ARC Document Solutions Inc (ARC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ARC Document Solutions third quarter earnings report. Today's conference is being recorded. And at this time, I'd like to turn the floor over to Mr. David Stickney, Vice President of Investor Relations. Please go ahead.

Thank you, Greg, and welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer. Our third quarter results for 2017 were publicized earlier today in a press release. The press release and other company materials are available from our Investor relation pages on ARC Document Solutions website at ir.e-arc.com.

Please note that today's call will contain forward-looking statements that fall within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are only predictions based on information as of today, November 1, 2017, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings.

This call will also contain references to certain non-GAAP measures, which are reconciled in today's press release and in our Form 8-K filing. I'll now turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon, everyone. The third quarter affected us on a number of fronts this year. Lower sales and pressured margins obscured some of the progress we made, but did not diminish its value. We continued to see smaller declines in construction printing volume while building back and protecting our print revenue. MPS sales also improved on the performance of Q2. And AIM sales, though small, were up more than 7% year-over-year. We also saw continuing progress in building our facilities management pipeline, and our potential customers are expressing significant interest in the new product. These were all good signs. But as I have said before, driving change is disruptive, and periods of lower performance must be expected. Overall company sales were affected by 3 primary drivers: First, print sales, while moderating, continued to decline; second, the hurricanes in late August and early September disrupted sales significantly in South Texas and most of Florida; third, we just had one less business day in the quarter relative to last year.

Margins were affected by lower sales, a difficult mix and high employee cost than usual. And ensuring the well-being of our people during the storms added pressure to our bottom line. Combined, these issues caused us to issue the revision in our annual forecast, which we announced earlier today in our press release. We are now forecasting adjusted earnings per share to be in the range of $0.12 to $0.15. Our cash flow from operations is expected to be in the range of $45 million to $48 million. (sic-see press release "$45 million to $49 million") And EBITDA is forecasted to be in the range of $52 million to $56 million. (sic-see press release "$52 million to $55 million")

Before I turn the call over to Dilo and Jorge to give some details behind the events of the quarter, I would like to comment on the circumstances around -- surrounding the hurricanes. Ten of our service centers and more than 120 people were directly in the part of Hurricane Harvey. Seven more service centers and virtually all of our people in Florida evacuated in advance of Hurricane Irma's landfall. While our service centers escaped significant damage, several of our employees lost their home and everything in them. Nearly all of our people who evacuated suffered losses of one kind or another and returned home to a very uncertain condition. In the face of these extraordinary circumstances, we elected to pay our affected employees during this time, even though our service centers were closed for several days. As I noted a moment ago, doing so had an impact on our margin. But given how well our people work together to prepare for the storms, the boost in morale we experienced from a shared purpose and how eagerly our people returned to their jobs, we clearly made the right decision. The energy and the persistence will be significant assets towards realizing our transformation in the coming quarter.

At this point, I'll ask Dilo to provide a brief operational summary, and then we'll wrap up our formal remarks with a review of the finances with Jorge. Dilo?

Thank you, Suri. I'll take a moment and walk through each of our business lines. CDIM, as most of you know, is made up of primarily construction printing and color imaging. Construction printing is where we've seen continuing decline. But in Q2, we saw them moderate to less than 4% despite the weather disruption. Color sales lagged a bit during Q3, and some of that was undoubtedly due to the hurricane. We normally demonstrate strong sales in Houston and Florida, 2 of our largest color markets.

While year-over-year performance in MPS improved in the third quarter, we anticipated earlier rollouts for new customers acquired in Q2. Instead, rollouts began late in the quarter as the details of each implementation were worked out. We expect to see some more acceleration in this activity in the early part of Q4. As a reminder, however, we will have fewer working days towards the end of the year due to the holidays, and much will depend on customer schedule.

The growth in AIM was small in dollars, but our pipeline is growing. New opportunities are converting to projects that involve putting data into existing document management systems as well as bringing data into our own platform.

Our sales mix was affected by another high-volume quarter from China on equipment and supply sales. The lower margins on equipment added pressure to our bottom line. Sales were obviously affected in South Texas and Florida on the days of the hurricane themselves. We also felt their impact with slower sales than usual during the 5 days prior to the storm and the week after. I should note that we don't expect business in these areas to accelerate to make up for the lost productivity. Instead, it is likely to pick up where it left of. Lower daily sales in these areas during early October will likely have an impact during the fourth quarter.

With all this said, our employees are determined to recover and focused on the building back the lost business. Morale is excellent, and energy is high. We have ongoing marketing efforts to reach out to customers and prospects to communicate the value of our services, and harvesting more warm leads is helping our outside sales teams.

I'll now turn the call over to Jorge to run through the numbers in more detail. Jorge?

Thanks, Dilo. Sales declined in the third quarter by $4 million or 4%. Roughly $2.5 million or 2.5% of the loss was due to the effects of the hurricanes and having one less business day in the period. Excluding these items, our sales decline in the third quarter was essentially flat to the second quarter.

Gross margins of 30.3% for the quarter suffered from our inability to leverage our fixed costs and labor with the decline in sales. Additional pressure on our margins came from a difficult sales mix, higher-than-usual employee benefit costs and from paying our employees during the closures from the hurricane. By paying our employees during the closures, most of the impact of the lost sales fell directly to the bottom line.

SG&A of $25.8 million was in line with Q2 and higher than last year, but well within our expectation as we continue to invest in our sales and marketing initiatives while managing administrative costs to offset them were prudent.

Given our third quarter results and the implementation of new, simplified goodwill impairment guidance, we took a noncash charge of $17.6 million associated with historical acquisition. While we have goodwill remaining on our books, we do not expect any further impairment charges in the future.

Despite our challenges, ARC continued to generate very strong cash flow throughout the quarter. Cash flow from operations was $11.3 million in the period and $36.8 million year-to-date. On a year-to-date basis, operating cash flows increased by $2.7 million or 8%.

We expect our strong cash flow performance to continue, assisted by the benefit of our low interest rate on our senior debt and the fact that we will not pay any meaningful taxes due to our historical net operating losses. We paid down an additional $5 million in principal on our Term A loan during the quarter, reducing our original principal by $70 million or 40% since its inception.

The capital structure of the company remains in excellent condition. Our strategy to protect our historical print business and grow our technology offerings in support of our transformation remains in place. While some of the progress we made towards achieving those objectives was obscured by the events in third quarter, all of us are encouraged by the efforts in the fields. The strength of the capital structure is clear, and our cash position continues to support the changes we're making throughout the company.

At this point, I'll turn the call back to Suri. Suri?

Thank you, Jorge. Operator, at this time we are happy to take our listeners' questions.

(Operator Instructions) And first from B. Riley, we have Josh Nichols.

I was going to ask, so you've hit a mile marker here with 10,000 MPS customers. That number keeps growing, but the revenue has continued to decline. I guess could you help quantify a bit about what numbers we should be looking for and when you think the MPS business might transition back to revenue growth?

Sure, sure. I mean, what's fundamentally happening is the number of customers we acquire continue to grow, obviously. However, what's happening is that the amount each of these customers print is what is shrinking, and that is due to, obviously, the use of technology and people moving away from paper, et cetera, et cetera, which is exactly what is affecting the print industry. So if at some stage we continue to acquire customers faster than the erosion, it's an ongoing challenge, then at that stage, we'll be able to moderate it. And that's one of our strategies is to continue to try to get more market share and in fact, get more MPS customers at a faster rate than the shrinking itself. That's exactly what we are trying to do. And at this point in time, as you see can see, from Q2 to Q3, the MPS performance has improved. But in absolute dollars, obviously, it's a bigger drop. But year-over-year, you know our performance in Q3 is actually better than what we performed in Q2. Am I right, Jorge?

Yes, that's right. Year-over-year, we dropped 3% in the second quarter, and we dropped 2% year-over-year in the third quarter. So as you could tell, we're making our inroads to -- getting that back to the positive.

That's exactly what I was saying in the call. It's hard to see those numbers given the macro conditions. But we are, at this stage, extremely excited about the fact that we are making progress inside the print segment. But obviously, it's slow, and there are going to be quarters like this where we are going to have a few bumps on the road.

Just generally speaking, would you say -- I mean, it looks like year-over-year growth was like 7% for customers in the MPS business. Like, do you think that, that, on the revenue side, could turn positive if you were able to start achieving, say, like 10% year-over-year customer growth in that business? Or -- I'm just trying to quantify a little bit.

Jorge?

Yes. You can't look at it that simplistically because there might be an MPS account that brings in one machine and it's, whatever, $500 a month, $300 a month. As we've said in the past, some of the bigger needle movers are the big, what we'd call, our Global Solutions customers, our enterprise customers there. We have one account that could add $2 million, $3 million. So you can't look at it that simplistically as we hit this number, then we hit growth. Obviously, the more accounts we add, the better position we are to be in a growth position.

In the MPS space, Josh, we have customers who basically own a couple of machines, single machines, 2 machines, 3 machines, which are actually the number of, what we call, FMC account or facilities management contract fleet count. And then there are some contracts somebody could have 15 or 20 machines. And of course, the global contracts are much larger. They could have 500, 600, 800 machines. So like Jorge said, number of customers is not actually a proper measure. But it's a question of how many machines are out there and how much print we are able to get. So it's not a simplistic straightforward answer. But if we continue to keep using the benefit we have by having this national footprint and our ability to serve customers in multiple locations, we are using that to get larger customers, it'll be helpful.

No, that's helpful and I guess, good to see. So we have some growth in the Digital Services business. It's still a small percentage of revenue. What do you think it's going to take to really get the growth in that business to where it should be so that it could one day, hopefully, become a meaningful percentage of revenue?

Sure. That's exactly hitting around our transformation story. I mean -- so given the fact that we are in the construction space, our technology tools we have developed and the solutions we have developed, we believe, are very powerful, very useful. However, getting them out there in the marketplace, especially in the legacy space like construction, where adoption is slow and such solutions are new solutions so they're disruptive -- that's exactly what we said in the prepared speeches. These are disruptive things. And when you introduce disruptive solutions out there, it takes a while to get traction. what's interesting, Josh -- or what's exciting for us is that there's a lot of excitement from the customers about the solutions we talk about, especially on the facilities management side. What it can do, how easy it is to access the information, how easy it is -- is it for you to search the information you have and so on and so forth. So of course, they should translate into numbers, and that's why we have always said it takes a while for these solutions to get traction. But once they get traction, because our shrinkage in print is not that huge, very quickly, we'll be able to offset it. But it's just a question of how we -- how fast we can break into those technology sales, which is what we are laying the groundwork for and working towards.

And then last question for me, and then I'll pass it on. I know there was a couple items weighing on margins for Q3. But it seems like some of the stuff, like the hurricane impact, also carried over to early Q4. Do you expect margins for the company to be relatively comparable quarter-over-quarter for Q4?

I would think so. Largely, I think it's going to be comparable. I mean, I think some of that effect will go through. But we feel like, based on our -- the revised guidance, as you can see, we expect Q4 to be pretty much in line with Q3. Wouldn't you say that, Jorge?

Yes, I definitely agree with that. In essence, we already kind of took the drop that we typically take from the third quarter to the fourth quarter. So to answer the question, just to repeat what Suri said, we expect the fourth quarter from a margin perspective, from a top line perspective, to be in line with what we saw in the third quarter on absolute dollars.

(Operator Instructions) And it looks like we have no further questions from the audience at this time. I'll turn the floor back to management for any additional or closing remark.

Ladies and gentlemen, thanks very much for your attention this evening. Thanks very much. We look forward to talking with you in February on our Q4 and fiscal year-end results call. Take care. Good night.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may now disconnect.