Good afternoon and thank you for standing by. Welcome to the ARC Quarter Three 2019 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] I'd now like to turn today's call over to David Stickney, Vice President of Corporate Communications and Investor Relations. Thank you, David. You may begin..

Thank you, Ely, 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 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, November 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 certain references to 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?.

Good afternoon and thank you for joining us today. ARC continued to feel especially in the third quarter from market trends similar to those we have seen all year. Revenues results was declining revenues of our traditional service line.

These results, especially when compared to last year, the year which we consider to be a good one, grow us to reexamine the structure of operations and the services we offer. The purpose was to identify segments of our business that were underperforming and to remove or reorganize them as required based on our customers current needs.

I'm happy to announce that we will very pleased with the outcome of this exercise. By the end of this year, we will have realized more than $10 million in annualized savings. This ensures the protection of our cash flows and eases the pressure on our margins.

We are well aware that we cannot save all the interceptors, but it is necessary that we protect our financial health today, so we will have the flexibility and the options to take advantage of the opportunities which may present themselves tomorrow as we move forward.

During this time, I think it's vitally important to keep in mind that our business is not suffering from a loss of customers or a lack of relevant services or competitive pressures. As I noted today in our press release, we have what our clients want and need. But they're simply not using our traditional services as much as they have in the past.

The use of technology in the construction space is and will continue to affect our print-driven revenues.

While there is no threat of print revenues completely disappearing anytime in the future, we will continue to feel the impact on our revenues until we are able to offset these secular challenges with some of our other initiatives we have discussed in the past. Two of these initiatives are notable.

One, the use of technology to differentiate our services, sustain and grow market share, especially in MPS and the archival business. And second, the increase use of color as we discussed in our Q2 report. Especially important is how we use technology to sell aggressively to a broader segment of the digital color market.

Both these businesses have the potential to help us offset the erosion or decline in our traditional revenues. Needless to say, we have been engaged in both MPS and the color business for a while now, but both these businesses are also evolving.

For example, while the MPS business in the construction phase has been somewhat stagnant, there are emerging opportunities in the non-AEZ [ph] space for MPS. We are exploring those opportunities very carefully.

Similarly, in the broader segment of the digital color market, we have made significant inroads into a variety of retail, hospitality, healthcare, and other verticals that have shown great a promise. We need to prove to prove our capabilities with these high profile customers. And during the past three months, we went a long way forward doing so.

Here again our sales and marketing strategies are markedly different from the past. We are using tools such as our customized digital storefronts and driving sales through a variety of digital marketing channels.

On the imaging side, this includes things such as corporate team building graphics, adaptable artistico, educational classrooms, and common sense messaging, and HR and other company culture displays. These niche areas represented growing market, while graphic applications are in high demand, and we are well positioned to supply them.

In essence, our preventive color and non-traditional use of our print services will help expand our addressable market. While the optimization of our sales, marketing and workforce helps us make the most of what we already have.

As we address the operational needs of the company, we also intend to better leverage our strong cash flows on behalf of all shareholders. While we have been active buyers of ARC stock in the open market, since the second quarter, we understand that our share price is under pressure.

Therefore, we continue to explore ways to retain greater value to our shareholders, such as paying annual dividend or expanding our current share repurchase program by means other than open market purchases.

We are in discussion with our lender to determine, if such options can be accommodated within our current facility or through other alternatives. While this quarter's financial results challenge the company's performance, we are maintaining our annual forecast for 2019. We anticipate earnings per share to be in the range of $0.14 to $0.18.

We expect the annual cash provided by operating activities to be in the range of $45 million to $50 million and annual adjusted EBITDA should be in the range of $49 million to $54. million.

With this as a brief backdrop, Dilo will now take a moment for an operational review of the quarter, followed by a brief financial update from George, and then we will provide some time for Q&A.

Dilo?.

Thank you, Suri. While there continues to be demand for our printing services in non-traditional areas, the drop in printing services from Construction and Design companies increased year-over-year, and we see work from homebuilders dropping as well.

By contrast, we have been able to secure new sales from our MPS business, including new clients from outside of the construction industry. And we continue to make progress with expansions and new location rollouts with our existing customers.

Scan and archival services continue to appeal to our customers and our facility customers continue to show interest in our abilities to help them. Equipment and supplies sales were affected via drop in our Chinese joint venture, but the equipment business in the U.S. remains generally flat, but healthy.

In addition to the cost savings we've achieved in the third quarter, we took steps to expand our business and build awareness in the market outside of our traditional channels; we marketed heavily in non-construction verticals with our new programs targeted towards healthcare, advertising and design agencies as well as sports and fitness franchises.

We used videos, highlighted successful and well-known customers and reached out aggressively with email campaigns to qualified prospects. We recently revamped our website to leverage our experience from these marketing programs to increase our appeal to verticals beyond construction. We are not giving up on construction.

It still provides us with strong sales in traditional print, but we are putting more focus on industries that have greater potential to use more and different kinds of trend. As Suri mentioned earlier, we made strategic changes in the company to align them operations with our level of sales.

In addition to what he mentioned, we also close two print locations in non-strategic markets. As always, we are continued to focus on the fundamentals of operations by maintaining good customer service, inventory control, and strong cash collection. With that, I'll turn the call over to Jorge.

Jorge?.

Thank, Dilo. Overall sales for the quarter declined 6.3% year-over-year for reasons that were outlined earlier, including another double-digit drop in international equipment and supply sales, as China's softened economy continues to suppress capital spending.

As a reminder, the China business is not strategic for us, and it's very low margin, but it did account for 2.6% of our sales drop during the quarter. Despite the drop in sales, we were able to maintain our strong gross margins due to cost controls we had in place prior to the third quarter, and additional measures we took during the quarter.

These cost saving measures also contributed to the decline in SG&A of nearly $1 million and reduce the impact to EBITDA resulting from the decline in sales. It is worth noting that these measures produced a restructuring expense of just over $300,000 that appears on our income statement.

Cash flows from operations were $3.7 million higher year-over-year, primarily due to aggressive inventory management, improved AR collections, as well as other changes and working capital. On a year-to-date basis, our aggressive cash management resulted in our cash flow from operations to be at par with prior year.

Our strong cash flow allowed us to pay down our senior debt by another $5 million during the quarter. Our bank debt is now less than $65 million. And our leverage ratio net of cash remains under 2 times. We also use a portion of our excess cash to repurchase approximately 200,000 shares during the quarter.

Our continuing strong cash management performance, and a significant reduction of our debt over the past several years is now providing us with the opportunity to explore returning value to our shareholders, as Suri described earlier. I'll close with our normal reminders for those of you who are new to us for developing your own forecast.

Our effective tax rate will be approximately 30% for the year as a result of the new tax law. Our historical operating losses of nearly $80 million remain at our disposal, and we'll keep our cash taxes well under $1 million for the foreseeable future.

In the first quarter financial statements, you'll see a gross-up on our balance sheet of approximately $50 million, as a result of the new accounting guidance for operating leases. This guidance had no material impact to the income statement or cash flows in that or subsequent quarters. With that, I'll turn the call back to Suri.

Suri?.

Thank you, Jorge. Ely, at this time we’ll be available to take our listeners questions..

[Operator Instructions] And our first question is going to come from the line of Alan Weber, Robotti Advisors. .

Good afternoon.

Can you just talk about, you know, you spoke about trying to do more business in some of your non-traditional channels? Can you just give like an natural example of what you're doing and, and like that?.

Sure. And we do this both in the emptier space, and also the color space so what we were doing is I mean, not that we not have non-traditional customers before, but we are increasingly focusing on these segments because we think there are great opportunities and probably less competition than in the construction space itself.

So for example, management services, we are looking at other large companies, companies insurance, companies or energy companies. There are companies who would be involved say for examples in government and state sector. You know, who would be providing services to variety of people in the government, we are – who require regularly equipped.

So we're looking at those opportunities and those and figuring out way to tie our management services capabilities with our offset, what he called an offsite printing which will help us, so there is a huge amount of work, you know, opportunities that we can explore. We're doing that on the MPS side.

On the color side, we are looking at, you know, what used to be primarily driven by construction related printing now we're looking at retail, hospitality, healthcare, like I said, you know, there are classroom graphics and office – corporate graphics, and then motivational graphics, all kinds of different graphics.

I mean, you go to a gym today there is no empty walls anymore. They're full of graphics, right? I mean, when you go to a gym or whether you go to a big store, retail store, you will find all of the store walls are filled with graphics. These are all new graphic opportunities we have largely known as the environmental printing.

And this is relates to either corporate culture or human resource or team building. Any one of those efforts so those are all new opportunities, and we are starting to market to that space..

Okay. Thanks.

It looks like on the MPS, is there any like 29 millimeter projection goal in terms of over the next year or two in terms of revenue, what you really hope to accomplish?.

So MPS is a very interesting animal and we've talked about this previously, MPS revenues comes to us in chunks that are years we will do very well. You know, depending on the number of contracts, we sign and then suddenly, in a year or two, we might really have very bad revenues.

And this has been the case for us largely because most of our MPS revenues, the big ones came from what you refer to as global customers in the construction space. But as you know, in the last, especially five, six plus years, there's been lots of mergers and acquisitions in this space.

So customer, we have, we might have had a long-term, you know, MPS contract with them. They get acquired by another customer who doesn't actually have assessed their contract, so we lose that customer. On the other hand, there might be another acquisition in which there could be a new customer being added on to our existing contracts.

So because of that, it has been pretty tumultuous for us, especially the MPS revenues. I think it was in 2016 and 2017. We had multiple mergers and acquisitions, which worked against us negatively. But in some years, we have good years, where we have growth. So, we feel good about the opportunities, we have there. We need to market them.

And there are good years and bad years, but it is very hard to predict consistently as to how they will grow because of two reasons. One, number of contracts themselves, we might lose our game.

Number two, that no matter how big the customer is, if we sign them today, next year, there will be a decline in the revenues for MPS because those customers are all printing less, use of technology is impacting that number. So it's a fluid balance. So we can't consistently predict those numbers.

But in a good year, we largely maintain the previous year's MPS numbers and maybe add low single digits in terms of growth. On a very good year, that might be a little on the -- be on the higher side. On a bad year, we might lose a few digits in growth. So, that's the range we are talking about. But we know constantly we are bringing in new customers.

We are signing new contracts. But that also has to offset the declining revenues and any mergers and acquisitions by which we could -- can’t loose these customers..

Okay. Great. Thank you very much..

Our next question is going to come from the line of Walter Schenker, MAZ Partners. [Operator Instructions] Walter, go ahead with your question..

Thank you. I have two questions actually. The second one, the address hopefully is given the pressure on the stock in the last quarter; why were you not able to buy back more stock? But the other question is the $10 million in cost savings. Just a little bit more color. Those are largely cash costs and therefore all other things being equal.

Once that's all implemented, it should be incremental to operating profits on an annualized basis starting in the first quarter of next year. That's it..

Okay.

So the first question Walter was on why winning by more shares?.

Or why would you want buyback shares, okay. That’s a straightforward answer. Walter, because we are restricted as to how much shares we can buy based on the liquidity in the market. So, we could only buy up to a certain amount allowed by CC depending on the trading volumes we have.

So that's one -- that's the biggest limitations we had, otherwise we could have bought more shares. And that's the standard requirement there. On the second side, obviously better cost saving guidance, certainly ask Jorge to give you more color. But overall, if you look at it about 60% of that is from cost of goods, COGS and about 40% comes from D&A.

So, I mean, that's the base number. I mean, we won't give specific details, but roughly, that's what you're looking at. Jorge would you like to add some color..

Yeah, definitely. And to answer the question, I mean, we made things where we were able to optimize different things. As Suri mentioned in both the -- direct cost side as well as our SG&A costs. And we do anticipate those costs primarily dropping to the bottom line.

I mean there might be some areas where it affects another part of the business and you don't fully realize all the savings that you wanted. But all things being constant, biggest thing, obviously revenue being constant and you know, no blow ups in other areas of the company, then you would expect that to just slow to the bottom line in 2020.

Does that answer your question?.

It'd be redundant. So these are actual courses opposed to accounting course, i.e.

where you're amortizing something, which really is non-cash, goodwill or anything like that?.

No, these are, these are actual costs. These are actual costs coming out of the organization. And remember we started this in the third quarter. So it's not like you're going to get a full 10 million year over year impact in 2020.

We're starting to realize some of those to a smaller degree in the third quarter, little bigger degree in the fourth quarter and then you'll get a full year impact next year..

If you can give anything related to the accounting, you know adjustments or whatever. We'll call that out. We always do. But these are directly close down to the bottom line which is meaningful.

Do always showers as any investors do now?.

Okay, thank you. Good luck. Trying to figure a better way to return cash to shareholders. Give them a large cash flow. I think that would make everybody pretty happy. .

Absolutely. I mean we are definitely focused on that. As I said to you in my script, we are exploring all the options and we are determine to make sure that you know we worked towards that goal. .

Thank you..

[Operator Instructions] And we have a follow-up question from the line of Alan Weber, Robotti Advisors. .

So just quickly, when you talk about the $10 million savings excluding that, when you look into 2020, do you think you can keep cash flow relatively flat or kind of what do you think of -- how do you think the cash flow for next year?.

Yeah. Again, a hard number to predict. Obviously, we can't quite predict exactly what we do in 2020. If assuming it's a year like, we did this year. You know, again, in terms of revenue, Alan then, our objective would be to protect the cash flows. We've always done that very rarely year after year, that has been the trademark of ARC.

So we'll certainly be focused on the cash flows very much like what we did this year.

But very hard to exactly predict what will happen in 2020 without really knowing what our revenues would be 2020 will it be judged?.

Yeah. I would agree with that. Sorry. And the way I look at it and say, Hey! That $10 million is ensuring that they protect us and make sure that our cash flow generation will stay at similar levels that we seen in 2019. And previously, now pay for successful in some of the venture so we mentioned or Dilo mentioned on the sales side.

Well, then there's some upside there..

Okay, great. Thank you..

All right..

Thank you. At this time, we have no further questions. We'll turn the call back over to you for closing comments..

Thanks, Ely and thank you everyone for joining us this evening. We appreciate your continued interest company. We look forward to talking with you again soon. Take care. And have a great night..

Once again would like to thank you for participating in today's conference call. You may now disconnect..