ARC Document Solutions, Inc.

emphasized earlier today in a press release. The press release and other company materials are available from our investor relations pages on our document solutions website at ir.e-arc.com. Please note that today's call will contain forward-looking statements and are only predictions based on information as of today, February 28, 2024, and actual results may differ materially as a result of risks and uncertainties that we highlight in our quarterly and annual SEC filings. Any non-GAAP measures discussed today are reconciled in our press release and form 8K filing. I'll turn the call over to our Chairman and CEO, Suri Suryakumar. Suri? Thank you, David.

If there was a year that validated our efforts to transform the company, 2023 might have been it. The challenges were easy to see, but so were the opportunities that balanced them. Watching the progress we made in offsetting declines in our older business lines with our more contemporary services, namely color and document scanning, was extremely gratifying. I can see a time in the not too distant future when our strategic business lines will come to dominate our revenue mix. Business conditions were fairly predictable for us after the first quarter of 2023. Capital spending was constrained due to interest rate hikes. Market activity was strong but focused on short-term. Return to office initiatives lost much of their momentum. And while the country and the general business environment seemed like it was improving, sentiment was muted. As much as we prefer bigger, long-term projects, Seasonal and event-driven marketing work helped us spur growth in our color services throughout the year. The trend for converting paper documents to digital information that began with the pandemic continued to gain momentum throughout the year and dramatically increased demand for scanning historical documents from the office and from warehouse storage. While the short-term growth of this service is gratifying, The volume of such information and the compelling need for it to be converted are both enormous and likely to last for decades. While we've seen declines in our on-site services as employees continue to work from home, sales in 2023 began to stabilize and we had significant success in the fourth quarter. You will hear more about that from Dillow later on this call. In this economic environment, construction projects were much more difficult to justify as for the purchases of large equipment. So it wasn't much of a surprise when construction plan printing got off to a sluggish start and the equipment and supply sales followed suit. But our ability to adapt to changing market conditions drove an increase in fourth quarter revenue, limited declines in annual revenue to less than 2%, and our skill and experience in managing costs held gross margin steady for the year. We had higher hopes, of course, but the continuing progress we made in identifying new markets, launching new and exciting products, and finding new partners and making the necessary investments to take promising services to the next level positioned us well for 2024 and beyond. To help explain some of the details about our efforts throughout the last quarter and to help put the entire year in perspective, I'll turn the call over to Dilo and George for their comments. Dilo?

Thank you, Suri. In the fourth quarter, we achieved encouraging results particularly in our strategic revenue lines, as Suri mentioned. Despite facing a decline in planned printing revenue, we successfully offset this loss by growing our document scanning and digital color revenue streams. Notably, our sales in document scanning services were 34% higher than they were in 2022, and our digital color services saw a surge in demand driven by significant projects supporting year-end promotional activities across various business verticals. Beyond the holidays, our consistent focus on expanding retail, trade show, and mall operations, coupled with increased tourism activity in the hotels vertical, contributed much of the business that led to our growth in digital color printing. Leveraging our premier digital print services brand, Riot, we continue to attract major brands across North America, positioning ourselves as a leading provider of on-demand, high-quality color printing solutions in all major markets in the U.S. In North America, few companies offer anything close. Achieving this level of service demands meticulous planning and a cohesive, dedicated production team, qualities that define our operations. Over the past three decades, we honed these capabilities with plan printing, resulting in a dominant market presence in construction. Now, we are applying the same expertise and co-competencies to our digital wide format color services, ensuring consistent quality and efficiency to our clients. The demand for document scanning remains robust as businesses prioritize moving their critical content to digital platforms. Hybrid work models and the growing trend of office space reduction further propel the adoption of document digitization projects among our clientele. Our teams conduct thorough site audits and collaborate closely with clients to tailor solutions to their specific requirements. Our Scan by the Box program caters to smaller clients seeking efficient and cost-effective scanning solutions for a file cabinet or two and our success in securing enterprise-level scanning contracts in the past few months with several contracts exceeding six figures has significantly improved our production backlog. Through targeted marketing campaigns, we are actively educating clients on the advantages of digitizing documents, and our performance is solidifying ARC's reputation as a trusted nationwide provider of document scanning services. Additionally, Our continuous enhancement of technology tools enables us to streamline project management, elevate quality standards, manage labor costs, and provide improved accessibility via cloud-based solutions for valued customers. By contrast, we have yet to observe any significant improvement in plan printing from new construction projects. Our assessment indicates that positive momentum in this revenue stream hinges on a substantial decline in interest rates, which we have yet to witness. Nonetheless, we remain proactive in showcasing and promoting other services offered by AHRQ to diversify our revenue streams. Our long-standing relationships with construction clients serve as a valuable foundation for introducing and expanding our new services within their accounts. As office customer behaviors evolve, we've also noted a decline in onsite print services along with equipment sales. However, over the past year, we have made a concentrated effort in renewing our onsite service contracts with key clients. I'm pleased to report that we've achieved successful renewals for multiple years with several major MPS customers. Their continued satisfaction with our service and confidence in our comprehensive on-site service solution bode well for maintaining revenue in this service line. Moving forward, our revenue performance in the fourth quarter serves as a clear indication of the positive direction our company is headed. Our emphasis on scanning and digital color printing is driving overall company expansion, and our management team is Every market is 100% on board. Our strategic investments, ongoing staff training initiatives, and targeted marketing and selling strategies are all directed towards advancing this primary objective. Key areas of focus for our management teams include production management, customer service, margin optimization, and planning capacity. We are also doubling down on our online and social media marketing efforts to generate new customer leads while maintaining a steady sales representative headcount. I encourage our investor community to follow us on LinkedIn and other social media platforms. Creating and sustaining a fun and secure workplace environment for employees remains a top priority for management. We consistently implement initiatives to support our team members, including various employee assistance programs and a profit sharing bonus plan. As we further establish ourselves as a prominent presence in digital color printing, document conversion, and more, fostering a dedicated and inspired team is crucial to our success. I look forward to sharing our first quarter results soon. At this point, I'll hand over to George for more on the financials. George?

Thank you, Dillo. While sales of equipment and supplies, onsite services, and construction clamp printing were soft during the first three quarters, we saw signs of stabilization in the fourth quarter. Combined with strong sales in color and scanning, it led to incremental sales during the period. As Suri and Dillo noted, our work in 2023 has created a favorable environment for new sales opportunities. With rates forecasted to come down, a limited chance of recession, and confidence building in the resilience of the economy, we're in a good position to capitalize on them in 2024. Gross margin held steady for the year, but fell in the fourth quarter as a result of our fourth quarter mix of business. High margin, plant printing decreased normally does during the fourth quarter, but unlike last year, we did not have a drop in the low-margin equipment sales. Throughout the year, we kept a tight leash on costs in light of softer sales, reaped the benefits of lower depreciation costs that reduced our equipment purchases on on-site services, and even higher labor costs associated with increase in scanning and revenue and inflationary pressures were not enough to put a debt on our gross margin. SG&A for the year was down, benefiting from a lower level of sales commissions and bonuses, which left us with net income and earnings per share relatively stable year over year. The decrease in adjusted EBITDA for the year was attributed to our lower sales and an increase in labor costs. While cash flow from operations was affected by the same things, the decrease was mitigated by strong cash collection efforts in the second half of the year. Our DSO dropped a full four days, which helped keep 2023 cash flow from operations in line with prior year, and drove the $2.9 million increase in the fourth quarter. We are happy to report that for the full year, we returned $12 million to shareholders in the form of dividends and share buyback. This was the most we have ever done in the history of the company, and we plan to do it again in 2024. Our liquidity and capital structure continues to improve even after the $12 million spent on shareholder returns. Our cash balance, increased by $3.5 million. Our net debt was only $6.1 million, representing a $7.7 million decrease. Our leverage ratio stands at only 0.3 times adjusted EBITDA. Finally, before we end our remarks, we need to address the obvious outlier on our P&L for the year. the site remediation expense. The expense stems from an acquisition we made in California during the 1990s that included property that had been used for a gas station before we purchased it. The gas station had long been demolished and its storage tanks removed well before our involvement. Several years ago, ground monitoring detected petroleum on the property and we were asked to create a remediation plan for the site. We did so, and the plan was approved. But further monitoring in the fourth quarter of 2023 turned up additional risk and now required a much more extensive plan. Three points are worth emphasizing about this expense. First, none of this has to do with our operations. Second, this is the only service center property we own. And third, and most importantly, this expense will extend over a long period of time, but accounting rules require us to establish a liability now. We don't expect it to hamper our operations or our cash flows in a meaningful way in any given year of the project. Turning our attention to 2024, we are seeing encouraging growth in our strategic services, And our pipeline of opportunities and backlog is robust. The economy is benefiting from anticipated declines in interest rates, and the variety of industries and customers we serve continues to grow. We've also made prudent investments in people, marketing, and equipment to drive future growth. With that in mind, we look forward to what lies ahead in 2024. and sharing our progress with you in the coming quarters. At this point, I'll turn the call back to Suri. Suri?

Thank you, George. Operator, we are now ready for questions from our listeners.

Thank you, and everyone, just a reminder that it is star one if you would like to ask a question today. Once again, that is star one for questions. We'll go to Greg Burns, Sedoti & Company.

Good afternoon. In the construction industry, Planned printing market, I guess you noted, you saw some signs of stabilization in the fourth quarter. As you look into 24, I know interest rates going down would be a potential catalyst to get that part of the business higher, but barring interest rates going down, do you feel like that business has stabilized at a lower level? How should we think about the potential for further declines in that side of the business?

Yep, like you said, Greg, If actually the interest rates go down, it's definitely going to kickstart some of the construction business and it'll be helpful for the plan printing segment of our revenues. However, if the interest rates don't move, which I think is unlikely, you know, probably it's going to be stable and, you know, it's going to just be muted. I don't think it's going to do any different deal. Would you agree?

No, I agree. So I think the other thing to do is even if the interest rates go down in the second quarter, there's always a six to nine month lag to see new designs, new constructions put into place. So, you know, just want to keep that timing in mind as well.

And we'll go to our next question.

Hang on. Greg, did you have another question?

Oh, yeah, sure. Just one more. Around your capital allocation priorities, I guess if the cash flow remains strong this year, you'll probably be in a net cash position. What are your thoughts on maybe increasing the dividend or accelerating buybacks? How do you think about the capitalization and share return for the business?

Yeah, both of those opportunities. Greg. I mean, obviously, based on everything what we did last year, which is an amazing year from a shareholder returns point of view. I mean, you know, I was talking to George 33% of our, you know, cash flow from operations went back to the shareholders. How good is that so you know so that it's already pretty good. And if it continues to improve, then, of course, depending on the market conditions. you know, we will decide what to do as to whether we should buy back more shares or how we deploy that cash. Cost of operating the business is also going up, so it's something that we want to bear in mind. We might choose to make some investments in the business. George, would you like to add to that?

Yeah, but I mean, we don't see us reducing the level we did at 23. I mean, we think the cash flows we generate obviously stay pretty stable and will allow us to do that and more. Like I mentioned on my script, I mean, Even with everything we did and returning the shareholder value, we still grew cash by almost $4 million after all that. So future's bright for us. We have options, which is a good thing.

Thank you.

And we'll go to our next question, which comes from David Marsh, Singular Research.

Hey, guys. Thanks for taking the questions. Sure. And congrats on the year. It looks like you used a little over some kind of K to repurchase equity in the fourth quarter.

Could you just give us an update on where that puts you with regard to your share repurchase program? And can you give us a sense of kind of what the average... Sorry, could you repeat that question?

I think it was about share repurchase. And if I don't answer the question right, just clarify. But I think you were saying the repurchases we did. We did $3.5 million repurchase. worth of share repurchases. We still have another $9 million-ish available under the board-approved plan. Every quarter is a little different. Sometimes there's more opportunity to buy more in a certain quarter versus another one. Think about the first quarter. The open window doesn't open until March, so we have two, three weeks to buy shares. Very truncated period of time. But overall for the year, we expect to be in that $3.5 million range for 2024, borrowing, you know, other opportunities that Suri mentioned earlier. Did that answer your question?

Yeah, yeah. I just was asking, the other part of it was, could you just give us a sense of what the average price per share was at repurchase?

At the repurchase, it was under $3. It was in that $280, $290 range. Don't quote me exactly, but it's pretty close to that. Got it.

Yep, that's helpful. And then just turning to more kind of the business fundamental side, are there particular industry verticals that have started to show incremental strength here in the back half of 23, early 24 that maybe you didn't have as strong of a performance from during the earlier part of 23? And are there any other particular verticals that you know, away from the construction side, which obviously we know hinges a little bit on interest rate movements. But are there any other verticals that you could talk about that you have particularly strong expectations for in the coming year?

Yeah. So, I mean, obviously, based on the market sentiments right now, it sure looks like we're going to have a positive, you know, impact on the market going forward. Nothing shows that the market is going to deteriorate. It sure seems like it's stabilizing. And if that is the case, obviously the other segments of the business is going to be much more active and we are thinking that that will be positive. What's your perspective on that?

I think if you're looking at the business segments of the company, there wasn't one or two specific business segments that that really helped us in Q4 because different seasons, different customer types get busy. Obviously, towards the holiday season, retail, retail mall, mall operations, those type of customers were very, very strong in the fourth quarter. But overall, when we track all our verticals, as you know, we track about 53 verticals in the organization, we see a bump in almost all categories because One of the things that we see is that every company is marketing. They are marketing. They are trying to grab extra market share. A lot of trade show work is continuing to bump up. So I think that's a positive sign that we see pretty much in all business verticals because everybody is looking for that new business. That's where our digital marketing and digital color graphics services bode well with those customer verticals.

That's very helpful. And then last one for me, just another kind of housekeeping type item. George, just looking at the liability side here, balance sheet, it kind of looks like the operating leases bumped up a bit and the debt in finance leases kind of bumped up a little bit long-term. Can you just talk about what's going on there and what your expectation is for the next 12 months?

Yeah, I'll start off with the easy one. In regards to the finance leases, that actually went down. 2022, end of the year, we were at $26 million. We ended the year at $22 million. So I foresee that kind of staying there. either in that range or potentially dropping a little bit more, so not a big shift there from a balance sheet perspective. In regards to the operating leases, this is just a product of facility renewals. Our annual rent expense is going to stay pretty stable, but the new accounting rules say, okay, if I'm in a building, say it's one of my bigger buildings, and I renew it in December, now I have a seven-year lease for the next seven years, That all shows up as a liability on my books, but my annual rent stays the same. So it's kind of just like a balance sheet gross up on your financials there. Nothing that I would be worried about from this is going to have an impact on my P&L. Does that make sense?

Yep, makes a lot of sense. Thanks very much, Greg. Appreciate the time. No problem.

Just a reminder, everyone, that is star one if you have a question. And we'll go back to Greg Burns.

I just wanted to follow up with your outlook for 2024. If, you know, construction plan printing is stable, do you foresee the strategic growth areas driving net growth next year for the business?

Oh, yeah, we definitely feel so, especially given the activity we have been having with the customers. I think it will be going in the, you know, it will definitely improve. Do you like that?

Yeah, I mean, if you take a look at the Q4 as a proxy, our strategic business line growth overtook the drop-in plan printing. So if the plan printing stabilizes in 2024, definitely we'll see that growth. But we are fully focused on building our strategy, building our push behind those specific growth initiatives. And that, as I said in our call, all our management teams are fully behind that. Over the last two years, we've been putting certain things in place and now we are enjoying the benefits of that.

Okay, great. Thank you.

And at this time, there are no further questions.

I'll hand things back to Mr. David Stickney for any additional or closing remarks.

Thanks, Lisa, and thank everyone for your attention tonight. We appreciate your continuing interest in AHRQ and encourage you to reach out to us with any questions about our progress. In the meantime, we look forward to talking with you soon on our first quarter call in early May. Thanks, and have a good evening.

And once again, that does conclude this conference. Thank you all for your participation. You may now disconnect.

We look forward to talking with you soon on our first quarter call in early May. Thanks.