Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Q3 2018 Earnings Report Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

David Stickney, Vice President of Investor Relations. You may begin..

Thank you, Josh. 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 third 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, November 7, 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. We are pleased to report another successful quarter and continued progress towards our strategic objectives. As many of you know our goal has been to protect and even grow our print sales as we develop solutions and a new customer base for our technology services.

To many, pursuing growth in what is considered a dying industry may have seemed counterintuitive, but with our long experience in the industry and deep insight into the markets we serve, the potential was obvious despite its inherent challenges.

It was this potential that drove our investments in the new equipment that improved the quality of our print offerings, while lowering our production costs. Once in place, these resources allowed us to compete more aggressively for traditional print business and enhance our market share.

The size and scope of our service center network drives the economies of scale that our smaller competition cannot match. And when coupled with advancements in our existing print technology, ARC delivered four quarters of sales improvement in print and two quarters of growth in CDIM.

We continue to show incremental progress with the changing MPS market. Today, customers have more options than ever before with regard to the equipment and the technology they use to manage their print networks and workflows.

To that end, we have added features to Abacus our print management solution and released an upgrade that makes it much easier to leverage the cloud, drive work to our service centers for high volume work, which is unsuited for the average office and cross-sell a number of other services.

These improvements to print services side of our business are not just one-time efforts but instead built on a legacy of innovative thinking that has kept us in the forefront of our industry for decades.

With a year of improvement in the print sales under our belts, we think these efforts and their results are sustainable in the near future and will provide us with continuing opportunity to grow our base in technology. The year-over-year increase in AIM and other technology sales for the quarter, it's a clear step in the right direction.

Our customer base is growing and we have established a customer counsel to help us align the needs of the market and we are happy with the direction we have established. By combining our progress in sales, with a relentless focus on managing costs, we delivered a strong gross margin and drove a meaningful increase in our EBITDA during the quarter.

As noted in our earnings release today, our performances has also driven a solid improvement in earnings per share and adjusted EBITDA as well as an upgrade in our annual forecast for the second time this year. We now expect ARC’s annual EPS to be in the range of $0.15 to $0.18 and adjusted EBITDA to be in the range of $52 million to $55 million.

We remain confident in our operating cash flow forecast, as we enter the fourth quarter and so we are maintaining our guidance of $44 million to $50 million. With that as an introduction, I’ll turn the call over to Dilo for a deeper dive into our operations for the quarter.

Dilo?.

Thank you, Suri. We are extremely happy with our sales performance in the third quarter. All our business lines grew year-over-year. As I have communicated during our past several calls we’re continuing to focus on the key fundamentals of offering exceptional customer experience while aggressively focusing on acquiring new market share.

Construction-related print services demonstrated strong growth in the period. While the past several quarters have shown significant improvement, our results in the third quarter were impressive. We attribute our success to executing on the basic, winning new projects, securing new print customers and servicing them at a competitive price.

When we win a new project we not only secure a construction printing but we are also securing color, scanning and other technology services from the same client. Our sales reps are continuing to sell deep and wide into each account. Our customers are busy designing and building new projects.

And we continue to take advantage of the improved market conditions to increase our performance. Color services are continuing to prove their value. In the past, customers used our high quality print services primarily to produce their marketing proposals and presentation materials.

While this business segment remains very strong, we are seeing more adoption of color and environmental graphics in the offices and workplaces. Customer needs strong project management and execution skills from their suppliers to perform such work.

Our nationwide network of write centers and their expertise are helping us to penetrate this multibillion dollar market. Our MPS business grew nominally in the third quarter. Some of the larger account wins we had earlier in the year are being deployed, while the new acquisition of local MPS customers remains an important focus for our sales teams.

As Suri alluded to earlier Abacus our print and fleet management software also had a new release last month and it features continue to benefit our customers to build a secure print environment in their officers, while assisting them to reduce internal print costs.

While these successes are notable, print volumes continue to decline in our legacy print installations as customers move into digital workflows to distribute their information. AIM and technology services performed well.

We continue to benefit our existing customers with scanning and cloud document management services and our list of new faculty service customers continues to grow. Many companies already using our faculty solution are becoming more familiar with the product and expanding its use within the organizations.

Others in the industry are recognizing its value too. Last month, our facilities mobile dashboard won the 2018 Campus Safety best award. We also recently introduced drone services for construction site as an expansion to our technology solution.

Today, many of our customers are using aerial intelligence to capture and document information that assist them to proper site and safety management requirements. Finally, our equipment and supplies business line improved led by a solid quarter from our Chinese joint venture.

Therefore our attention to cost management and efficient operations drove our gross margin improvement during the period. As Suri mentioned, over the previous six quarters, the investment in new production printing equipment which enabled us to deliver high quality print, while reducing the cost of production.

We support our production staff and continue to inspire and motivate them with bonuses and profit share programs. Our ability to maintain long-term quality employed is a key to our success.

Our marketing efforts are ongoing with demand generation and social media activities during new buyers -- bringing new buyers to our website and to our service centers.

While our customers may print less in the office environment, our ability to sell a wide variety of document and technology solutions via our service centers will continue to fuel our growth.

As always, our continued strategy is to be the best in what we do, continue to earn the right to win business away from our competitor and increase our market share.

Jorge?.

Thanks Dilo. Once again, our delivered solid quarterly performance with improvements across the Board. In the third quarter, we achieved year-over-year revenue growth in all lines of our business. Once again CDIM representing more than 50% of our revenue led the way with year-over-year growth of 4.6%.

Gross margins expanded 220 basis points due to our ability to leverage our overhead and labor with increasing sales and aggressive cost management. We are continuing to invest in those business lines and initiatives that are proving themselves and cutting costs in those areas that are not.

This is not only true with our direct costs but also with our SG&A as evidenced by the stabilization of SG&A. Our aggressive cost management efforts in conjunction with ARC’s revenue increase are producing great results, especially in light of medical costs that were $600,000 more in the third quarter of 2018 compared to prior year.

As we communicated in August, we expected medical costs to moderate from the $1.5 million to quarterly increase we experienced in the first half of the year. And that is exactly what we saw. We expect this downward trend to continue into the fourth quarter.

Of course, all of this translates into year-over-year adjusted EBITDA growth of more than $2 million or nearly 19%. Higher sales, margins and gross profit with the stabilization of SG&A are driving our improvement in EBITDA.

From a cash flow perspective, year-to-date results have lagged behind prior year results due to the timing of accounts receivable collection and the $3.6 million year-to-date increase in medical expenses. A large portion of our sales from the third quarter will not be collected until the fourth quarter.

Therefore, we expect an acceleration of cash flows in the fourth quarter which gives us confidence that we will meet our annual cash flow guidance. We continue to improve our capital structure by reducing our senior debt by $5 million during the quarter, making our overall reduction $15 million for the year.

The result of our debt reduction has been an improvement in our leverage ratio to 2.4 times and interest costs staying flat in spite of rising interest rates. A persistent and steady effort rarely makes for an exciting story, but it always creates a satisfying ending.

While we've got one quarter to go before we wrap up 2018, our management team is completely focused on meeting the goals we set for ourselves and perhaps even exceeding those objectives in a few areas.

The results of the past two quarters have begun to show what is possible with the constant efforts, a good strategy, a little bit of momentum and so we look forward to sharing more steady progress with you at the end of 2018 and into 2019.

Suri?.

Thank you Jorge. Operator, we are now ready for the questions..

[Operator instructions]. Your first question comes from Josh Nicholas with FBR. Your line is open..

Yes thanks for taking my question. I want to ask a little bit, I mean nice increase in the gross margin. I know the company's always been diligent about its expense and overhead management.

Could you talk a little bit about the different margin profiles you've been seeing between like CDIM and AIM and how that's been affecting the mix and changes on that front?.

Yes, absolutely, that's a perfect question for Jorge.

Jorge if you would like to answer that?.

Yes, sure. So one of the things that we always talk about with CDIM most of that revenue is driven through our service centers. So when you look at our cost structure there our facilities as well as our equipment is big, maybe a little variability in the labor.

But when we drive more revenue in there the contribution margin there comes in at a much higher rate than our normal gross margin. So when we look at a mix in this quarter where CDIM has got 4.6% that's a big contributor to why we have the 200 basis points increase in gross margins.

Does that answer your question?.

Yes. Perfect. Thank you. I was going to ask a follow-up question on the MPS front .Good to see some healthy continued growth trajectory there for two quarters now. Do you think that’s sustainable as we move into ‘19? And then also, is there, what’s the driver behind that, is a large regional national wins.

Any additional color you could provide would be helpful?.

Sure. So MPS as you probably know is largely driven by small format printing that’s the one which dominates the managed print services marketplace in offices. And that’s a challenging market, because the number one day is a huge amount of oversupply in the market, there are still over 20 manufacturers competing for this market fiercely.

And in addition to that, that is the one market, which is actually taking a beating from the user technology, related to that something as simple as even signing contractual documents, you’ve probably heard DocuSign just went public and it’s a $5 billion company. So more people are using electronic signatures.

And so the user technology is actually cutting that space and that will continue. So this will always be a challenge market, like any other print segment, this is more vulnerable to user technology. And we have been very opportunistic about it.

And with regard to what really delivered our numbers this time is yes, we have every now and then sometimes we win a larger account or regional or national account. And that will help us drop our numbers down.

But because of all of the technology integration we have, and the fact that we are actually one we can provide an ecosystem of all these construction-related services, we are able to grow in many parts of the segments of the -- many segments of this business..

And last question from me. Good to see that the SG&A coming down a bit.

I was just wondering like, how much of that quarter-over-quarter drop we saw is due to just medical expenses coming down versus some cost cutting that will likely flow through beyond Q4 and potentially pass that?.

Sure. I’ll get Jorge to give you a little more color. But what I want to say as general concept is that one of the things we are doing with our business is constantly focusing on improve of efficiency. So it’s not more really as cost cutting effect, which is what he did before, when the market was challenged.

But now is a vision of user technology to improve efficiency inside of our company and with our customers. So that’s helping us a lot.

Constantly like Jorge mentioned, we are like, quarter-after-quarter looking at our expenses and improving every part of the P&L, where we think there is some leakage or wastage, we will go and improve the efficiency there. So that’s the overall theme in the company, that does a lot and certainly Jorge you can..

Yes. I mean, more specifically on the SG&A, yes, the reduction on SG&A is driven mostly from the optimization as Suri described right now.

From a medical standpoint, I’m talking about year-over-year increase of $600,000, but if you look at it kind of sequentially from the second and third quarter, medical expenses did go down a little bit, but not that much.

So really, the drop that you’re seeing there is really us taking a hard look as Suri mentioned at all our costs and saying, hey there’s certain areas where we invested that we’re panning out and so we cut those costs.

And as I said in my script, those that are proving themselves we will continue to invest in them and maybe even put a little bit more that way. So that was one of the reasons why I say I feel that we're in a stabilization of SG&A I don't see it going up from here, I see the opportunity for it to go down potentially.

So hopefully that kind of gives a little bit more color to your question..

That does. Thank you very much. I’ll hop back in the queue..

Your next question comes from Glenn Primack with Promise Holding, your line is open..

Good afternoon guys. So kind of feel pretty good with two in a row..

Yes, we sure are feeling good..

Yes, we're feeling good..

Excellent. And so if I'm guessing there's like as -- I appreciate the explanation on the cash flow into Q4 from Q3, yes, and I know you're not ready to give ‘19 guidance but if you just keep grinding it out, wow, what would prevent like you know the board sitting down on a buyback.

Is it just like I can't believe after all the hard work and paying down the debt that's like does it allow the stock to sit where it is without taking advantage of sale prices?.

Yes, I love your optimism by the way Glenn, thank you, without a doubt.

As you know we've gone through a pretty difficult period in the last several years and we had to carefully navigate during that period to make sure our ratios are staying sharp, especially when your top-line is shrinking and your bottom-line is shrinking which is what we experienced before the two in a row or four quarters of improvement in a row.

So obviously we were focused on reducing the debt and making sure our ratios are in check, bearing in mind the interest rates are also creeping up, so that also later will have some impact on us. So we've done that very well.

But now that we are where we are, we are feeling very good about it and we'll see how next year proceeds and if that continues to go on in the right direction, you know why not, I completely agree, I mean we have done this in 2017, there is no reason why we won't do it again.

Although I am not too confident that if this trajectory continues, the stock price would be where it is, but we'll see how it goes..

Excellent, that means like I've got to get some before you get some..

You know they put all these rules and regulations on us so we can’t get some..

Alright, wave does start turning the ship around then I think with the midterm elections over maybe there will be some infrastructure spending some time before the cycle ends..

Yes, I mean the team is really pumped up, fired up, we’re really excited about the fact that we can have back-to-back improving numbers and we've had this for four plus quarters now. We're excited about what we have in front of us..

Just I’ve got at least to do a couple more.

Have you maintained your market share in the State of California do you think?.

Yes, I would think so. It's one of the things that market share is a very interesting, it depends on how you're looking at it Glenn. I mean previously market share could be defined for the print market specifically where you can measure that. But today what is market share, if you think about it the entire print business is evolving.

It's not anymore just pure print business, right. If you think about it the technology is playing a bigger role in it. And there is no such thing as in my opinion in the construction space pure technology play. So, I would tell that’s a hybrid market. We are -- customers are using technology, but they are also using a lot of paper.

So, a perfect place to play that space where we have paper business, print business, but we also have technology business, whether it is hyperlinking or scanning or something like drone services, think about it. We are -- on the one hand, we are still providing print, really, really basic stuff.

On the other hand, we are messing around with things like drone and hyperlinking and scanning and optical character recognition. So, the market has evolved and changed. All I can assure you is we’re getting a bigger market share of our customers’ needs today with the user technology than we did it previously.

So I could confidently say our share the business with our customers are definitely growing and which we feel very good about..

And then I think Jacobs recently sold some stuff to WorleyParsons. And then you don’t have to comment on it.

So WorleyParsons, have they been client before?.

Yes, they have been our clients. We have been servicing them for a long time. That’s an interesting thing. I don’t have a whole lot to say there. But except for the fact that people looking from the outside thought Worley is in trouble. Worley always told us, they were to grow and sure enough, they are growing. So we are happy..

No, that’s great.

And then lastly, can you give any tit bit or like potentially how many pilots you’re working on new cool stuff?.

I know you’ll not finish your questions without asking something like that. Well, there’s nothing really meaningful or material to report, Glenn. We are talking to a multiple customers about the use of technology more increasingly. So there no things as pilots really because we don’t do things for free anymore.

So there is no such thing as pilots anymore. When people want, we suggest to them and recommend them, hey we can incorporate this and we can incorporate this and provide it this way. So it’s not like really we didn’t serve these customers before, we served them, but we served them more with paper and print et cetera.

Now we are giving them different strategies as to how they can use data in different ways. So no pilots, nothing free, customers are testing it out and if that pans out and becomes meaningful you’ll be the first one to know..

Fantastic. Your press releases this afternoon warmed me up a little bit on a very chilly Midwestern afternoon. So …..

Alright. Good one, Glenn. Thank you..

[Operator Instructions]. There are currently no further questions at this time. I’ll turn the call back to Mr. Stickney..

Thank you, Josh. And thank you everyone for joining us this evening. We appreciate your attention and continued interest in the company. Have a great night. Bye, bye..

This concludes today’s conference call. You may now disconnect..