Ladies and gentlemen, thank you for standing by, and welcome to the Donnelley Financial Solutions fourth quarter earnings conference call. [Operator Instructions].I would now like to hand the conference over to Justin Ritchie, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Denise. Good morning, everyone, and thank you for joining Donnelley Financial Solutions Fourth Quarter and Full Year 2019 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 the call, we will 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 in our annual report on Form 10-K 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 press release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information.I'm joined this morning by Dan Leib, Dave Gardella, Kami Turner and Tom Juhase.I will now turn the call over to Dan.

Thank you, Justin, and good morning, everyone. We finished 2019 by delivering solid fourth quarter results, including record quarterly SaaS sales, which made up 26.2% of total sales as well as significant year-over-year increases in quarterly earnings, earnings per share and free cash flow. By continuing to focus on operating efficiencies, our team managed to improve fourth quarter non-GAAP EBITDA margin by 400 basis points.Our fourth quarter performance allows us to enter 2020 with momentum, as we continue to execute on our long-term strategy. For the full year, we recorded net sales of $874.7 million and non-GAAP adjusted EBITDA of $137 million, holding non-GAAP EBITDA margin relatively flat year-over-year. We delivered solid results despite the significant headwinds that we faced over the course of the year in capital markets transactions and Venue, 2 of our most profitable offerings. Related to the first quarter SEC shutdown, uncertainties in Europe related to Brexit, civil unrest in Hong Kong and an overall slowdown of global M&A activity.As the year progressed, our team stayed focused on closing our share of business available in the market, while also driving efficiencies throughout the company. Our operating efficiency focus helped us to expand non-GAAP adjusted EBITDA margins in the final two quarters of the year, keeping us on solid footing heading into 2020. We also continue to responsibly manage our asset base during 2019, selling nonstrategic assets to free up cash that was used to help reduce our total debt by $66.7 million. Since becoming a stand-alone company in 2016, we reduced our outstanding debt by $340 million, including fully paying off our term loan.We are also pleased to have ended the year at 2x net leverage, below the low end of our targeted leverage range, giving us enhanced flexibility related to our capital deployment priorities. 2019…

Thank you, Dan. Good morning, everyone. Before I discuss our fourth quarter financial performance, I'd like to recap a few housekeeping items, some of which impact our year-over-year comparability. First, as part of our ongoing effort to actively manage our asset base, we sold 50% of our investment in AuditBoard, receiving proceeds of $12.8 million in the fourth quarter of 2019. This transaction resulted in a combined realized and unrealized gain of $13.6 million, freeing up cash for other uses, including debt repayment.Next, certain pension plan participants elected to receive lump sum pension payments in the fourth quarter, which resulted in a noncash settlement charge of $3.9 million in the fourth quarter. We also paid off the remaining balance of our term loan credit facility of $72.5 million in the fourth quarter. As a result, we recognized a pretax loss on extinguishment of debt of $4.1 million related to unamortized debt issuance cost and the original issuance discount. This loss is included in our fourth quarter 2019 interest expense. All 3 of these items are excluded from our non-GAAP results.GAAP income tax expense for the fourth quarter of 2019 was a benefit of $2 million due to favorable return to provision adjustments, primarily related to our foreign-derived intangible income deduction, state and local income taxes and our research and development credits. Finally, as we have discussed on the last several calls, we completed the sale of our Language Solutions business in the third quarter of 2018. For the year, the sale negatively impacts the year-over-year net sales comparison by $41.8 million, and negatively impacted our gross profit and non-GAAP adjusted EBITDA comparisons by approximately $12 million and $3 million, respectively, inclusive of net stranded costs. The sale did not impact the year-over-year comparisons in the fourth quarter of 2019.Keeping these…

Thank you, Dave. Before we open it up for Q&A, I wanted to share a few additional thoughts. Over the 3 years, I'm proud that our team has established DFIN as a profitable stand-alone company, made significant progress against our strategic priorities to improve our mix of business, protected our core markets and evolved our company, all while significantly deleveraging the business.Moving into 2020, we are entering a new chapter of our digital transformation, one that will feature an enhanced focus on accelerating our software growth and continuing to improve our overall business performance. We firmly believe in our strategy and remain focused on delivering value to our shareholders.And with that, let's open the line for Q&A.

[Operator Instructions]. Your first question comes from Michael Cho with JPMorgan.

I just wanted to ask -- you mentioned some comments around rightsizing the platform and taking proactive, I guess, reductions in the profitability of the business, and can you just give a little bit more flavor on what that kind of looks like? What that means to you from a -- one, from a physical operating perspective? And then two, from a financial perspective?

Yes, sure. So we own several facilities in which we print our own products. And that represents work that -- or of our total work, that represents roughly 50% of our own. We use our own capacity for 50% of our production work, and we outsource the rest, et cetera. And so as we think through that, and we know what's coming in terms of regulatory change, the fixed cost nature of a platform taking into consideration what we can also offshore, we want to look at all of the work that gets produced. And it's both within our physical platform as well as what we're doing on the software side. We're looking at all client profitability and product profitability and job profitability. But in this regard, it's looking at how we optimize our physical assets in order to drive a higher level of profit and cash, recognizing that we know there's a reduction, regulatory-driven, in print volume. In terms of sizing it for you, we'll plan to do that later this year. But that's our thinking. And I think we made good progress against it, and well on the way to being finalized with that analysis.

Okay, great. And if I could just ask one follow-up on the software business. I mean, just given strength in the quarter around the software business, maybe can you just remind us how big some of the components are that you mentioned whether it's ActiveDisclosure, Venue or ArcPro?

Yes, sure. So we -- and we've broken these out before. So Venue is the largest, followed by FundSuite Arc, and then ActiveDisclosure. ActiveDisclosure has had the nicest growth this quarter as well as through the balance of the year. And that's consistent with what we've seen going in -- starting probably midyear last year.

Your next question comes from Peter Heckmann with Davidson.

Looks like Capital Markets for the year on a global basis is maybe between 55% and 60% of revenue. Can you talk about how much of the transactional business made up of that? And if possible, maybe some rough quantification of IPOs and M&A?

Yes. Yes. So Pete, on a global basis, transactional was roughly $250 million of total revenue, about $190 million of that in the U.S. and $60 million internationally. And then as you look at -- within transactions on a full year basis, the biggest decline, as we've talked about all year long, the biggest challenge was in M&A activity, and that volume was certainly down on a year-over-year basis. IPOs, and I'm looking for the detail here, hang on a second. The S-1 activity was up for the year, about $6 million in revenue. And when we look at total, S-4 revenue was down about $27 million.

Got it. Okay. And then in terms of what you're seeing right now, the IPO activity year-to-date looks okay, some questions that you said about the election, the coronavirus. But I guess, how do you feel about the pipeline which you're seeing today, still relatively solid and reflecting solid market share?

Yes. So certainly, the pipeline is good. We are certainly internationally seeing the impact of the virus. And that will -- in the region, most of our offices, not all, but most of the offices have people working from home, and we've seen a standstill there. Early in the year, as I mentioned, pipeline is good. Share seems stronger, and M&A is still not where -- still not fully picked up, but seeing a little bit of firming up there.

Your next question comes from Charlie Strauzer with CJS.

If you could talk a little bit more about 30e-3? And I assume we're still on the same start date there for next year?

Yes. Yes, it's first quarter of 2021.

Got it. And any changes to your thoughts on the potential revenue impact there?

We're doing more work there. There's certainly the fund side, there's the variable annuity side of it as well. And as we layer in some of the work we -- that I mentioned on the profitability side, we'll come back with an overall estimate of what we think that looks like. But making good progress there. On the profit side, I think we're pretty well covered in terms of our ability to mitigate the impact on the bottom line.

Excellent. And if you -- on Q1, you talked about improvement year-over-year on EBITDA margins. So maybe a little bit more color there and a little bit more quantification, if you could?

Yes, Charlie. So I think we talked about the cost savings rolling through. A lot of the margin improvement is going to depend on the level of transactional activity that we see and then the impact internationally, as we talked about of the coronavirus and how that impacts international transactional activity. I think we're expecting that to be obviously softer. But all in all, still expecting overall EBITDA margin improvement, again, largely driven by the cost savings. We haven't specifically quantified it only because of the variability that, as you know, transactional could have.

Your next question comes from Bill Warmington with Wells Fargo.

So to follow-up on that question, what's the incremental margin running on the transactional business these days?

Yes. It's still, Bill, in the -- we would call it, probably in the 50% to 60% range. Now a lot of it depends on the mix of transactions, right? So something -- there's variance between debt deals, IPO, M&A., and then within those transactions, the size and complexity could also drive variance in the incremental margins on each. But I think if you looked at it overall, we would say in the 50-plus percent range.

Got it. And then the operating cash flow guidance improvement, I just want to know if you could talk a little bit about the drivers there? I know you had mentioned in a cash flow improvement program that you had, but I wasn't sure if that was driving all of it or some of it?

Yes. So it's some of it. I think when you look at the cash flow in 2019, we were just under $10 million in free cash. But there's about $25 million or so of either unusual items or incremental investment. We noted in the press release this morning that there was just over $18 million associated with some taxes related to -- in 2019 to the gain on Language Solutions as well as the sale of the Secaucus facility. And then in addition, in the free cash flow number, there was about $7 million of CapEx related to the digitization of the print platform in 2019, that we don't expect to recur in 2020. And as I mentioned in the prepared remarks, so far, 7 or 8 weeks into the year, we're starting -- we're already starting to see some of the benefits of the initiatives.

Got it. And then I was also going to ask about the -- you named a number of new business wins. And I just wanted to ask for some color there? Are they -- is that -- are those typically net new clients or the existing clients buying new products? Some color there would help.

Sure. Yes, it's a little bit of both. What -- in the example I gave on using ArcPro, that's actually an existing client finding a new use case for our software to solve a firm-wide challenge that they had. And so given our strong share in all of our core offerings, typically, we find a lot of opportunity to expand share of wallet with existing clients. In some of the more transactional offerings, you'll also find new clients there. Specific to these, it's a little bit of both.

Your next question comes from Bill Mastoris with Baird.

Dan, you talked about the -- you're entering a new chapter of digital transformation. You also highlighted the regulatory change, which is going to reduce print volume. I'm just kind of wondering right now, what is kind of the breakdown between maybe print transactions and digital transactions? And then anything that you could comment on just in terms of trends that you would expect? Obviously, with the new regulatory requirement, I would expect them to drop off, but any color that you -- any additional color that you could provide would be greatly appreciated.

Yes, sure. Thanks, Bill. So we stated our software revenue was roughly 22% for the full year, print would be in that 35% to 37% range, and the balance would be services. And to your point, as 30e-3 takes hold, and there's obviously the -- as I mentioned, the mutual fund piece, there's a variable annuity piece, which may come in over different times, but that will take print down in aggregate, for sure. And then what we've seen as we model it out, and as Dave mentioned, some additional disclosures coming next quarter, and you'll be able to see it more clearly. But the -- as we model it out, you see good growth in software this year, low double digits. And so when you remix this, you continue to see the shift that we've seen, which is quite positive from our perspective, generates a higher incremental margin, generates good free cash flow. And so that's the shift that we're talking about, Bill.

Okay, great. And Dave, a question for you on kind of the cadence of the change in leverage ratios. As you mentioned, you're a cash user for the first half of the year, and during the back half of the year, you generate considerable cash. Would we see a similar fluctuation to, let's say, 2019 in leverage ratios, where we're going to have an increase of maybe 0.5 turn to maybe a full turn in the first half of the year and then we get back down to near 2x at the tail end of the year? How is that going to work out that cadence? And I do acknowledge, of course, that the International division is going to have an impact depending upon how long the coronavirus actually plays out?

Yes, bill. And I think generally, similar pattern, I think it will be, based on what we're seeing so far this year and some of the initiatives in place, it will be less pronounced in terms of the cash usage, specifically, in the first and second quarters of the year. And then that we start to overlap some of the benefits. But I think generally, that pattern of being a user in the first half will hold this year, but again, less dramatic than what we've seen in -- certainly in '19 and in all previous years.

[Operator Instructions]. Your next question comes from Michael Cho with JPMorgan.

You made a quick comment on -- in your internal comments around winning market share for the first time in a long time. So I was just -- and I assume that has to do with ActiveDisclosure. But I'm trying to get a little bit more color behind that comment? I mean, you're winning share in the 10-K, 10-Q compliance solutions area. I mean, is it just ActiveDisclosure just winning more RFPs or displacing a competitor? Or was there something else in the competitive backdrop?

Sure. Yes. So when we look at the overall compliance side, there are -- or there is some impact from transactional offerings that have compliance types filings, which is why we were pretty specific on the 10-K, 10-Q notice and proxy. But as you characterized it, it is driven by success of ActiveDisclosure, and winning more in the marketplace, the 21% growth is a strong quarter for us. We have won dozens of new clients, consistent with prior quarters, and that's on a net basis. And so that's the biggest driver.

Your next question comes from Raj Sharma with B. Riley FBR.

I was wondering if you could provide some more color on what you're assuming in your first quarter guidance? Is the transactions, is it in line with -- sort of what level of transactional business are you assuming for the first quarter and for the rest of the year?

Yes. So as we said, for the full year, transactional, expected to be flat to slightly down. For the first quarter, and again, largely depending on what we see in international, flattish is probably the right way to think about it.

Right. And then what -- for 2020, what sort of print/services breakdown are you assuming on the $860 million to $880 million number?

So we -- the print versus software and service in 2019 was 37% print, and 63% service. The print probably comes down a few hundred basis points to closer to 35%, so probably 35-65. And in the 65%, we would expect the SaaS number. As Dan mentioned, it was approaching 22% in 2019, we would expect that to increase a few hundred basis points.

Right. Up 200 basis points. And then what sort of margins? I heard that you said transactions was around 50% margins than transactions-related business?

Yes, that's on an incremental basis, Raj.

So what sort of margins are you getting on the overall SaaS business?

More to come on that. The -- as we go throughout the year here and part of our comments on the additional disclosures regarding traditional and SaaS. And the expectation is that throughout 2020, you'll start to see more of that.

There are no further questions at this time. I'll turn the call back over to Dan Leib for closing remarks.

Thank you, and thank you, everyone, for joining. We'll look forward to speaking with you again in May. Thanks. Bye.

This concludes today's conference call. You may now disconnect.