ARC Document Solutions Inc (ARC) 2020 Q4 法說會逐字稿

Thank you for standing by, and welcome to ARC Q4 and fiscal year-end earnings report. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Stickney, Vice President, Corporation Communications and Investor Relations. Please go ahead.

Thank you, Celine, and welcome, everyone. On the call with me today are Suri Suriyakumar, our CEO; our Chief Operating Officer, Dilo Wijesuriya; and Jorge Avalos, our Chief Financial Officer.

Our fourth quarter and fiscal year-end results for 2020 were published earlier today in a press release. The press release and other company materials are available from our Investor Relations pages on ARC Document Solutions' website at ir.e-arc.com.

In today's earnings announcement, ARC offered expanded supplemental disclosures to provide shareholders and analysts with additional information in advance of our quarterly conference call. The disclosures are largely historical and will not be read on today's call.

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, February 23, 2021, 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 CEO, Suri Suriyakumar. Suri?

Thank you, David, and good afternoon, everybody. Our business and financial performance in 2020 outperformed expectations across the board. Despite a sales drop of more than $90 million caused by the pandemic, we aligned our cost structure with a new revenue model, opened up new markets for our services, produced strong earnings and generated cash at an unprecedented level.

After pause in the middle of the year, we recommenced our dividend program in order to return value directly to our shareholders, and we also resumed share repurchases. Less than 2 months later, we increased our quarterly dividend by 100%.

It's an enviable position, considering the economic impact of COVID-19 on businesses around the world. When we reconfigured this business in the third quarter of 2019, the plan was to create a company that was smaller but held more potential for the future. We thought the changes we made were significant, far reaching and impactful. Little did we realize what awaited us in 2020. The precipitous decline in revenues due to the effects of the pandemic compelled us to dig even deeper into this strategy to become more adaptable to the environment and the customers' needs.

We incorporated more technology into our marketing efforts to address an audience more in tune with social media, with their shopping and online purchasing allowing us to showcase the extraordinary work our color experts produce for retail, hospitality, technology and education.

We announced our scanning operations, the real engine for online document access, to create capacity and credibility for a wide variety of document types. In addition, using our knowledge and experience in managing print infrastructure for multinational engineering companies, we were able to win contracts for other multibillion-dollar entities such as utility companies and other large public entities. In short, during the last 18 months, our organization has encountered unprecedented challenges, not only because of the secular changes that impacted our legacy print business, but also the extraordinary twist and turns brought about by the pandemic. More often than not, such conditions result in the demise of a company. We not only survived this catastrophe but emerged strong out of the crisis as evidenced by our numbers.

From a financial perspective, we were able to match our 2019 annual earnings per share, increase annual cash flow from operations over last year, hold more cash on the balance sheet than in any previous year prior to the recession, and deliver nearly $45 million in adjusted EBITDA.

In 2021, we will be conducting business much along the same lines. Most of our new business in 2020 came from nonconstruction-oriented customers, and we expect that trend to continue. These new sales aren't likely to rival existing sales to architects, engineers and construction companies in the near term, but the plan is to shift more equitable balance in the future. The lack of office activity is the biggest obstacle for any of our on-site services, but many of our customers are already planning to bring employees back into their offices. As they do so, we expect our sales to improve with them.

We are proud of what we have accomplished through this incredibly trying period. We are also excited to see how the new year will play out. The continuing pandemic and the recent weather will undoubtedly provide a rocky start, but we remain very confident in our strategic vision for the company.

With that in mind, I will ask Dilo to provide some operational details for your consideration. Dilo?

Thank you, Suri. Thanks to our sales and divisional management teams, we were able to navigate the fourth quarter well. As Suri pointed out, the pandemic has been throwing different challenges at us throughout the year, and we have skillfully responded to them. Our primary focus has been to listen and work with customers and support their immediate needs. ARC has a diversified customer portfolio, and it has allowed us to pursue the jobs and projects of those customers who are staying busy throughout the pandemic.

The education sector continues to order distancing and other signage from us, and our comprehensive ability to design, print and install has won us several new projects. The construction vertical continues to use also plain -- plan printing, thanks to a wide variety of distribution services supported by a 150-plus service center network. It has helped our customers to seamlessly work from home and still get printing done and delivered from the nearest ARC print center.

Many of our customers from different industries are focused on getting their paper documents converted to a digital platform. These customers either require a reduction of the office space currently taken up by paper documents or they need to enhance document workflows for employees who work from home or under remote locations. In addition to our 20 specialized scan centers, we have added capacity and capabilities to all our print centers to capture the new scanning needs of our customers.

Large color projects are -- also continue to keep us busy as signage, merchandising and environmental graphics must do more to communicate in a more socially distanced world. Today, we have yet to see much life in our MPS and equipment sales as customers are either only partially working in their offices or working from home exclusively. As both MPS and equipment sales are driven by office activity, these segments of our business are being affected more than others.

Through the latter part of 2020 fourth quarter, we started to experience the effects of a tighter economic lockdown in California, New York City, Canada and in the U.K. These lockdowns are continuing into 2021 and are providing a slow start in the new year. As Suri mentioned, the impact of [fees and] weather disruptions will likely aggravate the situation. But as the vaccination program is rolled out throughout the country and economic activity returns to more normal levels, we anticipate greater demand for all our services. Our customers have indicated that they are planning for the return of their staff in stages beginning in the second quarter and proceeding incrementally. If all goes well, we are confident in our ability to capture new market share and continue to support our customers' new workflows.

Key controls we put in place during the pandemic are continuing to be of value in keeping the company healthy. These controls help ARC to deliver strong performance in 2020. We revolve around keeping our customers and staff safe, delivering exceptional customer service, listening to customers and supporting their new document requirements, improving our operating margins, tight management of inventory and prompt cash collections.

As we enter 2021, we are certain that the pandemic will continue to throw obstacles in our path. As a management team, however, we have the experience and the adaptability to overcome this. We will leverage the solid trends we have already put in place, rely on a broad and deep portfolio of services, divert the business when necessary and continue to keep the company safe as we grow our market share.

With that, I'll hand over to Jorge for a financial update. Jorge?

Thank you, Dilo. Over the past 2 quarters, we've offered numerous examples of the customer needs we've met and the opportunities we discovered during the pandemic. While much of this experience was new to us, we were ready. Chance favors the prepared, as the saying goes.

When we started the year, we were ready to operate a smaller company, the stage has been set for a more focused sales effort in 2020 and the shedding of service lines that were no longer relevant to our existing customers. The emphasis on moving more of our marketing efforts towards customers outside of the construction market was well timed. And coupled with being considered an essential service, we were able to maintain business continuity and continue to serve our communities at the same time.

While the pandemic ultimately shrank 2020 revenue more than we could have imagined, reconfiguring the business and reducing expenses had been baked into our plans from the beginning. We simply had to do more of it. The results of our efforts were that our gross margins were comfortably above 30% every quarter during 2020. We took the same approach with SG&A, resulting in a 26% year-over-year reduction in expenses, the strength of which benefited earnings and cash flows throughout the year. EBITDA was more than $10 million in each period, including the fourth quarter, the historically weakest quarter in a historically pressured year. EBITDA margin for the year was 15.5%, a 260 basis point increase from prior year.

Cash flow from operations surpassed $50 million and actually grew year-over-year by more than $1.5 million. Our 2020 cash flows were not only aided by our sustained profitability during the pandemic, but also from an over $10 million improvement in working capital driven by strong AR collections, a reduction in inventory and deferment afforded to us under the CARES Act.

The ultimate strength of our performance had a dramatic impact on our capital structure. If you consider the cash on our balance sheet of more than $50 million, our lower debt levels and the reduction of our leverage ratio to 1.3x, net of U.S. cash, our capital structure today is considerably stronger than it was prior to the pandemic. Our confidence in the future is also higher as demonstrated by the recently announced increase in our quarterly dividend.

As I mentioned during our last call, our investors should recognize that we are working from a position of strength, and we are keeping our commitment to returning shareholder value at the top of our minds.

With that as a summary, I'll now turn the call back to Suri. Suri?

Thank you, Jorge. Operator, we are now available to -- for all questions.

(Operator Instructions) We have no questions at this time. I mean we have a question just came in, coming from the line of [Jeffrey Scott] with Wells Fargo Bank.

I guess the question that I have is, as you guys look forward into 2021, at the top line, the revenue which obviously is down in 2020 versus 2019, as you've described. Where do you see that top line going in 2021? Do you believe that the top line has stabilized at this point? Or are you anticipating further decline for which you will then have to adjust your cost structure further?

So for the 2020 top line, we are now seeing that as the base top line, that is something that we talked about in the last quarter. We have reengineered and reconfigured our company to a new baseline. And this is -- for ARC, this has been happening for a while. We've had previously impact because of the secular changes to our traditional and legacy print business. So this has been ongoing.

What the pandemic did is, it just compelled us to relook at this and really come up with a new baseline in 2020 based on all the conditions we experienced. So that's where we are in 2020. So we are not thinking about what happened in 2019. We are starting off with what happened in 2020. That's our new cost and operational structure we have.

From there onwards, the simple answer to that is, obviously, we operated under some extraordinary conditions in 2020 during the pandemic. It was very difficult and very hard. We all agreed 2021 is going to be better because the vaccinations are out, things are coming back to normal. Generally, conditions are improving, and there is a lot of forecast in offices opening up back, schools opening up back, which means activity will be higher. And there will be a return of some amount of legacy business compared to 2020, so which means we expect 2021 to be better.

(Operator Instructions)

Celine, at this point, it doesn't look like we have further questions, so we can go ahead and end the call.

Thanks, everyone, for listening this evening. We appreciate your attention and your continued interest in ARC Document Solutions. We look forward to talking with you again next time. Take care. Bye-bye.

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