ARC Doc Options, Inc. (ARC) This autumn 2023 Earnings Name Transcript

ARC Doc Options, Inc. (NYSE:ARC) This autumn 2023 Earnings Convention Name February 28, 2024 5:00 PM ET

Firm Individuals

David Stickney – VP, IR

Kumarakulasingam Suriyakumar – Chairman & CEO

Dilantha Wijesuriya – President & COO

Jorge Avalos – CFO

Convention Name Individuals

Gregory Burns – Sidoti & Firm

David Marsh – Singular Analysis

Operator

Good afternoon, everybody. Welcome to the ARC Doc Options to report 2023 Fourth Quarter and 12 months Finish Outcomes Convention Name.

Right now, I want to hand issues over to David Stickney, Vice President of Investor Relations. Please go forward, sir.

David Stickney

Thanks, Lisa, and welcome, everybody. On the decision with me immediately are Suri Suriyakumar, our CEO and Chairman; our President and Chief Working Officer, Dilo Wijesuriya; and Jorge Avalos, our Chief Monetary Officer.

Our fourth quarter and full 12 months outcomes for 2023 have been publicized earlier immediately in a press launch. The press launch and different firm supplies can be found from our Investor Relations pages on ARC Doc Options web site at ir.e-arc.com.

Please word that immediately’s name will include forward-looking statements and are solely predictions primarily based on info as of immediately, February 28, 2024, and precise outcomes might differ materially because of dangers and uncertainties that we spotlight in our quarterly and annual SEC filings. Any non-GAAP measures mentioned immediately are reconciled in our press launch and Type 8-Okay submitting.

I am going to flip the decision over to our Chairman and CEO, Suri Suriyakumar. Suri?

Kumarakulasingam Suriyakumar

Thanks, David. If there was a 12 months that validated our efforts to remodel the corporate, 2023 may need been it. The challenges have been straightforward to see, however so have been the alternatives that stability them. Watching the progress we made in offsetting declines in our older enterprise strains with our extra up to date companies, particularly colour and doc scanning, was extraordinarily gratifying.

I can see a time within the not-too-distant future when our strategic enterprise strains will come to dominate our income combine. Enterprise circumstances have been pretty predictable for us after the primary quarter of 2023. Capital spending was constrained attributable to rate of interest hikes, market exercise was sturdy however targeted on brief time period, return-to-office initiatives misplaced a lot of their momentum, and whereas the nation and the overall enterprise surroundings appeared prefer it was enhancing, sentiment was muted.

As a lot as we want greater long-term initiatives, seasonal and event-driven advertising work helped us construct progress in our colour companies all year long. The development for changing paper paperwork to digital info that started with the pandemic continued to realize momentum all year long and dramatically elevated demand for scanning historic paperwork from the workplace and from warehouse storage.

Whereas the short-term progress of this service is gratifying, the amount of such info and the compelling want for it to be transformed are each monumental and more likely to final for many years. When you’ve seen declines in our on-site companies as staff proceed to do business from home, gross sales in 2023 started to stabilize, and we had vital success within the fourth quarter. You’ll hear extra about that from Dilo afterward this name.

On this financial surroundings, building initiatives have been way more troublesome to justify as for the purchases of huge tools. So it wasn’t a lot of a shock when building plan printing acquired off to a sluggish begin, and the tools and provide gross sales adopted swimsuit. However our skill to adapt to altering market circumstances drove a rise within the fourth quarter income, restricted declines in annual income to lower than 2%, and our ability and expertise in managing prices held gross margin regular for the 12 months.

We had increased hopes, in fact, however the persevering with progress we made in figuring out new markets, launching new and thrilling merchandise and discovering new companions and making the mandatory investments to take promising companies to the subsequent degree positioned us properly for 2024 and past.

To assist clarify a few of the particulars about our efforts all through the final quarter and to assist with all the 12 months finish perspective, I am going to flip the decision over to Dilo and Jorge for his or her feedback. Dilo?

Dilantha Wijesuriya

Thanks, Suri. Within the fourth quarter, we achieved encouraging outcomes, notably in our strategic income strains, as Suri talked about. Regardless of going through a decline in plan printing income, we efficiently offset this loss by rising our doc scanning and digital colour income streams. Notably, our gross sales in doc scanning companies have been 34% increased than they have been in 2022, and our digital colour companies noticed a surge in demand, pushed by vital initiatives supporting year-end promotional actions throughout varied enterprise verticals.

Past the vacations, our constant give attention to increasing retail, commerce present and small and extra operations, coupled with elevated tourism exercise within the resort vertical, contributed a lot of the enterprise that led to our progress in digital colour printing. Leveraging our premier digital print companies model, Riot, we continued to draw main manufacturers throughout North America, positioning ourselves as a number one supplier of on-demand, high-quality colour printing options in all main markets within the U.S.

In North America, a couple of corporations supply something shut. Reaching this degree of service calls for meticulous planning and a cohesive, devoted manufacturing crew, qualities that outline our operations. Over the previous three a long time, we honed these capabilities with plan printing, leading to a dominant market presence in building. Now we’re making use of the identical experience and core competencies to our digital wide-format colour companies, guaranteeing constant high quality and effectivity to our purchasers.

The demand for doc scanning stays sturdy as companies prioritize shifting their essential content material to digital platforms. Hybrid work fashions and the rising development of workplace area discount additional propel the adoption of doc digitization initiatives amongst our clientele. Our groups conduct thorough website audits and collaborate intently with purchasers to tailor options to their particular necessities.

Our Scan by the Field program caters to smaller purchasers looking for environment friendly and cost-effective scanning options for a file cupboard or two. And our success in securing enterprise-level scanning contract previously few months, with a number of contracts exceeding six figures, has considerably improved our manufacturing backlog. Via focused advertising campaigns, we’re actively educating purchasers on the benefits of digitizing paperwork, and our efficiency is solidifying ARC’s status as a trusted nationwide supplier of doc scanning companies.

Moreover, our steady enhancement of expertise instruments allows us to streamline venture administration, elevate high quality normal, handle labor prices and supply improved accessibility by way of cloud-based options for our valued clients.

In contrast, we’ve got but to look at any vital enchancment in plan printing from new building initiatives. Our evaluation signifies that optimistic momentum on this income stream hinges on a considerable decline in rates of interest, which we’ve got but to witness. Nonetheless, we stay proactive in showcasing and selling different companies provided by ARC to diversify our income streams.

Our long-standing relationship with building purchasers function a beneficial basis for introducing and increasing our new companies inside their accounts. As workplace buyer behaviors evolve, we have additionally famous a decline in on-site print companies, together with tools gross sales. Nonetheless, over the previous 12 months, we’ve got made a relentless — concerted effort in renewing our on-site service contracts with our key purchasers.

I am happy to report that we have achieved profitable renewals for a number of years with a number of main MPS clients. Their continued satisfaction with our service and confidence in our complete on-site service resolution bode properly for sustaining income within the service line.

Transferring ahead, our income efficiency within the fourth quarter serves as a transparent indication of the optimistic course our firm is headed. Our emphasis on scanning and digital colour printing is driving general firm enlargement, and our administration crew is — each market is 100% on board. Our strategic investments, ongoing workers coaching initiatives and focused advertising and promoting methods are all directed in the direction of advancing this main goal.

Key areas of focus for our administration groups embrace manufacturing administration, customer support, margin optimization and planning capability. We’re additionally doubling down on our on-line and social media advertising efforts to generate new buyer leads whereas sustaining a gentle gross sales consultant headcount. I encourage our investor neighborhood to observe us on LinkedIn and different social media platforms.

Creating and sustaining a enjoyable and safe office surroundings for workers stays a prime precedence for administration. We constantly implement initiatives to assist our crew members, together with varied worker help packages and a profit-sharing bonus plan. As we additional set up ourselves as a outstanding presence in digital colour printing, doc conversion and extra, fostering a devoted and impressed crew is essential to our success. I look ahead to sharing our first quarter outcomes.

So at this level, I am going to hand over to Jorge for extra on the financials. Jorge?

Jorge Avalos

Thanks, Dilo. Whereas gross sales of apparatus and provides, on-site companies and building plan printing have been gentle through the first three quarters, we noticed indicators of stabilization within the fourth quarter, mixed with sturdy gross sales in colour and scanning that led to incremental gross sales through the interval.

As Suri and Dilo famous, our work in 2023 has created a good surroundings for brand spanking new gross sales alternatives. With charges forecasted to return down, a restricted likelihood of recession and confidence constructing and the resilience of the financial system, we’re in a superb place to capitalize on them in 2024.

Gross margin held regular for the 12 months however fell within the fourth quarter because of our fourth quarter mixture of enterprise. Excessive-margin plan printing decreased because it usually does through the fourth quarter. However in contrast to final 12 months, we didn’t have a drop within the low-margin tools gross sales.

All year long, we stored a good leash on value in mild of softer gross sales, reap the advantages of decrease depreciation prices that decreased our tools purchases on on-site companies. And even increased labor prices related to enhance in scanning and income and inflationary pressures weren’t sufficient to place a dent on our gross margin.

SG&A for the 12 months was down, benefiting from a decrease degree of gross sales commissions and bonuses, which left us with internet revenue and earnings per share comparatively secure year-over-year. The lower in adjusted EBITDA for the 12 months was attributed to our decrease gross sales and a rise in labor prices. Whereas money movement from operations was affected by the identical issues, the lower was mitigated by sturdy money assortment efforts within the second half of the 12 months.

Our DSO dropped a full 4 days, which helped preserve 2023 money movement from operations in keeping with prior 12 months and drove the $2.9 million enhance within the fourth quarter. We’re completely happy to report that for the complete 12 months, we returned $12 million to shareholders within the type of dividend and share buyback. This was essentially the most we’ve got ever finished within the historical past of the corporate, and we plan to do it once more in 2024.

Our liquidity and capital construction continues to enhance, even after the $12 million spent on shareholder returns. Our money stability decreased by $3.5 million. Our internet debt was solely $6 million, representing a $7.7 million lower. Our leverage ratio stands at solely 0.3 adjusted EBITDA.

Lastly, earlier than we finish our remarks, we have to handle the plain outlier on our P&L for the 12 months, the positioning remediation expense. The expense stems from an acquisition we made in California through the Nineteen Nineties that embrace a property which have been used for a fuel station earlier than we bought it. The fuel station had lengthy been demolished and its storage tax eliminated properly earlier than our involvement.

A number of years in the past, floor monitoring detected petroleum on the property, and we have been requested to create a remediation plan for this website. We did so, and the plan was accredited. However additional monitoring within the fourth quarter of 2023 turned up further threat and now required a way more intensive plan.

Three factors are price emphasizing about this expense. First, none of this has to do with our operations. Second, that is the one service middle property we personal. And third, and most significantly, this expense will lengthen over a protracted time period, however accounting guidelines require us to determine reliability now. We do not count on it to hamper our operations or our money flows in a significant method in any given 12 months of the venture.

Turning our consideration to 2024. We’re seeing encouraging progress in our strategic companies, and our pipeline of alternatives and backlog is powerful. The financial system is benefiting from anticipated declines in rates of interest, and the number of industries and clients we serve continues to develop. We have additionally made prudent investments in individuals, advertising and tools to drive future progress. With that in thoughts, we look ahead to what lies forward in 2024 and sharing our progress with you within the coming quarters.

At this level, I am going to flip the decision again to Suri. Suri?

Kumarakulasingam Suriyakumar

Thanks, Jorge. Operator, we are actually prepared for questions from our listeners.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] We’ll go to Greg Burns, Sidoti & Firm.

Gregory Burns

Good afternoon. Within the building plan printing market, I suppose, you famous you noticed some indicators of stabilization within the fourth quarter. As you look into ’24, I do know rates of interest happening can be a possible catalyst to get that a part of the enterprise increased. However do you — barring rates of interest happening, do you are feeling like that enterprise has stabilized at a decrease degree? How ought to we take into consideration the potential for additional declines in that aspect of the enterprise?

Kumarakulasingam Suriyakumar

Yeah. Such as you stated, Greg, if really the rates of interest go down, it is positively going to kickstart a few of the building enterprise, and it is going to be useful for the plan printing phase of our revenues. Nonetheless, if the rates of interest do not transfer, which I feel is unlikely, in all probability it will be secure, and it will simply be muted. I do not suppose it will do any completely different. Dilo, would you agree?

Dilantha Wijesuriya

No, I agree, Suri. And I am pondering the opposite factor to do is, even when the rates of interest go down within the second quarter, it will rely all the time at a six to 9 month lag to see new designs, new building put into place. So I simply needed to maintain that timing in thoughts as properly.

Operator

And we are going to transfer to our subsequent query.

Dilantha Wijesuriya

Cling on. Greg, did you’ve got one other query?

Gregory Burns

Yeah. Positive. Only one extra round your capital allocation priorities. I suppose, if the money movement stays sturdy this 12 months, you will in all probability be in a internet money place. What are your ideas on possibly rising the dividend or accelerating buybacks? How do you consider the capitalization and share return for the enterprise?

Kumarakulasingam Suriyakumar

Yeah. Each of these alternatives, Greg. I imply, clearly, primarily based on the whole lot that we did final 12 months, which was an incredible 12 months from a shareholder returns standpoint, I imply, I used to be speaking to Jorge, 33% of our money movement from operations went again to the shareholders. How good is that? So I imply — in order that — it is already fairly good. And if it continues to enhance, then in fact, relying in the marketplace circumstances, we are going to resolve what to do as as to if we should always purchase again extra shares or how we deploy that money. Value of working the enterprise can be going up. So it is one thing that we would like to remember. We would select to make some investments within the enterprise. Jorge, would you want so as to add to that?

Jorge Avalos

Sure. However I imply, we do not see us lowering the extent we did at ’23. I imply, we expect money flows we generate, clearly, keep fairly secure and can permit us to try this and extra. Like I discussed on my script, I imply, even with the whole lot we did and returning to shareholder worth, we nonetheless grew money by virtually $4 million in any case that. So future is vibrant for us. We now have choices, which is an effective factor.

Gregory Burns

Okay. Thanks.

Operator

And we’ll go to our subsequent query, which comes from David Marsh, Singular Analysis.

David Marsh

Hey, guys. Thanks for taking the questions and congrats on the 12 months. So it appears such as you used a bit of over $600,000 to repurchase fairness within the fourth quarter. Are you able to simply give us an replace on the place that places you with regard to your share repurchase program? And might you give us a way of form of what the typical…

Kumarakulasingam Suriyakumar

Sorry, might you repeat that query? It’s not very clear.

Jorge Avalos

I feel it is about share repurchase. And if I do not reply the query proper, simply make clear. However I feel you have been saying the repurchases we did, we did $3.5 million price of share repurchases. We nonetheless have one other $9 million-ish obtainable underneath the Board-approved plan. Each quarter is a bit of completely different. Generally there’s extra alternative to purchase extra within the third quarter versus one other one. Take into consideration the primary quarter. open window does not open till March. So we’ve got two, three weeks to purchase shares, very truncated time period. However general, for the 12 months, we count on to be in that $3.5 million vary for 2024, barring different alternatives that Suri talked about earlier. Did that reply your query?

David Marsh

Yeah. Simply to ask you, the opposite a part of it was, might you simply give us a way for what the typical value per share was at repurchase?

Jorge Avalos

The repurchase, it was underneath $3, and it was in that $2.80 to $2.90 vary. Do not quote me precisely, nevertheless it’s fairly near that.

Kumarakulasingam Suriyakumar

Yeah.

David Marsh

Bought it. Yeah. That is useful. After which simply turning to extra form of the enterprise basic aspect. Are there explicit trade verticals which have began to indicate incremental strengths right here within the again half of ’23, early ’24 that possibly you did not have as sturdy of a efficiency from through the earlier a part of ’23? And are there every other explicit verticals that — away from the development aspect, which, clearly, we all know hinges a bit of bit on rate of interest actions. However are there every other verticals that you would discuss that you’ve got form of notably sturdy expectations for within the coming 12 months?

Kumarakulasingam Suriyakumar

Yeah. So I imply, clearly, primarily based in the marketplace sentiments proper now, it certain appears like we will have a optimistic affect in the marketplace going ahead. Nothing reveals that the market goes to deteriorate. It is going to — it certain looks as if it is stabilizing. And if that’s the case, clearly, the opposite segments of the enterprise goes to be way more lively. And we’re pondering that, that shall be a optimistic. Dilo, what’s your perspective on that?

Dilantha Wijesuriya

Sure. I feel if you happen to’re wanting on the enterprise segments of the corporate, there was one or two particular enterprise phase that basically helped us in This autumn as a result of completely different seasons, completely different buyer varieties get busy, clearly, in the direction of the vacation season, retail, retail mall, mall operations. These of our clients are very, very sturdy within the fourth quarter. However general, once we monitor all our verticals, as , we monitor about 53 verticals within the group.

We see a bump in virtually all classes. As a result of one of many issues that we see is that each firm is advertising. They’re advertising, they’re making an attempt to seize again additional market share. A variety of commerce present work is continuous to bump up. So I feel that is the optimistic signal that we see just about in all enterprise verticals as a result of everyone is in search of that new enterprise. In order that’s the place our digital advertising and digital colour graphics companies bode properly with these buyer verticals.

David Marsh

That is very useful. After which simply final one for me, simply one other form of housekeeping kind merchandise. Jorge, simply wanting on the legal responsibility aspect right here, stability sheet, it appears like — it form of appears just like the working leases bumped up a bit and the debt and finance leases form of bumped up a bit of bit long run. Are you able to simply discuss what is going on on there and what your expectation is for the subsequent 12 months?

Jorge Avalos

Sure. I am going to begin off with the simple one. Regarding the finance leases, that really went down. 2022, finish of the 12 months, we have been at $26 million. We ended the 12 months at $22 million. So I foresee that form of staying both in that vary or probably dropping a bit of bit extra. So not an enormous shift there from a stability sheet perspective.

Regarding the working leases, that is only a product facility renewals. Our annual lease expense goes to remain fairly secure. However the brand new accounting guidelines say, okay, if I am in a constructing, say, it is one among my greater buildings and I renew it in December, now I’ve a seven-year lease for the subsequent seven years. That every one reveals up as a legal responsibility on my books, however my annual lease stays the identical. So it is form of identical to a stability sheet gross up in your financials there. Nothing that I’d be frightened about from a — that is going to have an effect on my P&L. Does that make sense?

David Marsh

Sure, makes plenty of sense.

Jorge Avalos

No drawback.

David Marsh

Thanks very a lot. I respect the time.

Jorge Avalos

No drawback.

Operator

[Operator Instructions] And we’ll return to Greg Burns.

Gregory Burns

I simply needed to observe up along with your outlook for 2024. If building plan printing is secure, do you foresee the strategic progress areas driving internet progress subsequent 12 months for the enterprise?

Kumarakulasingam Suriyakumar

Effectively, yeah, we positively really feel so, particularly given the exercise we’ve got been having with the shoppers. I feel it is going to be going within the — it should positively enhance. Dilo, would you want so as to add to that?

Dilantha Wijesuriya

Yeah. I imply if you happen to check out This autumn as a proxy, our strategic enterprise line progress overtook the drop in plan printing. So if the plan printing stabilizes in 2024, positively, we’ll see that progress. However we’re totally targeted on constructing our technique, constructing our push behind these particular progress initiatives. And that, as I stated within the name, all our administration groups are totally behind that. Over the past two years, we have been placing sure issues in place, and now we’re having fun with the advantages of that.

Gregory Burns

Okay. Nice. Thanks.

Operator

And at the moment, there aren’t any additional questions. I am going to hand issues again to Mr. David Stickney for any further or closing remarks.

David Stickney

Thanks, Lisa, and thanks, everybody, in your consideration tonight. We respect your persevering with curiosity in ARC and encourage you to achieve out with us — to us with any questions on our progress. Within the meantime, we look ahead to speaking with you quickly on our first quarter name in early Could. Thanks, and have a superb night.

Operator

And as soon as once more, that does conclude this convention. Thanks all in your participation. You could now disconnect.