ARC Document Solutions, Inc.
Q2 2008 Earnings Call Transcript

Published: 11 Aug 2008

[Operator:]

Greetings and welcome to the American Reprographics Company second quarter 2008 conference call. (Operator instructions) It is now my pleasure to introduce your host, Mr. David Stickney of American Reprographics. Thank you Mr. Stickney, you may begin.

[David Stickney:]

Thank you, Kelly, and good afternoon. With me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer, and Jonathan Mather, our Chief Financial Officer. The call today will review the information we distributed earlier in our second quarter earnings release and offer some more insight and detail into the basic numbers. You can access today's press release and the company’s other releases from the Investor Relations section of the American Reprographic Company’s Web site at www.e-arc.com. A taped replay of this call will be made available beginning about an hour after its 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. Please be advised that we are webcasting our call this afternoon. A replay of the webcast will be available on our Web site for ninety days following the call. This call will contain forward-looking statement 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, August 7th, 2008, 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 is set forth in today’s press release and in our Form 8-K filing. With these administrative details now out the way, I'll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

[Suri Suriyakumar:]

Thank you, David, and good afternoon everyone. I'm happy to report another quarter with strong performance from our company. We posted revenues of $184.9 million or 4% growth year over year. While overall sales are slightly short of our own expectations, I'm really proud of our performance and our ability to aggressively seek market share in a challenging economic conditions. So, why am I so enthusiastic about our performance? First, in spite of the drop in revenue and increased costs of doing business in general, our gross margin numbers have improved over the last quarter. In fact, they are in their historical highs. This is clear evidence that we are managing our business aggressively and that our team is capable of performing well in adverse conditions. Gross margin for the second quarter was 42.8%, up from 42.1% during the same period in 2007 and 42.5% in the first quarter. This is remarkable performance given our revenue shortfall. Second, in spite of the lower sales volume as well as the lack of acquisition revenues which has supplemented our sales in the past, our overall revenues have held up pretty well given the economy's performance. While we have experienced erosion in sales in markets such as Orange County, San Diego, Stockton and Las Vegas due to local conditions, we are growing in markets such as the Pacific Northwest, Texas, New Orleans, Ohio, and Canada. And we have held our own-in areas such as San Francisco, New York, and Philadelphia. Clearly the aggressive sales drive we initiated last year is alive and kicking. As the economy improves in the future, we expect aggressive growth across the company. Third, we continue to improve our cash position, which is substantiated by the fact that cash provided by operating activities for the year is at $61.5 million as compared to $45.4 million for the same time last year. Again, given the environment generating this kind of liquidity is no easy feat, where credit is hard to come by, there is no better position than to be armed with free cash and an excellent base structure for a growth oriented company. Fourth, our premier accounts strategy continues to produce solid sales results for the company because of its truly unique ability to address regional and national customer as a single company under a single contract, premier accounts provides us with a substantive competitive advantage and it is becoming well known in our marketplace. This quarter, we were happy to report that these signed HDR and other significant account similar to size in Boeing which we had won last year. We plan to continue to build this segment of our business aggressively. Fifth, our FM placements continue to grow every quarter. We ended the second quarter with 250 more FMs in place, but signed contracts for more than 150 others that will be installed in the third quarter. Sixth, our extensive footprint nationwide combined with our strong technology is beginning to become an important aspect of distribute and print services. We are able to move our customers' large format documents across great distances faster and at a lower cost compared to traditional shipping methods. In addition, we can now provide print facilities to our customers through working partnerships in more than 22 international locations ranging from London to Moscow. Finally, we will look to speed up our domestic acquisition program in the second half of this year. The pipeline for acquisition candidates looks strong and the market seems to be ready for more activity. In addition, given our customers' increased focus on international projects, we are beginning to look at international expansion at – in a different light. We've recently received clearances to operate in China and we'll begin our operations there with an initial focus on equipment and FMs. But there are additional opportunities that are becoming more and more compelling. We may look to form joint venture or to acquire businesses in other countries as well as – as well like the United Kingdom and the Middle East. Given our performance and the opportunities ahead, we are not losing sleep over the slow economy since we have no control over it. While we might see short-term declines in business volume and revenue, our position in the marketplace combined with a strong management team give us tremendous confidence in being able to go aggressively when the economy bounces back. With that as a background and as a company that is stronger and healthier than ever before, let me review the second quarter results. Revenue from acquisitions was approximately 8.8% and organic growth for the quarter was down at negative 4.8%. The company’s EBITDA margin for the quarter was 26.5% from 26.9% in the same period last year. However, if we exclude the favorable impact of last year's legal settlement, EBITDA for the second quarter of 2007 was actually 25.7%. I mentioned last quarter that this kind of performance at the gross margin and EBITDA line is clear evidence that we can manage our business aggressively during downturns and I want to reiterate it here. Absent large acquisitions that lend to dilute our performance temporarily, we can continue to acquire both market share and additional businesses in a downmarket and still maintain strong margins. Net income for the second quarter of 2008 was $18.9 million or $0.42 per diluted share. This compares to net income for the second quarter of 2007 of $19.6 million or $0.43 per diluted share. In the second quarter of 2007, the company benefitted from $1.4 million one-time legal settlement net of tax, which translated to $0.03 benefit fully diluted share. Taking that adjustment for 2007 into account, net income and fully diluted EPS for the second quarter 2008 improved year over year. Approximately 70% of our second quarter sales came from our non-residential reprographics customers. Slightly less than 10% came from residential clients and above 20% of our business came from non-AEC accounts. Picking it out by service line, our FMs contributed 16.9% to our revenue this quarter. We had a net total of approximately 5100 contracts through the second quarter of this year. Equipment supplies were 7.9% of our revenue and the digital services produced 7.8% of our revenue, up from 6.2% in the same period in 2007. Based on these numbers, I want to reiterate how confident we are about our own performance. Time and again we've been asked about how we manage the company so successfully during the downturn from 2001 to 2003. As we deliver this quarter's results, you are getting a first hand look at how we did it. We tightened up the cost structure of the company in advance of the economic decline. We boosted the management communication through the roof. We watched every number every day, and we kept a sharp eye out for opportunities that would provide explosive growth the moment the economy turned around. The only thing we had no control over was the economy itself. As many of you know, we arrive at our annual forecast after paying close attention to vacancy rates, private investment and unemployment to assess the demand for commercial construction. Vacancy rates in the second quarter was substantially higher in most markets and in most segments. Private investments has significantly slowed down as we all know and this is coupled with an increase in unemployment numbers. So, where does this leave us? Quite simply, we remain bullish about the company and our ability to operate under difficult circumstances, but we don't have confidence in the economy of course. As a result, while we are reiterating our sales and revenue forecast of $720 million to $760 million for 2008 with EPS in range of $1.52 to $1.60, there is likelihood due to the slow economy that we will finish the year at the lower end of this annual forecast in spite of our strong performance to date. With that I'm going to turn the call over to Jonathan, but before I do, I would like to a moment to formally thank my friend and partner for more than 20 years, Mohan Chandra Mohan for his services and excellent stewardship of the company since its inception. Mohan stepped down as CEO in June 2007 and at the end of July, he formally retired from the Board of Directors completing the leadership transition he and I planned in November of 2006. He will remain a consultant to the Board through 2010 and remains one of the largest individual shareholders of the company. I'm enormously proud to assume the leadership role of the company and of the Board, and I wish Mohan only the best in his future endeavors. And while we are on the topic of leadership, I'm also happy to announce that as noted in a separate announcement earlier today Dilo Wijesuriya, a standout executive and a veteran of the company for the past 18 years has been appointed as an Executive Officer of the company. As Senior Vice President of National Operations, Dilo will be directly engaged with the day-to-day operations of the company's divisions and will spearhead our international business development efforts. I look forward to his continuing good counsel and contributions to the company. I will turn the call over to our CFO, Jonathan Mather for the details behind the finances. Jonathan?

[Jonathan Mather:]

Thank you Suri and good afternoon everyone. I'll spend a few minutes with the numbers we issued today as a part of the press release and give you a few details before moving to Q&A as usual. Beginning with revenue by product categories. In quarter two 2008, reprographics services grew 4.5% compared to quarter two in 2007. Digital services, which are included in our overall reprographic services grew 29.7% year over year and contributed 7.8% of total revenue in this quarter compared to 6.2% for the same period last year. As we mentioned in last year's – last quarter's earnings call, this growth is incremental and is largely caused by two factors, one, our customers' are actively embracing digital services as a means of process improvement and lowering cost. And two, we are charging consistently for digital services as the tools become more accepted in the marketplace. Facilities management grew 7.7% compared to quarter two 2007, while revenue from equipment and supplies decreased by 6.6% compared to quarter two 2007. Revenue and revenue trend by geographical segment in this quarter was as follows Southern California, $43 million, down 11.3%; Northern California $25.9 million, down 4.8%; Pacific Northwest $12.5 million, up 17.9%; South, $49.3 million, up 12.9%; Midwest $27.3 million up 34.3%; and finally Northeast $26.9 million down 2.1%. As Suri noted earlier, we grew our gross margin in the second quarter to 42.8%. This compares to 42.1% in the second quarter of 2007 and 42.5% in the first quarter of 2008. Comparing the second quarter of 2008 with the same period last year, gross margins were favorably impacted by approximately 140 basis points due to a change in our product mix, price increases, and production efficiencies. We were negatively affected by the dilutive impact primarily from platform acquisitions completed since March 31st, 2007. The dilution from these acquisitions amounted to approximately 70 basis points of margins in the second quarter of 2008. We maintained our SG&A expense as a percentage of revenue at 21.4% during the second quarter of 2008 as we maintained a close watch on our costs. This compares to 19.4% in the second quarter of 2007 when we received the benefit of $2.2 million before tax from a legal settlement. Stock base compensation is included in the SG&A expense. In quarter two 2008, stock base compensation was $1.1 million, compared to $1 million in quarter two 2007, and $900,000 in quarter one of 2008. In the second quarter 2008, total depreciation, amortization, and interest expense was $18.8 million made up of depreciation at $9.4 million, amortization expense at $2.8million and interest expense at $6.6 million. This compares to quarter two 2007 of $16.7 million with depreciation at $7.6 million, amortization at $2.5 million and interest at $6.6 million. EBITDA for the second quarter was $49 million or 26.5%. This compares to 26.9% in quarter two 2007 including the benefit on the legal settlement Suri mentioned earlier at 26.3% in quarter one 2008. (inaudible) the balance sheet. We ended the second quarter 2008 with working capital of $33.6 million or approximately 4.6% of trailing 12 months revenues. This compares to $15 million for March 2008 or approximately 2.1% of trailing 12 months revenue. Day sales outstanding or DSO were 50 days in the second quarter 2008, compared to 50 days in the second quarter of 2007, and a reduction from 51 days in first quarter 2008. Total debt, including capital leases at the end of the second quarter 2008 was $363.1 million, down from $379 million for the first quarter of 2008. The ratio of debt to trailing 12-month EBITDA at the end of the second quarter was $1.9 million compared to $2 million at the end of first quarter 2008. Cash flow from operation was $61.5 million in 2008 or $1.35 per fully diluted share. This compares to $45.4 million in the same period of 2007. 2008 payments for acquisitions and payments associated with acquisitions, including earnouts to sellers amounted to $5.5 million compared to $86.5 million in the same period last year. That concludes our financial discussion. At this point I will turn the call back to our Chairman, Suri.

[Suri Suriyakumar:]

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

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) There are no questions in the queue at this time. I would like to turn the floor back over to management for closing comments.

[David Stickney:]

Ladies and gentlemen at this time, we will conclude our call. Thanks very much for your attention and continued interest in American Reprographics Company. Have a great evening.

[Operator:]

This concludes our teleconference for today. You may disconnect your lines at this time. Thank you for your participation.