Good afternoon. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Q1 2019 Earnings Report Conference Call. [Operator Instructions]. Thank you. David Stickney, Vice President of Corporate Communications and Investor Relations. You may begin your conference..

Thank you, Sheryl and welcome, everyone. On the call with me today are; Dilo Wijesuriya, our Chief Operating Officer; and Jorge Avalos, our Chief Financial Officer. Our first quarter results for 2019 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 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 6, 2019, 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 will now turn the call over to our Chairman, President and CEO, Suriyakumar.

Suri?.

Thank you David and good afternoon everyone. While we had a short quarter to start with, we made the most of it. With one less day of sale in the period, we still manage to grow our EBITDA, expand our gross margin and improve our cash flow over last year.

Our performance was no accurate considering we did all this on a small decline in consolidated sales and higher SG&A cost. Our first quarter sales performance featured double-digit growth in AIM and a strong showing in equipment and supply sale, particularly in China.

CDIM took a small step, that from the growth trajectory we established in 2018, but as we have discussed in the past, we don’t expect to overcome continuing and declines all at once. This quarter, macroeconomic conditions, a little bit of weather and as no debt, one less day in the previous and then up to a decline in the start of our business.

None of these things were impossible obstacles in themselves, but taken together they slowed us, but did not stop our progress. Likewise in MBS we continue to increase the acquisition of regional fliers in our transitional market and explore new industries where offering can make a difference.

However, we are now capturing the national contracts we have seen in the past nor do we expect it. The landscape for larger companies continues to change as a result of the economic and technological drivers. Not to mention dramatically increased M&A activity.

To put that in perspective, more than 1000 E&P companies were involved in a transaction of one kind or another in 2018 adding up to more than 500 deals in the past year alone. Since the recession, the industry has got about 400 annually.

Targeting smaller regular client and battling lower print volumes means we must capture more of the different kinds of clients, but our progress in this has been encouraging. All-in-all, I remain confident with regard to our long-term strategy to protect and perhaps even grow from print revenue.

We are challenging the status quo and the quarters leading up to this one, not only have demonstrated our resilience, but also have proven how agile we have become in capturing new opportunities in markets that are often old.

On another note, all the employees are engaged and as the moral is high, but as we all know, the employment environment we are working on is challenging. Retention is a constant issue as our people don’t have to look for jobs, instead they are being sort after as demand consistently outstrips supply.

Throughout last year, we made changes to our compensation plans and our benefit plans, to both keep good employees in place through new phase of performance initiatives and to make sure all of our employees understand how much we appreciate their efforts. You will start to see the effect of those changes in the coming quarters.

In a very few minute, you will hear about our latest technology release and how as counter intuitive as it sounds. Using this technology is to increase our print business. You will hear about the achievements of private certification such as HIPAA do help us drive more work into our service centers.

You will also hear about our financial performance that delivered profitability gain this quarter. Also a new authorization from our Board to consider [indiscernible] feature.

We did all activities that has potential to deliver another positive year for ARC and it's shareholder and with these point in mind, I‘m maintaining the financial outlook we announced in February 2019.

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

Thank you, Suri. As the quarter was one day shorter than last year, we were able to improve on sales on a daily basis throughout the period. We did so even while challenged with a few disruption from operations in some of Northern states due to tough weather condition and pressure from a decline in homebuilding on the West Coast.

Our project printing exposure to the residential market is relatively low nationwide, but a cooling market in California after several very strong years affected our service center there. In the first quarter, we introduced our new ARC Print App to our customers and prospects.

Many of our customers travel between their offices and project site and managing thin job on the go is very challenging. Our new App will help customers to place orders, track them and request course through their mobile devices.

Also, our App will connect our customer to each of our 190 Print Centers worldwide with a few tabs on their phone, they can get ARC to Print and distribute Print anywhere they work. Our customers manage their digital document in multiply cloud platforms such as SkySite, Google Drive, Box and Dropbox.

That is why the App features access to virtually any document stored in the cloud and provide seamless connectivity between the digital document and our Print Centers. The habit and demographic of our customers are changing and in the future mobile Apps will play a significant role in the way customers interact with ARC Print Centers.

This quarter, we are also pleased to announce that four of our AIM production centers were approved as HIPAA compliance. This enables us to start selling our AIM services to companies that have Protected Healthcare Information. We are currently working on receiving HIPPA approval for our SkySite cloud application as well.

We had good growth in sales for AIM services in the first quarter. New revenues from our facilities solution as well as scanning and archiving services are helping us to expand these revenues lines. ARC operation team were the source of our healthy margins during the quarter, as they kept a close watch on costs throughout the period.

Our ongoing focus is new customer acquisition, selling additional services to our existing customers and managing an efficient production process at our service center. We know that our customers are busy, and we continue to focus on our efforts on improving our market share to protect print revenues in the future.

With that as a backdrop for operation, I will turn the call to Jorge.

Jorge?.

Thanks Dilo. Overall sales for the quarter declined less than 1% year-over-year for the reasons Suri and Dilo outlined. The decline in sales was partially offset by growth in AIM and an increase in equipment sales in China. Normally, low margin equipment sales would have a dilutive effect on our margins.

But thanks to aggressive measures to reduce our cost structure, gross margin not only remain strong, but in fact, outpaced our 2018 Q1 performance by 70 basis points. Our adjusted EBIT also grew year-over-year, turning in $330,000 or 3% increase from prior year.

This is a remarkable achievement considering that we had $590,000 decrease in sales and a $340,000 increase in SG&A as we continue to work through high medical expenses, among other items.

We anticipate higher medical costs than usual through the end of the year, but to the degree we can predict these things, we expect these costs to be in-line with 2018 with a possible moderation as the year progresses.

We ended the first quarter with nearly $19 million in cash on our balancing, an increase of $4.8 million over prior year Q1 and paid down our senior debt by another $5 million during the quarter. Cash flow from operating activities were $2.7 million for the quarter or up $4.6 million, as compared to prior year.

We expect to end 2019 with strong cash flows reflected in our annual guidance. As a reminder for those of you developing your forecast, the recent Tax Reform Act were lower effective tax rate to 31% for the year and our historical operating losses of nearly $80 million remained at our disposal.

Therefore, cash taxes will not be material in the foreseeable future. Two other changes are worthy of note for 2019. First, due to the recent changes in these accounting rules you will see a gross up on our balance sheet of approximately $50 million.

The new guidance now requires us to record on our balance sheet, all our operating leases as a right-to-use asset with a corresponding operating lease liability. This new guidance had no material impact to the income statement or cash flows. Second. Our Board authorized share repurchase plan that runs through March 31, 2021.

We are authorized, but not required to opportunistically purchase up to $15 million of our stock during the defined period. As we did in the past, we will use excess cash for both share repurchases and a continuation of aggressive debt pay down, as we deem appropriate based on market condition.

For those of you who are new to the Company, ARC had a similar repurchase authorization plan in place from the beginning of 2016 through the end of 2017, over which time we purchased approximately $9 million of our own shares.

I will wrap up with a reminder that our guidance for the full-year remain in place with earnings per share at $0.17 to $0.22, cash flow from operations to be in the range of $47 million to $52 million and $52 million to $57 million for adjusted EBITDA. With that, I will turn the call back to Suri. Suri..

Thank you Jorge. Operator, at this time, we are happy to take our listeners questions..

[Operator Instructions] We have a question from Glenn Primack of PDT Capital. Please go ahead your line is open..

Hi good afternoon.

The gross margin, again is that based on mix or is that more you guys really tackled the cost of goods sold line?.

We have really tackled the cost of goods sold line, actually the mix was unfavorable since it was although weighted….

For the equipment..

Yes, which easily drops our margins. So hence why we were pretty happy with the performance from a margin perspective..

Okay and then yes, because now I gotten eaten some by the SG&A and that is still - is that a continuation from last year’s medical or is it just basic healthcare in America or did you just paid more?.

Yes. And it’s a continuation from last year. We still have a little high claimants, I mean so it’s not increasing overlaps here, but it’s in the range of last year and then we had a few other little miscellaneous things that are really worth mentioning that caused that $300,000 increase..

Okay and then the CDIM, are you holding your share you think in California?.

I think for the most part, we have….

Because that was down a little bit, and you mentioned macroeconomic conditions, but like that is one of your power areas. So just..

No. definitely people are holding on to our share. You have to also consider we have one last business day also impacting that with a little softness in the West Coast as we have talked about in the housing. So it’s not like we are losing customer, it’s more macro dynamic there..

Yes. I'm pretty confident that Glenn in terms of market share, I think we are in a good place there, obviously because we have this so many new initiatives and obviously from a Company standpoint we can pretty much withstand any kind of pressure, if it is pricing or otherwise.

So I don’t mean market share is an issue, but it’s just a macroeconomic conditions is what it seem like stuffing up a little in certain areas..

And if you had that one more day back, I'm guessing you would have had a little bit more flow through into EBITDA from gross margin dollars is that….

Oh definitely. As you know, our infrastructure, our facility’s the cost is monthly what it is, our equipment cost is what it is. So when you get that additional revenue in, it comes at a pretty high contribution margin. So yes, that would be a good or correct comment..

Alright and then last one.

The announcement today with the capital equipment over at [Riot] (Ph), was that spent during the first quarter or is that coming into the second quarter?.

Yes, mostly it would be in the second quarter..

Okay and I’m guessing that gives you maybe some competitive advantage within the whole you know riot?.

Yes the new equipment that we have invested is going to strengthen us in our production centers. Cost of goods sold will be definitely positively impact as well securing new markets, new verticals for right color..

So mostly this plan, if you think about it, all the point of purchase, all the graphics we do in large offices or businesses they are becoming very popular now and we certainly have opportunity to grow our market share there. This is again market share plan.

And we want to make sure we are well equipped to do that and we have had really some really good positive results with regard to that. So we continue to do that..

Alright.

Just one last one like, Dilo you think the technology that you have in place is under-Appreciated somewhat by folks like me, because it's interesting when you talk about being able to communicate with the Print Centers and everything is going mobile and you have got different ways to get there on the communication front and through different backdrops for those guys like the Google.

Can you just talk about that a little bit, because I don't know who else can do it and if it's like - you feel like that is some ARC secret sauce we get to hear?.

Sure. And so it’s an interesting question Glenn. I mean the way we look at it, we really think, number one, the App is not going to have a complicated work order fills, that is not what we are thinking about.

So, basically the theory is within two taps and a swipe or swipe and three taps whatever that is, we should be able to get the information we want. And interestingly I don’t know whether you know this, but whenever we do study from this, we are finding much more people use mobile than we think they use, strange thing.

Think about checking the weather, what do you use your mobile to check the weather, order your food, get a cab, find out which restaurant you want to go to, listen to your music, get your boarding pass.

So the use of App is really exploding and literally you do use Apps for everything, you use not as predominantly in front of all, but subconsciously more and more people are using Apps, and Apps simply means it’s simple and easy and a few tabs. So what we have done with the ARC App is really emulated that for our customers.

So, if you really want to know what your ordered, just put the order number and hit boom, we will tell you where exactly it is. And if you want to deliver something, just press a couple of buttons, we can do that. You want to order something, pull out order and then we can do that. So, I think there is going to be more traction on this.

We are finding more people are accessing the mobile devices these days than ever before. So, I think, again, there is no [indiscernible], we don't know that. We will know soon, but for example, I mean from our DSF, how much business do we get right now, this is customers directly ordering from the web….

Significant..

Significant, right. Significant amount of business comes in through that. So these all - so there multiple, little, small pockets to which business is building Glenn.

You don’t really get spin, we already do drone services or visualization services through the App, through DSF, a bunch of different challenges, but when put together, that is already bumped in and remember there is a little sales reps here when you do sell light benefits. People getting used to using our products.

Anyway, that is a long answer to your short question..

No that was like a good answer. Thanks..

You are welcome..

There are no further questions at this time. I would like to turn the call back over to David Stickney for closing comments..

Thank you everyone for listening today. We appreciate your continued interest in the Company, and we look forward to talking to you again next quarter. Have a great evening. Bye, bye..

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