Ladies and gentlemen, thank you for standing by, and welcome to the Donnelley Financial Solutions Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. Please be advised, that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Justin Ritchie, Head of Investor Relations. Thank you. Please go ahead, sir..

Thank you. Good morning, everyone, and thank you for joining the Donnelley Financial Solutions fourth quarter 2020 results conference call. This morning, we issued our fourth quarter earnings release, a copy of which can be found in the Investors section of our website at investor.dfinsolutions.com.

During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statements included in our earnings release and further detailed on our annual report on Form 10-K and other filings with the SEC..

Thank you, Justin and good morning, everyone. Before I comment on our results, I'd like to introduce two of the people that Justin just mentioned; Craig Clay and Eric Johnson. Craig is the President of our Capital Markets Business, and Eric is the President of our Investment Companies Business.

With Tom Juhase moving into an advisory role as of year-end, Craig and Eric, who now report directly to me, will be on our calls going forward. I'd like to thank Tom for the leadership he provided to DFIN, and the insight he added on these calls, and I look forward to Craig and Eric sharing their insights with you as we continue to transform DFIN.

Turning now to our financial results. We finished the year by delivering strong fourth quarter results highlighted by record quarterly software solutions net sales of $54.2 million or nearly 26% of our total net sales in the quarter. Overall, our consolidated net sales grew by over 10% as compared to last year's fourth quarter.

Excluding print and distribution, our remaining net sales grew approximately 20% as the strong rebound that began in the third quarter in our transactional offerings, as well as in our software solution sales continued. We also posted record quarterly operating cash flow and free cash flow of $101.7 million and $5.1 million respectively.

Fourth quarter non-GAAP adjusted EBITDA margin was 16.6%, an improvement of approximately 290 basis points from last year's fourth quarter, continuing a trend of year-over-year improvement that now stands at six straight quarters.

The improvement was primarily driven by a better business mix, along with the significant impact of permanent cost reductions. Dave will provide more details on our quarterly results shortly, but it's fair to say I'm pleased with our performance, and more importantly, the momentum.

I'm seeing in our software solutions and capital markets transactional offerings heading into 2021..

Thank you, Dan and good morning, everyone. Before I discuss our fourth quarter financial performance, I'd like to recap a few housekeeping items. First, as discussed throughout the year.

We are using the regulatory changes that are reducing mutual fund and variable annuity print demand as a catalyst to accelerate our mix shift toward our software and tech-enabled solution offerings. This more proactive approach has changed our longer-term growth outlook for the traditional investment company's offerings.

Given this change in expectations, as part of our annual goodwill impairment analysis, we recognize a non-cash goodwill impairment charge of $40.6 million during the fourth quarter to fully impair goodwill in the investment company's compliance and communications management segment..

Thank you, Dave. Before we open it up for Q&A, I would like to discuss further our 44 in 24 strategy. In May of last year, I introduced our goal of doubling the proportion of our sales mix derived from software over the next five years; moving from 22% of sales from software solutions in 2019 to 44% in 2024.

Growth in our software offerings, strong tech-enabled service offerings, and a shrinking printing distribution offering results in continued strong adjusted EBITDA, adjusted EBITDA margin, and cash flow performance.

As I detailed in my opening remarks, we have made excellent progress in terms of enhancing product development velocity; introducing three new software products to market over the last 15 months, while also expanding various key customer relationships across our product portfolio.

Building off already strong software solution sales growth in the second half of 2020, these product introductions and expanded relationships, as well as the potential for a rebound in M&A in 2021, a key driver of venue growth, positions us well to increase our software solution sales growth back to double digits in 2021.

While on the print and distribution side, we remain on-track to execute our print platform optimization efforts in concert with the rollout of SEC rules 30E3 and 498A which when combined with our proactive exit from non-strategic low margin commercial print contracts significantly reduces our expected print and distribution sales starting this year.

The combined impact of these efforts have us on-track with, if not ahead of, where we thought we would be heading into year two of our 44 in 24 journey.

In fact, we are currently estimating that software solutions net sales will make up over 30% of total net sales in 2021, with print and distribution falling to a little over 20% which will mark the first time in the company's history that software sales will exceed print sales, a major milestone in our transformation.

Given the significant progress we made against our 44 in 24 operating objectives in 2020, as well as our outstanding financial performance, we are updating our longer term financial objectives heading into 2021, and will include these updated targets in our investor presentation. Let's start with our longer term organic revenue growth target.

As business mix continues to improve and with the reduced headwind from print and distribution sales, we continue to expect that we will return to sustained, consolidated organic revenue growth in 2022 following the regulatory driven reduction in print and distribution sales.

Regarding software solution sale specifically, we expect software solution annual net sales growth to return to 10% starting in 2021. With this acceleration in software solutions sales growth, we continue to expect software solutions to make up at least 44% of total sales by 2024.

With print and distribution sales expected to drop down to the mid-teens.

In terms of profitability, we made significant progress in this area in 2020 improving non-GAAP adjusted EBITDA margin by approximately 370 basis points year-over-year which is well ahead of our initial goal of 75 basis points per year and putting us close to our original longer-term target of 20% by 2024.

Due to our over achievement in 2020, we are updating our longer-term margin goals and now expect to operate at or above 20% non-GAAP adjusted EBITDA margin, starting in 2021 with the intent of continuing to improve margin from this level over time, while also investing for growth.

As I mentioned earlier, our improved profitability, stronger business mix, lower cash interest and disciplined capital spending produced record annual free cash flow in 2020 again, well ahead of our expectations heading into the year.

Going forward, we will continue to focus on driving free cash flow, targeting to convert our EBITDA to adjusted free cash flow at an average of at least 40% annually, which for context is our average annual conversion rate since the spin.

One last comment on longer term targets as Dave mentioned earlier, we are very excited about the wealth of internal investment opportunities we have currently and given the accelerated progress we saw in 2020 in terms of profit and cash flow growth.

We are planning to increase our investment in annual capital spending to approximately 5% to 6% of net sales over the next few years. To ensure we can continue to drive the top line growth, we are targeting. As a reminder, the vast majority of our capital spending relates to the capitalization of software development costs.

Like all our capital allocation decisions, you can expect us to remain disciplined in our approach to internal investment, allocating funding only to projects that we expect will produce superior returns to investors over the long term.

In closing, we enter 2021 with strong end markets and are keenly focused on continuing to drive our 44 and 24 strategy and the resulting financial profile.

Our various operational successes in 2020 prove that we are delivering the right solutions in the moments that matter and creating exceptional value for our clients while the stellar financial performance in 2020 shows how those successes can translate into superior returns for our shareholders. I’m more confident than ever in our future.

Now with that, operator, we're ready for questions. .

Your first question comes from the line of Pete Heckman. Please go ahead, your line is open. .

Good morning, gentlemen. Thanks for all the information on the quarter and the outlook. Dan could you revisit a comment that you just made, want to make sure that I heard correctly.

I mean, clearly, the company has made some sustainable reductions in the cost base and our assumption was that you really outperformed in 2020 and we are expecting EBITDA margins to fall in 2021.

You made a comment, as regards 2021 just a few minutes ago it and I missed it, sounds to me like you're expecting that in kind of a base case 2021 EBITDA margins could be up year-on-year?.

Thanks, Pete. Yeah, that's correct. When we look at the reduction of revenue coming in print and distribution out the $35 million at the midpoint and $5 million to $10 million of EBITDA, coupled with where we're seeing growth, mainly software solutions and then entering 2021 with a pretty robust transactions market.

We feel we have the opportunity to expand margins in 2021..

That's great. That's impressive. All right and then, great job on getting net leverage down significantly over the last three or four years, how does that change your thoughts about capital allocation and the kind of target leverage that you think about running the business. .

Sure. Thanks. So I'll take a first crack and then Dave, if you want to jump in, but it's an important question and one that we discuss internally and with our Board frequently, certainly we're pleased that our performance has put us in the position to have the amount of financial flexibility that we do.

And we do have a lot of our revenue, that's recurring but we also understand the cyclicality of some of the markets we play and as Dave has mentioned previously the transactions turn off and on very quickly.

So even taking that into consideration, we’ve created a great balance sheet, the cash does not burn a hole in our pocket so when we think of capital allocation, you saw we increased our buyback. It starts with looking at our business in the assets that we own.

We model out several years forward look at intrinsic value, the typical financial metrics nothing unique there. I think what is unique within our businesses is the transformation that is underway and well in progress.

And so we have over $200 million of software revenue growing in the 10 plus percent range and that has a lot of value when we look at comparable market multiples. The largest part of the revenue software revenues roughly two third is recurring compliance SaaS revenue primarily ArcSuite and ActiveDisclosure.

Venue and eBravia make up the -- most of the rest, and they have really attractive financial profiles and value as well. So we look at CapEx is the other place and so on 2021 that we're increasing CapEx. We view capital and that's we're increasing that it's primarily software development and where we're making the increase is in software development.

And it's variable, and so we're thrilled with our internal development efforts in terms of great product design, development velocity rather. And so we've opened the spigot there a bit. We think the markets for existing products, ability to add functionality capabilities to serve our clients. In additional markets our offerings is really strong.

And so I would say that even though we are planning to ramp-up CapEx we're only going to spend, where we have good projects, like 2020 was a great example we had more dollars allotted, we were unconstrained by our balance sheet and cash flow. We remain very disciplined on projects and dollars that we approved and ultimately spent.

And so, we've built a culture here of not confusing activity with progress. So, and then moving on M&A. M&A does remain very expensive despite our enhanced financial flexibility, we look at M&A based on intrinsic value of the asset and what it means to us. We also recognized a current prices many our price for perfection or beyond.

So while we've looked at a ton of opportunities over the past four years, or four plus years. If you look at M&A, we've been a net seller. Debt pay down will continue and so, if I were to summarize it maybe give a little more.

But if I were to summarize it, I would say, more of the same continue to drive performance, generate cash and be very disciplined and thoughtful on how we deploy your capital to grow the business profitably. .

Got it.

And just on a housekeeping basis those term notes 230 million in notes in the quarter those can be called in October at 102?.

That's correct. .

Thanks. All right. .

Your next question comes from Charles Strauzer from CJS Securities. Your line is open. .

Hi, good morning.

If you could maybe explain a little bit more on the guidance, if you could, you talked about EBITDA improving substantially year-over-year maybe quantify that and also maybe give us some sense on the different segments, how we should think about that for Q1 and how that should shape up for the year as well, and both the top line and profitability perspective based?.

Sure, Charley. So, as I noted we're expecting an uplift to margin and it's really driven by the shift in the revenue mix as Dan commented earlier. Really two specific aspects of that, the first is less print and more software and tech-enabled services. And then the second is the higher proportion of the capital markets transactional revenue.

You look we way we started the year, our January results support this. We don't have February results yet, but the trend has continued. I'd also say in addition to that, we did a great job in 2020 reducing the cost structure. Most of that reduction was not reflected until the second quarter in 2020. So we'll also see the benefits of those actions.

I guess more specific to the margin. Last year, we reported 13.6% in the first quarter and I'd say if current trends continue through March. I see EBITDA margin exceeding 20%.

So call it low to mid '20s from a margin perspective and again all contingent on the stronger mix continuing and as we said that published part to predict is really the capital markets transaction market. We have strong activity there, but the timing of exactly when those will hit is not certain..

Got it. And perhaps just a little bit more the commentary by the segments than in Q1 in terms of the contribution from each of the segments and also the margin outlook that. .

So to my comments obviously the transactional revenue in capital markets would hit within capital markets compliance and communication management. So that's the area we'd expect to see the most expansion also with the software growth we would expect to see operating leverage there in the few software segments.

And then on the investment company compliance and Communications Management, a couple of different things going on there, one with the drop in print, you have negative operating leverage and I commented on this in my prepared remarks, but one of the things that will affect all the segments, is the way some of the shared costs get allocated.

We have certain expenses more centralized functions in their areas like IT, finance, procurement, HR, just to name a few. And those get allocated to the four operating segments. There is a variety of drivers that we use to allocate these costs in different segments. Most of them are really based on a combination of net sales and headcount.

And so I would say is, given the significant drop that we expect to see in investment company's compliance and Communications Management net sales related to this regulatory impact we'll be shifting, probably about $11 million of cost out of that segment. And then I'll go to the other three segments.

Roughly $3 million to $3.5 million will get pushed to each of the two software segments and then the remaining $4 million to $5 million will go to capital markets compliance and Communications Management and those are, just to clarify, those are full year numbers.

And again it's a zero-sum game really just a question on how the segment share certain of those centralized past..

Got it.

And then just one more question on the Q1 guidance, the 200 to 220 there, how much of that reflects kind of the -- lost print, if you will?.

Yes. So obviously with the regulatory impact that's hitting this year. We haven't specifically broken out the print detail relatives to the first quarter of 2020. We're certainly expecting that to decline and then again, mostly offset or nearly offset by the transactional activity and the growth in the software revenue..

Just looking at the comps year-over-year, we're seeing the back half of 2021 being a tougher comp versus last year obviously..

Yes that's a great point. I would go back to my comments about having a lack of visibility.

Probably a good example, less than a year ago, when we were trying to understand the potential impact that the pandemic would have, we certainly would have expected a substantially weaker transactional environment during 2020 and obviously, we're pleasantly surprised by the strength of the markets there.

Certainly hard to predict what the second half of 2021 will look like, but to your point, we’ll definitely be comping against a very strong second half..

Got it. Thank you very much. .

There are no further questions at this time, I will now turn -- we have a question from Raj Sharma from B. Riley Securities. Your line is open. .

Hello, good morning. Yes. Fine results, congratulations. I think congratulations also on the continued efforts to cut down costs and improve margins. I just wanted to follow up on the guidance for the year. There is not much of a revenue guidance, but you did say print is going to be down 130 from fiscal 2020 levels. .

That's right, yes. .

Then, software services up 10%, right? Or double digits? And then tech-enabled, we will be leaving out because that's all transactional based. .

I wouldn't say it's all transactional based, but certainly the transactional piece, then again as we pointed to several times, not only in the past, but also on this call, it's the hardest to predict and that's really the biggest variable that from a predictability standpoint, we don't have great insight to what the balance of the year will look like on the transaction side.

.

So it is what it is. It is what transactions turn out to be in the U.S.

and globally and will happen to be enough for the guidance for the first quarter, are you assuming transaction sequentially up or is there any?.

Yes. To my earlier comments, what we saw in January supports that. We haven't closed February yet, but the activity level remains high on transactional and then we'll see where March comes out. Right, we have a lot in the pipeline still.

One of the challenges on transactional is also the timing on when these deals will hit and one will ultimately recognize revenue. And so if that trend continues and that mix remains favorable like that, that was my earlier comment around margins potentially reaching low 20%. .

And just to add to that is, it's great to see Venue respond with a stronger M&A market. We went through a fairly weak M&A market, despite the fact that IPO has been really hard and so you saw Venue was strong growth starting in Q3 continuing in Q4, to the 10.4% in Q4 and that will be sensitive to the M&A market as well.

In Q1 we had last year, one or two larger projects, but a strong M&A market will certainly be helpful for venue..

Right and on that front, any sort of change in pricing relative to IPO’s respects and also about your market share, so market share holding up in deals that are greater than $100 million in the funds transaction side?.

So we continue to have strong market share. I think when you look at the activity in 2020, a lot of what drove the IPO pricings was the SPAC market and typically, we historically have had lower market share there, but have really increased that in 2020.

So I think when you look at the overall -- we increased our share in SPACs IPO, we increased our share in non-SPAC IPO, but given the mix, I think probably our overall share is down on the IPO side, but certainly happy that, individually, when we look at SPAC and non-SPAC that we're doing very, very well there.

SPACs obviously result in De-SPACs, so that's being well positioned on the M&A side, as well..

Got it. And then, on the compliance, you mentioned the compliance side revenues in the fourth quarter were up year-on-year. I understand there’s seasonality there on the fourth quarter.

Any color on why they were higher than expected?.

I don't think seasonality would play into a year-over-year comparison, but certainly we commented on market share being slightly up, some additional 8-K volume, etcetera..

Some of that compliance here is driven on the transactional side, so just which is the 8-K piece involved and you saw on the transaction side?.

Got it. And then, just a couple of more -- I understand your comments about your capital allocation. So as I understand it correctly, there’s no real big M&A, basically the new CapEx is going to be our internal software product development to grow on into areas related to compliance and management..

Yes. So we continue to look at M&A aggressively, but we're disciplined on what things are worth. And so to us, what it means for our business. But yes, we've increased -- we see great opportunity in our internal development both for venue, as well as for the compliance platforms.

One of the things, I think Dave may have referenced earlier, on the Investment Company side is, the print is going away, the $135 million next in 2021, we're extremely well-positioned for our total compliance management product which leverages our software and so, we're investing behind those software products to drive the growth.

But relative to capital allocation, I think you've got it right, which is we'll continue to look at M&A, but we're realistic about the price multiples..

That's all, again, congratulations on a wonderful job of transforming the company and pushing up cash flows..

There are no further questions at this time. I will now turn the call back to the presenters for closing remarks..

Great, thank you very much and thank you for everyone for joining us and we will speak to you again in May..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..