TransUnion (TRU) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for the 2020 RBC Capital Markets Global Consumer and Retail Virtual Conference. I'm Seth Weber, RBC's Business Services' Analyst, which is a broad category that includes many consumer-facing names, including TransUnion. So it's with great pleasure that we welcome Todd Cello, TransUnion's Executive Vice President and Chief Financial Officer with us this morning. Todd has been with TransUnion since 1997, and been in his current seat for nearly 3 years. So Todd, welcome and hope you're keeping well.

Good morning, Seth, and thank you for having me this morning, and yes, all is well here with me. I hope the same for you.

Keeping well. So it's been about 4 weeks since TransUnion's first quarter report, and the question obviously, on many investors' minds is whether you've seen any -- whether there's any updated comments regarding a narrowing of the declines seen in certain end markets like auto and credit cards, any change in financial institutions, willingness to lend or demand for credit. And as fate would have it, you have filed an 8-K this morning with some updated disclosure around the company's confidence, I guess, in the base case scenario that you outlined about 4 weeks ago? And maybe can you just give us an overview or kind of talk through some of the details of the filing? What you're seeing and what kind of is underpinning that?

Sure, Seth. I think that's a great place to start. So if we go back to our earnings call, which was on April 28, in our presentation materials, we wanted to provide our investors and the market with a perspective on how TransUnion was performing into the month of April because our first quarter was relatively strong, even having to deal with about 2 to 2.5 weeks worth of impact from COVID-19. But the view of the current state of TransUnion wasn't really clear, just looking at the Q1 financials. So as a result, we provided more transparency in our earnings materials. And in particular, we showed our online credit reporting trends for our U.S. markets financial services vertical and then we provided some additional color on our international businesses as well as consumer interactive. So I guess as a month has gone by, let me just start with the punchline, and then I'll get into the details as to what we have seen over the last month. So based on the trends across the company that we've seen over the past month, we have increased confidence that we will achieve the base case scenario for Q2 that we discussed on our earnings call. And if the trends that I'll go through in a little bit more detail in a moment, persist for the remainder of the second quarter, we may end up in our upside case. So if we start first with our U.S. markets business, trends have largely improved in the past month. Notably, financial services inquiry volumes are better overall, highlighted by the level of acceleration in mortgage as well as in auto. So while each of those markets have their own dynamics, the efforts of our customers to stimulate activity, along with the pace of the reopenings in various states, is likely the catalyst that spurred this improvement. Also within our U.S. markets business and in particular, in the emerging verticals, insurance continues to perform relatively well, and we've seen some improved shopping trends in auto insurance over the past month. And the other big part of our emerging vertical group includes healthcare, which has continued to hold up as health care providers aggressively work their bad debt files on the back end of the revenue cycle management. And public sector remains largely unaffected and continues to pursue new business opportunities. And with the reopenings that we've seen across the countries, we've seen some pickup in our screening business as well as in telecommunications, so think mobile operators. And our Consumer Interactive segment is tracking better than previously expected as our direct business continues to perform relatively well as a result of effective targeted marketing that we've employed. And the other part of our consumer interactive business is our indirect channel and that business is under some pressure, but holding off relatively well. And then finally, our International segment, it really hasn't seen any material changes in trends. Developed markets such as the U.K. and Canada are performing better than our more emerging markets. But both groups are essentially in line with the expectations that we provided on April 28. So the net all of this is that we expect to deliver second quarter results mostly in line with our base case outlook and have an evolving view that we may achieve the upside case if these trends that I just went through continue on for the remainder of May and into June.

That's a great update. On your -- on the first quarter call, you did talk about the potential for some of the emerging markets to lag a recovery, so that sounds like it's trending in line with your expectations. Can you just talk to -- can you talk to that dynamic? And why that would be, why you think the emerging markets could lag a recovery?

Sure. No, absolutely. I think, Seth, as you've already alluded to, the impact, it's worse in the more emerging markets. So for us to put some more color around that, that would be regions that we operate in, in Latin America, it would be India and it would be Africa as some of the examples. And the reason that the impact has been worse is consumers in those geographies, by and large, rely more on branch and other in-person channels. And across almost all these markets, there's a lack of digitization along with more aggressive government lockdown restrictions. So if you just look at what we've seen in the news as far as you compare the U.S. lockdown or the shelter in place to what we see in other parts of the world, it's very different in those emerging markets. So you've kind of got -- you've got the combination of the lack of digitization and reliance on more in-person channels and the severity of the lockdown themselves imposed by each of the governments. So that's what's creating that dynamic. Now if you compare that to what we see in our more developed markets, as I already said, to Canada or the U.K., those businesses have not deteriorated as much because I think the shelter in place or the lockdowns were not as severe. And we are anticipating that they will have potentially a faster rebound as these governments will have a little bit more capability and the capacity to implement stimulus to continue to drive their economic growth.

Okay. And then just maybe going back to your update this morning, the U.S. market commentary. I mean do you feel like that, that's -- that the trends that you're seeing is just -- is there a possibility that, that's just kind of some sort of catch up that's happening here? Or do you feel like that we've really -- are you getting worried that you feel like this is a sustainable turn here? Is there any way to sort of parse that -- parse those 2 ideas out?

Yes. So I think that's the question that we ask ourselves every day. I think we have great tracking capabilities in our business, not just in the U.S., but globally, just by the nature of it, but the nature of the business being transactional as well as many of our batch services are job based. So we can see both the balance of the volumes as well as the jobs that are coming in. So we're pretty much obsessed with forecasting would probably be the best way to characterize it. And with the pandemic hitting us in the middle of March, it was almost second nature for us to shift into a mode where we're able to really monitor those volumes. So where we're at with that is, we're asking similar questions about the sustainability of this. When you talk -- you look at mortgage, in particular, there is a significant amount of refinance activity that's going on in the U.S. market because low rates are continuing to drive that surge. And we're starting to see maybe some slow -- some signs of a recovery in purchase as some states are coming out of the lockdown. So the sellers are getting back to visiting to their homes. and some buyer demand seems to be there. But with mortgage, that business tends to ebb and flow with rates. So while things maybe a little bit more strong at this point in time, maybe a year from now, that won't be the case. So I think everyone does appreciate that. But some of our other markets, like in particular auto, I mentioned, we put that in our 8-K this morning as well, I think it's really kind of coincides the growth that we're seeing there, and that's on the growth but the rebound would be the way to say it. It's really, again, coinciding with the states reopening and dealerships being open. And then there's some cautious optimism that we have as the auto manufacturers begin to restart production. But of course, we've all seen the impact on the supply chains that they've had. So -- but then the other big part of auto is that there's just a lot of incentives that are out there with things such as 0% financing, some of the stimulus money that came from the government may have provided some confidence to consumers. So to your question, maybe this one might be a little bit more sustainable than perhaps on mortgages. And then a couple of our other end markets in the U.S. would be card. Their banking activity continued to increase, but I wouldn't say that we're back to the levels that we saw prior to mid-March. Some card programs have done well from what we can see in partnering with our customers. But there's been obviously some challenges on that side with travel and then just retail because of the severe hit that those industries have had. So hopefully, that provides some context there on what we're seeing.

Right. No, that's super helpful. And then on the consumer business, on the first quarter call, you talked about you are kind of having substantial discussions with some new partners -- new indirect partners, is that -- I mean, any updates there that you could share or is that a source of optimism going forward for the rest of the year?

Yes. I think so, Seth, when we -- if you just look back at TransUnion's capabilities with partners, and this is what I refer to as our indirect channel. We have had numerous meaningful discussions with potential new partners in this channel. As they have -- their initial reaction was to pull back on new account acquisition. And as a result, as they come back into the market, we are anticipating that they will want to use maybe their own web properties to be able to market to consumers or perhaps even the cross-sell to their own customers. So as a result of that, we've seen a significant amount of expressed interest in some meaningful financial institutions wanting to build more robust consumer-facing offerings. So think of things like financial education and modeling tools for their clients who may be facing difficult personal financial situations. So that's the essence of what CreditView does for our partners, is it's those dashboards and it's those tools that are provided to the consumer to understand where they're at and then it provides our customer with the opportunity then to potentially engage in a relationship with that consumer as they're offering those credit programs to them. So right now, we don't have anything specific to announce in regards to a new customer. But I would say that our team continues to be optimistic and work diligently towards expanding those indirect relationships.

Perfect. And then your base case scenario for the second quarter implies a pretty dramatic decremental margin. And to be fair, the company, I think, has taken the tact of not really to cut cost deep -- not cutting structural costs deeply, which seems like it's going to prove to be the right decision. So what type of leverage -- incremental leverage would you expect to see as markets get better as your revenue starts to improve? Have you talked to what kind of incremental operating leverage you might enjoy on the upside, again?

Sure. Yes. Let me just start though -- because you're right, as far as what we put out in our base case scenario outlook for the second quarter. There was a meaningful decremental impact on our adjusted EBITDA margin. So in the base case, we were calling for revenues to be down 13% to 18%, with adjusted EBITDA down 33% to 38%. And the thought process that we went through was very deliberate as far as how we wanted to address our cost structure. And up until the middle of March, as we talked about on our first quarter call, our results were strong. If you just look at where Q1 came in, with over 2 weeks of the COVID-19 pandemic hitting our results, we exceeded our high end of guidance on revenue, and we came right within range on adjusted EBITDA. So the underlying performance of the business was very strong. And the way Chris Cartwright and I had looked at that, it was more -- but we didn't want to cut into what we were looking at as muscle. We've built a great team over the last several years and we -- after modeling different scenarios and understanding where our cash flows would come in at, which is something we continue to do today, we just got ourselves comfortable with not necessarily needing to make short-term decisions to just have our margin increase in this quarter or maybe in the third or fourth quarter. Because quite candidly, we were also just trying to figure out what was going to happen as well. So we were very deliberate in our approach towards managing expenses. So yes, as the revenue, if it does increase, as what we've talked about this morning and our confidence in the base case outlook, the leverage, it's meaningful. We'll be able -- you'll see any incremental revenues will have a very significant high flow-through to adjusted EBITDA and margin as well, too. So what that's enabling us to do then is to prioritize our investments. And so areas that we have been focused in, in particular, Project Rise, which is our technology evolution or transformation, we continue to fund that. But then also, we've been very deliberate in focusing on a new group that Chris Cartwright set up last year as he became CEO, which is our Solutions group. And striving for what the next set of innovation that will come out of TransUnion to continue to grow our top line. And then hand in hand with that, our operations group looking for efficiencies in our business. So just in essence, make TransUnion an easier place to do business with. And by doing that, we feel that we'll find some savings that we'll be able to redeploy in the business. So I would say in all 3 of those areas, we've been very selective in our investments to make certain that we keep the good momentum going through this uncertain time.

Right. Okay. I mean -- and the company has really benefited greatly from some of your first-mover status and things like trended data solutions, CreditVision, for example. Can you maintain those types of advantages? And what are maybe some of the broader market opportunities that you see out there for that type of solution?

Yes, sure, Seth. Let me talk about CreditVision for a little bit as well as CreditVision Link. And yes, we do have -- we were a first-mover. If I were to go back probably 7 to 8 years ago when we launched this product in earnest, and we had early success in the mortgage space, also with the fintechs. And then we dispersed the IP globally. And we have CreditVision in a number of our international geographies. But even with all of that success that we've had to date, we feel that there's still a considerable amount of incremental opportunity ahead of us with our trended data solutions. In particular, I think it's just worth calling out that in the midst of the COVID-19 crisis, we have found that it's been especially helpful to use trended data for understanding the risk of existing portfolios for our customers and even in some cases, for new client acquisition, granted that, that's limited at this time. So a couple of examples, things that we've proactively worked on over the last couple of months on one, we call a CreditVision Aggregate Excess Payment. So think of this as something in regards to how much more a consumer is paying monthly on existing debt obligations above the minimum required amount. So why is that important? Well, it's powerful for a risk management tool because our customers can identify consumers who have greater financial resilience. So that's a product that we have been offering to our customers. In addition to that, we've also developed what we refer to as CreditVision Acute Relief solution set. And again, this is to assist lenders in understanding the impact of COVID-19 on their consumers. And what we've done is, we've created a set of attributes, in particular, 25 of them in May, and then we're ready to launch about another 25 to 30 more attributes in June. And then on top of that, we'll also be launching CreditVision Acute Relief Risk Score based on trended data sometime in June. So the point in telling all that is that it's not just what we've already had and developed. This is a product that we're able to continuously kind of reinvent itself based on the current environment to help our customers with their risk management decisions. So we're really excited about this.

Super. And then can you -- you touched a little bit on things like insurance and healthcare, but it seems like fraud and ID is a pretty big global opportunity for TransUnion. Can you just talk about how your offering stacks up to some peers that are out there? And do you have the requisite data information behind it at this point? Or will you need to do more M&A there? Or just kind of your go-to-market strategy for that area?

Yes, sure. So fraud and ID is -- it's a large part of our business. And -- but I think more importantly, it's growing. And we have assets that are disparate across the organization. Let me just elaborate that for a moment. So TransUnion has always played in the fraud market, and our products were primarily tailored towards new account origination. So using our credit beta assets to ensure or to validate that the person on the other side of the desk, so to speak, is who they say they are. So that's really where we had our origins. But from there, through acquisitions that we've made, we go back to 2018, we bought a set of fraud capabilities with our Callcredit acquisition in the U.K., that business, about 1/3 of their revenues come from fraud. So they built a very nice fraud business that has some complementary aspects to what TransUnion historically have done. And then at the same time -- roughly on the same time, we acquired Callcredit, we acquired IDVision, which provides a device-based view of fraud. And so you had those assets. And then we made an acquisition of the company several years ago, called Trustev. So we have all these different assets, and they're working in different parts of the company. But I think where we see -- what we're really excited right now is the opportunity to bring those data assets together and to have a platform for our fraud capabilities. So we recently brought in a new leader to run our fraud group, his name is Shai Cohen. And Shai's responsibility is to take these great assets that we have and how do we stitch them together to make them even more powerful. So we're excited about that. M&A is always something that we look at to better our product capabilities or even the data sets that we have. So that is definitely an area of focus for us as well, too, as we look to build out our fraud capabilities.

Okay. And I guess the last one here since you mentioned M&A. Just on capital allocation side, your leverage is a touch over 3, your dividend yield is towards the lower end of the peers. Maybe just can you talk to how you're prioritizing capital allocation, whether it's -- I mean, you obviously have a big tech investment underway, Project Rise, but just prioritizing growth investments versus dividend versus debt reduction, M&A or buyback, I guess?

Yes. No, that's a great one to end on, Seth. So thanks for asking that. And you're right, our priorities right now for cash, first and foremost, are to run our business without interruption in all of our geographies, but also to continue to make those select investments in areas that we feel will power TransUnion forward in sustaining our top line revenue growth as well as the nice flow through to margin that we have. So you alluded to Project Rise, and that is definitely a priority for the organization. So that will go uninterrupted even in this time. But after -- we're specified that we can operate our business, the other priorities probably goes about saying is servicing our debt and then looking at certain M&A and sticking with the strategy that you've heard us talk to about data, vertical capabilities and maybe new markets and then paying our dividend. And at this time, we feel comfortable paying the dividend. Circumstances would have to deteriorate meaningfully beyond where we're at, where we would maybe consider recommending to our Board to temporarily reduce or suspend the dividend, but we're just not there yet. So hopefully, that gives you the context of how we're thinking about use of capital.

For sure. And it sounds like you're actually on the better side of the decision process with your update this morning with the 8-K. So it sounds like things are moving in the right direction. So I think we're at the top of the hour. So Todd, we really appreciate you being here and TransUnion for participating. So I hope everybody stays safe and stays well. And thank you again, Todd.

Seth, thank you very much for the opportunity this morning. It's much appreciated.

Thank you.