David Stickney - Vice President Corporate Communications and Investor Relations Suri Suriyakumar - Chairman, President and Chief Executive Officer Dilo Wijesuriya - Chief Operating Officer Jorge Avalos - Chief Financial Officer.

Aman Gulani - B. Riley FBR Alan Weber - Robotti Advisors.

Good day, everyone. And welcome to the ARC Document Solutions' First Quarter Financial Results and Webcast. Today's conference is being recorded. And at this time, I'd like to turn the conference over to David Stickney, Vice President Investor Relations. Please go ahead, sir..

Thank you, Yolanda. And welcome, everyone. On the call with me today are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer. Our first quarter results for 2018 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. 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 1, 2018, 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 good afternoon, everyone. Just a few months ago, I opened my comments on our year end call expressing our growing confidence in ARC's transformation.

This is based on the execution of our strategy throughout 2017 and the result this is beginning to deliver, especially in the area of protecting print revenue as we look to grow our technology revenues. In the fourth quarter of last year, CDIM which means Construction, Document and Information Management declined just 1% year-over-year.

And during the first quarter of this year, we built on that process. In fact, we posted a growth in CDIM, our largest business unit for the first time since 2015. Our renewed focus on ARC's print business delivered a 2.1% increase in CDIM, driven primarily by increase in project and printing.

As we pursued this business interactively, product sales remained stable. We are winning more projects. We have more prudent investments in our operations and our focus is clearly in the right place. Both MPS and AIM revenues still remain challenged and we are working hard to turn this around.

Despite the growth in our more traditional print business our margins in the bottom lines appear to take a beating during the quarter. But it is important to note that extraordinarily high medical costs impacted our results, not the performance of the business.

These costs were well in excess of $1 million and we felt in our progress in our gross margin, SG&A costs and our EBITDA. Jorge will offer more detail in just a few minutes. With all this said, we are ever mindful of the more traditional costs associated with our business.

Over the past several quarters, we have watched how our strategy has developed and played out in an ever changing business environment and we continue to make changes to stay ahead of the curve.

To ensure our progress we will continue to support those business lines that are demonstrating growth and strong potential, but we will not hesitate to shrink or eliminate the costs where products and services have failed to produce results commensurate with their investment.

With these points in mind, we are feeling upbeat about the rest of the year and I am maintaining our guidance for 2018. Our forecast of earnings per share will remain at $0.10 to $0.16. We expect cash flow from operations to be in the range of $44 million to $50 million and we are guiding to a range of $48 million to $54 million for adjusted EBITDA.

With this as a backdrop for further discussion, I will turn the call over to Dilo for some additional color on our operations and then we will conduct a brief overview of our finances with Jorge, before taking your questions.

Dilo?.

Thank you, Suri. We were very pleased with our efforts in growing our CDIM services. Over the past few years CDIM revenue has been challenged due to a reduction in print from the construction sector. While this reduction continues to prevail, we attribute our success to securing new market share and protecting sales from our existing customers.

As a reminder, our CDIM service segment includes revenue from construction printing, color printing and digital services that relate to print. While construction documents maybe moving to cloud and mobile, there remains a market for print services.

ARC's primary strategy is to win repeat business from our customer and expand our services by offering great quality and service. Our goal is to make it easy for our customers to do business with ARC's 170 service centers in North America. Our color printing services continue to be of value to our customers.

Environmental graphics are becoming a popular product in newly renovated offices. Safety and project signage continue to gain momentum at construction sites. We continue to introduce new technology services to our AEC customers to support their document and information flow by using SKYSITE as a central cloud and mobile platform.

ARC is the only company who can offer hybrid solutions with print and technology services, and all our customers continue to communicate their design and construction information using print as well as technology. We are well placed to capture the requirements of both our customer needs.

The new services we launched for our facility customers continue to gain momentum. We continue to educate our customers on how to use mobile technologies to reduce the time spent on finding their valuable information.

Our specialty sales teams are focused on print and technology services and are professionals in their ability to consult with our customers and deliver solutions to meet their needs. Our global services team is continuing to build a strong pipeline of large prospects.

We even succeeded in adding several large MPS customers that will be rolling out in the coming quarters. However, print usage within our customers' offices continue to drop organically as they move to digital channels to distribute their information.

We are working on providing additional services at both large and small customers to offset the decline in volume. Equipment and Supply sales are coming mostly from our Chinese division. We expect flat performance in this segment during the year. Archival and information management services had a 9% drop in sales, but on a small sales base.

As a reminder this is a business line where we are launching our new facility adventure. We expect this revenue [aligned] to gain strength throughout the year. Our marketing efforts continue to improve as we push the growth of additional revenue from existing customers and secure new market share.

Our goal is to continually remind our customers of the many services we offer and be present when they have a need. We continue to engage in social media, [happening] marketing programs to accomplish this. In our business, customer referrals are very powerful and good quality and service are the key to win repeat business from our customers.

Our recent investments in new print hardware have been beneficial in both securing new business and maintaining existing accounts. In the last few months we have also seen many of the large paper converters reducing their manufacturing capacity with the hope that they can stabilize the price of printing -- pricing of paper.

This of course results in increased prices. Like ARC many of our competitors around the country have been passing down these cost increases to customers. This is another indication that the print volumes are continuing to shrink even though the service fulfills the critical needs for our key customers.

While we pay attention to improving our quality and service, we are also building programs to retain and motivate our staff. In the current tight labor market it is essential that we keep our employees inspired and excited.

We conduct contests, skit programs, satisfaction surveys, executive outreach and more to encourage our employees to keep up the outstanding performance and stick with the leader in the industry. Our continuing strategy is to be the best in what we do and continue to build new market share for ARC.

With that update on the sales and operations, I'll turn the call over to Jorge to provide you with financial update.

Jorge?.

Thanks Dilo. Overall sales for the quarter declined just 1% year-over-year, due primarily to declines in our Equipment and Supply sales. In terms of our transformation, it was encouraging to see a 2.1% increase in CBIM which makes that more than 50% of our total revenue. With regards to our margins, we also made great strides on that front.

But as Suri alluded to, they were massed due to exceptionally high medical costs during the period. We are partially self-insured with adequate stop-loss insurance but all-in-all medical claims increased year-over-year by $1.4 million. This resulted in a negative impact on operating margins of 140 basis points and $0.02 impact on earnings per share.

I should note that we anticipate high medical costs to continue during the second quarter. After which, we expect moderation as our stop-loss insurance comes into effect. Despite these heavy medical costs split fairly evenly between cost of goods sold and SG&A, our gross margin of 30.9% represented a year-over-year decline of just 30 basis points.

If not for the increase in medical costs, gross margins would have increased over prior year by more than 50 basis points.

While SG&A costs were expected to rise year-over-year driven by the new investments we made in sales and marketing, the higher than anticipated SG&A costs during the first quarter can be attributed almost entirely to the portion of medical claims that hit this line item.

Earnings per share of $0.01 for the period and adjusted EBITDA of $10.9 million were also affected by the medical claims. We ended the first quarter with nearly $40 million in cash on the balance sheet and we continue to pay down our senior debt to the tune of $5 million during the period.

Cash flows from operating activities were negatively impacted for the -- in the quarter due to changes in working capital and more specifically, the timing of payables. Our long-term investors have seen this trend play out over the past several years and we don't expect 2018 to be any exception.

We anticipate this performance to reverse by the second half of the year and as represented in our forecast, we expect to end 2018 with our usual strong cash flows. Finally, for those of you modeling estimates for the year, it is worth remembering that the new Tax Reform Act will lower our effective tax rate to 30% for the year.

Our historical operating losses of more than $80 million also remain at our disposal. So cash taxes will not be material for the next several years. In closing, I will reiterate Suri's comments regarding our ability to control costs as we restore growth to the company.

We have always thought that managing our costs in good times or bad times are part of our DNA at ARC and this hasn't changed, despite the challenges we have experienced in our marketplace and the evolution of our strategy.

While we are not willing to compromise clear opportunities for growth and will continue to make prudent investments and business initiatives that show result, the past several years have highlighted opportunities for savings as we move forward.

By continuing our relentless approach to managing costs, remaining focused on preserving our print sales while developing our technology sales and keeping a sharp eye on cash generation, we feel confident in moving forward with a strategy that is beginning to deliver the performance we all know ARC is capable of.

Suri?.

Thank you, Jorge. Operator, we are ready to take our listener's questions now..

Certainly. [Operator Instructions] Our first question will come from Aman Gulani with B. Riley FBR. Please go ahead..

I guess my first question would be like what will you say is the primary driver for growth in the CDIM business, like was it more the color in the digital services business or was that the traditional reprographics?.

It's actually traditional reprographics, basically, Dilo would you like to add on to that..

Yes, most of the new revenue is coming from the traditional reprographics side of the business which are primarily construction related documents and information flow.

Another thing I want to mention to you is that, you may see a growth in first quarter but if you notice that we have been reducing the drop in the revenue since about the second quarter of last year. So it seems we have a specialized sales organization that focuses on construction related print services which are part of the CDIM.

And that strategy has been helping us to eliminate the loss in the revenue line since about last year. So this year obviously we have seen a growth and we will hope to continue to do a good job on that service segment..

For the MPS business you mentioned you did win a large customer.

So will we be seeing a increase in locations in the coming quarters and how long does that take to ramp up?.

Usually again MPS customers especially in the secure global type of client, usually the rollout period is primarily dictated by the client, because they may have certain leases that needs to expire and return while they receive equipment from us.

So my hope is that within the next three quarters we should be able to rollout some of these new wins that we have in place..

And then just switching gears and talking about the transition.

Just in your opinion, how many more quarters until you think you sort of completed your transition to digital?.

So that is actually an ongoing transformation for us. The digital revenues are starting to gather a little momentum like I said in the previous quarters. It's not big enough for us to really start quantifying and talking about it.

We would -- David remind me we are into about 20 months into our transformation now?.

Certainly..

So we say clearly 24 to 36 months we are about into that about 20 months, effectively in the last year we have had the team being built from the marketing perspective and the sales perspective and the sales organization infrastructure, et cetera. So we would still have another four, five quarters I'd think. A - David Stickney Yeah..

And then last question from me, you mentioned that you are taking measures to gain more market share.

Can you give a bit more color on that? What exactly your plans to take more market share?.

Sure. On the -- so obviously we are investing -- this is what we were saying, I said in my previous call as well, we are investing both on the print revenue side and also on the technology revenue side. But of course everybody knew we have been investing in the technology revenue side for a while.

What we have been doing in the last three or four quarters is focusing on really going out there and marketing our services on the print side. So which means additional marketing on the web, additional marketing on the social media front and then also reaching out to our customers.

And like Dilo said in his comments, we're making sure our customers know all the different services we provide. We are also starting to see, we getting print orders not necessarily from our traditional customers but also customers who are not our traditional customers which is construction related.

So for example, museums, art galleries and other people who are involved in color related work reaching out to us because of our presence on the web.

And we do -- another part is just focus on the fundamentals, give great service, good quality, good customer communication because in our business it's all word of mouth to get referrals and customers refer different other customers to us as well.

So once they have a good experience, we focus on repeat -- winning repeat business from the same customer. And our sales teams are very focused in taking the extra services, additional services that we have introduced in the last couple of years to the same customer base.

So if they give us construction related printing, we focus on construction signage, archiving services and so forth and we are -- our teams are getting better at that. So those are some of the criteria that we focus on to improve our market share and gain additional business from the same customer list..

So in short what I would say is that we are driving that printing business which we were not driving it as hard in the last let's say 18 months or so because of our focus on technology. Now we are giving equal impact both to the technology.

While technology is being built, we are also trying to drive the print business so we can minimize the erosion in print earnings..

Got it. That's helpful. I actually just had one more question and then I'll jump back in the queue.

In terms of your MPS business, who do you say your primary competitors are when it comes to the MPS business?.

There are multiple competitors on multiple fronts. For example -- I mean you know so the simplest and easiest example is manufacturers. So manufacturers compete with us in different levels.

In one level they compete -- at a lower level they compete with us through the dealers, all manufacturers have dealers, nationwide dealers and then manufacturers themselves have a larger presence to service their large clients.

So when it comes to global accounts, accounts which are actually across the United States and globally, those clients actually we compete with the manufacturers direct because each manufacturer has a global team addressing that market space, so that's one.

And then we do have other reprographers who we compete with on and off and then we also have other smaller MPS providers who are regional in nature. So there are multiple people. But most of the time, my short answer would be manufacturers in especially these large accounts..

[Operator Instructions] Our next question will come from Alan Weber with Robotti Advisors. Please go ahead..

My first question is on the MPS. I think last year the revenue's roughly 130 million or so, can you talk about how much additional business you have to win to kind of keep that level of revenue flat? Because you have been adding in public customers and yet the revenues have kind of floundered down..

Yes, yes, excellent, Alan. This can addressed at two levels. We have two groups of customers inside the managed print services. One group of customers are smaller customers, regional and locally [major], who would order either a machine or two or three, these are small customers.

So our regular foot sales people who are out there in regions would be selling, and we would be selling again manufacturers, dealers mostly. So that's one bucket through which we can generate.

I think last quarter we probably did about, how many MPS installations did we have Dilo, about 150?.

About 100..

100 to 150 new installations. So these are new installations which means additional new revenue. And then the second bucket from which we draw the largest MPS revenues is from the global clients. These are nationwide clients or clients who are across the globe.

So these are large construction companies, engineering companies with whom we have multiyear contracts. So a combination of that is what is required. I'd say overall and I'll let Jorge answer a little more in detail, overall print business in the managed print services segment gets affected on a quarterly basis, around 5% to 8%.

I mean there are some quarters it will be slightly less than 5% and some quarters this could be closer to 6%, 7% and sometimes on a bad quarter we might have 8%. So it's a range depending on the number of projects out there, number of customers out there and how many more new clients we sign. That is the range of the numbers.

And what we've been doing is focusing on selling these small clients, increasing that placements from 100 to 150 to 175 that is one of our focus and the other one there of course is [largely getting] large multinational customers.

The challenge with the larger clients is that because those volumes or revenues comes in lumps, often certain quarters could get affected.

Jorge would you like add some color to that?.

To get a little more specific in the numbers that Suri mentioned in that 5% plus range in dropped revenue from existing customers, so if you will just take that math and you say okay, well we are around 130 million, so that means our existing customers are dropping somewhere around 6 million a year -- 6 million, 7 million a year.

Plus we have our normal small attrition of customers that, hey a project site just ended so technically that MPS will end as well. So when you combine those two things then you're looking at the $8 million to $10 million range of new business.

Some of that comes fairly easy, a new project starts out, it's been our customer, replace new machines in there.

The other part of it comes from what Suri alluded to a little while ago, it's from our enterprise type customers, trying to add some of those enterprise customers that really move the needle in a bigger way and obviously also focusing in our local markets and try and get some of that revenues. So hopefully that answers the question for you..

And then just few others. One is, so the medical costs -- why were some of the medical costs impacting gross margin? I'd have thought that will always go through SG&A..

Because it is split up between where employees are, I mean we cover medical for our direct labor employees, so that portion that relates to the direct labor employees would hit direct labor, the portion that hits SG&A is the labor benefits that we provide for SG&A type of employees, right, your sales staff, your back end staff.

Hence, that's why that cost is split up between the two groups..

And then for the year, can you talk about what you're seeing capital spending will be and how much on capital leases?.

For the first quarter we were $2.8 million in cash CapEx. Anticipate us being in that $2 million to $3 million range, call it $2.5 million on a cash CapEx on a quarterly basis. In regards to our capital leases, we will be in that -- we were at $3 million, a little bit over for the first quarter.

We will be in that $3 million to $4 million range for the balance of the year. You may have one quarter that spikes up but then the following quarter will come down. But on average we will be in that $3 million to $4 million range per quarter..

And I guess my last question is, on the CDIM, since the business has struggled not just for you, have you seen any change in terms of the competitors leaving the business and enabling you to gain some of the market share?.

Not really. We haven't seen much negative effect on the competitor side. Occasionally we hear about small companies seeking to operate but some of our intelligence that we have is that some of our competitors are shrinking in size rather than going out of business.

But we don't too much focus on about our competitors -- we focus on, what we can do and drive the service and quality level with the customers that are out there. But just to answer your question, we don't see too much of companies getting out of the business..

One of the things which I will add to what Dilo said, which helps us is the fact that we have a very large footprint.

So customers who are in multiple locations, who want a single invoice or want a single price or a single contract to be able to do projects parallely in multiple places, those customers can only service -- be serviced by companies like us.

So -- but I agree with Dilo, there isn't a huge difference in the landscape of the competition we have, but there's no question the market is tougher, and people are competing for the same business..

[Operator Instructions] And I currently see no further telephone questions in our queue..

Thank you very much, Yolanda. And thank you ladies and gentlemen for joining us this evening. We appreciate your continued interest in ARC Document Solutions. We look forward to talking with you again next time. Thanks. Good night..

That will conclude today's conference. Thank you all once again for your participation. You may now disconnect..