Okay, let's go ahead and get started. I'm really pleased to be joined by Mark Begor, CEO of Equifax.
Begor.
Yes.
Wrong spelling, but that's okay.
Oh, Begor. And John Gamble, CFO of Equifax. Mark, John, thank you for being here with us.
Great to be here, George. Thanks for having us.
Of course. A great place to start would be perhaps on the broader macro environment and the state of consumer credit health...
Yep
Given Equifax's position in the credit space. We've seen certainly mixed data points on the macro front. On the positive side, unemployment is low, consumer spending is strong, but on the cautionary side, you have high borrowing costs and elevated inflation. So based on what you're seeing, how would you characterize the overall health of the U.S. consumer from a credit perspective?
Yeah, I would say, not a lot of change from what we expected for the fourth quarter or what we saw broadly in the first half of the year. I think, as you know, George, and you called this, a year ago, last summer, you started to see some pressure on subprime consumers, primarily from inflation. They're working, you know, which is really a positive. And when I think about, you know, risks to, you know, underwriting, if consumers aren't working, they generally don't pay their bills. When they are working, they do pay their bills. So, that's been a, you know, a positive that unemployment's so low.
As you know, you know, I don't know what the number was this morning, eight million open jobs and four or five million people looking for them, so there's still a real balance there. But subprime delinquencies, you know, started going up last summer. That's continued, you know, still at fairly manageable levels. But that's driven by inflation, where they were more impacted. And I think, as you know, subprime is a small part of our business and a small part of the financial services industry. It's generally fintechs are the ones that, you know, are participating in subprime lending. You know, the broader economy and consumer base is really still quite strong, again, because they're working. And then, if you look at our customers, you know, customers being...
I'll focus on FI. As you know, we're much more than FI, whether it's in government or background screening with talent and other verticals that we're in. But you know, in the broader customer set, they're quite strong too. You know, the banks are strong. We were all worried about deposits earlier this year. That seems to have organized itself, you know, going forward. I think things we're watching, you know, I keep a close eye on unemployment. You know, if unemployment goes up, you know, that generally results in delinquencies going up. We don't see that changing in the medium term, meaning through, like, the first half of next year. It doesn't feel like that's gonna change. We also watch, you know, we got student lending.
The Biden administration's done all kinds of things to, you know, support students that have outstanding debt. You know, some of that's coming on, on, forward. That could put some pressure, you know, on the delinquencies. Inflation's coming back down, you know, which is probably a good thing, you know, for the marketplace. But, you know, when we laid out a guide for the year early in this year, back in February, and actually throughout the year, we put in our guide a slowdown, a moderate slowdown in the second half and in the fourth quarter, and I don't think we're seeing anything different from that. Would you add anything, John?
No, the other big market where that impacts us is hiring, right? We have about a $400 million business that is involved in talent solutions and other business that's involved with onboarding. And you've certainly seen a slowdown in hiring, okay? Continues to be probably robust based on some historical standards, but it's definitely seen a slowdown since the summer, right? And kind of a slowdown a little bit as you move through the quarter. So we're seeing that. That's impacting our business. But overall, as Mark said, the consumer seems relatively good.
Right. And George, I don't know if you're gonna get to mortgage, but obviously, the last 24 months, we've lived through a mortgage recession-
Yeah
... like we haven't seen in our lifetime.
Right.
So I'll leave that and see if you wanna touch on it or not.
Yeah, we'll definitely get to mortgages later. So maybe let's talk about your financial framework in the context of the broader macro environment. Your long-term revenue growth target is 7%-10% growth.
Organic.
Organic revenue growth.
8-12 overall, including both on M&A. Yep.
Right. What, what kind of macro environment would be supportive of that? What, what threshold of minimum GDP or maximum threshold for interest rates and inflation would be conducive for you to achieve that target?
Well, the current environment. You know, we, we're doing that in our non-mortgage businesses this year. We did it last year. You know, in the environment that we're in, you know, again, you know, when you have a kind of moderate GDP, think about a couple of points of GDP, I think that's in our long-term framework, that we would have a couple points of GDP. That's seven-10 organic or 8-12, including bolt-on M&A, is something we have a lot of confidence in, and we've delivered that outside of the mortgage market macro in 2022 and in 2023. And we have a confidence that in the long term, and then, as you know, with that, George, is the 50 basis points a year margin expansion-
Mm-hmm
... that comes from that, operating leverage, and workforce solutions, higher margins coming in because they're growing faster than the rest of Equifax, you know, into our P&L. You know, if you take the, 8-12 or seven-10, we have workforce solutions growing substantially above that, you know, with their 50% EBITDA margins, and then USIS, it's six-eight, and international, it's seven-nine, you know, is how we think about the long term of Equifax. And that's up, you know, from our old framework from three years ago, by 100 basis points on the low end and 200 on the high end.
Right.
If you think about some nearer-term things that are impacting us, right? Again, around the margin area, obviously, with organic growth of seven-10, what we talk about is 50 basis points of margin expansion.
We get a little bit of a benefit in 2024, because we've executed some cost reductions and spending reductions. We've had $210 million of spending reductions we executed in 2023. That carries over into 2024, 'cause we executed during the year.
Mm-hmm.
We've got another $65 million of spending reductions that we'll see in 2024. About 60% of that is probably expense related, 40% capital related. So that additional, say, $35 million-ish, you know, 60% of 65 million, is an expense benefit that we should see as helping our margins as we go into next year, which should be somewhat beneficial to the normal 50 basis points of growth, to the extent we see organic growth of 7%-10%.
Right.
Some headwinds a little bit year-on-year. Obviously, this year, given the very weak mortgage market, for example, our incentive compensation is, is lower in 2023. We'll normalize that in 2024. So there's some headwind related to that. But if you think about kind of how our margins should, should trend, that's a way to think about it.
Got it. Related to next year's outlook and the longer-term outlook, the FHFA last year ruled to go from tri-merge to bi-merge. What's your assessment of what the potential impact could be on the business longer term? And how is that process playing out? What's the base case? What's the downside case with that implementation?
Yeah, just, just to be clear, they didn't rule on it. They rolled it out as a proposal they were working on, and with it, they also said they wanted to go to FICO plus VantageScore.
Right. Mm-hmm.
As you know, today, the FHFA requires three bureaus, and they require the FICO score on all mortgages. Going forward, there's discussions around that. The FHFA hasn't resolved it. They've actually pushed out the implementation date. About a month ago, they said they were gonna push that out sometime into 2024.
Mm-hmm.
So we don't expect that to happen until maybe the second half of 2024, just given on the process. And I think, as you know, in the mortgage market, the cost of a credit file and the credit score is a pass-through cost to the consumer. So if you've gotten a mortgage, anyone in the room has, or you have, George-
Mm-hmm
... you'll, on your closing statement, you pay for the credit score and for the credit file. So there's less friction because it's not a COGS to the mortgage originator. So, the impact to Equifax, I think we've got to start with, you know, first, on the Vantage plus FICO, that's a good guy for Equifax. We'll be selling two credit scores-
Mm-hmm
... instead of one going forward. So that's a positive if and when it happens, going forward. I think, you know, you know, FICO's in the marketplace. It's public in some, trade press about a large increase in 2023, off a large increase in 2022. They passed that through us.
Right.
That's how they go to market. We mark it up, so that becomes a positive for us in 2023. On the 3B to 2B, that will be an option to go from 3 to 2.
Mm-hmm.
Today, it's a requirement for three.
Right.
They're proposing to make a requirement for two. So we're doing a number of things to try to position to be one of the two. As you know, earlier this year, we rolled out a addition of some cell phone utility trade lines to our mortgage credit file that only Equifax can deliver. So we've got a more a richer, more powerful mortgage file. Second is, mortgage originators, we believe, will likely still pull all three because of the differences between the three credit files.
Right.
Today, there's 8 million U.S. consumers that are only on one of the three credit files because not every financial institution contributes to all three. So if you go from three to two, you may not be able to approve that consumer that's only on the third you didn't pick. Second, there's 40 million consumers that have more than a 40-point difference between the three credit files for the same reason, because of contributors. So while it might change, we would expect most originators to still pull all three because of the predictive nature of all three. So to your question about the financial impact on Equifax, you know, mortgage is less than 15% of Equifax. Most of our mortgage revenue is EWS. The USIS credit file mortgage piece is smaller.
The Tri-merge piece is where we would be more impacted, and, you know, we think we're positioned. If there is an impact, it would be, you know, quite small for sure in 2024.
Got it. That's helpful. Let's talk a little bit about your transformation program, tech transformation. You're now in your sixth year in your tech journey.
Right.
What improvements have you noticed in the business as a result of that? What next steps do you have to complete the tech and cloud transformation? What are your next milestones?
Sure. I'm gonna correct your math. It ain't 6 years. You know, it's been something like 4.5-5 years of the tech transformation.
Right.
So I think everyone knows, after the cyber event, we made a decision to invest in the cloud in 2018. That really launched late in 2018, is when we got started on it. We made a decision to go cloud native. Number one, we think in a digital world-
Mm-hmm
... being cloud native is table stakes, around being always on.
Right.
The nine nines of stability that comes from being cloud native versus legacy. So that was reason number one. Second, with digital, it's the speed of data transmission. With everything being digital with our customers, not only do you have to be always on, you gotta deliver data very quickly to them, 'cause remember, every time there's a credit card application, mortgage application, auto loan, our customers, being a bank, credit union, financial institution, will hit our database, and then we'll deliver back that solution. Then it goes through their decisioning engine. There's a lot of latency in there. So the speed of that, we're making it very quick, is super important. We also, as a part of our cloud transformation, went to a single data fabric, and this was a big move for Equifax.
It was a big part of the $1.5 billion cost over the last, you know, 4.5-5 years, to go take all our siloed data assets and put it all together. We believe that's gonna allow us to innovate more quickly and do solutions we couldn't do before as far as new products, whether it's historical data or data combinations, going forward. So going forward, we're about 65% complete as we speak. We're in the throes of finishing our USIS business. EWS is in the cloud. The USIS business will be complete in the next couple of quarters, which will be a big deal to have North America complete.
When we get to this conference next year, we'll be 90% complete, somewhere in that range, meaning in the second half of 2024, and that's meaning all the revenue in the cloud on their new applications. And then we'll have some international platforms, like Australia, to complete in 2025. So we're way down the road on it, and we're super energized about it. We think it's gonna really position Equifax to be a preferred partner because of the tech and stability we deliver and the speed of data transmission, and then also to be a preferred partner on our ability to innovate and roll out more new products. And I think, as you know, we've ramped up our Vitality Index and our new product rollouts.
By being in the cloud with a single data fabric, we can do either data combinations, which drives value and predictability and performance for our customers around a score or a solution we're delivering, or deliver historical data, you know, going forward.
Got it. Great. Let's dive a little bit more into some of the revenue trends. And going back to a topic we touched on around subprime, so one of your competitors, TransUnion, noticed a pretty big drop-off in credit volumes in the month of September and October. Can you talk a little bit about whether you saw a similar type of trend in your business and what the risks are that the subprime weakness could spread to near prime and prime consumers?
Yeah, we didn't see what they saw, and I don't think our other competitors saw it either. We were puzzled by it because, you know, we didn't really have that exposure, and we still haven't. It may be that they're more exposed to fintech than we are. They have a larger fintech business. I think that's well known in the industry. They have a great business in that space, and most fintechs are subprime, you know, where they're doing their business. And, you know, that's, as I said earlier, kind of old news. That started declining last summer, you know, meaning in 2022, and then continued. And from our perspective, we're kind of comping off lower... You know, low numbers as we go into the fourth quarter, you know, from a fintech perspective.
On the idea of it spreading, I know that's maybe, I think, one of your theses perhaps, you know, of how you think about it. We don't. Again, is it where's unemployment gonna go? Is there gonna be a broad increase in unemployment? If there is, that's gonna put a challenge on both subprime and near prime and perhaps prime. We don't see that happening. You know, do you think there's gonna be recession? I think is really the thing you have to think about, you know, to have that kind of an impact. John, anything?
No, I think you covered it.
Yep.
Yeah.
Great. And then maybe we can talk a little bit more about the USIS business. You've in the last quarter saw the benefits of rate shopping in the high interest rate environment, and-
In our mortgage business?
Yes.
Yep.
The non-mortgage business, up around 5% organically. Can you talk about some of the dynamics you're seeing in autos and cards?
Yeah
... specifically?
I don't know if you want to come back to it, but just as a reminder, our USIS business is much more than just the FI and autos, cards, mortgages.
Mm.
You know, we have a commercial business that's, you know, you know, almost at $200 million in USIS that was up double-digit in the quarter, was up 20% last year. We have an identity and fraud business that sits in USIS that was up double-digit, so-
That was a big tailwind identity.
Yeah.
Yeah.
Yeah, and we expect that to continue to be one going forward.
Right
... as well as the commercial business, we expect to outperform USIS because the differentiated data that they have in the marketplace. You know, so back to your question on, I guess it was specifically around auto or the other vertical?
Auto, the cards, personal loans.
Yeah, no real change, I would characterize it-
Mm
... that's different than the year. John, would you say?
Yeah, we talked about it in the third quarter, right? We talked about the fact that banking and lending performed relatively well. Part of that was around strong commercial. Some of that does flow through identity as well. And though, as you said, identity, fraud, and commercial were very strong for us. Auto, again, was okay in the third quarter, right? I think you've seen some discussion in the industry around some slowing auto sales, so obviously, we're impacted by that if that were to occur. But, overall, I'd say our performance in those businesses has been fine this year, right? I mean, generally speaking, we've seen auto be a little stronger than banking and lending, but our real strength has been around identity, fraud, commercial, right?
Those have been the things that have grown really nicely for us as we've gone through this year.
Right. Well, let's talk a little bit more about mortgage. So, you updated your guide, trimmed it, last quarter because of weakness in the mortgage market.
I'd say trimmed it again.
Yeah.
To be fair.
Yeah, and you're looking for overall industry mortgage inquiries to go down about 34% full year. Can you talk about what assumptions you're making around mortgage rates, whether you think that we've established a bottom in terms of mortgage expectations at this point?
Yeah, I think it's challenging for us to call the bottom. We're not good at forecasting where the inflation was gonna go and where the Fed was gonna go. It feels like we're getting real close to a bottom-
Mm
... just from our perspective, you know, on how the market's performing, and you've seen the 10-year come in, which has brought mortgage rates down-
Yep
... which we think is impact. And I think just a size that I think is very helpful, we've never seen in our lifetimes a mortgage market contraction like the one we've seen in the last 24 months. And when I say mortgage market contraction, it's principally in the purchase side of mortgage. There's really two types of mortgages: there's refis, and then there's purchase. There's some level of refis that happen all the time. I think, as you know, in 2020 and 2021, when rates came down, there was a refi boom. In 2021, we benefited from that, and our revenue went up meaningfully. When we look at where we are in the fourth quarter, you know, really from a run rate standpoint versus what we would call a normal mortgage market, meaning without a refi element in it, of 2015 to 2019.
That, for us, is how we think about more normal. You can agree or disagree, but that's how we think about a normal market, that kind of rates were steady, there wasn't a, you know, a big refi element. We're 50% below that today... And that's kind of the exit rate we have going into 2024. On the call a few weeks ago, when we had our third quarter earnings, we talked about if you take fourth quarter run rates and run them through 2024, that would be a 15% decline year-over-year-
Next year.
as mortgage came down
Right.
from 2020—you know, through the year on a quarterly basis. I think, as you know, we outperform the underlying mortgage markets, and we do all of our markets from price, from product, from penetration, new customers, et cetera. In the third quarter, our USIS business was 33 points of outperformance. So if you think about a market that's down 15, and we have some level of outperformance, you know, we should be able to outgrow that negative 15 next year. And then in USIS—I'm sorry, in EWS, we were up by 20 points, you know, versus the market. So when we think about a market that's flattening out, versus 2015 to 2019, and we're not giving guidance for 2024, we're just illustrative of what-
Right.
fourth quarter run rate looks like for 2024, if you believe it's gonna be flat. But at some point, the mortgage market will return, we believe, to normal.
Right.
Which is that 2015-2019, and that's, again, we're 50% below that. So directionally, you're looking at $1 billion of mortgage revenue as it comes back towards normal. Now, whether that's 2024, 2025, 2026, or 2027, somewhere in that timeframe, we believe that will happen. And then second is, I think as you know, if you believe that rates are gonna come down at some point, I think your bank... I don't know if they're recommending rates are coming down in the second half. I don't know what your Goldman's prediction is, but many banks are saying that there'll be a rate decline in the second half.
Yeah.
We're not economists. We're not making that call. But when that happens, there'll be some element of refi, meaning people that took out mortgages over the last couple of years at 5, 6, 7%, at some point, when the Fed takes rates down, there will be a refi positive, for Equifax coming forward in the mortgage business.
Right. That makes sense. If we shift gears and talk about workforce solutions.
Yep.
Last quarter, you-
Finally.
-stated-
Yes.
your revenue outlook to be up about 0.5% from 4% previously for this year. Can you talk about some of the trends, both positive and negative, you're seeing in workforce? Certainly, mortgage was a headwind.
Headwind.
Government was certainly a big tailwind.
Positive, yep.
Yeah, so some of the puts and takes that you're seeing in that business.
Yeah, and so maybe just for the rest of the group, I'll just frame workforce, I think, as you know, is our income and employment business. It's a very unique data set for Equifax. It's a business that we expect to grow north of our 8%-12% or 7%-10% organic in the 13%-15% range over the long term. 50% EBITDA margin, so its revenue growth and its margin-
Mm-hmm.
-is highly accretive to Equifax. About $1 billion of the $1.5 billion is in FI. About $1.5 billion is outside of FI. And I'll hit... So we already talked about mortgage. That's clearly been a headwind-
Yep
You know, for the business. Auto, cards, P loans have been, you know, performing kind of normally, you know. I would characterize in 2023, and I would expect that to be in 2024. When you think about, if you think mortgage is gonna be down 15% next year, meaning off of the current run rates, and we're able to deliver mortgage outperformance, that will offset a lot of that decline inside of that business. We have a $400 million business, almost $500, that does employer services, regulated and compliance services, that companies outsource to Equifax. So we do unemployment claims management, I-9 verification, Work Opportunity Tax Credit, Employee Retention Credit, ACA benefits, W-2 management. Those kind of services are outsourced to Equifax, and that's a $400, almost $500 million business for us.
You know, that business has been growing, you know, kind of low to mid-single digits. As a part of that relationship with the company, we have payroll records that we can then monetize across the rest of the platform. We have a $400 million business in the talent vertical, that is what we call it, but where we're selling our work history to background screeners.
Mm.
We collect every record for the last 20 years. We have 164 million active records every pay period, so we're getting those records from all the different sources. We have 640 million total records. Think about that as jobs and people. So that work history is a very valuable instant data solution we can deliver to background screeners. That's a $400 million business that was up almost 2x last year. It's been impacted by the hiring market this year.
Right.
That is kind of comping out, although we're not sure where that's gonna go, where we think primarily we're more impacted with our customers on white-collar, background screens than blue collar. But that's one where we've been outgrowing the market through price, product, more records, higher hit rates, and penetration in the vertical. That's a $3+ billion TAM, for the background screeners of the manual effort they do-
Mm
-around verifying employment. We've got a $400 million business, so there's room- white space to grow in converting manual to our instant solution. And then the last vertical that, you know, we're very positive about is government. That's where we're our, our data, our instant data on income, is used to verify social services eligibility, whether it's, food stamps, rent support, childcare support, student lending support. All those social services require you to verify income, because if you make less, you get more social services. That's a $500 million business for us. It was up 50% last year. It'll be up strong double digit again this year. It's one that, is about a $3 billion TAM of manual efforts. This all happens at the states.
Each of the agencies are delivered, and those social services, I think, as you know, are delivered at the state level by each agency. So we've been developing the connections to those different states, to convert them from manual to using our instant solution, and we deliver speed and productivity, which is what we really do in every vertical in workforce solutions, is we're converting a manual income verification or employment verification to an instant verification using our data set. And you remember, George, from the third quarter call a couple weeks ago, we announced two big contracts in government. We extended our contract with CMS, which is $1.2 billion over five years, so you see the scale of that business. And we added a new contract with USDA for SNAP TANF, which is food stamps. That's $190 million.
Over five years. So, you know, government's, you know, one of the many verticals that we're quite high on. But, you know, the power of workforce is those diversity of those verticals we're participating in, the penetration opportunities of converting manual to our instant solution. In every vertical, the majority of the income or employment or both verification is done manually. And then the last one is the ability to add records. Mm-hmm. You know, very unique in this business because we're getting inquiries from our customers for every applicant. As I said earlier, we have 164 million active records, 122 million of those are individuals. The delta is people having two jobs or three jobs in our data set. And you think about 122 million individuals in the third quarter, that was up 10% year-over-year.
That translates into revenue growth because we have higher hit rates, and we have a long runway to add records. There's about 220 million income-producing Americans, so there's directionally another 100 million records to go for us, and we have dedicated teams in each of the different record verticals to grow those. So it's a very powerful lever for the business, along with price, product, and penetration, to add records and monetize them. And total non-mortgage grew very nicely in the third quarter, like good growth, up over 10%, substantially outperformed the talent market that we serve, right? Which was down significantly. We saw our talent business grow again. And as Mark said, government, very strong, up north of 20%. Little bit of weakness, obviously, in card, right? Mm-hmm.
Because card probably in auto, because we probably skew towards subprime there. And we're also underpenetrated where we're doing income validation. We're underpenetrated there. We're underpenetrated. Mm. But really, overall, very nice, very nice non-mortgage growth at double digits, which we expect to actually strengthen in the fourth quarter. Right. Competitors TransUnion and Experian have been incrementally expanding into the verification space, albeit at much smaller scale. Can you talk a little bit about what your assessment is of the competitive landscape and competitive threats in workforce solutions? Yeah. You know, we watch what Experian and you said TransUnion. I don't think TransUnion's in this space. They have an investment in Truework. Truework, yeah. So I don't think they're participating directly, but maybe they are, and we're not aware of it.
I think they announced three years ago they were going to get in the space. They didn't really do much, and now they've made an investment in a fintech to try to participate. You know, we're aware of what they're doing. Our 122 million records, the scale of our technology, the scale of our distribution, the scale of our capabilities around security, privacy, everything else, and our ability to add new records. You know, we added 10 million records year over year in the third quarter. If you go over the third quarter in 2022, you know, that's more records than the two of them have combined, you know, as far as unique records.
So, you know, we're well aware of, you know, a strong company like Experian that's, focused on the space. You know, we're focused on making sure we continue to drive growth, and we feel like we've been quite successful in it. Got it. Let's talk about Boa Vista. You closed on the acquisition of the stake in the third quarter. How is the integration going, and how do you view the Brazilian overall credit opportunity? Yeah. So for the rest of the group, I think you're well aware that there's a-- Experian has a very large position with Serasa in Brazil. They've been very successful at it. We've got a lot of respect for what they've delivered in growing a large business inside the Brazilian market. They bought it, I don't know, 15 years ago, something like that.
We've wanted to participate in Brazil because it's a big market, fast-growing middle class, and there really wasn't a second player. Boa Vista was a private equity-owned company that we've been watching for a number of years. We had a small investment in it, and we saw a window of opportunity last December to buy it. It was publicly traded, wasn't performing well, so we bought it at very good value. We closed on it in July, as you know, and we're gonna bring in. They were down the path of going into the Google Cloud. We're in the Google Cloud, so we're moving them into our tech stack. We're gonna bring our tech capabilities to Brazil. We're gonna add our product capabilities from our global platform.
You know, we hear from customers are very positive about having a second global player in a large Brazilian market. The market itself is growing, by our measure, kinda high single digits, low double digit. So, you know, we like the macros of the Brazilian consumer market. A lot of unbanked consumers moving into the formal financial environment. And then Boa Vista also comes with a unique data set that's unique to Equifax, Boa Vista, from retailers in the São Paulo state, which is the largest state in Brazil, is a very unique data set that's quite additive to the bank transaction data we have, which we think will differentiate us. So we're down the path of the tech integration. We've got people down on the ground there.
We've got, we're integrating the business, and we're, you know, quite energized about the acquisition for the future. That's great. Let's talk a little bit about margins. Yeah. Previously, you had targeted 39% EBITDA margins by 2025, but that's likely not viable because of the mortgage environment. What would mortgage volumes need to be for you to achieve high 30s EBITDA margins? Yeah, so maybe a little frame of... And I'll let John jump in, also. You said not viable. What we said on the third quarter call is, it's not gonna happen in 2025 - but we're still committed to the 39%. So just to be clear on that, we would disagree on the not viable point.
When you think about our margin expansion from where we are in 2023 towards that 39, we've been very clear that with our 8%-12% growth, we expect to have operating leverage that delivers something like 50 dips per year of margin expansion from the core business operating leverage, and that's up from 25 historically. As you know, we increased that in our long-term framework. You get that from workforce, you know, as a bigger piece of those 50% EBITDA margins. That math just delivers a meaningful chunk of that 50 basis points, and then you get operating leverage from the rest of the business, as well as our new product rollouts. And then, the lift on top of the 50, as we complete the cloud, is the cloud cost savings.
Mm-hmm.
Earlier this year, we announced $275 million of cost CapEx reductions this year, $65 million of carryover in 2024. There'll be additional cloud cost savings in 2024 from us completing USIS and some of our international platforms, as well as in 2025, and those are the two steps that move you towards that 39. And as you point out, you know, when we made the 39% commitment for 2025, that was in a normal mortgage market.
Mm-hmm.
Mortgage is now 50% below.
Mm-hmm.
John, if you want to take kind of the path from-
Sure
Here to there, you know, as far as timing. We haven't made a commitment around when 39 happens-
Yeah.
But we made a commitment, we're still going to deliver it.
Right. So when we made the original commitment back in 2021, it was kind of linked to $7 billion in revenue and 39% margins. And we, we'd said we expected to be able to get to $7 billion in revenue, given a more normal mortgage market. And we said a normal mortgage market at the time, which, as Mark's already said, we're 50% below-
Mm-hmm
... by 2025, right? Obviously, that's not going to happen. But we still look at being able to deliver 39% margins at some level of revenue. It'll be above $7 billion, right? Because you're going to have normal cost increases that occur as you go beyond 2025. So we'll need to have revenue higher than $7 billion. But as we cross $7 billion in revenue, obviously driven mostly by organic growth, because our organic growth is where we generate the greatest margin leverage, then that's how we'll drive our path to 39% margins. And we continue to see the opportunity to do that as we drive leverage, sorry, drive revenue higher and drive it above $7 billion.
The positive on the top line is that our non-mortgage businesses, which is 85% of Equifax in the fourth quarter, have been outperforming that framework, meaning they're growing faster. So that's a real positive. And obviously, mortgage has been dramatically different when it's down 50%, than what we anticipated. So we would expect our non-mortgage businesses to continue to perform well. And then, we still have the goal to get to 39%, EBITDA margins. And along the way, our CapEx is coming down-
Mm-hmm
... as we complete the cloud, and as those margins expand, our free cash flow will expand beyond what we believe we're going to use for CapEx.
Mm-hmm
... to invest in the company or bolt on M&A. At the right time, in whether it's 2025 or 2026 or in the future, our intention is to return that excess free cash flow to investors through dividend growth and buyback.
Right. And we-
As we complete the cloud, you should see CapEx go down towards 7% of revenue.
Right. And maybe last question on the topic of free cash flow. Over the past six years, the free cash flow conversion from EBITDA has been around 30%. What do you see as a viable longer-term target or run rate for cash flow conversion? And, maybe a little bit more on your capital allocation priorities.
So, sure. On capital allocation, right, we continue to be focused, obviously, on internal investments, and we're continuing to be focused there first.
Completing the cloud.
Completing the cloud-
Yeah
... right. Let's get that done. And then, then once we go beyond that, obviously, we continue to be focused on, on executing on the dividend that we've already committed to, executing acquisitions so that we can try to drive 1%-2% of incremental revenue. Obviously, very accretive acquisitions is what we're focused on trying to execute then. But then we think, given the strong cash we're going to generate as we go forward, we should be able to start to return capital to shareholders, and we'll determine the timing of that, as we move through next year, through share repurchase and dividend increases. You should see us be talking about that in 2024, as we go forward.
As we move through 2024, we'll give you more. As we give guidance on 2024, we'll give you a better view of, of where we expect our long-term cash flow to
Mm-hmm
... to settle out, and to settle out relative to our adjusted net income.
Great. Well, Mark, John, thank you so much for the insights. Please remain. Thank you, management.