ARC Document Solutions Inc (ARC) 2022 Q1 法說會逐字稿

Good day. My name is Savannah, and I will be your conference operator for today. At this time, I would like to welcome everyone to the ARC Q1 2022 Earnings Report. Today's call is being recorded. (Operator Instructions)

Thank you. And I would now like to turn the conference over to David Stickney. Please go ahead.

Thank you, Savannah, 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 first quarter results for 2022 were publicized earlier today in a press release. The press release and other company materials are available from our recently updated Investor Relations pages on ARC Document Solutions website at ir.e-arc.com. We encourage you to explore our new site as its design and content have improved to provide investors with easier access to historical data, our current company presentation, an updated calendar and more.

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, May 4, 2022, 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 thank you all for joining us. For the past year, our strategy to diversify our addressable market has been performing to plan and our first quarter performance gives us confidence that growth will continue. This was the fourth quarter in a row in which ARC delivered overall sales growth, and it's the second quarter in a row in which all 4 of our business lines grew year-over-year. This is even more notable considering that the fourth and the first quarters of the year are historically weakened. Our teams in sales and operations continue to fire on all cylinders, and we are selling into a markets with an appetite for our services.

As Dilo mentioned in our last call, we are selling into more than 40 different industry verticals. We are getting accustomed to tracking [decreased] sales in most of them. Demand especially is high in digital printing and just getting off the ground in scanning and imaging. Our bottom line results for the first quarter were impacted with net income and earnings per share growing well over 100% despite inflationary pressures, competition for labor and the need to ensure that we have the materials and the sources on hand to supply our products and services. It is an enviable position to be, not only we are working from a position of strength operationally, but our capital structure is remarkably sound. Many of the small companies took on heavy debt loads over the past several years and with the benchmark rates expected to rise, these companies are likely to be cash constrained in the near future. By contrast, our debt load is small enough to manage with a [reward]. Our interest rates required debt payments and our leverage ratio are all at all-time lows, and the cash on the balance sheet remains at more than $50 million.

The upshot is that we have plenty room to work in and the lack of the financial constraint found in other businesses will allow us to keep our focus on growth. Looking ahead, we anticipate another year of expanding our customer base. Whatever the economy may throw at us, today's business models require a visible presence in both the digital and physical world. Every company is brand followed and needs to be seen in whatever venue their customers can be found. As a result, we believe the demand for our services in digital printing will continue to remain high and that we still have markets to approach with our services.

The moderation of work from home orders will put more people in offices for at least part of each week, which bodes very well for our managed services engagement. In addition, our construction customers are still reliant on having on-site capabilities on their job sites. As I mentioned earlier, we also believe that the growing needs of scanning and imaging is likely to be at its early stages, getting documents out of boxes and into the cloud where anyone can reach (inaudible) is becoming a necessity. Regardless of the industry, we think the diversity in the market for scanning and document conversion services may even drive that of our printing services. All of these suggests an excellent environment to improve our sales.

ARC is in a good position to capitalize on its advantages in 2022, and its strong resilience gives us confidence in confronting whatever the challenges lying ahead in the coming quarters.

To provide some of the details behind our optimism, I'll turn the call over to Dilo and then Jorge at this point of time for an operational and financial perspective. Dilo?

Thank you, Suri. We were very pleased with the sales growth we achieved in quarter 1. We were able to execute well on the pipeline of opportunities and secured 12% growth year-over-year in our top line. We've maintained healthy daily sales throughout the period and grew sales for all 4 of our business lines. During the month of March, we noted a higher percentage of our large customers executing their plans to increase the work from office space. However, the hybrid growth model seems to remain very popular among many of our customers. This new work pattern creates new opportunities for us, as well as some challenges. We are one of the few companies with a national footprint that offers comprehensive services to companies who continue to move to a paperless digital workflow, as well as to companies that require information sharing using paper as a media. ARC nicely fit into the digital device of our customers. [Among us], additional opportunities that are gaining momentum is the need for scanning and digital imaging.

As customers scale into a hybrid workforce, it is essential that the important documents are converted to a digital data and hosted in a cloud platform. The result is that our document scanning services continue to be of value to our customers. We are expanding our scan centers and our document scanning capabilities to accommodate enterprise-level documents scanning, as well as small opportunities with our scan by the box service. While document scanning is done by many, we bring special expertise to our customers for document search and indexing using our domain experience and our own proprietary software.

Paper scanning is easy, but the ability to help customers with quick and easy search is complex and requires good technology and expertise. One of the challenges we face is that, customers are continuing to reduce their office footprint and the on-site print room concept is fast fading away. While this puts pressure on printing volume done at our customer site, it fits very well into our strategy to drive print volume throughout the service centers to leverage our equipment, economies of scale and cross train the workforce.

As the needs of office printing evolved due to hybrid work schedules and digital workflows, ARC is in a great provision to provide high-quality outsourced print services via our 140 digital print centers. Our employees are fast, skilled and service-oriented, making it easy and convenient to shift print volumes from office to our production facilities. The drive to get employees back into office also plays to our strength. Employers are reenergizing their growth spaces with modern traffic and building new, pleasing work environment. Our digital graphics and our [wall out] print program is helping our customers to achieve these concepts.

ARC NPS program is also benefiting from changing business practices. Unlike in the past, we don't see customers using their capital to purchase print equipment for long-term use. Most especially, our construction customers are moving to short-term rentals of print equipment. Our ability to supply print capacity on an as-needed basis is well suited to meet their needs. Since we have a strong service organization, we continue to deploy a large remanufactured fleet of devices on short-term rentals at construction sites. The cost of raw materials, especially paper has been a challenge. Many manufacturers have been reducing their production capacity of office and specialties paper, which affects price and availability. Where possible, we have been passing down these cost increases to our customers to maintain our margins.

In terms of building our base of new customers, our web, digital and social media marketing activities continue to generate good results. As customers work from home and search for new services, our ability to showcase our products and services online is a very important component of our marketing and sales efforts. Our sales opportunity pipelines are strong, and we are confident that we will be able to strengthen our top line revenue during the coming year.

Finally, I'm pleased to share with you that we received our 17,000 online customer review last month. Our average rating is 4.95 out of 5, making it clear that our employees focus on maintaining a great customer experience is paying off as we grow of our market share.

With that as a summary of the company's operations, I'll hand it over to Jorge for a financial update. Jorge?

Thank you, Dilo. We continue to drive top line and bottom line growth during the first quarter of 2022. Our sales growth was significant in every business line with scanning and imaging deemed the standout at 38%. Overall growth helped us drive gross margins up by 190 basis points in spite of some pressures from inflation, supply chain issues, which manifested themselves primarily in the form of increased costs. These increases were more than offset by our ability to leverage our infrastructure and cross-train workforce with the increase in sales.

We expect the currency inflationary pressures to persist throughout the year, but we do not expect them to dramatically affect our bottom line performance as most cost increases continue to be passed on to our customers. Sales growth drove increased commissions, bonuses and travel and like companies everywhere that are competing for talent, we also have selective increases in salaries to retain existing employees or attract new hires. Even so, we were able to increase earnings before taxes by $1.5 million, reflecting a 200 basis point increase in operating margins. And our EPS more than doubled from $2.2 last year to nearly $0.05 this year.

As many of you know, historical cash flows in the first quarter are at the lowest level of the year due to the timing of sales and bonus payments, and this year was no different. One additional impact, however, was a conscious effort to increase inventory levels to account for the current supply chain disruption. The last thing we want is a lack of material to slow our sales momentum in the remaining quarters of the year. As in past years, we expect cash flows to significantly ramp up as the year progresses. Like our cash flows from operations, EBITDA had a slow start to the year, growing just 3.5%, but our confidence in achieving $40 million or more in EBITDA for the year remains intact. The strength of our balance sheet remains evident as we ended the quarter with more than $50 million in cash, and our leverage ratio, net of cash, is at an all-time low.

Finally, we remain committed to returning shareholder value, spending $2.4 million during the first quarter, primarily via our quarterly dividend payment. As we look ahead, we expect solid sales growth for the year. Just as importantly, we expect margins to remain strong and earnings to continue to grow. In summary, we expect our current success to continue throughout 2022.

I'll now turn the call back to Suri. Suri?

Thank you, Jorge. Operator, we are now available for our listeners' questions.

(Operator Instructions) And with no questions, I'll turn it back to David Stickney for closing remarks.

Thanks, Savannah, and thank you, everyone, for your interest in ARC Document Solutions and for your attention this afternoon. We look forward to speaking with you again next quarter. Have a great evening. Good night.

And this will conclude today's conference. Thank you for your participation, and you may now disconnect.