Deluxe Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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. Please be advised that today's conference may be recorded. If you require any further assistance, please press star, then 0. I would now like to hand the conference over to your speaker, Chief Communications and HR Officer Jane Elliott. Please go ahead.

Thank you, and welcome to the Deluxe Third Quarter 2020 Earnings Call. Joining me on today's call is Barry McCarthy, our President and Chief Executive Officer, Keith Bush, our Chief Financial Officer, and Heather Davis, our new head of investor relations. At the end of today's prepared remarks, we will take questions. I remind everyone today that comments made regarding management's intentions, projections, financial estimates, or expectations about the company's future strategy or performance are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995. These comments are subject to risk and uncertainties, including risks related to COVID-19, which could cause our actual results to differ materially from our projections. Additional information about factors that may cause our actual results to differ from projections is contained in our press release issued today and filed with the SEC in Form 8-K in the company's Form 10-K for the year ended December 31, 2019, and Form 10-Q, which will be released in conjunction with our third quarter 2020 earnings, as well as other SEC filings. On the call today, we will discuss non-GAAP financial measures, including adjusted EBITDA and free cash flow. In our press release and our filings with the SEC, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under U.S. GAAP. Now, I'll turn the call over to Barry.

Thanks, Jane, and good afternoon. First, I'd like to welcome Heather Davis to Deluxe as our new head of investor relations. Some of you may know her from her IR roles at tech-driven companies like Groupon and Lawson Software and from Buffalo Wild Wings. Chief Jane and I look forward to working with her. We're pleased to have delivered improved third quarter results despite continued pandemic-related economic pressures, including nearly a 300 basis point improvement in adjusted EBITDA margin. We continue to make meaningful progress on executing our overall transformation to one deluxe. As discussed last quarter, we began to see an improvement in the latter part of our second quarter, which continued into the third quarter. We see our sequential improvement in top-line revenue, gap, and adjusted EBITDA margins as clear evidence of our continued momentum. By our estimates, we delivered sales-driven growth excluding COVID-related impacts for the third consecutive quarter. We continue to win new business at an accelerated rate, and we're successfully cross-selling our products and services. We're pleased to have the financial strength and flexibility to support the long-term growth potential of the business. We've restored some of our investments in the company's overall infrastructure, including technology upgrades, continued real estate consolidations, streamlined organization design, talent enhancements, and more after slowing a bit in Q2. Importantly, We remain confident in our financial strength as demonstrated by declaring our regular quarterly dividend. Our net debt is now at its lowest in more than two years. I continue to believe this is all compelling evidence our one deluxe strategy is working. Here are some specifics. We deliver 23.3% adjusted EBITDA margins a 290 basis point sequential improvement from last quarter, better improvement than we expected. We reported a revenue of $439 million, improving over 600 basis points sequentially over second quarter, with revenue down 11 percent, or $54 million versus last year. Also better improvement than we expected. Our sales-driven performance continues. We built cash reserves from operations. Our Q3 net debt is now the lowest level in more than two years. We fully repaid our COVID-related draw on the revolver in October, demonstrating the strength of our business. Over the last seven months of the pandemic, we continued to generate cash from operations, naturally improving our liquidity and eliminating the need for any additional cushion. Our financial position continues to serve as a competitive advantage, helping us win across all our segments. Adjusting for decisions we made to slow progress through the pandemic, we're on path and on budget in our technology infrastructure upgrade and renewal. We've closed nearly 50 of more than 80 sites, representing nearly a 60 percent reduction in the number of our locations over the last 18 months, including seven additional site closures in Q3. We're particularly pleased with the future operating savings and significant capital avoidance we're going to achieve by relocating both our Minneapolis headquarters and Atlanta technology facilities to more efficient spaces. Now on to sales. We continue to make progress in becoming a sales-driven revenue growth company. Everyone sells at Deluxe. Our one Deluxe approach works, bringing the best of Deluxe to our customers to solve their problems rather than simply peddling one solution at a time. We continue to outperform our pre-pandemic sales plan and have closed over 1,000 deals with multi-year contracts year to date, including six of our top 25 targets. We've signed significant wins in each of our four businesses during the third quarter. It will take time to onboard these wins, and the pandemic environment lengthens implementation timelines as our clients work through sequencing their own priorities. However, We're very proud to be expanding our pipeline and closing new business at record rates, giving us confidence that we'll exit 2020 with a strong backlog for us to focus our efforts on converting to revenue. Some of our key wins for the quarter include securing a contract with M&T Bank for our treasury management services. We expanded our relationship with REMAX to provide national marketing, branded print, and promotional solutions to their 65,000 agents. This is an excellent example of us growing share and moving from a transactional vendor to a recurring revenue managed services partner. And our MPX and DPX solutions added Delta Dental and Albertsons as customers, too. Our telesale centers continued to cross-sell, delivering record average order value. Combined with our enterprise efforts, we've signed more than 175 cross-sell deals, totaling $11 million in total contract value. The results are clear, even amidst the COVID fog. We're winning new business across all our divisions, delivering record cross-sell performance, selling our existing solutions to existing customers, while adding new customers and distribution partners. This continued success gives us confidence that we'll be able to deliver sales driven revenue growth in the low to mid single digits with adjusted EBITDA margins of 20% or more over the long term. Now on to some segment details. Our payments business continues to perform well and delivered 15.6% revenue growth over prior year. We are well positioned in our receivables, payables, and SMB cash management businesses where we're winning new clients in market share and benefiting from positive secular outsourcing trends as firms focus on speed and efficiency in accounts receivables. We continue to see new and longstanding customers shifting volume to the safety of Deluxe due to our strong balance sheet and trusted service levels. Our cloud and promotional solutions divisions continue to experience the greatest COVID-related impacts. And accordingly, we expect revenue and profit growth to lag the recovery due to reduced discretionary spending. In cloud, this impact is visible in data-driven marketing revenue, where mainly financial institutions have deferred campaign spend. We believe that financial institution spend will return, And in fact, we saw increased demand in Q3 versus last year's quarter. We've also signed new financial institution customers as well. While our incorporation and website services have experienced weakened demand, we continue to focus on adding new relationships to deliver our incorporation and website services, including the Hartford and NFIB. Our promotional solutions delivered sequential quarterly improvement in revenue while driving significant benefit to adjusted EBITDA margins. While we did not repeat the benefit we saw from PPE in Q3, we did experience positive sequential growth and what we call our business essentials, product area, forms, and more that businesses use to operate. We also find several new customers focused on our managed brand services program giving us more confidence in our future profitable growth. Now on to checks. As anticipated, the secular decline in the checks business sequentially improved during the third quarter, consistent with the pattern of previous economic downturns. We continue to see an increase in new check customers resulting from new business startup. We're encouraged to see self-service and digital order volume acceleration in the third quarter, proving our digital strategy works. Competitively, we're winning new check customers at a rate faster than before, and we renewed a top five check customer. Our financial strength is a key factor here too, just like in payments. The uncertainty of the pandemic continues, and as such, we will not provide detailed outlook for the fourth quarter or full year 2021 today. Keith will provide some detail on our future expectations, which reflect today's environment. The macro environment remains challenged as we're in the midst of a second wave of COVID. Most importantly, given the work we've accomplished and the results we've delivered despite the ongoing challenges, I feel good about our relative position in the market, and we continue to believe total company adjusted EBITDA margins will remain at our long-term target of 20% or better. Lastly, I want to emphasize our team has delivered better than expected performance, again, despite the pandemic. Deluxe remains financially sound. We expanded margins almost 300 basis points, paid our dividend, paid our revolver down to the pre-COVID level, have the lowest net debt in more than two years, and our sales engine is working. Here's Keith.