ARC Document Solutions Inc (ARC) 2012 Q1 法說會逐字稿

Good afternoon. Welcome to the quarter one ARC earnings conference call. My name is Samantha and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions). At this time I would like to turn the call over to David Stickney, Vice President of Corporate Communications for ARC.

Thank you Samantha and welcome everyone. Joining me are Suri Suiryakumar, our Chairman, President & Chief Executive Officer, Dilo Wijesuriya, our COO, John Toth our Chief Financial Officer, and Jorge Avalos our Chief Accounting OfficerOur first quarter results were publicized earlier today in a press release. You can access the press release and the Company's other releases from the investor relation section of ARC's website at www.e-arc.com.

A taped replay of this call will be made available several hours after it's 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. We are also webcasting our call today as usual and the re-play of the webcast will be available for 90 days on ARC'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, 2012, and accept 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 are 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 Suiryakumar. Suri.

Good day, David, and good afternoon everyone. As noted in our earnings release, the first quarter revenue was $103.6 million and a gross margin of 30.8%. Our adjusted EBITDA margin was 15.4% and cash flow from operations was $12.4 million equating to $0.27 of cash flow per share. Our adjusted earnings per share was $0.00.

We are affirming our annual forecast for the full year of 2012. We expect annual EPS to be in the range of $0.05 to $0.10. We expect cash flow from operations to remain strong ending the year in the range of $40 million to $50 million. Our revenue from traditional services remain challenged. The reasons for these are not surprising, and we have discussed them at length during previous earnings calls.

Despite some year-over-year growth, reported in construction spending in recent periods, these figures are benefiting by comparison given the 12-year low reported in construction spending last spring. No matter how you look at it, economic conditions have remained soft for private non-residential construction. There has been some commentary put on the potential for increased construction activity during the latter half of the year and other forecasters have focused on the possibility of another year like 2011.

Where our early data points to strong recovery only to be followed by lackluster results. The current [employment] suggest that this may be the case, especially with the elections later in the year and the apparent deadlock in congress. In either case we are treating both these ideas with healthy skepticism given our experience with the construction forecast of the past few years. If a significant increase in construction activity takes place, we are well prepared to capitalize on it.

The improvements we have made in operational efficiency, technology development, and [resizing] the organization will serve us well whenever recovery gets under way. However, such a recovery may take time given the current economic conditions. Therefore, we have put our focus on new initiatives that will drive organic growth from the same customer base.

Our sales initiatives in management services, (technical difficulties) and digital services are all in high gear. These efforts will help offset any revenue lost due to economic conditions or changes in our customers' behavior due to the increased adoption of technology. The bright spot in the first quarter for ARC was the result of aggressive efforts in our MPS sales team. They produced more than 10% growth for the fourth quarter in a row led primarily by the expansion of our business with larger clients.

All of our clients remain robust, and we continue to mine the top 100 construction clients for new business. We are also very encouraged by the progress in our regional MPS program. Over the past year our strongest regional sales executives have been assisting in identifying and securing our large accounts in their regions. With the national program well established we are starting to see local prospects increase, and we look forward to their contributions in future quarters.

Digital color sales decreased 5.5% in the first quarter, but comprised 29% of our reprographics revenue in the first quarter, which was 27% in the first quarter last year. Clearly demonstrating colors growing influence in our product mix. Three factors affected color sales in the first quarter.

First, we made some significant changes to our color sales team, investing in training and other on-boarding activities early in the first quarter which [dampened] the activity. Second, we had several large local sports oriented color products in 2011 that were not repeated this year. And third, a large [non-easing] global solutions client reduced their work with us, and that added pressure to the top line in color.

With that said, our color sales team is integrated with new people and new ideas. We have recently launched a whole new marketing campaign for the year. We are aggressively pursuing new accounts and we expect to be back on track and improving our performance in the coming quarter.

Digital services are starting to make a big impact with our customers. Although our digital services revenue increased by just 2% year-over-year, it represented 9.3% of our overall revenue and we are sensing greater adoption of technology by our customers in nearly every area of our business. A case in point. With our managed file transfer tool we saw an increase in large international jobs being managed with ishipdocs during the first quarter and have generated more than $2 million from all digital shipping tools to date.

In April a new version of ishipdocs was released with new features that include Chinese language support to facilitate transmission to our service centers there, better contact integration, and options for customized branding. PlanWell Collaborate also received major upgrades that included support for 3D files, clash detection to identify problems in building information modules, and the announced file viewer and more. These tools continue to generate interest with new clients, assist us in deepening our existing customer relationships and expanding the range of our services.

Our equipment and supplies business grew primarily because of sales in China. The increase in sales has largely been a result of the infrastructure we have put in place there. We have the people, resources and experience to assist in these growing markets, and equipment and supply sales make up a larger part of the documents solutions in China than we offer here in the United States.

The increase in equipment and supply sales in China, along with sales here in the US, affected our product mix and diluted our gross margin by an estimated 250 basis points as compared to quarter one of last year. Primarily due to the high end material cost associated with these sales. That said, gross margin for the quarter came in nearly at 31%. A very healthy performance even though it was pressured by the product mix and lower sales for the quarter.

The implementation of our Stay Fit program over the past several years has served us well, and kept us firmly focused on cost controls. The benefits of brand and footprint consolidation and aggressive management of labor costs. These have helped offset lower margin sales for the first quarter and we believe they will deliver margin expansion in the future when combined with top-line growth.

The benefit of our Stay Fit effort is also clearly in the strong adjusted EBITDA of 15.4% in the first quarter of this year. Finally, our relentless focus on cash generation and the strength of our balance sheet deserves your attention. The Company is well positioned to maintain its leadership position in document solutions during these difficult times and continue its expansion into our new service lines.

With this in mind I'll turn the call over to John to review the specifics of our financial and then we'll open the call to your questions. John.

Thank you, Suri, and good afternoon, everyone. I'll briefly review our revenue mix for the quarter and then work my way down the income statement to our earnings results. Then I'll speak to our balance sheet and cash flow results.

With regard to revenue mix by customer base, revenue from AEC customers accounted for 77% of our total revenue with 23% of our revenue coming from non-AEC customers. This is largely in line with trends we've seen over the past 12 months. As I mentioned in our previous call, our stable customer mix suggests that while a material increase in construction projects has not occurred, we are still finding meaningful ways to leverage our AEC customer relationships and sell our new products and services to our existing customers.

With regard to revenue mix by service, reprographics services delivered roughly 50% of our overall revenue. Our facilities management sales delivered approximately 26% of our revenue, and equipment and supply sales delivered approximately 15% of our revenue. As Suri mentioned, digital services delivered 9% of our revenue.

As a reminder, our reprographics services revenue as reported in our financials includes both color and digital sales in addition to black and white print sales. And the FM or Facilities Management line item includes our Managed Print Services or MPS sales. For your daily sales calculations, the first quarter of 2012 had 64 days as did the first quarter of 2011.

With regard to sales by geography, our year-over-year regional revenue performance for Q1 2012 was as follows. Southern California was down 12%. Northern California was up 1%. The Pacific Northwest was down 7%. Our southern region was down 10%. The Midwest was down 2%. And the Northeast was down 2%.

Our international operations, excluding Canada, are up 61% largely due to our very strong quarter in China. As Suri mentioned earlier, the gross margin was diluted by the growth in our equipment and supply sales, particularly in China. This decrease in margin was largely offset by the cost savings we achieved through our Stay Fit program executed during the course of 2011.

At $4.6 million, amortization of intangible assets was essentially flat for the quarter as compared to the same period in 2011. I bring this to your attention because the accelerated amortization of our trade name, which we initiated during the fourth quarter of 2010 and which was roughly $800,000 per month, ended April 30th. You can expect to see a decline in amortization of intangibles in future periods.

Net interest expense was $7.4 million during the first quarter as compared to $8.2 million in the same period in 2011. And consists primarily of accrued interest on our 10.5% high yield notes issued December, 2010. Moving on to the balance sheets and related metrics. We ended the first quarter of 2012 with a cash balance of $29.8 million. This is a 17% or $4.4 million more than we had this time last year.

Day sales outstanding, or DSO, were 52 days on the first quarter of 2012 which is in line with our past Q1 performance. Total debt, including capital leases, in the first quarter of 2012 was $226.5 million. Down from $247.8 million in the same period in 2011. An almost 9% decrease on a year-over-year basis.

I should also point out that the new $50 million asset supported senior facility we put in place in January remains entirely undrawn. The ratio of debt to trailing 12 months adjusted EBITDA at the end of the first quarter was below 3.4 and adjusted EBITDA coverage of interest was greater than 2.2 times. As I wrap up this financial review, I think it's important to recognize how actively we are managing and improving our liquidity in capital structure.

To reiterate some of the highlights, year-over-year cash flow from operations is in excess of $12 million versus only $5 million during the first quarter of last year. Up more than two and a half times. This outstanding result is due to the company's aggressive and ongoing cost management. Cash and cash equivalents is up more than 15% on a year-over-year basis.

And although we have grown our FMMPS business by more than 10% on a year-over-year base, our CapEx is down 8% for the same period. Our debt plus capital leases is down from $248 million to $226 million on a year-over-year basis. As I said, our new revolver remains untapped and our US based senior debt is effectively zero which leaves just $1.3 million of senior debt based in China.

And our net changes in working capital added $2 million to our cash from operations versus last year when net changes in working capital reduced our cash by $9 million. And when it comes to operating capital, the effect of our aggressive management stance is best demonstrated in our adjusted EBITDA margin. It grew from 13.9% in the first quarter of 2011 to 15.4% in the first quarter of this year.

As Suri mentioned, we are confident about delivering between $40 million and $50 million in cash flow from operations in 2012. While we remain constantly focused on improving our revenue picture for ARC, we continue to have confidence in the underlying financial structure of the Company. For further details I encourage you to look at our 10-Q which will be filed tomorrow. At this point I'll turn the call back over to Suri.

Thank you, Jon. Operator, at this time we will be available to take questions from the callers.

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

Hi, this is Molly McGarrett for Andrew. I was wondering if you could give us break down of how your sales force breaks down between service lines. I know you talked about ramping up some new sales initiatives in MPS, but a breakout of that would be great.

So, because our sales force specifically is not broken down, Molly, by products because we have a lot of sales team members actually work what we refer to as [gender] list who would be selling FMMPS, color, and also traditional reprographics services and digital services. Now there (technical difficulties) in regions in certain areas we do have a MPS specialist or a FM specialist. We could have digital specialist, depending on the size of the region we might have one, two, or three specialists.

What we have for Riot is, for the Riot color, we have two brands of color inside ARC, one is the ARC color, which is the traditional color sales we have with our existing customers. Then we have this new brand called Riot where we have a separate sales force for that. Riot sales team is about 27 Riot sales reps we have across the nation.

And we are continuing to hire them as we have been opening the centers, we have been hiring them. So it's about 27 separate reps for Riot. But everybody else is actually together as a sales group which totals about 230 sales reps round numbers.

Got it. Thank you. And then just I thought your comment on your regional sales was interesting just on a breakdown of Northern California and Southern California, the divergence there. Do you have any idea why they were so different.

Yes, obvious they are different markets. Southern California, the dip we had there because of the recession has been pretty aggressive. It is starting to come back. There are green shoots all over, but there isn't enough revenues to actually prop it up. So we are still seeing the impacts of that housing down turn that we had, that we're still recovering from.

I think it is starting to show signs of life, but it is still there. The difference in Northern California, the impact was not as bad in the Northern California area, but what is actually good about Northern California area is the silicon valley section, the technology sector, is starting to show a lot of life. So there is a lot of activity going on in the tech companies which actually help us prop the numbers. So that is the one which is helping us.

Okay. Great, thank you.

Oh, you're welcome.

Your next question comes from the line of Scott Schneeberger.

Hello.

Hello, yes, go ahead.

Hey, it's Ryan Davison here for Scott. I just had a few questions here. First, can you guys kind of touch on any inquiries maybe outside of bigger projects? And also another quick question about the move to digital in the core repro market, what is the latest thinking on that rate. And also, does the proliferation of ipads speed that up any.

Okay. So three questions. I'll try to remember all three of them. The first one is bigger projects. There is, there are talks about a lot of new projects, but we have not seen them really materialize. We will not probably see any of them through the end of the year given the fact that this is very sensitive year, election year, there are a lot of things on hold.

So people have talked about a lot of sports stadiums, arenas, there have been other shopping centers. There are talks about a big new hotel in Las Vegas, but none of them really have come to fruition in terms of reprographics works. That is something big showing up on the radar screen, although we have constantly monitoring that.

The second one you had was the impact on digital. So we are starting to see more customers adopting digital tools. So the rationale behind that is when we are talking to customers today, they're more receptive to receiving proposals about digital archives.

There was a time they would not be interested, or that would not be a subject of discussion. These days when we go up to the customers and say, you're printing all these things, putting them in boxes and storing them all over, wouldn't you be interested in actually storing them digitally as you go along, is starting to gain traction.

We are also, because we offer software solutions for our customers to actually collaborate on the web, we can use that same program to archive the documents while they are collaborating, in other words, while they are developing the documents or while they are collaborating, all of those change orders, all of those versions, all of those [attritions] can be actually sent directly to archive. Those kind of activities are starting to become more frequent.

I wouldn't say it's a flood gate but more frequent within our customers. So that's quite connected to your third question. Are ipads making an impact. I think definitely ipads are making an impact, or what you refer to as a tablet. People are using more tablets.

They're getting used to viewing that information or moving through that information through tablets. But if your question was, are they seeing drawings on tablets? I don't think we are there yet, but they're certainly looking at documents regard to product documents, project schedules, information, specifications, that's happening more and more. A few people might be also looking at certain drawings and so on and so forth, but that is not the biggest impact. The impact is the use of tablets and ipads have certainly accelerated the use of digital solutions in our customers' offices.

That's helpful. Thank you very much.

Okay.

Your next question comes from the line of Brandon Dobell.

Hi, guys.

Hi, Brandon.

I want to make sure that I understood what you're saying with regards to a couple of projects that were abnormally large in 2011. So two perspectives there. One, did I hear that correctly, and how do we size that out? And is there anything else in the remainder of 2011 that we should think about as we are trying to look at the core business for the remainder of 2012 that would create a weird comparison either good or bad.

Right, so when you are talking of projects, you were talking about the fact that I was saying there was a drop in our color business, meaning quarter-to-quarter we didn't have the same color numbers. That's because some projects we had in 2011, which we didn't have this year.

Got it, okay.

I was referring to the fact there. We did a massive project for final four in an obviously sports related in Texas. Dilo is adding here. He's right next to me. That particular project gave us obviously a very large revenue, and we didn't have that this year. That's one of the reasons why going from quarter-to-quarter that number showed different. That's what I was referring to.

Okay. And with the strong growth that continues at MPS, how should we think about, or I guess, what kind of assumptions are you making for what that does to other cash collection cycle in terms of your free cash flow estimate? Does it really change the DSO? Does it change how you think about how much cash you use for the remainder of the year, if this pace keeps up, kind of the core reprography business, maybe just bump it along here. Should we think about the cash flow any differently then we are thinking about it now?

Sure. No I don't think it's going to change the cash flow picture at all. What it is going to do is, that as we continue to drive this MPS sales, we are going to have, that's going to drive us deeper into our customers with regard to not just only project-related work or onsite and offsite related work but now also into the work we do inside the offices. So it actually makes us the complete solution provider.

We do onsite, we do offsite, we also do all of the work in the offices. So that actually becomes better and better. But in terms of the cash flow or the billing cycle, the identical to what we have been doing in the reprographics work, with regard to projects work, all the FMs we have had in the past. In fact, it's almost like a subscription model, right?

It's basically, is that what you are saying? It's like a subscription model. I have John Toth next to me. It's basically cost of copy. And that's why we do that also with the FM. It's a similar model. It's not going to have any negative or detrimental cash implications on our cash flow.

Okay. And then final one for me. I don't know if you guys had talked about this previously or not, is there any way to look at, I guess from a cross sale ratio or a tie ratio, something that tells us these many clients use one or more, two or more or three or more of our lines of business, and some way to see how that trajectory is moving? I guess I'm trying to get a better idea of how much you're selling into the existing customer base as opposed to creating new customers.

Right, that's a very good question, and in fact, it will be an interesting study. We haven't actually tried to identify how much of our business is actually being sold to the existing customer base. But one of the focuses we have is products like MPS, it's something very new. We have started in the last 24 months, or 18 to 24 months, and its starting to gather steam.

It certainly helps us a lot with larger clients because we are going to the national and global clients, and we are extremely successful in that field. What we are trying to do is we are trying to replicate the same level of success with regional clients and smaller customers which we are starting to sense. Therefore, when we sell those programs, we use our same sales channels, we have distributional channels we have on the ground to be able to promote that.

We have not done a specific study to be able to see whether each of those clients use that, but what we do is we take a report at the end of the quarter or at the end of the month, depending on how the senior regional vice presidents want to use it. And they would say, okay this customer uses this much business, but no color business, so let's go after the color business. Or they don't have a MPS inflation. That's how we are identifying. So your question is in line with what we do on the ground, but we have not quantified that yet to be able to speak about it on calls.

Okay. Thanks a lot. Appreciate it.

Alright. Thank you.

(Operator Instructions). Your next question comes from the line of Brad Safalow.

Thanks for taking my questions.

Oh, you're welcome, Brad.

Just first on the ishipdocs. You pulled out some statistics related to them, and I want to make sure that I understand them correctly. You said $2 million of revenues to the Company. Is that inception to date?

No, no, it's actually for this year. We have got $2 million. So what we are doing, Brad, we are going to our customers and promoting this aspect of, if you're doing overnight shipping or rather courier shipping, if you are shipping documents by courier, we can speed that process up, it can be greener, and the cost is lower and the time is substantially cut down.

That concept of we'll take those digital documents into our system, ship it digitally, meaning using two ishipdocs to either London, China, or wherever, and be able to deliver them faster. That concept has worked very well for us. Wherever customers have large volumes of documents which they need to deliver urgently. Because of the fact we not only just ship them digitally, but we also be able to shop it to our locations, print them and deliver them.

So we have what you call a global distribution center, right? GDC, set up where we have 350-plus locations where we can track these documents, deliver and give personalized service. That has actually helped us. These are new ways that we are reaching out to our customers and using our digital technologies to help them to deliver documents. So that's about $2 million in revenue.

Just to be clear, I know you charge some modest fees to third parties that are on your platform, and I think even to customers. The $2 million is just project-related work.

Sorry, say that again? I missed the last part of it, what is the last part.

The $2 million is just specifically for the project work you generated on the platform.

The $2 million basically comes out of this kind of work we do for our customer, and 40% of that would be pure digital costs, right? 60% would be print-related.

Okay.

If you know what I mean. So if you print something in China you spend $1, so probably $0.60 went, because we are printing and delivering that it's a color document or whatever, but 40% we charge for shipping and that 40% as you know is 80% or 90% margin because there is not much cost in shipping. We are not physically shipping anything.

And just to understand the network, I think on the ishipdocs site you, you say that you have 400 locations. How many of those are yours versus third party.

Right, so we have, in the US, we have, I'm just looking at this number here. We have a total of 214 locations. 193 are in the US. We have seven in Canada. One in UK. 11 in China, and two in India. Everything else, Brad, are partners, basically.

Okay, you talk about, kind of the sign-up rate for the partners? What have you seen? I know you've been spending some more time on this recently.

We've been keeping, if you have more jobs than we can consistently sign up more partners. So it depends on how much work is flowing. So we've been signing them up. Also we have been encouraging them to do reverse shipping, meaning encourage them to ship backwards into the US. So up now to about 350 dealers, in terms of partners? Total locations is about 350, Brad.

Okay. And just the $2 million compared to a year ago was what?

Do we have a comparison of $2 million a year ago? We don't have that number off the cuff, Brad.

Okay. That's very helpful. Just going back to the revenue growth you see now, and I guess it was the legacy FM line versus now FMMPS, is there any way you can extract for us what the actual impact was exclusively from the MPS initiative versus what you're actually seeing in terms of FM revenue, or the change in revenue on the FM side. I know there are overlaps, so it may be hard to say.

So we have been working, it's one of our projects, Brad, it's something that we plan to do over the year to be able to get that clarity because as you know, FM and MPS, you rightly said, can be quite a bit overlapping and that's what is happening with our customers. Sometimes we go for FM extension, which is a straight forward large format printer. And then they would say, oh, by the way, we need copiers, too. Then we would have now a large format printer and two small format copiers, but we technically don't consider that an MPS because it does not fall within the description of how we go after the MPS business. So we are trying to come to terms with that.

Right now it's in one single docket, but most of the growth in that segment is coming from the MPS. And that is actually driven by, not by small customers but large customers, where we have gone into national and global companies, and placed, say, 500 output devices, 800 output devices. So we know that kind of growth, any improvement of the numbers are largely coming from large customers. But we are working on it, and hopefully we'll be able to give you more color in the latter part of the year.

Okay, and this is another question I ask every quarter. You said 214 branches in the US. Is that right?

193 in the US.

Sorry, 193.

Seven in Canada. That would make about 200 in North America.

214 overall, and you did $63 million in reprographics revenue, which my math said, revenue per branch is 13%. I know you guys don't think of it that way.

Yes.

Did your capacity utilization, I think you said last quarter you were at 50%, you've been able to move the needle a little bit there?

Yes, but we will think that the capacity is largely there, Brad, because we don't run the second and the third shifts yet in any of the branches. That's all very possible. So if the market turns and the work starts coming, that will be wonderful. That is the least of issues.

Yes, but you are where you want to be in terms of footprint at this point.

Yes, very much so. What we're finding out, having that footprint gives us significant and specific advantage over other providers who can pretend to, or not pretend to, want to give similar services because we can do onsite, offsite and virtual. So when we are competing with customers, or other companies like Xerox or HP, in management services, that's the distinct advantage we have.

Where we can go to the customers and say we're not going to outfit your entire office with more printers or maximum number of printers. When you work with us, we will install the minimum number of printers in your office, and five miles down the street we have a location which can actually print and deliver all of your overflow capacity.

I guess I was just surprised that you actually reduced the number of branch locations quarter-to-quarter. That's what I was referring to more.

Right, what we are trying to do, Brad, we are trying to consolidate obviously and improve the efficiency, even now there are branches because of lease consideration, existing leases, we have not been able to rationalize them. So the whole idea, if you think about it, these opportunities are largely available in major metropolitan cities. Right?About 50 markets. That's where the biggest opportunities are for MPS. That's where the biggest offices are, that's where the biggest customers are, so all the major markets.

If you take the major markets, that is where we want to be largely within the metropolitan areas. So there are still some offices with just large footprint but we have not been able to convert that yet. We want to, because the missions are faster, quicker, so the new technologies are helping us actually reduce the footprint inside the offices. I think over the year we will still make them more and more efficient, without a doubt.

Just in terms of what you have on the lease horizon, and in terms of expiration, your at 214, how much more can that go down this year.

Because we have a very high visibility of when the leases are coming up for renewal, but from a branch network point of view, I think we have a solid branch network, and the locations are very good, very competitively placed. But what I tried to do is, every time we have a lease coming up for renewal, we will, I'll try to find a way to reduce the footprint of that location. Right?So the branch numbers won't get eliminated unless it's really, really required. What I will do is, probably, from a 10,000-square-foot subsidy I might bring it down to 6,000 or 7,000. Ideally reduce the operating expenses.

Okay. Thanks for all the detail, guys.

All right, take care.

There are no further questions at this time.

Great, thanks Samantha. Ladies and gentlemen, thank you very much for your attention and continued interest in ARC. Have a great evening and we'll talk to you next time. Bye bye.

This concludes today's conference call. You may now disconnect.