Good morning. Welcome to TransUnion 2020 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now turn the conference over to Aaron Hoffman. Please go ahead.

Good morning everyone, and thank you for joining us today. I hope that all of you are safe and healthy. On the call today, we have Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We've posted our earnings release and slides to accompany this call on the TransUnion Investor Relations Web site. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items, as well as certain non-GAAP disclosures and financial measures along with their corresponding reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded and a replay will be available on the Web site. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, in the comments made during this conference call and in our most recent Form 10-K, Forms 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. With all that out of the way, let me turn it over to Chris.

Thanks, Aaron. And I want to welcome all of you to our call and extend our most sincere hope that you and your loved ones are healthy and safe. At TransUnion, we continue to prioritize the health and safety of our associates, our customers and the wider communities in which we operate. To that end globally, we continue to have almost every one of our 8,000 employees working from home. There is no need for us to rush back into our offices as our associates have demonstrated the flexibility to work remotely and run our business with virtually no interruption. We remain deeply appreciative of the selfless and tireless work of healthcare professionals, first responders and other essential workers. We recognize them for how much they do to keep so many of us safe. I also want to take a moment to talk about some other heroes. During the quarter, in the wake of the senseless and brutal death of George Floyd, we witnessed a remarkable and swift movement to finally make good on the American promise of equality and justice for all. The millions of Americans who peacefully and thoughtfully took a stand for racial justice, are heroes too. At TransUnion, we have a culture that embraces diversity and fosters inclusion, with more than a dozen affinity groups for employees ranging from African Diaspora for our black associates to a veteran's alliance group to a group for our LGBTQ population and many more. However, we can and we will do more. As a major employer, there are many ways that TransUnion and I connect for change. My first priority will be to ensure our company is a place where all colleagues have equal access to professional growth and career opportunities and can come to work every day as their…

Thanks, Chris. As Chris highlighted, we achieved our upside case scenario for the second quarter as we benefited from reopenings in the U.S. and many of our international markets and the efficacy of our proactive response to support customers and consumers. I'll start with our consolidated results and for the sake of simplicity, all of the comparisons I discuss today will be against the second quarter of 2019 unless noted otherwise and all revenue discussions relate to adjusted revenue. Starting with the income statement, second quarter consolidated revenue decreased 4% on a reported basis and 3% in constant currency, revenue related to the May 2019 acquisition of TruSignal was immaterial in the quarter. Adjusted EBITDA decreased 8% on a reported basis and 7% in constant currency. Our adjusted EBITDA margin was 38.2%, down 150 basis points, compared with the year ago quarter. We realized a much higher margin than anticipated as revenue in margin flow through were relatively good and we maintained a conservative posture on expense management, though we continue to invest as Chris outlined, and we did not reduce headcount. Second quarter adjusted diluted EPS fell 4% and our adjusted tax rate was 23.7%. Now looking at segment financial performance, U.S. markets revenue was flat compared to the year ago quarter. The TruSignal acquisition had virtually no impact. Our financial services vertical revenue grew 4% on a reported and organic basis. As Chris discussed, we saw improvement in all our lending and markets with considerable strength in mortgage and solid recovery in auto, card and consumer lending. Excluding the cyclical growth in mortgage, the vertical would have declined mid-single digits. Probably not too soon to offer a word of caution about the comparisons we're going to face in mortgage next year is there likely to be a challenge.…

Thanks, Todd. So to conclude this morning, you've heard about how we have weathered the current crisis environment created by COVID-19 as well as our substantial investments in global solutions, global operations and Project Rise. We remain deeply committed to delivering strong above market growth over the long-term and we have a clear plan to do that. In the near term, we will continue to prioritize the well being of our associates, customers and consumers and communities. I'll end by reiterating my hope that all of you and your families remain safe and healthy. And with that, I'll turn the time back to Aaron.

Thanks, Chris. That concludes our prepared remarks. For the Q&A we ask that you each ask only one question so that we can include more participants. And now we'll be glad to take those questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Manav Patnaik from Barclays. Go ahead.

Hi. This is actually [indiscernible] calling on for Manav. Nice to hear about the improving sales pipeline and win rates. I just was hoping for a little bit of color on, whether you're seeing changes in the type of mix of offerings that are driving that pipeline and also maybe a little bit of color on converting that pipeline into actual new sales if you're seeing any slowing sales cycle. Thanks.

Okay. Yes. Good question and good morning. Yes, in fact, and we spoke about this at the end of our first quarter call, we kind of repositioned our consumer engagement approach, rather our customer engagement approach at the beginning of the pandemic to focus more on risk management and less on acquiring new customers as our customers became concerned about increasing delinquency risk. And so what you saw was a conversion, a diminishment of demand for pre-screens and marketing efforts in general and a pivot toward account management and general risk assessment. And in support of that pivot, we developed through our analytics group, a suite of CreditVision, or printed credit data attributes, we call it our acute release suite. That helps lenders identify those consumers that may be suffering financial distress as a result of the pandemic, who may have entered into forbearance relationships with their lenders and so they can determine the appropriate credit management practices, but also anticipate which lenders or rather consumers are going to need some lending relief after government support sides. That has been very helpful to the marketplace. We've seen strong demand. And what I would emphasize also is that, with a migration to online selling, which has really accelerated during the pandemic, there has been a concurrent increase in fraud activities. And that's driven a lot of demand in new sales for our fraud mitigation solutions, which we've heavily invested in recent years. And I think the combination of that plus and just effective, go-to-market tactics and a lot of thought leadership and client engagement has allowed us to really maintain a very strong pipeline. And I think more importantly, a high win rate in a high absolute level of new sales volume. And that's in comparison to the sales volume that we had achieved and we're trending, in the quarters prior to the pandemic. So I feel really good about the way we adjusted our offerings and our go-to-market in the early phases of the pandemic and we did it on a global basis. And we've had really strong results as a consequence. So, thanks.

Our next question is from Jeff Meuler from Baird. Go ahead.

I guess just maybe to boil it down a little, the third quarter revenue base case implies a similar trend to Q2 July obviously trending better than April was, I know mortgage comps toughen, and I'll let others ask about kind of the macro and reopening process or restriction factors. I just wanted to make sure I'm picking up on all of the business specific headwinds that you're calling out that we should think to incorporate. So I'm hearing three, but I'd love to know if there's anything else that we should be contemplating or including. So the three I'm hearing the back end healthcare business, from the flow through of the weaker kind of procedures or front-end volumes recently. The second factor would be the indirect consumer solutions on that end market, marketing and end subscriber churn. And then, the third is the collections pricing concessions. Do I have all three of those correct and any others business specific kind of headwinds that you know about that you call out? Thanks.

This is Todd. I'll take a stab at that one and let Chris jump in afterwards. So, when we think about the third quarter, I think the first thing that's important to call out is that the third quarter of 2019 was a record quarter for TransUnion. Net revenue and adjusted EBITDA were at all time highs for us. So the fact that we've got a scenario that contemplating, flat to down five, really just speak to the resiliency and the diversification of TransUnion business. As far as the specific drivers, obviously, what we provided and what I just stated just a little while ago, is that, that the base case that we put together is a continuation of the trends that we are seeing right now. So that's obviously contemplating their financial services in particular mortgage as well as auto remains strong. But to your point, you the areas that we want to -- we're keeping our cautious eye on is exactly that on health care in the back end. The impact of health care providers slowing down, or I should take focusing on COVID-19 cases and care and slowing down the other types of preventative and elective churn has an impact on the [indiscernible] because if there's less, care upfront, the tail end of that is there'll be less insurance, to recover later. So that's something we're cautiously watching. And then, consumer interactive, we're keeping an eye in particular on the -- our indirect channel and specifically just the aggregators on what we saw early in the second quarter was a pullback on marketing spend. We've seen some of those aggregators cautiously enter back into the market. And that, collections, I don't think is as much of a driver so I wouldn't particularly focus on that.

Our next question is from Andrew Steinerman from JPMorgan. Go ahead.

I was hoping at this time, it could just give us a little more color on the healthcare revenue declines in the second quarter. Obviously, I listened to carefully as you described Slide 8, are we talking about high single digit declines? How did they do in the second quarter and when you say that back end, could have some drag in to the second half? Could you give us any sense of what your thought on that potential is?

Hey, Todd. Why don't you start with that one? And then I've got some commentary for the end.

Yes, sure. And I'll be happy. Hey, good morning, Andrew. Thanks for the question on that. So, yes, in the second quarter, as I was just answering Jeff's question, our healthcare business was impacted on the front-end of the revenue cycle management product offerings. So that's where predominantly what we're selling is insurance eligibility type of products, but we also have patient customization services and charity care and other identity products that we sell. The insurance eligibility was lower for the reasons that I just provided to Jeff just simply because the number of cases or patrons to come in, was significantly lower at the beginning of the second quarter. And as I said, it was all -- it was just the focus on COVID-19 for many providers, but we also -- we're dealing with patients kind of going to the hospitals for care, as well as too. As the quarter progressed, we did note that there was somewhat of a recovery on those preventative and elective procedures. And we've actually put out a couple of press releases, to kind of make that point throughout the quarter. So take a look at that, that's some good data that we put out in the market. What we saw on the back end of healthcare in the quarter is that the back end solutions were not down as much simply because of the reasons I just talked about on the front-end, hospital and other care providers, make the majority of the revenues, doing those preventative and elective care. When they shut down those procedures, it had a very significant impact on their operations. So with that, put them in a position unfortunately was to focus on their liquidity, which is where our back end revenue cycle management products came in to help them. And that part of our business, as you know, is focused on what we call insurance, coverage discovery, which is where we are looking for -- care that's been provided, but the provider has not been paid by a commercial insurer, or the government. So those, products service is actually slightly grew for us in the quarter, so that the net of it in Q2, I would -- as I said in my remarks held up relatively well, I'm not going to provide you the exact number but it wasn't a significant decline. I think we were very pleased with the results. As we think about the back half of the year. We are seeing as I said, a little bit of an uptick in the preventative and elective care, which is going to help the front end. But we're a little cautious about the back end right now, just simply because the volumes that weren't there in the April, May timeframe could potentially translate into lower revenues in the second half of the year.

Yes. And the one point I would just add to that is regarding the overall health of the healthcare business. We feel pretty good about it. You will remember a couple of years ago, we slipped off of a trend of double-digit organic growth. At that point, we did a major restructuring of our sales force. We restructured we also expanded it and they began selling the entire suite of solutions both what we traditionally provided, but also HPS and Rubixis, two recovery solutions that we added through acquisition. And really, within one quarter of doing that reorganization, we doubled the level of new sales and new implementations. And we have continued on that pace. So, even though, the overall demand for the services has been disrupted because of the unique circumstances around the pandemic, which Todd I think just really nailed in detail. The underlying health of the business is strong and had it not been for COVID-19, I'm very comfortable that we would have returned to the high single-digit organic growth that we'd talked about previously.

Our next question is from Gary Bisbee from Bank of America Securities. Go ahead.

I guess a question on the costs. And as we think about all the investments you're making in [indiscernible] and some of the process improvement stuff, but also obviously, focused on cost at this point. Is there any color you can give and how we might think of the cadence of costs? And I guess part of the question is also, the incremental or detrimental margin, whatever you want to call it on the revenue performance this quarter was quite a bit better than I think, how we were thinking about it following your commentary at quarter ago. So just any color to help us think through the moving parts of costs would be great.

Hey, Gary, good morning. Its Todd. Let me let me take a stab at that one for you and thanks for asking it, because it's an important one. So as we entered into the second quarter, Chris and I focused quite intensely on managing costs and just overall liquidity of TransUnion just due to the high level of uncertainty that we were operating in -- if you go back to April, which we hope is a trough for us. So, things that we did, during that time, we put a freeze on headcount with the exception of select areas that we felt were important to invest back into particular Project Rise. We also managed our TV expense and other controllable expenses that we have. And I think you can see that when you look at the relative performance of our operating expense in the quarter, I think total operating expenses were only up about $8 million in the quarter and last year we had a very significant benefit on stock-based compensation. So for all intents and purposes, we managed the cost base very strong. And while also making those certain investments. And what we also dealt with in the second quarter was you can see just in the trends that we provided in the presentation materials, you can see the recovery and volumes in particular in the U.S. And then, in our international business might have been a little bit on the lag but start recovery, there was definitely a very high flow through to margin which resulted obviously in a very nice adjusted EBITDA performance for the second quarter. As we go forward, though on costs, we said at the onset of the call, we are not being very deliberate about taking the opportunity to invest back into the business and Chris went into significant detail with all the great programs that we have going on in our operations group as well as in our solutions group, in addition to Project Rise. So we highlighted some of those with procurements and our global capability center, the CRM contract processing and the opposite on the solution side what we're doing with fraud. So we're going to continue to be aggressive investing in those areas, because those are important parts of our organization that we believe are going to drive future growth and when we get out COVID-19 will be a source for the top line from the solutions group, from the ops group, of course efficiency and lower operating expenses.

Yes. And just, I think from a philosophical perspective, to answer your question, Gary. I mean, we're still very much focused on strengthening the business during this period. The management team, when I became CEO, obviously we'd had a nice run of results. But we all believed that there was an opportunity to further strengthen the business. And that was in terms of accelerating top line growth. Certainly, ensuring that we could consistently compound at the levels that we had previously and even freeing up cost for further growth investments or for margin improvements. And in the pre-pandemic world, we were confident as a team that we could make the investments in solutions, operations and in Project Rise and still deliver against the margin trends that we'd established in the prior quarters. Obviously, the macro environment has been materially disrupted. I think all things equal, we're weathering the storm pretty well. And I think it's just really important that we not take our eye off the ball, because there's a great opportunity to strengthen the business while still delivering very satisfactory results to the market. And we're going to focus on that because I'm confident we're going to emerge from this. And I'm confident that we're going to be able to resume a solid growth trajectory and it's just going to be better enhanced as a result of the work we're doing in these three areas.

Our next question is from Toni Kaplan from Morgan Stanley. Go ahead.

Thank you. I just wanted to ask about the consumer interactive segment. It sounds like on the direct side, you're making some investments and just wanted to understand what kind of benefit you're targeting from those. And then, on the indirect side, you talked about some of the headwinds and just wondering if there's any steps that you can take to mitigate some of those. Just trying to understand if there could be upside to your outlook there? Thanks.

Okay. Well, let me talk about the dynamics there and then you can divine, upside against the outlook. But, the two parts of our business again, direct is 40% of our consumer interactive business and the indirect is roughly 60%. The customers that we serve on the indirect side, their business models rely heavily on monetizing leads that they generate by offering our credit report services and other services. And obviously, in an environment where customer acquisition is diminished, their models are going to suffer and their ability to advertise and acquire is going to get restricted. We're working with a variety of the partners that we support to be helpful during this period. We have numerous ideas to continue to innovate and provide them with support and solutions beyond just reselling our credit data and our printed credit data, that's a way for us to get growth in that segment, while the macro landscape is challenged. The benefit and the real balance in our portfolio is, this is a still a very fertile market to establish subscription relationship with consumers directly. And we've taken advantage of that by accelerating our investment. Our yield is really strong our conversion there. And it's pushing very nice organic growth on the direct side, which is helping to balance the headwinds that we've got on the indirect side.

Our next question is from Andrew Jeffery from SunTrust. Go ahead.

Chris, I'm wondering if you can talk about plans to potentially build out a competitor to Equifax's [fourth] [ph] number database, the EWS business generally, is that initiative that you think is important is that an area were giving TransUnion has the ability to be more competitive and perhaps change some of the growth profile through the cycle for the [UIS] [ph] business.

Well, let me share a few thoughts. I mean, first, obviously, the work number, the [TOCs] [ph] business generally is a tremendous franchise. And with the current very favorable market circumstances, it's performing amazingly well. And as you can see through our efforts, and also experience efforts and others, there is a next generation of income solutions that's coming to market beyond income verification, it's really directly tapping into consumers' checking account, their demand deposit accounts, with consumer permission, of course, through partnerships with financial aggregators. And they're also other vehicles for gathering, both income current account and other alternative data sources that can be predictive of financial management behavior. And I think you'll see all three bureaus developing these solutions, what that landscape ends up looking like is, it's still open for debate. But it is clear that this is a critical new frontier for developing income solutions, rather alternative data solutions everybody's going after.

Our next question is from Bill Warmington from Wells Fargo. Go ahead.

So you had some cautious comments about the 2021 mortgage comps and I thought it might make sense to ask about how, what mortgages as a percentage of revenue these days? And then also to ask about some of the drivers that you mentioned and how they would play out in terms of the refi backlog, the purchase market and then the impact of forbearance ending, how that all comes into the mix?

Okay, Bill. Yes, let me get started on that. I mean, in more normal circumstances, let's say pre-pandemic, we've told you mortgages between 7% and 8% of our revenues. Right now, because of the surge in volume due to the low interest rate, it's getting closer to 10% of revenues, which is certainly a helpful counter cyclical component at this point in time. When we look at the current mortgage rates and we think about the total universe of mortgages in the U.S. that could be refinanced. Oh, I don't know, maybe 18 million, 20 million, something like that. Some that depends somewhat on the degree to which the bank's lower mortgage pricing to increase the addressable market. And then I think if you just look at the volume of daily refinancings, there's enough backlog where we're comfortable that to the end of '20, we're going to continue to see strong mortgage performance. I think it's hard to see how it really extends beyond the middle of '21. So if I were to take a guess, sometime second quarter of next year, we start to see some material diminishment in the refinancing bubble that we're all enjoying, currently. Todd would you care to add anything to that?

No, I think you covered it well, Chris. Good.

Okay.

The next question is from Seth Weber from RBC Capital Markets. Go ahead.

Chris, he mentioned A few times kind of investing in the fraud business. I'm wondering, can you just give us some more details on really what you feel like you still need to do to build out that platform to get to where you want it to be? Thanks.

Yes, sure. Well, I would just say, in recent years, we made a couple of material acquisitions that brought great fraud assets into the portfolio. And that complements an already strong business, providing what we call knowledge based authenticators to mitigate online fraud, basically, challenging individuals to demonstrate that they know things that only that individual would know about their credit about information that resides in their public records in order to confirm identity that's effective, but it adds a lot of transactional friction and breakage. And so as a result, we acquired one of the leading providers of device based identification in fraud detection and that is iovation based in Portland. And they complemented another device based acquisition that we had done previously, the solution out of Ireland called Trustev. And then when we acquired the Callcredit business, the Callcredit business, roughly a third of those revenues come from fraud mitigation solutions. The product there is called CallValidate. And it overlaps materially with the product that we have in the U.S. So, what we're currently focused on is, one, understanding from a global perspective, how we need to evolve these capabilities in order to meet both current market demands, but also where we see the market going because that's one thing about fraud, it is challenging and persistent and difficult to mitigate because the fraudsters are super creative. So we're getting a very clear sense on where the market is going. And then, integrating all of these applications on a single next generation platform supported by a global Salesforce and a consistent value proposition that we push out into all of the markets that we serve, and again, we're in 30 regions globally. And they all have varying degrees of ecommerce fraud currently. I mean, if you look at fraud activity, it's highly concentrated in the U.S. markets, Western Europe as well. But as banks and other lenders just raise their barriers of defense in those markets, it will push out into other markets globally. So there's great tailwind in fraud because it's difficult and there's a lot of financial opportunity. And, we want have a best-in-class solution that is, configurable and leverageable into all the different markets that we compete.

Do you feel like you have the adequate -- the assets in-house already? And it's just a question of kind of configuring them? Or do you feel like that's an area where you might do more M&A?

Look, I think we've got a great complement of assets currently. And if we integrate them all, we're going to achieve some efficiency that we can apply toward ongoing organic product development internally. That said, there's any number of complimentary fraud mitigation solutions that we could acquire, or continue to invest in. I mean, I think we've got a nice position in one of the leading providers of cellular phone data, which is a great persistent consumer identifier. And it's also a dataset on which our analysts can configure, fraud mitigation algorithms, until we've tended to make those type of early strategic investments in emerging datasets that are helpful to mitigate fraud overall, but also kind of lays a path toward acquisitions.

Our next question is from George Mihalos from Cowen. Go ahead.

Just had a quick question as it relates to what the emerging markets vertical on page 10, can you sort of rank order for us, what those sub-segments contribute to the emerging verticals sort of after healthcare and insurance? And then, Chris, just the political climate that's out there a lot of rhetoric that's out there. Just curious if you can make any sort of high level comments as to how you think maybe some of these comments, I'm not even trying to call them initiatives sort of play out and any potential impact on the bureaus? Thank you.

Okay. So I'm going to ask Todd to handle the first. I'm not sure we give rank ordering, but I'm sure he can provide some color. And then I'll handle the question about the political landscape. Todd?

Hey, George, thanks for the question on that. Yes. As far as the emerging verticals are concerned, obviously, we emphasize on insurance and health care. Those are clearly the two biggest in there. If I were to kind of think about it from other significant contributors. I'm in there I'd say, diversified markets which Chris spoke to earlier. You also think of what we do with utilities and telecommunications are just two examples. But it's a broad basket of retailers, ecommerce, businesses like that fall into it. I would then say, tenants and employments and then collections. And then from there think about verticals that we also highlighted in media as well as in the public sector.

Yes. And in terms of the political landscape, if you look at the various proposals that are being discussed by consumer advocates or conservative politicians, like there's really nothing that we haven't seen previously. I'd also point out that often there's a gap between the rhetoric of the campaign versus the reality of legislating post election. From our perspective, the most important thing that we can do is stay engaged in the process. We have a very evolved understanding of the role that the data that we provide plays in fueling the U.S. economy and also economies around the world. We believe that accurate, comprehensive, unbiased and transparent data is critical to enabling maximum consumer lending in fueling economic growth. And we're committed to demonstrating that and explaining that with legislators and regulators alike. And I think overall, we've got a pretty deep and balanced understanding of that perspective. Now, from time-to-time, there are criticisms that the body of information that's used to originate loans has certain biases in it. We really haven't seen it. We have looked hard at this issue over time. We have several smart and aggressive regulators who also look hard at this issue. And, it really hasn't been demonstrated. And I think you just have to get back to the fundamental economic motivations in the situation. It's our desire to provide all the information that we can to promote financial inclusion and really expand the lendable universe. That's good business for TransUnion. It's good for American consumers and it's good for lenders alike. So we want to provide comprehensive and unbiased and accurate information and I feel as a whole that our industry does.

Great. Thanks, Chris, and thanks everybody for joining us on the call. We hit the bottom of the hour here. So we're going to wrap up the call, everybody, I know there's a lot of calls going on today, get onto those. Thanks everybody for your time and we hope you continue to be safe and healthy. All the best.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.