American Reprographics' CEO Discusses Q1 2012 Results - Earnings Call Transcript

American Reprographics Company (ARC)

Q1 2012 Earnings Call

May 8, 2012 5:00 p.m. ET

Executives

Suri Suriyakumar - Chairman, President & CEO

Dilo Wijesuriya - COO

John Toth - CFO

Jorge Avalos - Chief Accounting Officer

David Stickney - VP, Corporate Communications

Analysts

Molly McGarrett - JPMorgan

Brandon Dobell - William Blair

Brad Safalow - PAA Research

Presentation

Operator

Good afternoon and welcome to the quarter one ARC earnings conference call. My name is Samantha and I will be facilitating the audio portion of today’s interactive broadcast. (Operator Instructions) Thank you.

At this time, I would like to turn the call over to David Stickney, Vice President of Corporate Communications for ARC.

David Stickney

Thank you Samantha and welcome everyone. Joining me are Suri Suriyakumar, our Chairman, President and Chief Executive Officer; Dilo Wijesuriya, our COO; John Toth, our Chief Financial Officer; and Jorge Avalos, our Chief Accounting Officer.

Our first quarter results were publicized earlier today in a press release. You can access the press release and the company’s other releases from the Investor Relations section of ARC’s website at www.e-arc.com. A taped replay of this call will be made available several hours after its conclusion. It will be accessible for seven days after the call. You can find the dial-in number for this replay in today’s press release. We are also webcasting our call today as usual and the replay of the webcast will be available for 90 days on ARC’s website.

This call will contain forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the company, including the company’s financial outlook. Bear in mind that such statements are only predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings.

The forward-looking statements contained in this call are based on information as of today, May 8, 2012 and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements.

Finally, this call will contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today’s press release and in our Form 8-K filing.

At this point, I’ll turn the call over to our Chairman, President and CEO, Suri Suriyakumar. Suri?

Suri Suriyakumar

Thank you, David and good afternoon everyone. As noted in our earnings release, ARC delivered first quarter revenue of $103.6 million and a gross margin of 30.8%. Our adjusted EBITDA margin was 15.4% and cash flow from operations was $12.4 million equating to $0.20 of cash flow per share. Our adjusted earnings share was zero cents.

We are firming our annual forecast for the full year of 2012. We expect annual EPS to be in the range of $0.05 to $0.10. We expect cash flow from operations to remain strong ending the year in the range of $40 million to $50 million. Our revenue from traditional services remained challenged. The reasons for this are not surprising and we have discussed them at length during previous earnings calls. Despite some year-over-year growth reported in construction spending in recent periods, these figures are benefitting by comparison given the 12-year low reported in construction spending last spring.

No matter how you look at it, economic conditions have remained soft for private non-residential construction. There has been some commentary around the potential for increased construction activities during the latter half of the year and other forecasters are focused on the possibility of another year like 2011. We have early data points to a stronger recovery only to be followed by lacklustre results. The current environment suggests that this may be the case, especially with the elections later in the year and the apparent deadlock in Congress.

In either case, we are treating both these ideas with healthy scepticism given our experience with the construction forecast of the past few years. If significant increase in construction activity takes place, we are well prepared to capitalize on it. The improvements we’ve made in operational efficiency, technology development and rightsizing the organization will serve us well whenever recovery gets underway. However, such a recovery may take time given the current economic condition. Therefore we have our focus on new initiatives that will drive organic growth from the same customer base.

Our sales initiatives in management services, color imaging and digital services are all in high gear. These efforts will help offset any revenue lost due to the economic conditions or changes in our customers’ behaviour due to the increased adoption of technology. The price part in the first quarter for ARC was the result of aggressive effort in our MPS sales team. They produced more than 10% growth for the fourth quarter in a row, led primarily by the expansion of our business with larger clients. Our pipelines remain robust and we continue to mine the top under construction clients for new business.

We’re also very encouraged by the progress in our regional MPS program over the past year. Our stronger sales executives have been assisting in identifying and securing our large accounts in their region. With the national program well established, we are starting to see local prospects increased and we look forward to their contribution in future quarters.

Digital color sales decreased by 0.5% in the quarter but comprised 29% of our reprographics revenue in the first quarter versus 27% in the first quarter last year, clearly demonstrating color’s growing influence in our product mix. Three factors affected color sales in the first quarter. But we made some significant changes to our color sales team, investing in training and other onboarding activities early in the first quarter which dampened the activity. Second, several large local sports oriented color products in 2011 that were not repeated this year. And third, a large non-AEC global solution client reduced their work with us and that added pressure to the top line in color.

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