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spk05: Good day and thank you for standing by. Welcome to the ARC Q2 2021 Earnings Report. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, David Stickney, VP Corp Communications and Investor Relations. Please go ahead.
spk01: Thank you, Jerome, and welcome, everyone. On the call with me today are Suri Suryakumar, our CEO, our Chief Operating Officer, Dila Widjasuria, and George Avalos, our Chief Financial Officer. Our second quarter 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, August 3, 2021, 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 8K filing. I'll now turn the call over to our Chairman, President, and CEO, Suri Suryakumar. Suri? Thank you, David, and welcome, everyone.
spk04: Our sales were up every segment for the second quarter, producing a 7% increase in net sales over the same period last year. On the strength of this increase in sales, we also posted improvements in gross margin, EPS, and adjusted EBITDA. This performance was, as we anticipated, a continuation of the trend we saw developing back in March. With what appears to be the worst of the pandemic behind us, economic activity picked up and so did demand for our services. While we can certainly attribute some of the success to improving circumstances, most specifically businesses opening their offices again for their employees, our focus on diversifying our market has accounted for the majority of our new business. Meanwhile, the economic reopening across North America has brought new vitality to our existing customers in the AAC market. While construction is struggling with some constraints regarding labor and the cost of materials, plans to move forward have not slowed down. As a case in point, the AIA's Architectural Billing Index recently experienced consecutive months of positive scores not seen since before the Great Recession and other surveys and indices. from trade associations are expressing similar optimism. Looking forward to the rest of the year, we anticipate continuing opportunities from customers both inside and outside of the construction vertical supported by a growing economy. Our challenge will be to accelerate the progress we have made in targeting new customers marketing to their needs, and converting a higher volume of proposals and quotes into sales. Of note, we don't believe that normal seasonal trends will play as a large a role as they have in the past years. Barring major setbacks in the fight against COVID-19, we think the economic and business optimism being expressed may well override the typical desire to slow down with the approach of the holidays. The push to make up lost ground is strong and we expect it to stay that way and benefit from it in the quarters ahead. As you would expect, our strong performance also supports our commitment to shareholder value A return to shareholder value primarily via our quarterly dividend program, as well as opportunistic stock repurchases. Just last week, we announced our fourth dividend of 2021. Shareholders will receive $0.02 per share on November 30th. With this broad sketch of the quarter as a basis for further discussion, I'll now turn the call over to Dilo to provide further detail. Dilo? Thank you, Suri. After a slow start for the year, I'm pleased to share with you that our accelerated activity throughout the period drew our top line by 11.5% from quarter one to quarter two. We also delivered more than $11 million in adjusted EBITDA for Q2, well above the flow of $10 million per quarter we've set for ourselves. We explored new markets, hunted new customers, won new sales, and produced outstanding work. Environmental graphics, specialty color printing for retail, entertainment and education, and scanning services all continue to grow in response to our targeted digital marketing initiatives. While there was plenty of increased activity in the U.S. during the quarter, Canada and the U.K. did not contribute much due to strict COVID-related lockdowns. But as we speak, these regions are opening up and we hope to see improved sales from them in the month ahead. Sales to our construction and non-construction customers continue to grow thanks to the expansion of our services. Our ability to sell more than just construction plant printing to general contractors, engineers, and architects is helping us to capture a larger share of their wallet at a time when construction backlogs are healthy and industry optimism is high. As we discussed in a prior call, around 65% of our new customer acquisition is coming from non-AEC customers. Our marketing team has been focused on this segment with e-marketing and social media campaigns exposing our digital print and document services to many new customer verticals. Digital print opportunities will continue to grow in these new customer verticals as employees return to work in an office. For those customers looking to consolidate their offices, we see a tremendous opportunity to grow our scanning business by digitizing their paper documents. Today, our AIM operations are busy and we are expanding our scan centers to accommodate the increased demand. Thanks to more efficiency and a better cost structure, our sales force is smaller than it was prior to the pandemic. We have learned how to attract more customers to us and develop new and profitable relationships without adding headcount. Likewise, we don't expect to spend more on our infrastructure to support increased demand. As we demonstrated this quarter, in addition to growing sales and increasing opportunities, our management team improved our margins by managing our material, labor, inventory, and infrastructure costs more efficiently. Another benefit of increasing our efficiency has been the smooth operation of our supply chain. We have excellent relationships with our suppliers and flexible inventory management practices to help us sidestep material shortages. At this time, we don't expect supply chain or inflation issues to have an impact on our results in the coming quarters. As Suri said previously, we have emerged as a different company after the pandemic. We will continue to deliver good value to our customers and operate as an efficient technology-driven print and document solutions company. At this time, I will hand over the call to George for a financial review. George?
spk02: Thank you, Dillow. As we expected, impressive sales growth combined with the permanent changes we made in our cost structure both prior to and during the pandemic drove a year-over-year increase of 130 basis points in our gross margin for the quarter. The $4.5 million revenue increase delivered $22.8 million in gross profit, up $2.3 million compared to the same period in 2020, and up $4 million compared to the first quarter of 2021. As I noted in today's press release, We believe the leverage our cost structure exerts on our sales is both sustainable and will provide consistent benefits in the future, especially considering that the second quarter did not benefit from the temporary wage and other cost reductions we made last year. The efficiency of our cost structure, coupled with our sales growth, powered an increase in EPS of three sets. or double what it was last year, and an increase in the adjusted EBITDA of $400,000. We saw a bigger impact on EPS this quarter thanks to significant reductions in interest, primarily due to lower debt and a drop in LIBOR. At the end of the second quarter, our net debt to adjusted EBITDA leverage ratio was 0.74, and the capital structure was further strengthened by the refinancing deal we announced in April. Cash flows from operations in the second quarter were freed from the more aggressive measures we took last year to manage working capital at the height of the pandemic. Instead, cash flows were normalized for the period and they reflect the usual cyclical build we see in the first half of the year. Per our typical cycle, we expect cash to continue to build in the second half of the year. As Suri mentioned, we announced our fourth dividend for the year last week. When paid in November, we will have returned $3 million to our shareholders via the program in 2021. Since the beginning of the current stock repurchase plan, we have repurchased over 4 million shares of stock, with 400,000 purchased in 2021. ARC is at a point where there is great potential for sales growth from dynamic new color markets, the momentum in construction work, and employees returning to offices. With our optimized cost structure, we will continue to add leverage to every new dollar of sales and drive bottom line performance and generate the strong cash flows our investors have come to expect. The business model is proving to be both sound and resilient. Our capital needs are low and we continue to return value to our shareholders. It's a good place for the company to be halfway through the year and an even better one for our investors. With that, I'll turn the call back to Suri. Suri?
spk04: Thank you, George. Operator, we are now ready and available for any listener's questions.
spk05: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, you need to press star 1 on your telephone. To withdraw your question, press the pound key. Your first question comes from the line of Alex Harmon, an individual investor. Your line is now open.
spk00: Thank you. So my question basically is a capital allocation question. I mean, you guys have about $50 million of cash on your balance sheet. It's been pretty steady for the last couple of years. I guess, you know, I'm just wondering why you're not getting more aggressive with the buyback. I mean, you know, basically anybody that buys a share of stock today, I mean, they're getting a dollar, you know, $1 market value is, you know, cash on the balance sheet, and then you're basically getting $1 for the business, and a business that basically generates $1 a year. So, I mean, why not get more aggressive? I mean, I think there's an acquisition candidate out there that had similar, you know, results. I mean, you would probably be looking to buy them out pretty quickly. Just your thoughts on that. Thanks.
spk04: Josh, would you like to take that question?
spk02: Sure. You know, when we look at our stock repurchases, we've been pretty aggressive as much as we could buy in the open market. Obviously, you're aware of our flow and SEC guidelines of what we're allowed to buy. To the extent that opportunities present themselves that we could accelerate that repurchase, we're definitely willing to do it.
spk00: Have you guys looked at maybe doing like a tender offer or something like that?
spk02: that is something we had looked at i mean at this stage in time and as you well know when you do a tender offer you would have to be looking at purchase somewhere upwards of 10 to 20 percent of the company companies um stock back at this current state we're coming out of a pandemic or we're still in the middle of a pandemic we don't think that's a prudent thing to do for the company all right it seems like you guys got a lot of cushion built in stuff like that so it might be something to consider again but i mean especially now that you know we're further along but
spk00: That's just my thoughts. Thank you. Thank you.
spk05: Thank you. Again, if you want to ask a question, you need to press star 1 on your telephone. Your next question comes from the line of Alan Weber of Provoti Advisors. Your line is now open.
spk03: Oh, good afternoon. How are you? Good, good. Very good. How are you? Good. Just a quick question. Did you give or can you talk about what the revenues are from color? Sorry, I didn't understand that question. Color, okay, yeah. Color, what the revenues are and compared over last year and sequentially and like that?
spk04: We don't typically break the color revenue out because color is part of our CDIM total services, but, Judge, color is about almost 50%.
spk02: Yeah, roughly. The way we look at it, CDIM is roughly 50% of CDIM. In the past, it was probably closer to 30% to 40%. Right now, we're about 40% to 50% of CDIM. So we definitely... We do see traction on the color sales there, but as Dillo mentioned, we don't disclose it separately because the way we look at the company is how much revenue, how much printing can we drive to a service center, be it black and white, be it color. So we look at it from a total perspective, how much revenue we could drive to that service center.
spk03: Right. Okay. That was my only question. Thank you very much.
spk02: All right. Thank you.
spk05: Thank you. There are no further questions at this time. Turning over back to you, David.
spk01: Thanks, Jerome, and thanks, everyone, for your attention and your participation this afternoon. We appreciate your continued interest in the company, and we look forward to talking with you again soon. Take care and have a good evening.
spk05: This concludes today's conference call. Thank you for participating. You may now disconnect.
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