Sanja Burklow - Investor Relations Dan Leib - Chief Executive Officer Dave Gardella - Chief Financial Officer Tom Juhase - Chief Operating Officer Kami Turner - Chief Accounting Officer.

Charles Strauzer - CJS Securities Jack Williams - Wells Fargo Bill Mastoris - Robert W. Baird.

Welcome to the Donnelley Financial Solutions Second Quarter 2017 Results Conference Call. My name is Nicole, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

I’ll now turn the call over to Sanja Burklow. Sanja. You may begin..

Thank you, Nicole. Good morning, everyone. And thank you for joining Donnelley Financial Solutions second quarter 2017 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 dfsco.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 statement included in our earnings release and further details in our Annual Reports 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 results 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 footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. We are joined this morning by Dan Leib; Dave Gardella; Tom Juhase; and Kami Turner. I will now turn the call over to Dan..

Thank you, Sanja, and good morning, everyone. On today's call, I will provide an update on our second quarter performance and overview of market activity, reiterate our strategic priorities and recap the progress we've made in repositioning the company to operate as a standalone entity.

Following my comments, Dave, will provide additional detail on our second quarter results and then we will open up the lines for a Q&A session.

Our second quarter results were in line with our expectations, as we highlighted on our last call, this year’s second quarter represents our most difficult comparable on a year-over-year basis, as last year’s second quarter included in a typical number of large deals within our U.S. capital markets transactions and Venue Data Room offerings.

In aggregate, these deals drove nearly $25 million of revenue in the second quarter of 2016. Within our capital markets offering, this year’s second quarter results reflect the continuation of an improving number of IPOs.

Although, market driven softness in M&A and debt capital markets activity coupled with the top comparable more than offset the improvement from IPOs and growth in our capital markets compliance offerings, including our ActiveDisclosure software. In addition, we drove strong sales and operational performance in our U.S. investment markets offering.

Continue to grow our international segment and benefited from our cost reduction efforts in the quarter. While total organic revenue decreased 1.8%, more than all of the decline was driven by difficult year-over-year comparisons in the nonrecurring portion of our U.S.

capital markets offering, as we experienced positive growth in each of our other U.S. reporting units, as well as in our international segment. Given this performance and our outlook for the back half of the year, today we reiterated our full year guidance. As I noted, we saw continued revenue growth outside of our U.S. capital markets offering. Our U.S.

investment markets revenue grew 6.4%, driven by proxy and perspectives volume from our mutual fund clients, as well as additional content management software, which grew by 10% in the quarter.

Looking ahead in investment markets we have developed software build on our FundSuiteArc platform to help our clients comply with the new N-CEN and N-PORT filing requirements, which will be required starting mid-2018.

These requirements are part of the SEC's modernization initiatives for 1940 Act Mutual Funds and ETF's aiming to enhance transparency, capturing more data elements and reporting on a more frequent basis.

Revenue in our language solutions and other unit grew by more than 15% and revenue growth in our international segment was nearly 35%, driven by strong capital markets transactional activity in each of our geographies, most notably in Asia. Adjusted for impacts of foreign exchange rates, organic growth in the international segment was 41.4%.

In terms of capital markets transactional activity, the market experienced double-digit growth in the number of major S&F filings relative to the second quarter of 2016 and our weighted market share and transactions increased modestly.

Specific to IPOs, we saw significant increase in market activity, with 65 deals being priced in the quarter, representing a 76% increase from last year’s second quarter and we maintained our strong market share in this area. Our mix of revenue between products and services continue to evolve.

Revenue from products, which primarily consists of print and related distribution costs decreased 8.1% from the second quarter of 2016, driven by the difficult comparable in our capital markets transactional offering that I noted earlier and represented 39% of our total revenue in the quarter, down from 41% in the second quarter of 2016.

Our services revenue, which primarily consists of composition, compliance-related filing, transaction solutions, data and analytics, content management and language solutions grew 1.3% from the second quarter of 2016 and represented 61% of our total revenue in the quarter up from 59% in the second quarter of 2016.

The growth in services is driven in part by continued growth in our software-related offerings. With respect to our operating plans, I'd like to reiterate a few of our key priorities for 2017 that I discussed on our last call. First, we will continue to build on the momentum that we have in our solutions offerings.

Second, we will continue to make enhancements across each of our technology-based solutions, from our ActiveDisclosure collaborative workflow tool and Venue Data Room to our FundSuiteArc content management platform and our language solutions MultiTrans software, we remain focused on delivering product enhancements and improving our clients experience with these tools.

We expect such enhancements to be the result of a combination of organic investment and expansion of our relationships with strategic partners. Third, we will continue to aggressively pursue the transactional activity within the global capital markets.

Our client relationships and reputations in this space position us well to capture this revenue as transactional activity continues to recover from the levels we experienced throughout last year. And we will accomplish each of these priorities while taking a disciplined approach to managing our cost structure and deploying capital.

Regarding the spinoff from R.R. Donnelley, we again made significant progress in the quarter to position the company for long-term success. As we have discussed in the last few calls, we've taken steps to right size the cost structure, our prioritizing our investment needs and identify new market opportunities.

We're making organic investments in ActiveDisclosure, Venue, FundSuiteArc and MultiTrans, and taking a thoughtful but aggressive approach to strengthen our portfolio of products and services, and bringing wide array of governance risk management and compliance-based solutions to market.

These solutions will allow us to broaden our portfolio and further enhance our client relationships, which balanced with cost management and resource allocation provide opportunity to create long-term value for shareholders. Let me turn it over to Dave.

Dave?.

Thanks, Dan, and good morning, everyone.

As Dan mentioned earlier and as we mentioned on our first quarter earnings call in May, this year’s second quarter is our most challenging quarter of the year from a year-over-year comparison perspective, last year’s second quarter included several large deals totaling close to $25 million in revenue in our capital markets reporting unit at higher than average margins given the nature of that work.

Overall, our results for the quarter were right in line with our expectations. Net sales for the second quarter were $290.2 million, a decrease of $7.8 million or 2.6% from the second quarter of 2016. After adjusting for changes in foreign exchange rates, organic sales decreased 1.8% driven by the decline in our U.S.

segment, which was partially offset by organic growth of over 40% in our international segment. The revenue decline in our U.S. segment was driven by lower capital markets transactions and was only partially offset by higher mutual funds and compliance volume.

International segment revenue growth was driven by higher capital markets transactions, as well as higher mutual funds volume and growth in our Venue Data Room offering. Second quarter gross margin was 40.5% or 327 basis points lower than the second quarter of 2016.

This includes approximately 230 basis points of a negative impact driven by a change in the classification of IT cost to cost of sales from SG&A compared to classifications in periods prior to the separation from R.R. Donnelley.

Excluding this reclassification, the second quarter gross margin decline of approximately 97 basis points was primarily driven by lower transactional volume partially offset by cost reductions we began to implement late last year. Non-GAAP SG&A expense in the quarter was $53.6 million, $5 million lower than the second quarter of 2016.

As a percentage of revenue, SG&A was 18.5% or 119 basis points lower than the second quarter of 2016. Excluding the favorable 230 basis point impact of the IT reclassification, SG&A as a percentage of revenue was approximately 111 basis points higher than the second quarter of 2016.

As mentioned in this morning's press release, we incurred approximately $3 million in higher costs related to dis-synergies and ongoing cost in excess of the cost historically allocated to the company. These incremental costs were partially offset by the cost reductions we began to implement late last year.

Our second quarter non-GAAP adjusted EBITDA was $63.9 million, a decrease of $7.9 million from the second quarter of 2016. Non-GAAP adjusted EBITDA margin in the quarter of 22% was 207 basis points lower than the second quarter of last year, driven by lower transactional volume and higher costs driven by the separation from R.R.

Donnelley, partially offset by cost reduction actions and higher mutual funds volume. From a segment perspective, revenue in our U.S. segment was $241.7 million in the second quarter of 2017, a decrease of 7.7% from last year’s second quarter.

As previously noted, last year’s second quarter included several large deals in capital markets that drove close to $25 million of revenue. The reduction in transactional revenue drove more than all of the decline in capital markets as we reported positive revenue growth in traditional compliance and our ActiveDisclosure offerings.

Investment markets revenue growth for the quarter was 6.4%, driven by higher mutual funds volume, as well as higher content management volume. Language solutions and other reported revenue growth of 15.2%, driven by higher commercial print volume.

Non-GAAP adjusted EBITDA margin for the segment of 25.7%, decreased 95 basis points from the second quarter of 2016. The impact of lower capital markets transactional volume was only partially offset by our cost savings actions, and higher mutual funds and content management volume in investment markets.

Our international segment includes our operations in Asia, Europe, Latin America and Canada, and is primarily focused on working with international clients on capital markets offerings and regulatory compliance-related activities into or within the United States.

In addition, we provide services to international investment market clients to allow them to comply with applicable SEC regulations and we provide language solutions to international clients. Revenue in this segment was $48.5 million in the second quarter of 2017, an increase of 34.7% from the second quarter of last year.

On an organic basis, excluding the unfavorable impact of changes in foreign exchange rates, revenue in the second quarter increased 41.4%, driven by strong capital markets transactional volume, as well as higher mutual funds volume and continued growth in the Venue Data Room offering.

Non-GAAP adjusted EBITDA margin for the segment of 16.1%, increased 414 basis points from the second quarter of 2016. Growth in the higher margin transactional volume and the impact of cost savings actions were only partially offset by higher allocation of IT expenses.

Our second quarter 2017 non-GAAP unallocated corporate expenses were $6 million, an increase of $3.7 million from the second quarter of 2016, driven by the dis-synergies related to the separation from R.R. Donnelley. Free cash flow in the quarter was an outflow of $8.9 million, a decline of $15.2 million in the second quarter of last year.

Second quarter 2017 cash flow includes interest payments of $16.6 million associated with the debt raised in connection with the spinoff from R.R. Donnelley, whereas the second quarter of 2016 did not include any cash interest and only a diminimus amount of interest expense in the P&L.

In addition to the interest payments, lower EBITDA and higher capital expenditures were partially offset by working capital productivity. Driven by the $68 million payment received from R.R.

Donnelley in the first week of April, as well as by the $18.8 million proceeds from the common stock issuance, we reduced our debt in the quarter by $81.6 million and ended the quarter with $525.9 million of debt and $8.1 million of cash.

As of June 30th our gross leverage was 3.2 times compared to 3.6 times at December 31, 2016, and we had net available liquidity of $222.4 million at the end of the second quarter. We are on track to be within our targeted leverage range of 2.25 times to 2.75 times by the end of this year.

As highlighted in this morning's press release, we affirmed our previous guidance and provided additional detail on full year 2017, which I will recap. We expect revenue approximately $1 billion, representing organic growth in the range of 3% to 5%.

This implies year to go organic revenue growth consistent with the 4.3% organic growth that we reported in the first half of the year. In addition, from a seasonality perspective, we expect the year-over-year percentage organic growth to be similar in the two remaining quarters.

We expect our non-GAAP adjusted EBITDA to be in the range of $175 million to $180 million. Depreciation and amortization is expected to be in the range of $40 million to $45 million. We expect interest expense of approximately $43 million. Our full year non-GAAP tax rate is expected to be in the range of 40% to 42%.

We project the full year fully diluted weighted average share count to be approximately 33 million shares. And lastly, we expect capital expenditures in the range of $30 million to $35 million and free cash flow in the range of $50 million to $60 million.

Included in this guidance is our expectations on dis-synergies and costs that were allocated to the company prior to the spinoff, which as we previously communicated result in an incremental $13.3 million of cost in 2017.

Of this $13.3 million, approximately $5 million of that cost was recognized in the first quarter and $3 million in the second quarter with the remaining $5.3 million expected to be recognized in the third quarter.

Regarding the $20 million of annualized cost actions that we communicated previously, the majority of these actions were taken at the end of 2016 and early this year, and we remain on track to recognize the vast majority of the $20 million savings in 2017. And with that, I will turn it back to Dan..

Thank you, Dave. In our first three quarters as a standalone company, we've made several changes to improve our operating efficiency and have begun the work to reposition the company for continued success.

Going forward, we will continue on this path with a focus on strengthening our core offerings, as well as investing in additional compliance-based solutions to bring to market. Before we open up the lines for the Q&A session, I would like to thank our employees.

Your dedication and hard work have allowed us to implement the changes that I have just noted and will also be the foundation of our path forward. Thank you for all the great work. And now, Operator, let's open it up for questions..

Thank you. [Operator Instructions] And I see our first question is from Charles Strauzer from CJS Securities. Your line is open..

Hi. Good morning..

Good morning, Charlie..

If you can expand a little bit more on the transactional side of the business and just kind of take a little deeper dive there to say and take a look at kind of trends they progress to the quarter and kind of your thoughts for the back half of the year, especially as you are in -- currently you are seasonally quietest or slowest carry for IPOs, maybe give us little more color there too?.

Yeah. Thanks, Charlie. It’s Dave. So we talked about overall the major S&F transactions the market being up in the quarter. I think when you look at the comp relative to last year, right, we mentioned the handful of large deals that we had on the transactional side and a little bit in the Venue Data Room.

So just a tough comp, but I think, momentum certainly building relative to last year and we have continued to see that not only Q1, Q2 and into July here. The IPO activity was up significantly and then I think from an overall share perspective, we are holding our own and Dan mentioned some modest gains in certain areas.

As we look to the back half of the year, I think, our organic growth implies similar growth to what we saw in the first half of the year from the capital markets transactional perspective.

Don't have perfect visibility to that market but I think based on the momentum that’s built throughout the year and what we are seeing even recently implies, our guidance assumes an environment I think similar to what we've seen over the last few months here..

And….

Yeah. The only think I would add to that just to elaborate is that if you reflect on some of the banks that have released earnings and in their comments is very consistent view of the markets, the pipelines look pretty good. There's a lot of good activity in in-house working with us and that’s reflected in our guidance..

Great.

And if you -- obviously if you look at your international success this quarter, you mentioned that transaction was the driver of that, I think -- still think strong transactional capital markets activity in the Asian markets?.

We are -- obviously the visibility and the turn time on these is relatively quick and can go the other way quickly, but thus far we are continuing to see strength..

Great.

And then just if you switching to kind of the expenses and the margins as we look at the back half of the year as these cost saves come into play, how should we think about margins and expenses kind of for Q3 and Q4?.

Yeah. Charlie, so if you look at our EBITDA guidance of $175 million to $180 million.

We mentioned from a revenue perspective that 4.5% implied organic growth in the back half would be we expected to be pretty ratable between Q3 and Q4, and then from an EBITDA perspective, probably, the only thing to mention there is, we talked about the year-over-year incremental dis-synergies that the remaining $5.3 million is flowing through in Q3 and then in Q4, obviously, we are overlapping being a standalone company and not much dis-synergy in Q4.

So I think from a margin perspective we’d probably expect Q3 to be a little bit softer than Q4..

Great. That’s helpful. Thank you very much..

Thank you..

And our next question comes from Jack Williams from Wells Fargo. Your line is open..

Good morning, everyone..

Good morning, jack..

Good morning..

I was hoping you could expand on the of regulatory change that drove some of the strength investment markets is back on we kind of rattle moving forward, is that more of a seasonal lift in Q2, just some color on that please?.

Yeah. Sure. So the comment we made on N-CEN and N-PORT was part of the modernization initiatives of the SEC has and they have passed legislation that will become effective in the second half of 2018. So we are in the process of we've got some prototypes out with clients right now and have been in the selling process on that.

And what it is as a more frequent filing requirement for the mutual funds, as well as requires more data elements. So that’s a permit legislative change that was put into effect last year..

Yeah. The only think I would add is -- it’s Tom Juhase is, Jack, I think you ask, if it was a capital markets effected, it is a -- it is our investment markets effects, so Dan said, it was related to funds. So it’s on the mutual fund side of the house and those are filings that they make..

Got it. Thank you very much..

Thank you..

Yeah. Thanks. Nicole, we have time for one more question..

And our final question comes from Bill Mastoris from Robert W. Baird. Your line is open..

Close enough, close enough..

Hi, Bill..

Dan -- hi. How are you doing? Dan and Dave, just -- and I think you touch on this a little bit earlier, but capital markets transactions this quarter versus last year. I mean, how are they trending, are they trending a little bit ahead, a little bit behind. I know you mentioned they have a very robust pipeline.

What might we expect there and I assume given your guidance that any M&A activity is kind of by the wayside at least for the time being, would that be a correct assumption?.

Yeah. Bill, so just to address the market, you we mentioned the IPO market was up significantly. I think if you look at the overall level of transactions and when you include M&A and that which was a little bit softer in the quarter as Dan alluded to. But the overall transactional market was up largely driven by the increase in IPO activity.

And as we look forward, I think, our guidance implies kind of more of the same of what we've seen here in Q2 over the last few months..

Yeah. And specific to your question on M&A, there -- our pipeline is full. We made the comment on us as a service provider to your question on us as a potential acquirer we are active in looking at opportunities.

There's quite a bit out there valuations are a bit rich in this sort of environment, so obviously we haven't done anything yet, we did announce the partnership last quarter with SOXHUB. But other than that we are continuing to be active in looking and nothing to report at this time..

Okay.

And then, I assume that there is no M&A activity in all of your forecasts that are included, because it looks as though mathematically you're going to be able to go ahead and reach your target leverage ratio, would it be correct in that assumption?.

Yeah. Yeah. Bill, that’s right. So, I think, if you look at our guidance for the full year and just take the midpoint of EBITDA and the midpoint of cash flow and make an assumption on, we have been obviously consistently be repaying debt. That’s how you get to the conclusion of being within our targeted leverage range by year end..

Yeah..

And all free cash flow is going to be used to go ahead and pay down debt, is that also fair?.

Yeah. I mean, we -- a lot of it depends on the mix, some of it international, et cetera. We certainly wouldn't commit to that at this time, but as you can see our recent actions, we paid down $81 million of debt in the quarter, $111 million since the spin. We are committed to that targeted leverage range..

Okay. Thank you very much..

Thank you. And with that, Operator, we wanted to thank everyone for joining us this morning and look forward to speaking you to you in November. Thanks..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..