ARC Document Solutions Inc (ARC) 2009 Q4 法說會逐字稿

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the American Reprographics fourth-quarter 2009 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Stickney, Vice President of Corporate Communications, you may begin your conference.

Thank you, Sarah, and thanks everyone for joining us today. With me are Suri Suriyakumar, our Chairman, President and Chief Executive Officer, and Jonathan Mather, our Chief Financial Officer.

The Company's release reporting financial results for the full year and fourth quarter ending December 31, 2009, was issued earlier today. We will review and expand on the information contained in the press release on this call, and then we will open up the call to your questions.

For your reference, you can access the press release and the Company's other releases from the Investor Relations section of American Reprographics Company's website at e-arc.com. A taped replay of this call will be made available beginning about an hour after its conclusion, and you can access the call any time within seven days from today. You can find the dial-in number for the replay in our press release.

As usual, we are webcasting our call today and a replay of the webcast will also be available on our 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. Please 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, February 23, 2010, 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 set forth in today's press release and in our Form 8-K filing. With that as a background for the call, I'll introduce our Chairman, President and CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon everyone. As we all expected the market was a difficult one in 2009 to say the least. In spite of the challenges, however, the Company performed very well enabling us to meet our obligations and invest in our future.

As most of you know, we have early visibility into our business. Realizing that 2009 was going to be a difficult year, we commenced our cost-cutting efforts in late 2008, and those efforts set the tone for 2009, where we continue to focus on right-sizing the Company given the extraordinary market conditions. Through 2009 our stated objective was to generate adequate cash, to meet our financial obligations, and to position ourselves for growth when the economy returned to normal. I'm proud to say that is exactly what we were able to accomplish.

First, we met our financial obligations comfortably through the first half of the year, which in turn allowed us to negotiate favorable amendments to our credit agreement. This, of course, has also positioned us well for 2010.

Second, we continued to generate substantial cash from operations, which allowed us to reduce our debt obligations by more than $85 million in spite of a drop in annual sales of more than 28%. Third, we were able to make significant investments of time, talent, and existing resources in business initiatives we believe will open up new revenue streams for us in the future.

I have said before that we will emerge from these difficult times a different company, a better company, than we have been in the past. These three accomplishments alone prove that we will, but there is more. Consider the following. We acquired building information modeling experts RCMS to provide outsource BIM services for our customers. We expanded our operations in China by acquiring another company in Shanghai.

We opened our first location in Bangalore, India, establishing a foothold in one of the most vibrant markets in the world. We also launched a new digital document shipping application called ishipdocs. We began licensing our print-tracking software, and upgraded MetaPrint, our print and imaging controller. And we also made significant upgrades to Sub-Hub, our online bid communication tool.

That is not all. Forbes Magazine named us to its Top 200 Small Companies for the third year in a row. We were able to make this list even after losing almost 30% of our annual revenues. We acquired two of the nation's largest architectural firms as global services accounts and secured the Boeing contract for two more years.

And finally, we launched riot Color, a separate division to enter the ever-expanding color graphics market. Hitherto, our efforts have been related primarily to our traditional customers. With riot we are now in a position to specifically target new, non-AEC segments of the market.

I have repeatedly stated that significant loss in revenues not only created excess production capacity but also management capacity, and I was determined to put it to good use. As a result, we tackled more during the worst year in our history than we have in several of the best years in our history.

While I'm enormously proud of our accomplishments, let me be clear. I am not saying that each of these initiatives delivered significant financial benefits to the Company in 2009. What I am explicitly saying, however, is that we are using our existing resources, abundant management talent, and excess capacity during these difficult times to prepare the Company for significant growth as the economy recovers.

Needless to say all of us would like to see our economy back on track and business as usual. While it is hard to predict when that will be, it is unlikely that we'll be experiencing any growth in our revenue streams in 2010. While the constraints of the credit market have eased, investment in commercial construction is unlikely until there is meaningful decline in vacancy rates.

However, when the recovery occurs we are well positioned to grow in three different areas. First, we expect a healthy recovery of revenues from our traditional customers. While growth in each area of our business may vary depending on the level of technology adoption that occurs in the market, construction will have tremendous potential when the economy picks up.

Second, we expect to recommence our acquisition activities when we see signs of recovery. It is our experience that after every down cycle, acquisition opportunities improve significantly. Third, the investments we have made in new revenue segments, such as color, global services and outsource BIM services will generate new sales. This will further diversify our revenue mix and reduce our dependence in our traditional market.

As I noted in the beginning of the call, the Company performed very well in 2009 despite the challenges we faced throughout the year. We met our financial obligations, advanced our business and technology agenda, and took steps to secure our future. While it appears that 2010 will continue to test our mettle, we are in an excellent position to leverage our strength and exploit our opportunities during the year. I look forward to reporting our progress to you in the coming months.

As noted in our press release today, we are going to maintain the practice of forecasting annual EPS and cash from operations. Thus we anticipate ARC's annual earnings per share in 2010 to be in the range of $0.15 to $0.30 on a fully diluted basis, and annual cash flow from operations in the range of $65 million to $80 million.

With that, I will turn the call over to Jonathan for some insight incrementally on our 2009 financial picture and then we will move on to Q&A. Jonathan?

Thank you, Suri. Looking across our customer base, the mix of AEC to non-AEC was relatively unchanged from the third quarter to the fourth quarter. Of our total revenue for the fourth quarter 21.8% came from the non-AEC segment with 72.2% coming from non-residential customers and 6% from our residential customers.

Our product and service mix remained stable as well. Facilities management made up 19.9% of our revenues. Digital services delivered 8.5% of our sales. 12.2% of our revenue was from equipment and supplies and the remaining 59.4% came from our base of reprographic services.

There were 63 working days for the fourth quarter compared to 64 days in the third quarter. There were also 63 days in quarter 4 of last year.

On a regional basis our year-over-year revenue performance was as follows. Southern California was down 32.2%, Northern California was down 30.2%, the Pacific Northwest was down 16.9%, our Southern Region was down 30.4%, the Midwest was down 23.5%, and the Northeast was down 31.7%. Our international operations, excluding Canada, are up 24.7%.

As a final note regarding the P&L, most of you are aware we amended our credit agreement last year, and thus incurred a charge of $2.6 million that included a fee to amend our interest-rate swap transaction. $1.7 million of the total $2.6 million charge was recorded in quarter four.

In reviewing the balance sheet, we ended the fourth quarter of 2009 with a cash balance of $29.4 million, despite a $35 million paydown, early, of our credit facility in the fourth quarter. Days sales outstanding, or DSO, were 43 days in the fourth quarter of 2009, considerably lower than 48 days in quarter three due to our continuing aggressive collection efforts.

Total debt, including capital leases, at the end of the fourth quarter 2009 was $274.2 million, down from $317.6 million for the third quarter of 2009 which is due to the early paydown of $35 million in conjunction with amendment credit agreement and $8.4 million in scheduled debt payments. The ratio of debt to trailing 12-month EBITDA, excluding the goodwill and intangible impairment, at the end of the fourth quarter was 2.7.

Cash flow from operations was $97.4 million in 2009, or $2.16 per fully diluted share, thanks to a better fourth quarter than anticipated. This compares to $127.3 million, or $2.80 per fully diluted share in 2008.

I think that covers the fundamentals for the moment. So at this point, I will turn the call back to our CEO, Suri.

Thank you, Jonathan. Operator, at this time we are able to take our callers' questions.

(Operator Instructions) Your first question comes from the line of Andrew Steinerman with JPMorgan.

Hi, gentlemen. Could you go over your comments about 2010 will not experience growth? Did you mean that no quarter year-over-year will experience growth, or did you mean no quarter sequentially would experience growth?

The way we are thinking about this is that obviously we know that in the latter part of 2009 the decline kind of leveled off, it is not declining any further. So we expect that trend to continue during 2010, and in that aspect we attribute that to the fact that we are gaining a little bit of market share on some of the efforts, new efforts we are putting in to go after non-AEC markets are helping us.

So we are hoping that in 2010 that we will continue the same level. Having said that, early part of the year we have a little bit of softness because of the seasonality, and of course the first couple of weeks in February didn't help a whole lot given the extreme weather conditions. Indeed several of our locations were affected.

But in general 2010 we don't expect it to get any worse. Although the numbers projected by FMI and McGraw Hill show that there will be a decline, we think that given the fact that we are taking some market share in our new initiatives we will be able to hold on or rather offset some of that decline.

I didn't fully capture that. Maybe if we could just focus at the beginning of the year, do you feel like we are at a point of sequential stability? Like when we look at first quarter versus fourth quarter, revenues could be stable? My question was on a sequential basis do you feel like you will hit stability or growth either early or during the year, sequentially speaking?

I would say stability, plus or minus 5%.

In the first quarter?

In the first quarter.

Thank you very much.

Your next question comes from the line of David Manthey with Robert W. Baird.

This is Luke Junk sitting in for David today.

Okay.

So can we touch on digital trends a bit here? Did you call out what they were as a percent revenues this quarter?

Yes. Yes. I think it is 8.5%.

Okay. And then just thinking about activity levels in your digital, obviously you have put some new initiatives out there this year. Are you really seeing any difference in those trends versus overall revenues or are those largely tracking in-line still?

They are pretty much tracking in line. The only conclusion I can come to, or the implied conclusion would be, given the fact that there is a lot of erosion of work from our existing customers -- not only when there is less work it doesn't mean that is just only analog work, it is work which we do for them both in digital and analog.

I think there is erosion in the digital work, but I think some of that is offset by the work we are getting in the color area and the non-AEC area. But it is not enough to show a huge difference just yet.

Okay. And then, thinking about your digital service offerings versus some of what your competitors are offering, are you noticing any differences in their behaviors as the downturn goes on here in terms of discounting or trying to package those services or has their behavior been pretty rational still?

Yes, it's rational, but of course it is affected by the economy. For example, we have not seen any one of our competitors put out new technology products. We, for example, released ishipdocs. We also released new versions on MetaPrint, on Abacus, and Sub-Hub. We updated all of them during the year in order to increase the efficiency of these products.

We haven't seen any of that in our competitors products, whether it is in the plan room aspect of it or any of the tools aspects of it, especially from within the industry. There are some products outside an the industry, like tracking tools and so on. They have done some work, but we have not seen a whole lot from those competitors from within the industry.

So that suddenly gives us the advantage to be able to sell more and impress upon our customers, even though the market is down, given our size and scope, we will continue to invest in the industry and invest in our products and will improve the products even during downturns. So that certainly puts us in a better position.

With regard to the behavior itself, I wouldn't call irrational, but there are pockets of areas where there is pricing pressure. The pricing pressure comes in areas where customers are looking for PO print-related work. But if the customers are trying to centralize the work, put it on a single platform, then most of our competitors, traditional competitors, are unable to provide those services while we are able to provide those services.

Okay. That is helpful.

That is where we can take market share.

Sure. Sure. And then just circling back last to your comment that in the first quarter you would expect some stability, call it plus or minus 5% relative to fourth-quarter revenues. As we get through the year thinking about the sequentials in terms of normal seasonality, if you will, given your comment that the declines have kind of leveled off here, would it be fair to say that we might see something resembling normal seasonality just off this lower base that we are at now, or is that unreasonable still?

Right. In a usual year, we are very comfortable predicting the first quarter because all you had to do was adjust it for seasonality and we have a good understanding of what the first quarter is. But I must say under these economic conditions it is very difficult to predict how exactly our customers are reacting, because obviously with the credit situation starting to thaw a little there is more talk about some of the work being continued. There is more talk about stimulus dollars flowing in.

So there is -- the market seems to operate with a lot of hope, but it is very hard to exactly predict how the market will behave. So when you actually talk about what do you think the first quarter is, if you look at the trends we have had for the last four months, from last year, in 2009, the market has reasonably steadied in terms of the revenue. And that is what we expect in the first quarter.

But having said that, given the seasonality and given that there is some amount of unease in the marketplace I am qualifying that by saying maybe plus or minus 5%.

Sure. Okay, that is helpful. Thanks, guys.

You are welcome.

(Operator instructions) And your next question comes from the line of Scott Schneeberger with Oppenheimer.

Thanks. Good evening, guys.

Good evening.

Just curious on the weather impact, there have been quarters in the past where weather has had a sizable impact, and while we are talking about the 5% plus or minus in the first quarter could weather have a sizable impact, a few percentage points? Or it is too early to determine?

Scott, if indeed -- if it is generally an average year, these things we could easily ignore it or the impact would have been less meaningful. But in a market like this, in conditions like this, where we are looking at pressure on the top line, for example in East Coast, we had several of our divisions closed four or five days. So that entire segment we lost our daily sales revenues. And in our business people don't come back and buy more the next day, it just gets put off.

So we are just cautioning and pointing that out that aspect is there. We have had several branch closures because certain cities were shut down during that period of time. But in general, in a market when it is under normal conditions that wouldn't have impacted us so much because the impact would have been different. But under these conditions I think we just have to be mindful of the fact that anything negative now will actually hurt the numbers.

Okay. Thanks. You mentioned when you were giving the regional breakout, international without Canada. Kind of a housekeeping question. Where does Canada land in that mix?

And then more to the meat, what are the immediate plans for international? You are probably still with the outlook you have provided want to remain in cash preservation mode and debt reduction, but you have started some things internationally. How active are you going to be over the coming year?

Okay, so to answer the first question -- Jonathan jump in case I am not accurate -- so Canada is broken into the two sections. I think Vancouver and then the northern part of it is in the Pacific Northwest area, and then of course Toronto would come under the Midwest or the Northeast numbers? Could be.

So it is actually, because of the regions are handled regionally by the Senior Vice Presidents, everything north of Canadian, Vancouver and areas like that, are attached to the Pacific Northwest. And then of course Toronto is tied into Northeast.

With regard to international operations, obviously all of the things we did during these times, obviously the economy is affected in all the areas. For example, in London things are still bad. Europe is still bad.

China we have been doing reasonably well, relatively. We have obviously acquired and we seem to experience growth in those marketplaces. And India is just a fresh step. We just opened our branch. It seems very vibrant, and we are very hopeful that we can continue to grow there.

Okay. Thanks. And then with regard to your ability to further reduce costs, it sounds like you are looking for kind of steady top line as we move ahead. If we have a leg down, how much more flexibility is there with regard to cost removal, and what are your plans for that for the immediate future?

Right. In terms of reducing costs, we can continue to work on that. Up to now, right where we are, as long as the revenues don't slide down any further, we don't feel like we need to reduce the cost any further, especially given the year, the last year that we completed. As you can see last year, middle of last year I stated we have largely right-sized the Company.

And that was proven by the fact that in spite of the fact that we had had almost 30% loss in revenues, we still were able to generate $90 million-plus in cash, meet our financial obligations. The whole idea is we want to continue to build on the business during this downturn.

So as it stands now, we don't see a big reason to have significant cuts. Although, the culture right now in the organization is that anything which is not producing, anything which is not returning the investment on, we are basically trying to clean it up. And so that day-to-day controlling of cost and keeping the fist tight would continue throughout the year.

But there is no reason for a major cut; we don't see one now. But should the market suffer, take a big beating, or something really unexpected happens, which is very unlikely at this point in time, we have the ability to further cut branches, shut down certain areas, rationalize some of the operations. We will have some room to go.

Okay. Thanks. And this is all with consideration primarily for the cash from operations guidance, which I assume is one of the key metrics for you to operate to this year?

Absolutely. Based on the projections we have, based on the numbers we have, we are confident based on our performance last year that we can continue to perform at those levels as long as the variation in revenues is within plus or minus 5%, Scott. If that remains like that, and we feel like it will, I think we will comfortably make those cash predictions.

Great. Thanks, Suri. Thanks Jonathan.

You are welcome.

Thanks.

At this time there are no further questions. Presenters, do you have any closing remarks?

Thanks, Sarah, and thanks everybody for your attention today and your continued support of American Reprographics Company. Have a great evening and we will talk to you next time. Bye-bye.