Donnelley Financial Solutions Inc

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. THE END Thank you. THE END Thank you. THE END THE END THE END

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' first quarter 2021 results conference call. This morning, we released our earnings report, a copy of which can be found in the investor section of our website at defensolutions.com. During this call, we'll refer to forward-looking statements that are subject to risk and uncertainties, For complete discussion, please refer to the cautionary statements included in our earnings release and further details in our most recent annual report on Form 10-K, quarterly report on Form 10-Q, and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I'm joined this morning by Dan Leib, Craig Clay, Eric Johnson, and Kami Turner. I'll now turn the call over to Dan. Thank you, Dave. And good morning, everyone. From all of us at DFIN, we hope that you and your families are staying safe and healthy. DFIN is off to a very strong start in 2021. I'm pleased with the continuing momentum in our operating performance, as well as within most of our end markets. We noted on our last couple of quarterly calls that we had been seeing a return to a more normalized level of growth in software sales. and a significant increase in transactional activity. This momentum accelerated in the first quarter, and activity remained high so far in the second quarter. The growth in higher-margin software solutions and tech-enabled services, net sales, our proactive pruning of low-margin print work, along with the significant impact of our ongoing cost control efforts, resulted in first quarter non-GAAP-adjusted EBITDA of $71.1 million, an increase of 136% from last year's first quarter. Similarly, adjusted EBITDA margin in the quarter was 29%, more than doubling the first quarter 2020 adjusted EBITDA margin. Total sales were up just over 11% from last year's first quarter. Software solution sales totaled $60.3 million, growing 27.5% over last year's first quarter, Yet again, marking a quarterly record, the third consecutive quarter we have achieved a new high watermark. The software solution sales growth was led by the recurring compliance products, primarily ArcSuite and Active Disclosure, which grew 35.2% and 16% respectively. In addition, our virtual data room product, Venue, achieved an all-time high for quarterly sales and grew more than 30% year-over-year, its highest growth quarter in the last 16. This growth was largely driven by an increase in M&A deal activity and what we can surmise was robust market share performance. The strength of the capital market's transactional activity and our strong market share once again resulted in strong sales growth. nearly doubling our transactional sales from the first quarter of 2020. As a result of the regulatory change in the investment companies' business and our proactive exiting from low-margin printing contracts, print and distribution sales declined by $25 million, or 27.3%, which was slightly less of a decline than we expected. Despite this decline, first quarter 2021 gross margins for print and distribution was 32.6%, an improvement of 770 basis points from the first quarter of 2020. Our proactive planning and cost savings initiatives related to the consolidation of the printing platform are tracking ahead of plan. In addition, the steps we took during 2020 and continue to take in 2021 to optimize our operations including streamlining our organizational structure and real estate footprint, are reflected in our first quarter performance and contributed to the 136% increase in adjusted EBITDA from the first quarter of 2020. Free cash flow in the quarter was essentially flat to the first quarter of 2020, despite an increased level of incentive-based payments based on the strong performance in full year 2020. At quarter end, our non-GAAP net debt was lower than last year's first quarter by $114.7 million, resulting in a non-GAAP net leverage of 1.0 times, 1.3 times lower than the first quarter of 2020. The execution of our strategy continues to deliver positive results. Our new software offerings contributed in the quarter and are attracting strong interest and adoption. We have now delivered year-over-year expansion in EBITDA margins for seven consecutive quarters, demonstrating not only the positive impact of ongoing cost management, but also the continued improvement in our business mix. Over these seven quarters, our sales have increased by $13 million, non-GAAP-adjusted EBITDA has increased by $84 million, and EBITDA margin has expanded by 890 basis points. The $13 million increase in sales is the combination of $31 million of growth in our software solution sales and $68 million of growth in our tech-enabled services sales, partially offset by an $86 million decrease in print-related sales. The trends in our results reinforce the value of our 44 in 24 strategies. specifically targeting 44% of our sales from software solutions by the year 2024, and more importantly, the resulting financial profile from such a business mix. Achieving this goal is driven by increases in our software solutions and tech-enabled services sales and decreases in print sales, yielding margin expansion and continued strong cash generation. Before I share a few business highlights as well as an update on our manufacturing platform optimization efforts, I would like to turn the call back to Dave to provide more detail on our first quarter financial results and our outlook for the second quarter. Dave? Thank you, Dan. Before I discuss our first quarter financial performance, I'd like to provide an update on the multi-employer pension plans obligation related to the second quarter 2020 bankruptcy of LSC Communications. During the first quarter, we successfully negotiated a discounted lump sum payment with one of the funds, and subsequent to quarter end, we successfully negotiated a discounted lump sum payment with the second fund. In aggregate, These two funds represented over 57% of the total liability associated with the LSC multi-employer pension plans at the time of the LSC bankruptcy. At the end of the first quarter, our liability was $21.5 million, which included the settlement payments to the two funds, the remaining contingent liability, and our estimated share of required payments until a final allocation between RRB and DFIN is determined. As a reminder, DFIN and RRD agreed to share required payments equally, and an adjustment and repayments will be made as needed in accordance with the final allocation determined in arbitration. The settlement payments to one of the funds was made in April, and our payment to the second fund will be made later in the second quarter, both negatively impacting second quarter cash flow. The expense associated with this liability has been recorded in SG&A within the corporate segment and has been excluded from our non-GAAP results. Relative to our performance in the first quarter, we delivered very strong results, including 11.1% sales growth and significant year-over-year increases in non-GAAP-adjusted EBITDA and non-GAAP-adjusted earnings per share. We maintained strong market share in our transactional filing business and posted 27.5% growth in our software solution sales, all while continuing to focus on operating efficiencies. These efforts resulted in a non-GAAP adjusted EBITDA margin of 29%, more than doubling the margin from last year's first quarter, further extending the trend in margin improvement we established in the second half of 2019 and demonstrating the strength of our business. On a consolidated basis, net sales for the first quarter of 2021 were $245.3 million, an increase of $24.6 million, or 11.1% from the first quarter of 2020. Software solutions net sales in the first quarter increased by $13 million, or 27.5%, compared to the first quarter of 2020, primarily due to accelerated product adoption within ArcSuite and acceleration of virtual data room activity in venue, driven by the improved M&A environment, as well as solid subscription growth in active disclosure. Tech-enabled services net sales increased by $36.6 million, or 44.7%, primarily due to increased capital markets transactional activity. Print and distribution revenue decreased by $25 million, or 27.3%, primarily due to a regulatory-driven reduction in demand for printed materials within investment companies and less commercial printing, where we have proactively exited certain low markets. First quarter non-GAAP gross margin was 54.7%, or approximately 1,650 basis points higher than the first quarter of 2020, primarily driven by a favorable business mix featuring growth in higher margin tech-enabled services and software solution sales, combined with lower overall print volume and the impact of ongoing cost control initiatives. Non-GAAP SG&A expense in the quarter was $63 million, $7.9 million higher than the first quarter of 2020. As a percentage of sales, Non-GAAP SG&A was 25.7%, an increase of approximately 70 basis points from the first quarter of 2020. The increase in Non-GAAP SG&A is primarily due to sales commission on higher sales changes in the business mix, higher incentive compensation expense, partially offset by the impact of ongoing cost control initiatives. Our first quarter non-GAAP adjusted EBITDA was $71.1 million, an increase of $41 million, or 136.2% from the first quarter of 2020. Our first quarter non-GAAP adjusted EBITDA margin was 29%, an increase of 1,540 basis points from the first quarter of 2020, again, primarily driven by a favorable sales mix, operating leverage on sales growth, and ongoing cost control initiatives, partially offset by higher incentive compensation and selling expenses. Turning now to our segment results, net sales in our capital market software solution segment, were $38.5 million in the first quarter of 2021, an increase of 23.4% from the first quarter of 2020, primarily due to increased venue virtual data room activity and continued growth in active disclosure subscriptions. Venue sales increased 30.6% from the first quarter of 2020, driven by an improving M&A environment and sales and marketing efforts focused on gaining market share and accelerating growth, while active disclosure also had a solid quarter, posting 16% growth. Non-GAAP adjusted EBITDA margin for the segment was 26.8%, an increase of over 1,000 basis points from the first quarter of 2020. The increase in non-GAAP adjusted EBITDA margin was primarily due to the operating leverage benefits on the increased sales, a favorable sales mix, as well as the impact of operating efficiencies partially offset by higher selling expense as a result of increased sales volumes. Net sales in our capital markets compliance and communications management segment were $138.5 million in the first quarter of 2021, an increase of 39.8% in the first quarter of 2020, primarily due to increased capital market transactional activity, continuing the trend that began in the third quarter of 2020. This growth was largely driven by the ongoing momentum in IPO activity, as well as M&A activity. The quarter was also significantly impacted by stacked IPOs, which made up a large share of the total number of priced IPOs in the quarter. Non-GAAP adjusted EBITDA margin for the segment was 43.6%, an increase of over 1,700 basis points from the first quarter of 2020. The large increase in non-GAAP adjusted EBITDA margin was primarily due to operating leverage on the increase in sales a favorable sales mix, and cost control initiatives, partially offset by higher selling expense as a result of the increased sales volume, higher allocation of overhead costs, and higher incentive compensation expense. Net sales in our investment company software solution segment were $21.8 million in the first quarter of 2021, an increase of 35.4% from the first quarter of 2020, primarily due to strong demand for ARK Digital, which continues to gain momentum since we've launched it in the second quarter of 2020, with new opportunity arising out of the regulatory changes affecting investment companies. In addition, increased activity from clients adding new funds to ARK Pro also fueled the growth in this segment. Non-GAAP adjusted EBITDA margin for the segment was 25.7%, an increase of 520 basis points from the first quarter of 2020. The large increase in non-GAAP adjusted EBITDA margin was primarily due to operating leverage on the increase in sales in a favorable sales mix, partially offset by higher incentive compensation expense. Net sales in our investment company's compliance and communications management segment were $46.5 million in the first quarter of 2021, a decrease of 37.4% from the first quarter of 2020 due to the impact of regulatory change in investment companies affecting print-related sales and a reduction of commercial printing sales related to contracts we have proactively exited. Non-GAAP adjusted EBITDA margin for the segment was 15.7%, an increase of 840 basis points from the first quarter of 2020. The increase in non-GAAP adjusted EBITDA margin was primarily due to reduction in overall expense within the segment, primarily due to cost savings as a result of consolidation of the print platform and a lower allocation of overhead costs, which are now being absorbed by our three other operating segments, as the lower activity level in this segment results in a reduced need for such shared resources. Our first quarter 2021 non-GAAP unallocated corporate expenses were $12.5 million, an increase of $2.5 million from the first quarter of last year. The increase in unallocated corporate costs was primarily due to increased incentive compensation driven by the strong performance, partially offset by the impact of ongoing cost control initiatives. Free cash flow in the quarter was negative $46.3 million, only $2.3 million unfavorable to the first quarter of last year, despite an increased level of incentive-based payments in the quarter, including annual bonuses and a 401k match based on the strong performance in full year 2020. We ended the quarter with $252.7 million of total debt and $214.2 million of non-GAAP net debt, including $22 million drawn on our revolver. From a liquidity perspective, we had access to the remaining $278 million of our revolver, as well as $38.5 million of cash on hand. As of March 31st, 2021, our non-GAAP net leverage ratio was one times down 1.3 times from the first quarter last year. As a reminder, our cash flow is historically seasonal. We are a user of cash in the first quarter, closer to break even in the second quarter, and generate more than 100% of our free cash flow in the second half of the year. As our sales mix continues to evolve to proportionately more subscription-based software solutions, we expect this seasonality to be less significant. We repurchased approximately 127,000 shares of common stock during the quarter for $3.4 million at an average price of $26.92 per share. We have approximately $46.7 million remaining on our $50 million stock repurchase authorization. As it relates to the second quarter, transactional activity in capital markets remained robust throughout the month of April. We do expect, however, SPAC activity to reset based on the SEC's recent statement regarding the accounting classification of warrants and their potential action on legal protection for growth projections. Our expectation is that these actions further legitimize the SPAC market as we currently are supporting our clients in their processes to file revised financial statements and amendments to their SPAC formations and de-SPAC transactions. Regarding our outlook for the second quarter, we are expecting net sales to be in the range of $230 million to $240 million. down approximately $20 million or 7.5% year over year at the midpoint due to the significant reduction in print and distribution for the regulatory changes related to SEC rules 30E3 and 498A. Given the historical seasonality of this print and distribution, the second quarter will include the largest reduction in print sales compared to the other quarters. We remain bullish on the near-term outlook for our software solution sales, as well as on capital markets transactional activity. From a profitability perspective, we expect a non-GAAP adjusted EBITDA margin in the mid 20% range, similar to last year's second quarter margin. I'll now pass it back to Dan, who will provide an update on our manufacturing platform optimization efforts and cover some first quarter business highlights. Dan? Thanks, Dave. I'd like to highlight a few items, and then we will open it up for Q&A. Regarding the regulatory change that will continue to reduce demand for print this year, we continue to expect a reduction in print-related net sales of approximately $130 to $140 million, and a reduction in non-GAAP-adjusted EBITDA of approximately $5 to $10 million. related to the regulatory change. We are ahead of our plan to deliver the cost savings associated with rightsizing our platform. As it relates to this plan, we recently announced to our affected employees that we are shifting to a digital-only platform and that we'll be shutting down our offset print platform effective June 30th this year. Any offset print requirements will be shifting to our vendor network where we have longstanding relationships. This change to our production model allows us to better align our platform with our clients' needs and also to fully variabilize our production costs for offset printing. In addition, I'm excited about the pace of development of and demand for our software solutions. Within investment companies, while the SEC's Rule 30E3 reduced the demand for print starting in the first quarter, as will Rule 498A beginning in the second quarter, we responded by launching ArcDigital last year and also introduced our total compliance management solution to the investment companies industry to serve our clients in new ways. Going forward, we will be able to leverage these solutions to address potential future rule changes. As evidenced by the 35% sales growth we posted in the first quarter for our investment companies software solution segment, client adoption of our new solutions is overwhelmingly positive. Looking ahead, we will continue to assist our clients in their own digital evolution, transitioning them from a more traditional service-based model to a step-by-step model. We expect outsized growth in 2021 from the adoption of our total compliance management solution, followed by several years of mid-teen growth as the solution expands. Within capital markets, we posted 16% growth in active disclosure sales. In addition to net wins related to serving our clients' ongoing compliance needs, we also saw increasing demand for active disclosure by pre-IPO and IPO clients. Regarding our new active disclosure platform, we launched our sales efforts in March, and we will start to see sales on the new platform in the second quarter. Two months into our sales effort, we are getting positive feedback from both new and existing clients, and this feedback is reflected in the pace at which clients are adopting and migrating to our new platform. We expect to transition all of our clients from active disclosure 3.0 to our new platform by the end of 2022. Also in capital markets, first quarter sales in our venue virtual data room solution grew by approximately 30% from last year's first quarter, achieving an all-time high for quarterly sales and its highest growth quarter in the last 16. This growth was largely driven by an increase in M&A deal activity in the quarter, combined with the strong IPO environment and our sales and marketing focus to accelerate growth. Importantly, we're achieving growth across the globe, Sales in the EMEA region grew 57%, the APAC region grew 37%, while U.S. sales for Venue grew 27% from the first quarter of 2020. The Venue pipeline now sits at an historical high, buoyed by excellent performance in a strong market. We are excited about our very strong first quarter results, along with the various sales and operational wins that produce them. We are well on our way to achieving the objectives we committed to as part of our 44 and 24 strategy. In closing, I want to thank the DFIN employees around the world who have been working tirelessly to maintain our operations and ensure our clients continue to receive the highest quality service without disruption. Stay safe and healthy. Now with that, operator, we're ready for questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Charlie Strasser with CJS.