Deluxe Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode, and today's call is being recorded. We will begin with opening remarks and introductions. At this time, I would like to turn the conference over to your host, Vice President of Investor Relations, Tom Morabito. Please go ahead.

Thank you, Operator. Welcome to the Deluxe First Quarter 2021 Earnings Call. Joining me on today's call is Barry McCarthy, our President and Executive Officer, and Keith Bush, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin, and as seen on the slide, I'd like to remind everyone that comments made today regarding management 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 risks and uncertainties, including risks related to COVID, risks that the acquisition of First American Payment Systems and or any other future acquisitions will not be consummated, and that any such acquisitions do not produce the anticipated results or synergies. Any of these risks and uncertainties 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 Form 10-K for the year ended December 31, 2020, and in other company 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 findings 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 it over to Barry.

Thanks, Tom, and good morning, everyone. We're off to a very solid start to 2021, as we expected, signaling our accelerating recovery from the pandemic. Our year-over-year rate of revenue decline in the first quarter improved meaningfully on a sequential basis, and we posted substantial improvements in adjusted EBITDA margins and adjusted EPS compared to the first quarter of 2020. Importantly, we told you we would deliver on this a year ago, and we delivered as promised, once again saying what we're going to do and then doing what we say. Our payment segment led the way for Deluxe, showing solid performance and continuing to deliver for our customers. We have also seen improvements on our data-driven marketing, part of our cloud solutions business, which reinforces our optimism around the rest of the year. We generated improvements despite continued COVID-related pressures, and the impact of severe weather conditions in many parts of the U.S. in February. Here are some highlights from the quarter. Revenue was $441 million, with a rate of decline on a year-over-year basis of 9%, a meaningful sequential improvement over the fourth quarter decline of nearly 13%. Adjusted EBITDA margin improved nearly 340 basis points year over year to 20.5%. Adjusted EPS improved nearly 17%. Free cash flow improved 47% year over year to $18 million. We've improved liquidity in each of the last four quarters And our net debt is now at the lowest level in nearly three years, which is a testament to the team's financial acumen and our responsible and prudent fiscal stewardship through the crisis. In terms of sales, the first quarter was the strongest we've ever had in terms of annual contract value, or ECB. We closed more than 1,600 deals. including the single largest win in Deluxe history with financial services leader PNC, as well as a significant deal with TD Bank. We closed 20 deals with ACV over $1 million each, and the top six deals have a combined ACV of over $50 million. Since we started our one-deluxe sales approach over six quarters ago, and including a recent win, which was signed in April, we have closed nine of the 13 largest deals of the last decade and two of the largest in company history. Of course, we still must implement all of these wins, but our continued sales success adds to our already strong confidence in our future. Across the company, we remained laser focused on our one deluxe go-to-market strategy, accelerating our historic transformation through 2020 and into 2021 in the midst of a global pandemic. Our success and our now proven strategy put us in the position to announce the largest acquisition in the company's 106-year history, First American Payment Systems, which is expected to close later in this current quarter. By acquiring First American, we're confirming our strategy to transform into a payments and trusted business technology company. The transaction will expand our payments business by adding merchant services to our product offerings and will double the size of the payment segments to approximately $600 million with 20% plus adjusted EBITDA margins and strong growth rates. Importantly, after the transaction closes, payments will now rival our check business on a revenue basis. As you will recall, and as I've communicated on several occasions, we have five prerequisites to re-engaging on M&A. On our Q4 earnings call, and again, at the first American payment transaction call on April 22nd, I confirmed we had met all five. As a reminder, those prerequisites were, first, a scalable, modern technology platform. Second, a sales organization capable of selling the entire portfolio. Third, a product function capable of adding features and new solutions. Fourth, a world-class team. And fifth, to strengthen our balance sheets. We refer to all of these actions as one deluxe, another example of saying what we will do and doing what we say. Having fulfilled these prerequisites, we're ready to expand our business through a major strategic, logical, and responsible acquisition. First American will be a great fit. With that, Let me now turn to sales. We continue to make significant progress in becoming a sales-driven revenue growth company as we've now signed the two largest deals in company history in less than six months with PNC and Truist as we continue to unify our go-to-market sales approach to drive growth. We continue to do business at an accelerated rate and we're successfully cross-selling our products and services. Let's talk about the PNC deal for a moment. Here we further expanded our existing relationship with a new multi-year partnership with the eighth largest commercial bank in the U.S., leveraging services from our core deluxe data-driven marketing solution, complemented by promotional, and multiple other deluxe products, including our proprietary artificial data tools, strategic sourcing framework, and delivery optimization algorithms, we will help PNC find and bring on new customers with improved speed to market, better value, increased efficiency, and continuous innovation. This is an important example of the power of expanding an existing relationship to include other existing deluxe services. The company's old operating silos would never have even identified the opportunity, much less combine multiple existing products to create a compelling solution for PMC. This is more evidence proving our one deluxe strategy really works. Some of our key wins for the quarter include. In payments, we have extended our relationship with BBVA with a significant number of deluxe mobile capture solution licenses to support its end consumer and small business customers. In cloud, aside from PNC, which will also benefit our promotional solution segment, Key wins include another top 50 financial institution where we will deliver full end-to-end campaign management services for its branch transformation and its initiatives. We also find the top mortgage originator in the U.S. where we will offer and mail services to support their customer acquisition and recapture programs. In promotional solutions and beyond the PNC transaction, Deluxe has expanded its relationship with LPL Financial. LPL will use the Deluxe Brand Center platform to efficiently rebrand newly acquired strategic broker dealers with all pertinent marketing and operational materials while supporting regulatory compliance. In checks, We successfully extended and expanded our contractual check relationships across several top tier financial institutions. In addition, we recently closed on a significant deal with TD Bank, the seventh largest bank in North America. Our recently enhanced check products and importantly, the strength of our balance sheet enable us to continue to win market share and protect our outstanding cash flow. Of course, it will take time to onboard these winds, but our one-go-luck strategy is clearly working, and we're on pace to significantly exceed last year's record sales performance. Moving on to some segment highlights. Cayman set a solid quarter, growing beyond the major winds in Q1 last year and the impact of the severe winter weather. We continue to work on our implementation backlog and expect acceleration as COVID-related implementation customer delays fade away over the coming months. Our treasury management business led the way this quarter. As a reminder, services here include automation and intelligence, lockbox processing, remote deposit capture, and electronic bill pay and presentment. Our digital payment business, which includes the deluxe payment exchange and medical payment exchange, while relatively small, more than double year over year, and we remain very optimistic about this business. This success highlights our ability to add new features and build new products successfully. During the quarter, we are pleased to have conducted a soft launch of our HR management solution. small, medium-sized businesses and integrated HR and payroll platform with a modern user experience. Another example of our new product building capability. We also expanded the Deluxe Payment Exchange Network, which builds upon our digital payment product to now also include digital payments directly into lockboxes. Our initial has been implemented for medical claims payments and will be expanded from there we are very optimistic on the potential growth prospects for both of these new offerings in cloud solutions we made important progress in adding a number of new clients as we've discussed before our 2021 cloud revenue performance will be impacted by the exits and divestitures we made in 2020. Excluding these impacts, the cloud rate of decline was about 10%, or just over half of the reported rate. And sequentially before, the business grew 5%. All of this provides us confidence in the trajectory of this business. Keith will discuss this in more detail. we are particularly optimistic about our data-driven marketing prospects as the economy recovers. As expected, we can see that liftoff beginning in our first quarter. We have good visibility now into the rest of the year as we partner with our financial institution customers, planning multiple large-scale marketing campaigns, adding to our confidence for 2021 and beyond. Our website services also showed resiliency when compared to the fourth quarter of 2020, driven by stronger client retention and favorable exchange rates. We did see encouraging signs for recovery in our corporation services, as we previously announced. Turning now to our promotional solutions segment. The business was affected by continued COVID-related lockdowns, particularly in the Northeast and West Coast, along with severe winter weather in February. Despite these impacts, the rate of decline improved for the fourth quarter of 2020, and we are very optimistic about this segment's prospects as the recovery unfolds. Importantly, adjusted EBITDA margin improved over 600 basis points year over year, which Keith will also touch on in a moment. Our business essentials line, where we deliver custom forms and other products that businesses consume in their routine operations, perform well during the quarter and as a leading indicator of the nation's overall economic rebound. We expect to see a recovery in branded merchandise as events and in-person activities return as COVID wanes. Finally, our highly profitable cash-generating checks business continue to be impacted by secular trends combined with the dual impact of the pandemic and severe weather. Importantly, we expect the accelerated COVID recovery plus our market share gains to significantly reduce the rate of decline over the course of the year. Early evidence of this recovery can be seen in the sequential improvement in revenue decline rates between Q4 2020 and Q1 2021. Our strategy in checks remains focused on capturing new share while holding margin percentage flat by making smart investments, giving a strong cash flow to invest in payments and cloud. And the strategy is working. helping us win some of the largest deals in the company's history, expand into Canada, and land multiple significant competitive takeaways. In summary, our recovery is accelerating and our margin percentage is expanding. We improved liquidity for the fourth consecutive quarter, and now net debt is at the lowest level in almost three years. All four businesses are experiencing positive momentum to start the year. Our transformation into a sales-driven payments and trusted business technology company is yielding results and will accelerate with the addition of First America. Our one deluxe strategy is clearly working, and our execution is strong. This really is a new deluxe. a payments and trusted business technology company. Now we'll turn over to Keith, who will provide you more details on our financial performance.