Ladies and gentlemen, thank you for standing by and welcome to the Deluxe First Quarter 2021 Earnings Conference Call. [Operator Instructions] 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 Chief 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'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 risks and uncertainties, including risks related to COVID, risks at 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 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 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 margin 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 payments segment led the way for Deluxe, showing solid performance and continuing to deliver for our customers. We have also seen improvements in our data-driven marketing, part of our Cloud Solutions business, which reinforces our optimism about around the rest of the year. We generated [Indecipherable] despite continued COVID-related pressures and the impact of severe weather conditions in many parts of the U.S. in February. There 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 ACV. We closed more than 1,600 deals, including the single largest win in Deluxe history with financial services leader, PNC, as…

Thank you, Barry, and good morning, everyone. As Barry mentioned, we are pleased with our first quarter results. While we felt the continuing effects of COVID as well as the impact from severe weather conditions in February, we delivered improvements in sequential quarterly trends. This performance was in line with our guidance and highlights the accelerating recovery we expected as we move through the rest of the year. Let's go through the enterprise level highlights for the quarter before moving on to the segments. We posted total revenue of $441.3 million. While this is a decline of 9.3% as compared to the same period last year, importantly, it was a 360 basis point improvement in the rate of decline experienced in the prior quarter. We reported GAAP net income of $24.3 million in the quarter. Year-over-year comparability is not meaningful given the asset impairment charges taken during the first quarter of 2020 related to the anticipated effects of COVID. Our measures of adjusted earnings and adjusted EBITDA exclude these noncash charges, along with restructuring, integration and other costs. These adjustments are detailed in the reconciliations provided in our release. Adjusted EBITDA grew 8.6% to $90.5 million and adjusted EBITDA margin improved nearly 340 basis points year-over-year to 20.5%. These improvements were largely driven by reductions in SG&A, and we have aligned expenses to our post-COVID operating model and continue progress against internal value realization initiatives. Now turning to our segment details. Consistent with our expectations shared on the fourth quarter call, Payments grew Q1 revenue 3.2% year-over-year to $79.5 million. Payments also grew nearly 2% sequentially from the fourth quarter. The quarterly performance was led by our treasury management business, which grew 4% year-over-year. Adjusted EBITDA increased 1.7% in the quarter and adjusted EBITDA margin was 23%, down 40 basis…

Thanks, Keith. Our first quarter results clearly demonstrate our continued momentum and the power of our One Deluxe strategy. The logical and responsible acquisition of First American is entirely consistent with our long-standing strategy and will serve to accelerate our growth, transforming Deluxe into a payments and trusted business technology company. We sat in the past 2.5 years preparing Deluxe to reenter the M&A market by improving our technology, reorganizing our sales structure and strategy, expanding our product set, building out our management team and strengthening our balance sheet. As I said before, I'm incredibly proud that our team delivered these prerequisites on an expedited time line in the midst of an unprecedented pandemic. We say what we're going to do, and we do what we say, consistently. We really are a new Deluxe. Operator, we're now ready to take questions.

[Operator Instructions] Your first question comes from Charles Strauzer from CJS.

Good morning. Morning, Just if we could start off by the Q2 commentary in the release. Maybe you could expand a little bit more on the guidance there in terms of tightening up a little bit more of the thought process there. You talked about continued improvement in revenues with solid margins. That certainly gives us kind of a wide girth to kind of work with. Maybe you could provide some more insight there.

Yes. The second quarter, Charlie, we think, from -- on a revenue basis, we start seeing positive growth here as we lap the initial major impact from COVID. And I think that becomes the launch pad for the rest of the year. The thing you should know, as you plan for Q2, is we also took really meaningful temporary expense reductions in Q2 to get us across that crisis period and some of that comes back. So we think we'll have a nice Q2 as well, showing the recovery is strong and our business is recovering well.

Got it. So definitely should be impacting margins, I would think a little bit here with the returns on that conversation. Is that correct?

Yes. Charlie, say that again. I didn't hear you well.

Just saying that the -- obviously, with some of those expenses coming back in this quarter that weren't there last year to -- is that going to impact your EBITDA margins significantly or just modestly?

We're confirming the margin for the full year, Charlie, in the 20% to 21% range. We think -- we feel confident about our ability to do that. But it does put some pressure on our ability to expand.

Excellent. And looking more kind of bigger picture, what are you seeing in terms of kind of small business creation trends versus, obviously, last year, there was a lot of small businesses that were impacted severely. Are you seeing a pickup in small business creation?

We had a release about this in Q4, and we continue to see positive momentum. We see two things that we think are really encouraging. We do see small businesses continuing or accelerating reorder of core products. We mentioned that in our promotional products business. The business we have there, which is business essentials is a pretty good leading indicator of what's happening in the marketplace because those are forms that people and businesses use in the normal operation of their business. And we've seen a very healthy rebound there. We've also seen good growth in our incorporation services that new businesses use, our web-based and our cloud-based corporation services help businesses incorporate. And so our optimism that we shared in Q4 continues into Q1 that we think small business formation continues and that we're especially pleased to see small business to start recovering as well. And we've got evidence that suggests that was strong and we expect it to continue.

That sounds encouraging. And just lastly, you sound like you had some nice wins in cloud. And I think it sounds like the trends are improving there. Maybe a little bit more color there in terms of what you're hearing from your bank customers on that side of the business.

Yes. And so -- Charlie, we're really proud that we have closed two of the company's largest deals in its 100-year history, and we closed both of those in the last six months in the middle of pandemic. And we think it really says an awful lot about the strength of our company, the strength of our strategy, the strength of our balance sheet because we have major institutions now in Truist and PNC that are creating long-term relationships with us. We already had some relationships with them, but expanding that relationship very meaningfully. The PNC deal, in particular, is just really exciting to us, and we talked about it in our prepared remarks. So the old company really operated in a series of silos and there was no connection between those silos. And so the opportunity of what we're able to close with PNC would never even have been on anyone's radar because people were only solely thinking about the one product they were there to talk to the customer about. And we fundamentally changed the go-to-market strategy instead to go to the customer, understand what their needs are and then put together all of our solutions in a way that can help them solve their problem. It's a really different approach. It's really about partnership, understanding the customers' needs and to help them to solve problems rather than simply walking in and trying to paddle one product at a time. And so in the cloud business, we had a relationship with PNC. We were able to expand that. And what that means is not only did we expand what we're doing for them on the data side, but we were able to bring in our promotional products and our marketing solution and delivery products to add to the…

Your next question comes from Chris McGinnis of Sidoti & Company.

Nice execution. I apologize. I've missed much of your commentary so far. But just wanted to ask around, you had -- you referenced this in the amount of large deals you won really over the last, say, 16, 18 months. What's the outlook for new wins look like given kind of One Deluxe strategy and how kind of produce these large deals. Just -- can you just talk about the outlook and the opportunity that you still have to go out and gain more deals? Maybe not as big as PNC, but...

Yes. I mean, Chris, we're really optimistic about our future not only because we were able to close so many large deals. And in my prepared remarks, I talked about the scale of our deals that we sold 1,600 deals and a number of them large, $50 million ACV, just on the top handful of them. So what makes us especially encouraged is that we are continuing to build our pipeline. So you might have assumed that if we sold these things, the pipeline would shrink. But actually, the pipeline is growing. And that's important because it indicates, obviously, that there's so much more market demand that we have not been able to address previously. And so we're at a place today where we can. And we're just -- I can feel that we're still really scaling our sales organization and our reach and very encouraged not only we've closed what we've closed, but that we have a big fat pipeline that's robust and expanding at the same time.

And I know one of the issues around Q1 was just the ability to get into the customer's office. Can you just talk about how -- it seems like economies are starting to open up. How has that changed? Indicated by your guidance, obviously, you still feel good about increased kind of revenue growth rates throughout the year. But just kind of where are you at with that? And how is that progressing?

Yes. And so it's a great question, Chris. And we are excited about that because as people -- more and more people get vaccinated and more and more of our customers and businesses in general are going back to the office, it just opens up the opportunity for us to complete implementations and help us board that revenue. Now it's not going to be a cakewalk, right, because everyone's not thrown the doors open back to everything business as usual. But as the year unfolds over the coming months, we really believe that we'll be able to get in and start implementing all of these wins, which translate, obviously, to revenue for us. And that's why, again, today, we reiterated that we think the full year will be 0% to 2%. You saw what we did in Q1, that our margin will stay healthy at 20% to 21%. But perhaps most importantly is that we're going to exit the year for the first time in more than a decade as a mid-single-digit revenue growth company. And that's all possible because we've been selling like crazy, and we think we'll be in the customer's office and facilities, getting the stuff implemented.

Okay. Just given -- I guess, maybe more industrial based, there's a real strong comeback in the economy. Are you starting to see that on your small business side, maybe in certain pockets as the economy starts to open up a bit more? Just greater conversation, maybe that would probably relate more to checks in the sense of more business kind of -- business-to-business payments. But can you just talk about what you're seeing in the underlying strength from your small business clients?

Absolutely. So we are seeing marked improvement in what we would consider sort of leading indicators here, which are our forms business, which are consumed in the normal operation of our business. So the forms business is [Indecipherable] that means that businesses are operating more, and they're just consuming because those are consumables. Similarly, we're seeing it in our business formations, in our incorporation services, our cloud-based and corporation services, and we continue to see strength and rebound now in our checks business, which also are obviously consumable and the prime market there, our business is making business-to-business payments. So that combination with a lot of optimism, and we think we can see the beginnings of the rebound also. Again, that's giving us confidence in the full year guidance.

Good luck in Q2 and the closing of First American.

Thanks.

I would now like to turn the call back to Tom Morabito for closing remarks.

Thanks, Stacy. Before we conclude, I'd like to mention the following conferences that management will be participating in. The Needham Virtual Technology and Media Conference on May 19 and the Baird Global Consumer Technology & Services Conference on June 8. Thank you again for joining us today. Please stay healthy and safe and we look forward to speaking with you in August as we share our second quarter 2021 results.

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.