Ladies and gentlemen, thank you for standing by, and welcome to the Donnelley Financial Solutions First Quarter Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Justin Ritchie, Head of Investor Relations. Sir the floor is yours

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions first quarter 2020 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 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, quarterly report on Form 10-Q, and other filings with the SEC.Further, we will discuss non-GAAP financial information. We believe this 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.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.From all of us at DFIN, we hope that you and your families are staying safe and healthy. Well, we noted on our February calls the potential business impacts of COVID-19, we could not have anticipated the broader impact the pandemic would have in terms of the way we have lived and worked each day over the last couple of months.I'm proud to say that as a company, we adapted quickly to the rapidly changing environment to keep our employees safe, while also meeting the ongoing needs of our clients. I'd like to thank our employees for the dedication and resilience they've demonstrated and encourage them to maintain the same focus, as we all continue to navigate through the challenges of the pandemic, both personally and professionally.As it relates to our performance, we are pleased with our first quarter results, which reflect our improving business mix, ability to manage costs, and improve cash conversion, resulting in a strong balance sheet and liquidity position. We achieved record first quarter software solutions revenue up 330 basis points of year-over-year improvement in adjusted EBITDA margin, and reduced our debt by $75 million, compared to the first quarter of 2019.This performance coupled with prudent financial discipline resulted in net leverage of 2.3 times and available liquidity of just over $200 million. We achieved these results despite the negative impact from the global pandemic. Early this year, as the virus impact in our operations in the Asia Pacific region, we activated our business continuity plan. The plan is focused on the health and safety of our employees and clients.In addition to ensuring supply continuity, upon activating the plan, we established a cross functional team that continues to meet on a regular basis to understand the global impacts and opportunities…

Thank you, Dan, and good morning everyone.On last quarter's earnings call, I indicated our intent to make certain disclosure changes aimed at providing additional clarity around the performance of our traditional and software offerings. Today, we are pleased to introduce new operating segments that are aligned with our software transformation strategy, provide better visibility into the unique growth and profit drivers of each business, and create enhanced transparency and accountability for results across the company. We see the footnotes in our Form 10-Q, which will be filed later today for a full description of these new segments.In summary, we have realigned our organization and financial reporting to provide visibility by client vertical, as well as by the type of offering we provide. Specifically, we are now disclosing our capital markets business, which primarily serves corporations, law firms and advisory firms, including investment banks, accounting firms and private equity firms in two reportable segments. Capital markets software solutions and capital markets compliance and communications management.And for our investment companies business where we primarily serve mutual funds and insurance companies, we're also reporting in two segments, investment companies software solutions and investment companies compliance and communications management.Later in my remarks, I will detail our first quarter performance for each of these segments, as well as our unallocated corporate costs. But I did want to specifically call your attention to the supporting schedules in today's press release, which provide additional segment information for each quarter of 2019. We are currently working on recasting the full-year 2018 results in the new segment structure and expect to disclose those results later this year.Turning now to our consolidated financial results, as Dan mentioned, we started 2020 by delivering strong first quarter results, including record first quarter software solutions, as well as significant year-over-year, increase in earnings,…

Thanks Dave.Moving to our first quarter business highlights in capital markets, ActiveDisclosure had another solid quarter, again adding new clients at a steady pace. Venue launched its data privacy tool for transactions and corporations, which can search for PII or personally identifiable information and redact the information, making it ideal for use cases involving GDPR and the California Consumer Privacy Act.With the eBrevia, we helped our clients automatically identify hundreds of different provisions in their contracts, including Force Majeure, events of default and terminations, speeding up contract review by 30% to 90%. Elsewhere in capital markets, while first quarter global transactional performance was mixed market share remained solid and despite the near term transactional headwinds, we expect to see related to COVID-19. Our transactions pipeline is building nicely for what we would expect to be stronger activity later in the year.Switching to investment companies, Arc reporting continued its growth in Europe, winning a multiyear contract to provide financial reporting software to RBC and Luxembourg. Elsewhere. ArcPro continued its recent sales momentum, with six more wins in the quarter as we continue to see strong demand for back office software to help our clients drive out costs and automate regulatory compliance workflows.Lastly as Dave mentioned earlier, we launched Arc regulatory our global regulatory platform in January. As regulatory requirements continue to shift globally, the need to consolidate reporting solutions has never been more critical. Arc regulatory offers a full suite of cloud-based reporting solutions to meet the complex regulatory demands.Next, I would like to provide a bit more context to the upcoming SEC rule 30e-3 regulatory change and associated manufacturing platform optimization initiatives. On our last earnings call, we discussed our efforts to take a broader look at client product and job profitability to optimize our platform given upcoming demand changes.Our…

Thank you, Dan.As we stated in this morning's press release, we have retracted our guidance for 2020. In the absence of specific guidance however, I would like to provide some guardrails for the year and also a high level outlook for the second quarter. First the guardrails, over 60% of our business is recurring in nature, corporations and mutual funds are still required to comply with their ongoing SEC compliance obligations. So we expect this portion of our revenue to be mostly unaffected.Our transactional related revenue including Venue will certainly be impacted by the overall environment. But the magnitude and duration of the impact is very difficult to predict, which is why we retracted and are not updating our 2020 guidance until visibility improves. As I've mentioned often previously, our transactional related revenue can be challenging to forecast in more stable environments, and the current macro environment makes it much more so.To add some context of size, revenue for our transaction related revenue, including Venue in the last three quarters of 2019, was approximately $255 million, nearly 40% of our total revenue for the last three quarters of 2019. Meanwhile, we continue to aggressively manage our cost structure to mitigate as much of the impact to our bottom line as possible. And as the market leader in transactional filings, we remain well positioned to capture transactional revenue and profit growth when market conditions return to a more normalized level.Other items that we feel we have enough visibility to comment on include depreciation and amortization which we continue to expect to be approximately $55 million. Interest expense, which we expect to be approximately $30 million, reflecting the, partial year benefit of retiring a portion of our 8.25% notes partially offset by a higher revolver balance.Regarding capital expenditures, which we previously expected to be approximately $35 million, we now expect to be in a range of $30 million to $35 million in light of the current situation in our end markets. Full year, fully diluted shares are expected to be approximately $34.5 million assuming no additional share repurchases.Lastly, for the second quarter, we're expecting net sales to be in the range of $220 million to $230 million down approximately 13% year-over-year at the midpoint, due largely to the impact of COVID-19 on our transactional and Venue offerings. Again for size context, these offerings generated approximately $90 million of revenue in the second quarter of 2019.Regarding profitability, we expect our second quarter non-GAAP adjusted EBITDA margin to be in the range of 16% to 17%. Down approximately 500 basis points from the second quarter of 2019 due to the expected lower level of transactional activity, partially offset by the impact of our ongoing cost savings initiatives.I'll now turn it back to Dan before we open it up for Q&A.

Thank you, Dave.In closing, I want to thank the DFIN employees around the world who have been working tirelessly to maintain our business operations and ensure our clients continue to receive the highest quality service without disruption. Your efforts have been inspiring, stay safe and healthy.Operator, we're ready for questions.

[Operator Instructions] And our first question is from Charlie Strauzer with CJS. Please go ahead.

Couple of just quick questions on the 30e-3, thank you for the additional and quantification there, just as we think about next year, the ramp of that $130 million to $140 million decline in revenue? How should we think about the ramp of that over the course of the year?

Sure. Yes. So I'll start off, Tom and Dave can jump in as well. So the regulation kicks in January, and just this background, it allows mutual funds and variable annuities to distribute their shareholder reports electronically by default rather than by option. And then the balance is another client work that we're exiting.So when we think about organizationally, our content management, software and service organization role is unchanged. Our system continues to manage client content and financials for SEC filing and shareholder viewing. As we've said previously from print and distribution, we have our own assets and then we also rely on the trade. So the team has been planning for options in light of the volume demands and including secular trends and printing as we design a platform both internal and external to serve our needs.So when we look at the financial impact, as you're familiar on the print side, a lot of the revenue here is passed through materials, paper and ink primarily, that's 100% variable and fluctuates with volume, beyond that we get into addressing or designing the network to serve our needs. And then, as I mentioned in my prepared remarks, from a strategic perspective, we're excited, it accelerates the strategy and delivering the 44% of our revenue from software by 2024.

Great, thank you for that. And looking kind of or near-term, but there has been a lot of talk in the news about the company's doing debt offerings, follow on equity offerings, et cetera to short their balance sheets. Are you seeing some of the benefits of that, and what is kind of baked into that forecast for Q2 that you gave out?

Sure, yes. So let me start, I'll take the broader guidance view, and then Dave, if you want to jump in as well. So, you know, as Dave said about 60% of our revenue is recurring, driven by compliance requirements within both the corporate and the fun space that works predictable. Within software and non-software segments, the mix of the same roughly 60% of our software revenues derived from recurring requirements.The balance of the work is as you highlighted is driven by transactions including the Venue data room. Within transactional offerings, our total filings are actually up year-to-year. However, the mix began to change in the last half of March and into April. So transactions that more market sensitive IPOs, M&A spin were reduced and product lines such as debt issuances were markedly higher.In the short term, we'd expect the disruption given market events until advisors and companies have a clear view on valuations, the market stabilizes and that ample liquidity is maintained in the market. So, as that happens, we're bullish on M&A in the medium and long-term. Regardless of the level that defines the new normal, there is tremendous amount of dry powder that will be deployed, valuations have in some spots come down and we'll find their level, and we would expect this favorable low interest rate environment and access to financing as well as some of the underlying dynamics of digital transformation technological disruption et cetera to continue.In terms of Dave's comments on Q2, I'll let him jump in here in a minute. The one thing I would say is, as we've seen with transactions, they can dry up relatively quickly, and they can also restart relatively quickly.Our overall business has seasonality to it, roughly 60% of our activities in the first half of the year, driven largely by client compliance schedules. And in the meantime, we've remained aggressive on the cost side, despite shrinking revenue, we've expanded margins over the past three quarters. We'll continue to be disciplined as it relates to capital deployment, and be opportunistic as we think about the balance sheet as well. So, David, you want to jump in more specific to the Q2 question?

Yes, sure, Charlie, just on Q2, as we look at the transactional pipeline of identified transactions that are significant size, the pipeline is actually a little bit better in terms of the number of deals than where we were a year ago at this point. I think the big question for us obviously is with the current macroenvironment, how long or how impactful the COVID-19 impact on the overall market will continue to be.And so we're optimistic, as Dan said about the pipeline building and the fact that, we're hopeful these will come back later in the year or come to market later in the year. It's just from a timing perspective, tough to predict. The other comment I would make with respect to your question around that offerings, we've certainly seen debt activity there and get our fair share of that work. But from a deal value size, as we've talked about in the past, certainly IPO and M&A are more valuable from an overall size of deal than debt offerings are.

And your next question is from Peter Heckmann with Davidson & Company. Please go ahead.

This is Alexis on for Pete. Good morning. So thank you for all of the incremental details its definitely very helpful. I also wanted to touch on 30e-3. So the estimated loss from printing is about double what you would set at the Investor Day in 2018. I think it was $70 million at the time. But the EBITDA reduction is essentially saying the same. So I'm hoping that you can provide a bit more detail on the assumptions going into this, and then really how much of that is 30e-3, and how much of it is practically terminating contracts?

Sure, thanks. So there is a couple of new components as you highlighted, the overall revenue impact about double, the profit impact about the same. In addition to funds, shareholder reporting, we've also assumed variable annuity, shareholder reporting will go electronic as well. And then we've taken the assumption and actions on some client contracts.So, as we think about, as I mentioned, the revenue and the composition of costs, there is a high content of variable costs. And then as we think about our platform, both internally managed as well as in the trade, we've just been able to do more work and refine those numbers and get to a better spot in terms of mitigating the impact.So roughly half the margin impact that we thought it would be originally, and as we're excited about the prospect because it does help us accelerate the transformation of the company into a much more software and tech-enabled service mix of revenue. And Dave, I don't know if you have something in.

Yes, Alexis, I would just say when we look at the overall cost structure in terms of our ability to move work either out of the trade at a lower cost and move them on to our own assets, or take additional fixed costs out of the platform that Dan mentioned in his prepared remarks, you're really the combination of those two things are what has allowed us to have a better [technical difficulty] Yes, just the one ad is that the majority of the reduction is regulatory driven. And the [technical difficulty] summary was moved into 2021. So that was originally contemplated to be further out.

Okay, thank you for that. And it was nicely done, I suppose my next question, which was - wondering if you could quantify the expense savings in the quarter, and how much of the cost cutting initiatives would you consider sustainable?

Yes, Alexis, so I'll take that one. We haven't quantified specifically the amount of cost savings in the quarter. We talked about frankly over the quarters through the last handful years, cost reduction is an ongoing aspect here, Dan mentioned in his prepared remarks that even absent regulatory changes, we still face headwinds on the secular decline related to print and are always looking at cost reductions. I think the cost reductions related to 30e-3 are not yet in place. And so, while we had the plans and ready to execute as appropriate, that would be in addition to kind of a normal cost mitigation efforts.

Yes, the only thing I'd add to that, this is Dan is, that these are sustained cost savings and some of it, facilitated by business mix shift, and just what the company needs to look like and tremendous job by the everyone within the company thinking of ways of doing business differently and driving efficiencies throughout the company at all levels.

Understood, thank you. And then one last one for us, so on the capital markets transactional side, it sounds like based off of our review that IPO transactions actually maintained fairly well in the first quarter. And so, I'm inferring that most of it is going to be coming from M&A volumes lower, which of course then leads to Venue trends. Have you seen any improvement in April that's maybe leading to your more bullish outlook on M&A in the medium and long-term?

Yes, one comment and I'll jump in and start and then Dave. So as we think about the market and comparison to last year, certainly last year we had the SEC was closed for the first month or so. So it was a pretty light IPO environment. And then, we did see the impact of the virus early on coming in the Asia Pacific region. Thankfully, we've seen some of that rebound as the viruses has moved on from that region.So yes, I think when we think about that, IPOs were up a little quarter-to-quarter. But when we look at March and April activity levels, it doesn't look so good. And then obviously in the M&A arena was a pretty soft quarter, actually worldwide, so both domestic and international. And the good news there is, as I mentioned in my comments I think it was Charlie's question. I think there's a lot of dynamics out there that would foreshadow a better M&A environment as things stabilize. Then Dave you want to add.

No Dan you covered what I was going to say, thanks.

And your next question is from Raj Sharma with Donnelly Financial. Please go ahead.

A couple of areas I just wanted to touch on. So you mentioned that the guidance this year, there's no material change from 30e-3 obviously that starts in the beginning of the new year. And also, you said free cash flow impact in fiscal 2021 would be immaterial from 30e-3. Is that correct, that because of the working capital savings?

That's correct.

And then the SaaS offerings what was overall number the percentage of the business what is the SaaS now as a percentage of the business and what was the overall growth year-on-year? I know that FundSuite are up in double-digits?

You’re right. So overall growth was 5.6% and in terms of the total revenue of the portfolio that it represents, I think if you just take the two software solution segments that you get to the number that you're looking for.

Yes just over 21% or so.

And your next question is from [Richard Sosa], Investor. Please go ahead.

Just I am a individual investor, and I do want to congratulate you on buying back so much of your debt, you rarely see that from companies and $66 million at that discount to par, makes me very happy. I know you probably can't comment on April, but will you be able to continue to be in the debt markets, I know that the bonds are still trading at a discount or is that something you can discuss there we have to wait?

Yes, yes that's not something that we would comment on.

And second question, just looking into 2021 and 2022. Just like is there like a kind of - if all else being equal, should we be seeing maybe something like 750, 780 in sales? Is that kind of, what else should we thinking about or is that a little bit higher or lower?

Yes, so we have given specific guidance there on the out years I think, you can start to get at the pieces, right. We still expect the software revenue to grow. As we've indicated, I think if you do the math on the impact that we talked about in terms of 30e-3 and some of the contracts that we're exiting. And then the secular decline on print, you should be able to get pretty close to what our estimates would be.Obviously, the big variable would be the transactional related work in both the capital markets, communications - compliance and communications management as well as the Venue portion of capital markets software solutions.

So the pullback in sales for 30e-3 should take like a year right to kind of fully is that the right way should we think at that. Could be all at once correct it’s going to be over a year…

It will be throughout 2021.

Okay, throughout 2021, okay. And then as that happens, are there any further asset sales we could expect, selling of a printer or anything like this or is that - most of that been done already?

Yes again, wouldn't comment on any specific asset sales, other than to say, we're always looking at monetizing things that we can. You've seen us do some transactions in the past where we generated cash. We're always looking at ways, to get the best value from our assets, but don't have any specific comments on that.

And my last question, with you buying so much of that $300 million at term debt, is there any chance to see a refinance prior to the October call date or is that out of the question - you can't take out additional debt to the further pay that off, correct?

Yes, again wouldn't comment on any specific transactions that we are contemplating or not contemplating. Obviously a lot of its driven by market conditions that that note is callable in October of next year at 102. But beyond that wouldn't say anything about any refinancing plans.

Okay, perfect. And I appreciate you guys taking my call and great quarter again. I love seeing you guys being so aggressive with the debt and stock and I really appreciate that.

[Operator Instructions] We have no further questions at this time.

Okay, thank you very much, and thank you to everyone for joining. We look forward to seeing you, if not in person virtually in the near future. And thanks again for your interest.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.