Thank you. Good morning, everyone and thank you for joining Donnelley Financial Solutions First Quarter 2021 Results Conference Call. This morning, we released our earnings report, a copy of which can be found in the Investors section of our website at dfinsolutions.com.

During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further detailed 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..

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 remains 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 Arc Suite and ActiveDisclosure, 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 markets 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 company's 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 margin 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..

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 lumpsum payment with one of the funds, and subsequent to quarter end, we successfully negotiated a discounted lumpsum 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..

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 million to $140 million, and a reduction in non-GAAP adjusted EBITDA of approximately $5 million 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 will 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 long-standing 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 solution.

Within investment companies, while the SEC's Rule 30e-3 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 solutions 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-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 ActiveDisclosure sales. In addition, the net wins related to serving our clients' ongoing compliance needs we also saw increasing demand for ActiveDisclosure by pre-IPO and IPO clients.

Regarding our new ActiveDisclosure 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 ActiveDisclosure 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 US 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 in 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..

Your first question comes from the line of Charlie Strauzer with CJS..

Hi. Good morning..

Good morning, Charlie..

Good morning, Charlie..

Hey.

I was wondering if we can get a sense of where we are with the SEC rule changes based on your Q1's actual and your guidance for Q2? How much of that $130 million to $140 million in revenue reduction is kind of baked into the first half of this year?.

Yeah. So Charlie, in the first quarter we said, print was down $25 million just based on the historical seasonality of when we see most of the print hit. The second quarter will have kind of disproportionately larger impact than what we saw in Q1 and it will be the largest impact of any quarter during the full year..

Got it. That's helpful. Thank you. And then shifting a little bit to the transactional work, obviously, SPACs have been a big percentage of the IPOs that came out in Q1. I think we saw probably a record growth. I think Q1 was higher than all of last year.

What percent of your transactional revenue in the quarter was related to SPACs? And then, also, are you starting to see any pickup at all in De-SPACing work at this time?.

Sure, Charlie. So I'll start and then, Craig or Dan can jump in.

When we look at our performance in the SPAC market, and obviously, as you said, it was up substantially relative to last year, but from a share perspective, we did very, very well there and it's historically been an area that we hadn't focused on until more recently and so we did very, very well there.

With respect to some of the De-SPAC transactions, we're starting to see some of that, but from an overall M&A perspective, we commented on the Venue growth being strong at over 30%, obviously, tied to the M&A activity, some of that De-SPAC related and then others just more on the traditional M&A space..

And Charlie, this is Craig. To build on that, Dave mentioned the reset. We expect on the other side of that, it will be less manic, but certainly brisk, and there are 426 SPACs that are searching for a business combination right now. There were 92 that were announced in Q1.

We did see a drop off in April, but it was equivalent honestly to the January, February numbers. So we, from a long-term perspective, as Dave mentioned, believe the SEC attention will actually legitimize and we will see this move forward as a strong product..

Great.

And then, the companies that are De-SPACing and working with you on kind of the transaction part of that, are they also signing up for -- do they then sign up for kind of recurring long-term compliance work as well?.

Yes. So we're seeing, certainly when they do the initial set up of the shell SPAC, we're seeing them also sign up for ActiveDisclosure, our compliance solution, and new ActiveDisclosure. We're also seeing during the De-SPAC process they use Venue supported by eBrevia, which is helping with their M&A diligence.

And then, certainly, at the acquisition time, we're seeing them continue to report using ActiveDisclosure. So, it's a real opportunity for us..

Great. Thank you very much..

Thanks, Charles..

Thanks, Charles..

Your next question comes from the line of Peter Heckmann with Davidson..

Hey, gentlemen..

Hi, Pete..

Spectacular results, and good to see that the share -- your share of filings both on capital markets and investment continues to be real strong.

I certainly think that a lot of the investments that you're doing in upgrading the technology are helping you keep here, but do you think there is also the opportunity to gain share? If so, what areas of the business do you think based on your current technology rollout plans, do you think you have the best opportunity to gain some share?.

Sure. Thanks, Pete. So when we step back and we look at our relative position in our markets, we are number one, two, or three in each of the markets in which we play. And so, to your point, we start from a very strong position as the only full-service provider in our markets. It offers us a great opportunity to sell across the house.

And so, you take each of these individually, very high share on the transactions parts. We did see that market change a bit and we adapted, and have been increasing share in SPACs. When you look at our compliance software side, ActiveDisclosure has a great opportunity.

We rolled out a new product as we mentioned, the new ActiveDisclosure, brand new build of the product, and have seen a very good interest and very good adoption. And as we mentioned in our comments on Venue, we can surmise that at 30% growth, that was a share taker. So, we continue to see very good opportunity in those areas.

Those are all the capital markets transactions compliance areas.

When we jump over to the investment companies side, the mid-30%s of growth on our software offering, which was really supported by – the team did a fantastic job of developing solutions for the markets in a changing market with what was taking place with regulation with 30e-3 and 498A, and we saw that come down on the print side,s but obviously, saw a great opportunity to develop a well-received solution and have seen outsized growth there that we think continues through the year.

So we feel very good in all of our core offerings..

That's great. And then in terms of just the capital allocation, I mean, you've done a fabulous job of deleveraging here over the last couple of years. And so you're now -- that's down to one times.

I guess how are you thinking about capital allocation? Are you starting to see some seller expectations come down on the M&A market so that might be some opportunity or for now are you just going to continue to deploy free cash flow toward debt reduction and opportunistic share repurchases?.

Sure. Yeah. Absolutely. So we went into or I went into a fair amount of detail on our last call and our perspective on it remains unchanged, which is really continue to drive performance, generate the strong cash flow and be disciplined and thoughtful on how we deploy shareholder capital to grow the business profitably.

When we look at the various – the five ways of deploying capital, we have been accelerating investments into the organic growth initiatives and that's really to your comment, multiples and ex-seller expectations remain extremely high.

So as I said, we put more into organic investment, we've been paying down debt, we've done a little bit of share buyback and I would expect more of the same but overriding continuing to be very disciplined..

Got it. That's helpful. I'll get back in the queue. I appreciate it..

Thank you..

Your next question comes from the line of Raj Sharma with B. Riley..

Hi. Good morning, guys. Spectacular results. Congratulations..

Thanks, Raj..

Hi. Sure, absolutely. So just if you could touch upon the cash flows for a second and you talked about there were some extraneous items in there because of LSC bankruptcy settlement and also seasonally the cash flows are supposed to be negative in the first quarter.

Could you isolate the incentive comp and the LSC impact on cash flows?.

Yeah, Raj. So the LSC multi-employer pension plan payments were pretty small in the first quarter. I think around $1 million or so. The two settlements that we talked about, while one of them happened in the first quarter, the payment was actually made in the second quarter.

And then, on the second settlement, that payment will also be made in the second quarter.

Frankly, the biggest impact on the first quarter cash flow on a year-over-year basis and we were roughly flat, I think down a couple of million dollars in free cash, but the big delta from year-over-year was really driven by the increased incentive comp payments, including annual bonus payments and 401(k).

We wouldn't break that out as a discrete number, but given the performance last year, those plans paid at a higher rate than -- at a much higher rate than they typically have in the past..

Okay. All right. And then just, off the -- two more questions, off the $130 million decline that you are expecting in print and had allowed for, I know Q1 was down $25 million, how much would Q2 be? I heard you say primarily the entire amount would be taken in Q2.

So in the first half you would have taken most of the $130 million decline in print?.

No. Sorry. And if I said that, let me clarify. What I intended to say was that the second quarter will be the largest decline of any of the four quarters of the year. So it will likely be substantially larger than what we saw in Q1, and then Qs three and four, ballpark should be roughly similar to what we saw in Q1..

Got it.

And then just lastly, the software solutions for the rest of the year, do you expect similar sort of robust growth in software solutions?.

Yeah. So, as we talked about on the software side, expecting double-digit growth and that's really across the board. When you look at it on a product-by-product basis, the momentum we have in ActiveDisclosure, grew 16% in the quarter. We expect that to be in the kind of mid-teen range.

Venue was 30% in the quarter and that has been ticking up the last couple of quarters. This was our highest growth quarter. And again, a lot of that will be tied to the M&A activity and as we said from a perspective on Venue, the pipeline is very strong there. And then, when we think about Arc Suite, we had a very aggressive plan coming into the year.

The first quarter at plus 35% was a little bit ahead of that plan. But we do expect that the combination of these offerings within the Arc Suite and especially ArcDigital and total compliance management will continue driving strong growth throughout the year..

Yeah. And the only thing I would add to it is that, if you reflect on last year, Venue's growth started to pick up in the back half commensurate with M&A picking up. And so you'll run in the comparables in terms of quarter-over-quarter or year-over-year growth within each quarter, but not withstanding that, we would expect to be in that mid-teens..

Right.

And then just lastly, the guidance for Q2 assumes a capital markets transactional activity in line with Q1 or lower?.

No. So, our guidance there Raj -- we think, Q1 transactional activity will be up not nearly the amount that we saw in Q1, right. Q1, we said in our prepared remarks that transactional activity almost doubled from the first quarter of 2020. In the second quarter, our guidance implies somewhere around 20% or roughly $15 million increase in transactional.

So, to the extent that from a market perspective, it's stronger or weaker than that expectation, there is some plus or minus in that guidance..

I'm sorry, $15 million sequential increase?.

No, sorry, $15 million year-over-year. Yeah..

Got it. Okay. Well, thank you so much for taking my more questions. Congratulations again..

Thank you, Raj..

Yes. Thanks..

Your next quarter comes from the line of Charlie Strauzer with CJS..

Hi. Just one quick follow-up.

Just looking at the balance sheet and the debt remaining on the balance sheet, any thoughts there on potential refinancing taking advantage of the kind of robust capital markets that you're seeing on your own business?.

Yes, Charlie. So we look at this all the time. To your point, we had 8.25% notes that become callable at 102 in October.

Given the strength in the markets and hopefully, that continues, right, we believe that it will and that there'll be an opportunity to refi that debt at a significantly lower rate, but a lot of that will just depend on what market conditions are at that time..

Excellent. Thank you very much..

Thank you..

Thanks..

And there are no further questions at this time..

Okay. Thank you all for joining and we'll look forward to speaking again in early August. Thank you..

This concludes today’s conference. You may now disconnect..