fourth quarter, October, November, December will be approximately flat to your September run-rate. I mean, if it was that would be a pretty unusual performance relative to the seasonality.

I agree. I think that's a very critical point. That is exactly what I was trying to highlight because given the fact that we are in the fourth quarter, given the fact that we are in the construction industry, the fourth quarter is always a challenged quarter. And plus of course the number of working days gets affected substantially, especially in November and December. Jonathan do you have the number of working days? We have it right here. A second, Franco, here I'll get that number for you.

I think it's from a monthly basis for the quarter. So we will have 19 days in November and then in December we'll have 22. But then of course that number in December is skewed again because depending on where Christmas is falling and New Year is falling, we lose working days. So you're absolutely right. So if we are able to maintain the same level, that would be fantastic. So that is yet to be seen, but the general tendency in the marketplace is to flatten out, taking out the seasonality and the fact of the holidays, number of working days.

Right. So I think that the one thing that we can take away from your commentary is that the end markets appear to have stabilized and are no longer kind of falling apart, right?

That's exactly the point.

So maybe this is a good question for Jonathan; if we kind of go back, forget 2008, which I think you described as wacko, which is pretty accurate as far as I'm concerned, but if we go back to 2007 and 2006, maybe more normalized, more stable environments, can you remind us of the approximate relative seasonality of the fourth quarter versus either the full year or the third quarter?

On a quarterly basis, as we have said before, fourth quarter is the weakest of the four quarters in a year. Fourth quarter is the weakest in our business when you look at it organically. And what we've also said is, let me just help you with this for the fourth quarter 2009, while we did not give revenue guidance in our EPS guidance we implied our revenue in the $485 to $495 million, which basically translates to let's say round numbers $390 million in year-to-date quarter 3, we're talking about a $100-$105 million type of range fourth quarter. That implies fourth quarter, using those seasonalities from (inaudible) million it is down just over 10%.

Right. That's exactly what I was looking for, because I think that's sort of what I remember from prior non-wacky years. Suri, the other thing that I'm very interested in getting you to give us some color on is over the last year you guys have made some extraordinary efforts to try to maybe restructure is the wrong word, but let me use it, restructure the sales force, increase the customer focus, really kind of be sensitive to the end market conditions. When you say that you're up 1%, down 1%, are you able at all to parse out of that how much is your success and your market share gains and how much of that is really just the market stabilizing?

You know, Franco, that's a very good question. That's something that actually we are unable to separate it, simply because if you take a sales person, we are constantly having new revenues. We actually measure -- we have no comparison with other public companies and so on, but we all the time mesh our performance of the sales people, although we don't publish those numbers, we know we are getting new revenues.

But what happens is constantly sometimes we get new revenues from the same customers because we are serving them in areas we didn't serve them before, we are selling them color, we are selling them additional digital and so on and so forth. And then of course we are getting new customers. But at the same time, the same customers, their traditional businesses are dropping so it's a very hard thing to separate. But all we know is because we are in the business of acquiring companies for a long time, we are starting to get a feel because we obviously are having inquiries and we have put the acquisitions on hold because we believe it's not yet time for us to kick start our acquisition program.

So in getting to see some of these numbers, we realize the competitors in our marketplace have taken a much bigger drop than we have. So that allows us to come to a reasonable conclusion that our sales efforts and the drive to make our company more sales driven -- that's the term I used to use and obviously you remember that well, in order for us to be more product focused, unlike being division focused those days, all those efforts we think are showing results. And I think that is why our revenues are stabilizing.

I think our revenues are stabilizing for a reason, because if you look at all the macro projections and look at what everything going on in the nonresidential space, we should still be experiencing substantial amount of erosion, I mean without a question. Because every indices you see and every prediction you see is showing a negative trend. But the reason I think it's flattening out is because of the efforts we are doing, using our size, using our footprint and the scope and the technology, it's showing results.

You've kind of stolen the thunder for my next question. But actually before I go there, Jonathan, just a real quick point here. So you are essentially expecting a charge for the refinancing but that charge has not yet been quantified or identified, is that why it's not in the press release but it may be in the 10-Q? Is that how we need to think about it?

Yes. Our 10-Q we'll file it early next week and we are fine tuning that number. The first point is this, Franco, we've said that the total amendment charge for this refinancing including the interest rate swap would range from $3.2 to $4 million or so. So that's the one charge. However, there's an element of that which applies to quarter 3, 2009 and that's what we are trying to fine tune and it could be in the range, as we said, $700,000 to $1.3 million, in that range is what we think is going to be booked. We are fine tuning it with our auditors, etc. It may be zero. But I think it's more likely and we should have the number in the next 24 hours, so that we would include it in our Q.

Okay. It just wasn't ready for the press release, which is why you highlighted that it might be there, but it's not in the numbers as in the press release.

Yes, that's why we just shared a range that we are calculating it to be.

And I'm sorry for one last one and then I really will let other people ask a question. So you've already answered this, but let me ask it explicitly. You've restructured the debt, you're producing great cash flow, your competitors are hurting more than you are, boy it would seem about time to kind of crank up that acquisition engine now. I mean it's obviously still too early, as you said, but what's it going to take for you to kind of get out there and pick up some of these distressed assets?

Confirmation that the market actually has bottomed out. Confirmation that our competitors have actually bottomed out. More than we're bottoming out or the market bottoming out, the confirmation that the competitors have bottomed out. Because we don't want to buy an asset let's say at revenues of $5 million because of what it is and where they are, watch them go down to $4.5 million or $3 million or whatever that number is. Even if they were going up, I would rather buy them on their way up at $3.5 million from $3 million than to buy it when they are going down.

And in a way if you think about it, you know, maybe it's a cynical way of looking at it, but it just so happens we are the acquirers so I guess we have to speak in the best interest of ARC, you know, if there are companies that are going away and I'm getting everything for free, then I may as well take it that way. That's another objective. Because we have seen competitors go away in some markets, especially smaller markets. We don't expect that to be widespread, but we certainly think there'll be more opportunities.

Although we are not buying companies, Franco, we are very active in the marketplace talking to the people because that's the right thing to do. Because we don't even have to reach out, because we are getting the calls. And the thing is to keep a pulse on the marketplace which is what we are doing. We think the opportunity will come, we all know that and it's no secret this is a brutal downturn and it's hard to escape that if you're a small company. So I think when the time is right we'll do it. And the way I am looking at it is we just don't feel we should open it up now. As you can see from our results, we have the cash, we have refinanced, so we have the structure ready to go; it's a matter of us feeling confident this is the right time, so that it will be truly accretive to everything that we are doing.

Well, I like the up part of a rollercoaster ride better, too.

Oh absolutely! Me too. Thank you.

Your next question is from David Manthey with Robert Baird.

I was wondering, in terms of the business lagging in economic cycle both in and out, I'm wondering is that still true today and if so, the upturn or the stabilization you're seeing right now seems to be fairly concurrent with the economic cycle. Could you fill us in on if there's been any change in that view?

No, not really. I think absolutely we lag the cycle; there is no question about it. That's just what it is, that's the industry and we lag the cycle. But if you note what I said specifically, we don't think the upturn is because the industry is turning up, we think the upturn -- it's not really an upturn, but actually the nullification of the erosion because of our efforts and just because of our position in the industry. So I wouldn't call it an upturn. I'm not even referring to it as an upturn.

I'm thinking stabilization. And the stabilization wouldn't have come now really, David. The stabilization would have come much later on. I think the stabilization is coming because of our technology, because of our additional sales, because of our efforts in non-AEC, because of our efforts in large national customer accounts. So all of that additional effort is actually resulting in somewhat differing that erosion; that's what's happening. I wouldn't classify it as an upturn just yet.

Okay thank you. And then second, as it relates to the upturn in the industry whenever that happens, should we still think about it in terms of sort of 8 to 10 months from approval to the bid where you'd actually start to see some revenues really flow in a meaningful way and if that's the case, are you seeing anything on the front-end of that pipeline that gives you some confidence that we might see something by, I don't know, late next year or something?

You know, 6 to 12 months is what we talk about. One can say 8 to 10 months, but generally it could be anywhere from 6 to 12 months, depending on the size of the project. Larger projects have a larger lag time. We haven't seen any up-tick. That's not there yet for sure, especially in nonresidential. So no, the answer to the up-tick part of it is, are we seeing anything in the pipeline, no. Everybody is talking about projects, everybody is looking at possibilities, but they are all on hold based on credit. That's the biggest thing; is the credit available for the [vertical] construction community. The big answer is, no. The answer is, not yet. So we are not seeing any up-tick, but generally it takes about 6 to 12 months.

Okay. And then final question Suri, I appreciate it. And forgive me if this is in the release, but do you give data in terms of number of active customers or is there some kind of way that you can show okay we are gaining share? Because I would imagine most of your customers are down in terms of what they're doing with you, but if you could show that okay with the number of customers that we're doing business with has increased, that would help sort of hang some context around what you're talking about.

No, we don't do that on a quarterly basis, in fact we don't track it on a quarterly basis, David. Every year or so we just take a quick count to know what our total number of customers is and it used to fluctuate significantly because of our acquisition strategy. But of course that has changed quite a bit now because we have not acquired new companies. But it's something that we can look at, it's a fluid number because we have a lot of small customers, daily customers and so on and so forth, but unfortunately I don't have a number for you on that.

(Operator instructions) There are no further questions in queue. Mr. Stickney, do you have any closing remarks?

Yes, I just wanted to say thanks to everyone for their continued interest in the company. We appreciate your attendance and attention on this call and by all means have a great evening. Thanks so much.

Thank you for participating in today's conference call. You may disconnect at this time.