ARC Document Solutions, Inc. (NYSE:ARC) Q2 2022 Earnings Conference Call August 3, 2022 5:00 PM ET
Company Participants
David Stickney – VP, Corporate Communications & IR
Suri Suriyakumar – Chairman & CEO
Dilantha Wijesuriya – President & COO
Jorge Avalos – CFO
Conference Call Participants
Robert Shapiro – Singular Research
Operator
Good afternoon, ladies and gentlemen, and welcome to the ARC Q2 2022 Earnings Report Call. [Operator Instructions].
Now at this time, I’ll turn things over to Mr. David Stickney, Head of Investor Relations. Please go ahead, sir.
David Stickney
Thank you, Bo, and welcome, everyone. On the call with me today are Suri Suriyakumar, our CEO and Chairman; our President and Chief Operating Officer, Dilo Wijesuriya; and Jorge Avalos, our Chief Financial Officer.
Our second quarter results for 2022 were publicized 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.
Please note that today’s call will contain forward-looking statements and are only predictions based on information as of today, August 3, 2022, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings. Any non-GAAP measures discussed today are reconciled in our press release and Form 8-K filing.
I’ll now turn the call over to our Chairman and CEO, Suri Suriyakumar. Suri?
Suri Suriyakumar
Thank you all for joining us. This has been an excellent quarter, and we are very pleased with the outcome. I want to take a few minutes and recap something I stated a few quarters ago, which validates our position today.
As many of you know, the company experienced tremendous growth through acquisitions since going public in 2005. Then in 2008, the great recession brought about the secular change that devastated the entire reprographics industry for the next 10 years. Many of the reprographers did not survive. Laden with heavy acquisition debt of nearly $360 million and double-digit revenue erosion, ARC battled through these years.
These were remarkable times, and it was an extraordinary feat to keep the company profitable, generate strong cash flows and meet our debt obligations in order to maintain a healthy balance sheet. By 2018, after 10 of the most difficult years in the company’s history, we had reduced our debt by more than 65% to $127 million.
In 2020, we were challenged again. The pandemic threatened our very existence, or at least that’s what everyone thought. But by now, our management team is exceptionally experienced in navigating through times like this.
We saw a perfect opportunity to reinvent the company, a company with a completely different business and revenue model with lower revenues but with great opportunities to grow and improve profitability. Understandably, it was hard for any investor to comprehend how the company would return to a path of profitability and prosperity in this period.
The past 1.5 years says it all, 5 straight quarters of EPS and revenue growth. In addition, we are on track to deliver an EPS of more than $0.25 in 2022. We haven’t seen performances like this since 2016 when our revenues were well over $400 million.
It is also noteworthy that we did not receive any economic assistance or used the American Rescue Plan during the height of the pandemic. Instead, we continued to pay our debt down, which currently stands at $72 million. Net of cash in hand, our debt is a mere $27 million while we continue to generate cash flows in the region of $35 million or more. Needless to say, if we choose to, we are capable of extinguishing our debt.
Even more remarkable has been our ability to ramp up shareholder returns quickly, confident we can extinguish the debt within a few years, we started down a path towards returning shareholder value. This too has produced extraordinary results.
Our current dividend yield is more than 7%. Meanwhile, over the past 3 years, we have repurchased almost 12% of the company’s shares at an average price of $1.62. This outcome should put to rest any skepticism out there regarding ARC’s performance or its ability to continue to grow and return shareholder value.
In just a moment, I’m going to hand over the call to Dilo to describe our progress in the recent quarter. Many of you know that Dilo was recently appointed President, a position that I had held for too long. His appointment is in addition to his role as Chief Operating Officer. A 30-year veteran at ARC, Dilo has proved that he is more than capable of handling this position personally by leading the transformation of this company through the pandemic with amazing results.
So without further ado, I’ll let him add some color to the detail and detail to our Q2 results and the outline of some of our plans for the future. Dilo?
Dilantha Wijesuriya
Thank you, Suri. I’m very grateful for the support Suri and the Board have shown me by appointing me President. It makes the work I’ve done to put the building blocks in place for sustainable growth even more meaningful to me.
Once again, we were pleased with the sales growth we achieved in the second quarter. Revenue increased 8.4%, and we continued to execute well on our pipeline of opportunities. Digital printing increased 7% in the second quarter, driven by strong sales in digital color graphics and signage as well as stable levels of digital plan printing. MPS also about 7%. Hybrid work schedules continue to constrain print volumes in the office, but we remain confident that moderate growth will continue.
Sales from scanning and digital imaging jumped nearly 32% year-over-year in the second quarter or about $1 million. Scanning remains in high demand not only to support remote working arrangements, but also to increase overall business efficiency by digitizing physical files.
Equipment and supply sales grew more than 9% in quarter 2. Demand continues to rise from our design, construction and public agency customers. We have a good backlog of pending machine deliveries, and we are now seeing moderate improvement in the supply chain. Throughout the period, daily sales were consistently strong, and we expect that strength to persist throughout the rest of the year.
Our general optimism for ARC is well supported. First, general business conditions in the U.S. mainly remained relatively strong in Q2. Most of our clients’ projects moved forward. Delays and project cancellations were few, and our customers appear confident in the business plans they have for the near future. Second, while our joint venture in China had a very difficult first half of the year due to COVID, our Canadian and U.K. operations bounced back in the second quarter from lockdowns that were in place earlier in the year. Third, most of our small and medium customers are fully operational and have their staff back at work and our construction customers have also been very active. Fourth and most important to us, our hiring pool is improving. Our people are the backbone of the company, and having a fully staffed workforce not only improves productivity, but it makes our employees happier and improves our ability to delight every customer. On the sales side, we continue to keep our headcount stable.
Finally, our customers continue to help us to understand what they need, what they want and what makes them happy. There are now more than 18,000 customer reviews up on the website with an average of 4.95 stars out of 5. More than 1,000 reviews were posted on Google during the second quarter as well.
On the marketing side, we continue to refine our digital marketing tools and improve our prospecting activity and customer engagement via e-mail, social media, customer success resources and the website. Among the headwinds that still challenge our market are cost increases in materials and price competition in certain local markets.
[Indiscernible] issue is overly concerning. Pricing increases continue to be passed on to our customers, and our teams remain very efficient with regard to operating costs and managing competition. That said, it takes a lot of work and careful attention to minimize inflation impact on profitability.
Looking ahead, we are refining our strategic objectives and charting a path for continued growth. 5 transformational goals will define our sales and operations strategy going forward. They are the transformation of our revenue line, the transformation of our customer base or industry vertical, transformation of how we sell, the strengthening of our service organization and reinforcing our commitment to the success of our employees.
The transformation of our revenue lines continues to build on opening new markets for the company. Going forward, we will continue to offer new service categories that can provide meaningful revenue. The transformation of our customer base is an extension of moving beyond the single market of construction. We will continue to expand customer verticals as well as sell multiple services to the same client.
The transmission of how we sell is directly related to the virtual selling we began during the pandemic. Today, these techniques are far from the rudimentary necessities we started with. We have to ensure our sales executives continue to improve their ability to identify customer needs in a virtual scenario in order to continue expanding our market.
Our customer service has powered much of our success, and we are determined to make it even better. When we go beyond satisfying our customers and truly delighting them, it will transform them into true advocates for ARC, making them part of our marketing team.
And of course, empowering and enabling our employees to succeed in these objectives is our biggest job. Without it, we cannot expect to accomplish much at all.
With this as an operational backdrop for the quarter, I’ll turn the call over to Jorge for a review of the financials. Jorge?
Jorge Avalos
Thank you, Dilo. As you’ve heard, the company performed well in every sales category. And we successfully managed to minimize the worst effects of inflation. Our higher sales boosted the leverage that we can apply to our fixed costs and help produce the impressive gross margins, operating income and EPS we reported today. Our gross margin was up 110 basis points year-over-year despite price increases on materials and supplies rising as much as 10% on certain heavily used consumables during the period.
SG&A increased in absolute dollars. But as a percentage of revenue, it was down both sequentially and year-over-year. Similar to last quarter, sales growth drove increased commissions, bonuses and travel, and we continue to compete hard to acquire and retain talent in the company. Our year-over-year gross margin was up nearly 200 basis points in the second quarter.
The end result of these improvements was a 27% year-over-year increase in net income. We produced earnings per share of $0.08 as compared to $0.06 for Q2 of 2021. Cash flows continued to build during the quarter, coming in at $8.6 million. We had some timing issues around receivables and payroll that muted second quarter cash flow, but we expect cash flow from operations to accelerate in the third and fourth quarters and meet or beat last year’s annual performance. EBITDA came in at $11.3 million, making up for a softer first quarter and putting us comfortably above our stated average of $10 million or more per quarter.
As we look at the balance sheet, we ended the quarter with $45 million in cash, and our net debt-to-EBITDA ratio continued to drop, currently standing at 0.6x. That is impressive performance considering that at the beginning of 2020, our ratio stood at 1.6x.
With respect to our cash balance, I am very happy to announce that we were successful in unlocking cash in China. During the second quarter, we completed an $11.2 million capital distribution from our Chinese joint venture. As we are 65% owners, $7.3 million came to us, and 35% or $3.9 million went to our JV partner, thus resulting in a decrease in our consolidated cash.
Looking ahead, we think strong sales will continue within the normal constraints of seasonal performance. Q3 sales are historically softer than Q2, and Q4 sales are also usually softer given fewer working days in the period. Even so, we think quarterly sales of $70 million or more are within our reach for the balance of the year. With sales at this level, we should continue to see year-over-year increases in EPS and an average EBITDA of $10 million or more per quarter.
In closing, I’ll remind you of our continuing commitment to return shareholder value. In the second quarter, we spent $2.1 million via our quarterly $0.05 dividend, delivering a 7.6% yield based on our stock price as of June 30. We also spent $1 million on opportunistic purchases of our stock in the open market.
While this management team has always made a point of being nimble and changing as our market evolves, I think we’ve built a model that will create opportunities for growth well into the future. And our commitment to a $0.05 quarterly dividend is a reflection of the confidence we have in executing on these opportunities.
With that, I’ll turn the call back to Suri. Suri?
Suri Suriyakumar
Thank you, Jorge. Operator, we are ready for the questions.
Question-and-Answer Session
Operator
[Operator Instructions]. We’ll take our first question this afternoon from Rob Shapiro.
Robert Shapiro
It’s Rob from Singular Research. My question is on the balance sheet. The line item has changed. It sounds like you mentioned the joint venture, but I see the noncontrolling interest went from down to . Is that related to that? I know that historically, it was $6,565 for multiple quarters in a row.
Dilantha Wijesuriya
Yes. And it is related to that. So basically, the $3.9 billion of that capital distribution that went to our JV partner, it was a decrease in our consolidated cash and the offset was a decrease in the minority interest in our stockholders’ equity section, the noncontrolling portion. So that’s where you see that going from roughly 6 and some change down to $2 million. Does that make sense?
Robert Shapiro
Yes. I understand, okay.
Operator
[Operator Instructions]. And Mr. Stickney, it appears we have no further questions this afternoon. I’ll turn the conference back to you.
David Stickney
Thanks, Bo, and thanks, everyone, for your participation this afternoon and your continued interest in the company. We very much appreciate it and look forward to talking with you again in November. Take care, and have a good night.
Operator
Thank you. Again, that will conclude today’s ARC Q2 2022 Earnings Report Conference Call. Again, we’d like to thank you all for joining us and wish you a great evening. Goodbye.
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