Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Q4 and Fiscal Year-end 2021 Earnings Report Call. Thank you. It's now my pleasure to turn the call over to Mr. David Stickney, Vice President of Investor Relations.

Sir, please go ahead..

Thank you, Brent, and welcome, everyone. On the call with me today are Suri Suriyakumar, our CEO; our Chief Operating Officer, Dilo Wijesuriya; and Jorge Avalos, our Chief Financial Officer. Our fourth quarter and fiscal year results for 2021 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. In today's earnings announcement, ARC offered expanded supplemental disclosures to provide shareholders and analysts with additional information in advance of our quarterly conference call.

The disclosures are largely historical and will not be read on today's call. 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, February 23, 2022, 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 welcome, everyone. 2021 was a year of challenges and opportunities. Looking back, I'm pleased to say that we overcame the difficulties in a decisive manner and took advantage of every opportunity for growth that was out there.

The year began with business sold under the cloud of COVID and our first quarter results reflected those dire circumstances. But in each quarter thereafter, the company improved on every front. Our expansion into new markets was remarkable, and perhaps surprising to nearly everyone but ourselves.

Even our traditional customers in the construction market significantly increased their appetite for our services well beyond digital plan printing. This will allow us to continue to accelerate our revenue streams in growth segments of our business unlike the pre-pandemic years.

Year-over-year, sales grew in each of the last 3 quarters, culminating in fourth quarter growth of more than 7%. Of note, every revenue line grew in the fourth quarter, which is typically our softest period of the year.

The bottom line was even more impressive as the fourth quarter earnings for the period delivered 158% growth in EPS as compared to the prior year. It is an excellent way to wrap up 2021 any way you look at it but even more so when we consider how it began.

Cash generation in the fourth quarter and the year was as expected, healthy and consistent with our level of sales. No better evidence of our confidence in continued cash generation was the 150% increase in our dividend announced in December. Dilo and Jorge will provide more detail a little further along in the call.

What I'd like to impress upon you most is how well our plans to transform the company have been executed. While the results of the past year have been enormously gratifying in themselves, the power of what we have done will be best demonstrated in the quarters and the years ahead. Our network of service centers is optimized like never before.

Our people are heavily cross trained. We continue to fine tune our marketing and attract new business, and the skill and responsiveness of our sales team is proving to be as versatile and diverse as our new markets are.

Not only we can meet the needs of our expanding customer base, but we are focusing our creativity and innovation on creating new services and products that leverage our existing skills and infrastructure. Doing so keeps the cost of developing new offerings low and assign greater value to the experience and talents of our employees.

As we continue to reap the benefits of a well-focused strategy and a transformed business model, we are also updating the way we report our results. You will have noticed that the names of 2 of our primary services, CDIM and AIM, are now referred to as Digital Printing and Scanning and Digital Imaging.

Given our expanding market, we believe it is more powerful to report our services in the language that it describes the way they are produced rather than by what any given industry might use them for. The methods for financial reporting and revenue recognition in our renamed business lines remain unchanged.

The country, our markets and ARC itself are in a very different position today than they were just 12 months ago. Challenges remain, but I think the current situation favors opportunities for 2022, especially for ARC.

I'll turn the call over to Dilo and Jorge at this point to fill in some important elements of our progress over the past year, and I'm sure you'll see why I remain optimistic about the coming year.

Dilo?.

expand our customer base beyond our traditional markets, sell additional growth services to the AC customer base by leveraging the strong relationships we have built over the past 35 years, introduce new growth services that can be performed from the same service center footprint; and protect high-margin plant printing revenue.

Critical to the achievement of these objectives is the service we provide to our customers. During several of our previous calls, we discussed the need for a higher level of customer service. In tough economic times, many clients have moved around due to lack of customer service from their existing providers.

As a team, we have diligently strengthened our service levels and communication to deliver superior value to our customers. The evidence of our success can be found in our reviews. We not only have received more than 15,000 online reviews from our customers, but our average rating is -- in these reviews is 4.97 out of 5 stars.

In terms of economic disruption, supply chain issues were noticeable in our industry at the end of the year. We avoided most supply problems earlier in the year thanks to close inventory management and selling certified used print devices with a full service guarantee from ARC.

Printing hardware for management services incurred delays during the fourth quarter. Due to our strong vendor relationship, however, we did not experience any delays on the key production material. Our production management teams were able to maintain good margins and profitability in the fourth quarter despite the issues.

As of now, we expect a moderate pushback on the start dates of that back-to-office initiatives as many of our customers are grappling with the effects of the Omicron variant. That said, we expect this to be sorted out within the coming months as restrictions are being lifted.

Beyond these challenges, our management teams across the country are looking forward to continuing our progress as we embark on the new year and our mission to be the best digital print company in North America. With that, I'll hand over to Jorge for a financial update.

Jorge?.

Thank you, Dilo. The year's accomplishments included an improvement in nearly every area of our financial performance. Considering that the economy was emerging from the worst of the pandemic at the beginning of the year, common sense suggests we should have struggled throughout the year to get back on track, but that wasn't the case.

Sales stabilized and then improved quarter-by-quarter. Gross margin stayed steady in spite of the reconfiguring of the company to be smaller, more nimble and more clearly into a wider audience. We compressed our SG&A costs, reduced our need for capital spending and finance leases and watched while operating margins responded vigorously.

To top it off, net income and EPS grew by more than 45% for the year and by more than 100% in the fourth quarter.

Most importantly, however, is the fact that we achieved all of this on the cash we generated during the year, including the $5 million of value we returned to shareholders with an increased quarterly dividend and stock repurchases in the open market.

At this point, it might sound odd to suggest that cash flows from operations that declined year-over-year helped drive our performance. But in reality, that reduction reflects normalized levels of cash generation and collectibles relative to the level of our sales and just as importantly, a solid foundation to build upon.

What's so different is the efficiency of our operations and cost structure after the transformative steps we've taken over the past 2 years. A perfect example of the efficiency we're achieving is the way we're reducing our capital expenditures and our need for cash at the same time.

We have recognized the need for printing equipment and our MPS engagements will be lower in the future due to the permanent adoption of hybrid work models. As such, we're not only acquiring less equipment but fewer leases for that equipment.

On top of it, we're working through existing inventory with our new certified equipment program to reduce capital spending even further and driving more and more work through our service centers where we can leverage production-grade equipment, more capacity and cross-trained labor.

We're tackling other issues in a similar way to address improvements from all angles. The highlights of our financials demonstrate the depth and breadth of this exercise. We grew sales for 3 consecutive quarters. Our operating margins improved 260 basis points for the quarter and 130 basis points for the year.

Cash on the balance sheet was nearly $56 million. At the end of 2021, our debt, net of cash, was $22.3 million, an annual reduction of $20 million, leaving us with a debt ratio of less than 1x.

We increased our quarterly dividend from $0.01 to $0.02 at the end of 2020 and then raised it to $0.05 per quarter at the end of 2021 providing an annual yield of more than 5%. Our EBITDA for the year was more than $40 million with a 15% EBITDA margin despite the slow start to the year and reduced sales volume.

Our EPS for 2021 was $0.22, a year-over-year increase of $0.07 compared to 2020. It's a long list of accomplishments and one we're proud of. But it's also an excellent basis for progress and growth in the near future. From a revenue, profitability and cash flow standpoint, we have created an excellent environment for even more improvements in 2020.

I'll now turn the call back to Suri.

Suri?.

Thank you, Jorge. And operator, we are now available to our listeners for their questions..

Your first question comes from the line of Robert Shapiro with Singular Research..

Given the company's transformation that you've been working on, how would this impact the quarterly seasonal trends?.

How does it impact -- did you say how does it impact the quarterly seasonal trend?.

Yes. You did mention that usually, the fourth quarter is the weakest. But maybe because of holiday season, the fourth quarter might be stronger now than some other quarters. Just wondering how that impacts -- let's say, for instance, the first quarter versus the fourth quarter.

Would you expect the first quarter to be weaker or stronger than the fourth quarter like in terms of seasonal trends?.

Yes. That's a good point. Actually, the fourth quarter is usually a soft quarter, but obviously, given our expansion into other verticals and new services, we are finding that's helping to offset some of the softness, which we previously experienced in the history of the company.

But it's also true that the first quarter last year was largely impacted by the Omicron variant, right? And that was the one thing which could tamper on it. So last year, I mean, it is not a normalized year.

So I think as we go forward, we'll start to see a consistent performance with regard to how all sales are reacting, and we'll get a better understanding. But last year was obviously tumultuous given the fact that the COVID still had an impact.

Jorge, would you like to add to that?.

Yes. And just kind of to add on to Suri's point, I mean, I guess, in summary, we don't expect to see such a dramatic difference for the first quarter, the second quarter, the third quarter, the fourth quarter.

Are there differences? Business is typically a little bit better in the second and third quarter but as Suri mentioned, not as pronounced as it was in prior years. There will be a more muted difference in between quarters..

It would be industry specific. Let's put it that way..

Okay. And you did mention Omicron, the Omicron variant.

You did feel like that impacted the fourth quarter this past quarter?.

No. I mean the earlier quarter.

Dilo, would you like to add?.

Yes. So 2021. Yes, the first quarter was a Delta related issues renew have that. But going into the fourth quarter, there was a slight slowdown because many customers are shutting off a lot earlier before Christmas season due to the variant and so forth. And we noticed that.

But again, from the sales point of view, due to the diversification that we've done over the last almost 6, 7 quarters, and those results are paying through positive momentum among our customers. So we didn't feel that very much..

Your next question comes from Alan Weber with Robotti Advisors..

So just a general question.

Kind of your legacy business, the architectural, engineering and like that, roughly what percent of your business isn't that legacy industry now versus, say, 2 or 3 years ago or 5 years ago?.

A high-level rule of thumb is you see our digital printing line item. That encompasses our legacy construction-related document premium as well as the new color printing. Rough justice, it's about 50%, 50% of that line item. I think that's a good growth.

From our perspective, we don't report on it nor do we plan to report on it because there's so much overlap between a lot of that work..

And also, Alan, one of the points I must mention is that although you might see just looking at it, 50-50, the kind of services they are buying from us are very different now. For example, there is much less plan printing. There is much like construction plan or specification-related printing because all that has become digital.

But what's happening is we are going back to the same customers. We already have relationships and sending them -- I covered that in my, what you call, the script, getting them to buy more digital print and color services, scanning services.

So although it seems like it's coming from the industry, it's really a different revenue stream, a new revenue stream, which is much more growth oriented as against the previous year. So if you go back to the previous sales and look at the revenue we generated from AEC industry, that was shrinking revenue. Not anymore. It is actually a growth revenue..

Okay. And then -- that's great. And then just a follow-up. One of you talked about the number of verticals.

Can you just talk about kind of what are the fastest growing verticals just in a general way over what's changed?.

Yes. So I spoke about the verticals, how we have expanded the verticals over the last probably 2 years in the organization. So we -- I wouldn't be able to talk about a specific vertical, which is really growing faster than any other vertical.

The way we look at it is you look at the vertical, we know what the -- what they can buy from digital print and scanning and digital imaging services.

And what we are doing is really focusing on understanding what their pain points are and all their buyers and understand their personas and really market to that group of customers so that they know that ARC can provide those services.

So that's what we are -- that's how we are very tactical in going after those verticals and expanding the services that we sell to those customers. So from the vertical standpoint, whether it's high education, medical, health care, government, city and counties, all those verticals are very, very solid for us, whether it's small malls developers.

All those are continuing to stay strong and that they have services that they need services that ARC can provide them..

So one way to -- another way to think about it is, Alan, that instead of thinking about the vertical. Think about the product lines.

So one way to think about it, what are the product lines which are growing fast? So if you think about it, Dilo would agree that digital color and scanning, those are the services which are really growing fast because every vertical requires those kind of services.

So what we are doing is by adding verticals, we are continuing to expand the growth of those product lines because we are selling to the same products, but do more verticals now. I hope that makes sense..

It does make sense. And just a little unrelated.

Any thoughts in terms of -- but I don't even know if you can talk about this -- what you hope to accomplish in terms of buying back stock during '22?.

So it will be very opportunistic overall when we look at it. Obviously, we've promised over the last 24 months or so, Jorge, we have been talking about focusing on returning shareholder value as the debt levels continue to come down. We focused on retaining shareholder value. And obviously, initially, we were largely focused on share buyback.

And then, of course, we shifted to dividends when we started doing it. And we obviously have expanded that aggressively. And share buyback will always be opportunistic depending on where the market is and how the stocks are trading.

Jorge, would you like to add to that?.

No. I mean I think you hit it on there. I mean we spent $5 million on returning shareholder value in 2021. Now looking at 2022 with the $0.05 dividend, that alone is going to give you $8 million of returning shareholder value in the form of dividend. And as Suri mentioned, we're not abandoning the share repurchase.

We're going to be opportunistic and go out there and try to get some more shares..

So the way we are looking at it, Alan, overall return to shareholder value, really double it..

Okay. And my last question is, any thoughts about acquisitions in terms of how much time you spend? Or is it really -- if you can just talk about that..

Very little because we don't see anybody around who are exactly like or rather have the similar business models, Alan. But there might be pockets of little acquisitions, which might be suitable in certain regional markets. And again, that will be opportunistic.

If something knocks on our door, and we think it's a fit, we might go after it, but that's not our strategy right now. Right now, it's just basically organic growth driven by marketing these new services. That's what we are doing right now..

Your next question is from the line of Mike Hughes with SGF Capital..

First high-level question, can you just talk about what pricing will look like for the coming year? And then related to that, I guess, just talk about the growth potential of the 4 businesses for this year..

Okay. So from a pricing perspective, we don't see pricing pressures now instead. Given what's going on around us, overall, I think the pricing will be pretty stable, if not, there is opportunity for risk to rise up. And obviously, that depends on suppliers, supply chains, everything that's going around us. But we are very opportunistic.

So given our buying power, we are able to keep the prices in check while drawing better prices from our. That's what's going on. With regard to the 4 products, you might have just thought in the top 4 products.

Dilo, would you like to comment?.

Yes. The top 4 products, if you look at the -- how the -- we performed in the fourth quarter, I mean, all product lines grew.

And we are fairly strong and we feel very strong about each of those product lines as we go through to 2022 as well because the way we are transforming our customer base and the product base, there are more opportunities for us to continue to market and expand into a higher share of wallet within the same customers as well.

So we will continue to do that, and we feel strongly about growing all 4 product lines this year..

Okay. Just 2 follow-ups. What does pricing look like over the last 4 or 5 years? I assume it's -- you've faced pressure. Is that correct? And now it's more stable.

Is that right?.

Dilo, would you like --.

Yes. No, there's not heavy price pressures like that the way you identified. There are pockets in the country. Occasionally, we will see some price pressure new to competition and so forth.

But since we went into the pandemic, our customers are clearly wanting services from companies who are reliable, who can get the job done based on the promises that they make because with the pandemic, there are so many staff-related disruptions, material product raw material disruption that goes on in the industry quite a bit.

And we know the customers are paying a good, fair competitive price to get the job done right the first time and from reliable companies like ourselves. So we do not have any meaningful price pressures and we hope that will continue to stay the same in the future..

So when you talked about, I think, just to add to that, you talked about 3 to 5 years. You go back 5 years. The market was different without a doubt. And they are -- you could say in certain areas, there was some amount of price pressure.

But like Dilo says, what's happened in the last year or 2, especially this year is companies are willing to pay for high-quality service, right, and reliable service. And we are seeing that. Obviously, that's one of the reasons we focus on high-quality service and get that high level of customer satisfaction.

With that kind of thing, we are able to command better price..

And our margins proved that out. I mean, our markets have improved and steady, continue to improve..

Yes..

Okay. Okay. And I understand the March quarter, you have a really easy comparison, so you should be able to put up year-over-year revenue growth.

Should that be the case for each of the remaining quarters too? You're looking at revenue growth for all 4 quarters on a year-over-year basis?.

Overall, that's what we are expecting. We obviously want to grow the revenue every quarter. That's the management team's objective. But obviously, as the pandemic settles down and we come back to normalcy, it will be even more clearer.

But our expectation is that we'll continue to grow because organic growth is what we offer and we are driving that hard..

And our last 3 quarters proves that out..

Okay. Super. One just last question for you. I think in the past, you've talked about EBITDA at a level of at least $10 million a quarter.

Is that correct?.

Correct. Yes..

Okay. So that would annualize to $40 million. Your interest expense is around $2 million, CapEx maybe $5 million and our cash taxes, $1 million or $2 million.

Is all of that -- are all of those decent assumptions?.

Cash tax is probably lower. We're well under $500,000. We have historical NOLs, so we don't foresee ourselves paying taxes for the foreseeable future. But the rest are generally in line..

Okay. So conservatively, that's $30 million in free cash flow. The dividend consumes $8 million to $9 million of that. And then your remainder is about $20 million. And I guess this goes back to the last gentleman's question about the buyback I guess. Even if you want to expand it, you're somewhat limited by the restricted payments basket at $15 million.

Is that still the case?.

That is still the case in our credit agreement..

Okay.

Any thoughts on going back to your bankers and having that change so you could do a little bit more aggressive buyback?.

Well, we on, yes. I mean it remains be seen. We came out of a very dark era with the banks. They were very nervous when the pandemic hit. And we completely turned that around and got ourselves a very, very favorable deal just very recently. So we are very happy with the deal right now.

As it evolves and things become better and become more consistent, we certainly have the opportunity to go back to the bank. And we also want to be mindful of the balance between dividends and the share buyback. So we'll take it as it comes..

There are no further questions at this time. I will now turn the call back over to Mr. David Stickney..

Thanks, everyone, for your attention this evening. We appreciate your continued interest in ARC, and we look forward to talking with you next quarter. Take care, and have a good evening..

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect..