Welcome, everyone. I'm Andrew Steinerman, your Business Information Services Analyst, and this is the 14th Annual Ultimate Services Investor Conference. I'm also gonna, if you don't mind, I'm actually gonna even put something on your calendar just so that you're ready for a year from now. Our conference next year, Ultimate Services 2024, our 15th annual conference, will be November 14, Thursday. Also, make sure you grab one of these information services data books. Stephanie Yi's in the audience. She's the vice president on my team. Stephanie and I worked over the weekend for these things, so grab one there. You can get it in the digital conference book as well. So, this is the Info Services track. This is the TransUnion Management Team.
I will be rotating with Stephanie between B and B and A, between Business Services and Info Services. We're so thrilled to have Chris Cartwright, CEO of TransUnion, with us, Aaron Hoffman, Greg Bardi of IR. Obviously, this is a great time and important time to be engaged with the TransUnion management team. These are all fireside chats, so you could see that I, you know, prepared a list of questions. You can watch the clock, too. We have 30 minutes together, or only 28 and 20 seconds now. I'm gonna ask questions, but just if you wanna ask a question, just raise your hand, and I will point to you, and you can engage in this conversation. Grab your information services data. Okay. Welcome, Jim. Thanks for being here.
Always a pleasure.
Thank you. So I just wanna talk about the stock. I hope, I hope you don't mind. You know, it's just abruptly under $60. You know, the stock hit, you know, $60 years ago, and here we are. You must be thinking that, you know, something is not being understood by the marketplace. So I just wanted to kind of open it up to you, of what do you think the market is missing when you see today's TransUnion stock?
Well, it's a good question, and we're here to talk about the business and talk about the stock, so-
Okay.
I thank you for it. You know, well, first of all, we're fortunate that we've got a group of core long-term shareholders that understands our transformation and how we're building value. I think perhaps in the near term, the growth momentum, the revenue growth momentum in the portfolio is being underappreciated in the market, and really for a few reasons. Now, you know, we came in a little short of our guide for the third quarter, and we were purposely very conservative in how we guided for the fourth quarter. The idea was to fully de-risk that estimate, but also create a reasonable opportunity for overperformance. I think that's been interpreted in different ways. You know, some in the market have extrapolated, perhaps, from that, and have assumed perhaps a worsening revenue situation.
You know, as we look at the momentum in the portfolio, you know, we believe that we can continue to grow and grow at a good rate. You know, we've got various positions in the portfolio, like the international business, that continue to compound in the low double digits, and that's a little over 20% of the business. Additionally, in the U.S. markets, the B2B section, which is about $2.5 billion, well, half of that, the emerging verticals are growing in the mid-single digits, and we expect that to continue. Now, in the third quarter, there was some volatility in part of financial services, and as a result, U.S. Financial Services was flat. But we don't expect it to remain that.
We feel that if you look across the several lines within financial services, a couple are down because of known pressures in the market on subprime lending and card origination. We think that, you know, from those floors, there is upside opportunity, but we also expect continued growth in auto, continued growth in mortgages, largely through hitting a volume floor, if you will, and some strong pricing actions. So the first thing I would say is we have growthful positions with momentum across the portfolio. We've also and supported by growth from various vertical markets. On top of that, we will realize the revenue benefits of another year of strong sales next year, and we expect further sales momentum and revenue conversion in the course of the year.
And then there are a host of the typical pricing actions, both our own and third parties, which provide further revenue momentum in the portfolio. So I think perhaps that's the first area of market disconnect. The second would be, you know, naturally, when there are concerns about revenue growth rates, there are knock-on concerns about profitability of the business, right? And, as we have described, we have been, since the second quarter of 2022, when the slowdown really started to happen, we have been managing our cost growth downward. And, you know, most recently, we took some actions early in the fourth quarter, even before we released earnings. And you would expect, and we will, continue to do that type of, belt-tightening in response to market volumes.
The more important actions that we've been planning for a long time are structural, and we announced those yesterday. It's a combination of workforce productivity by further leveraging our GCCs, which we've been investing in for-
Say what GCC?
... Oh, Global Capability Center. And again, those of you who've been following the stock and the story, you know, since the middle of 2019, when I took over, we made a commitment to reorganize how we worked, right? And we were gonna do more of our work in centers of excellence in talent-rich geographies like India or South Africa, and most recently in Costa Rica. And we would end up migrating a good deal of the work there, but then keeping in market those functions that have to be in market in order to be connected to customers and to drive innovation.
What we announced yesterday is really just the next step in that journey, but it's a material step, and we think it gets us to the right balance between working in market and then working in a centralized, standardized, and highly automated way in our GCCs. The other exciting thing which we announced is that we're now highly confident we can leverage the Neus tar Technology platform to become the central data ingestion, data management, identity resolution, analytics, and deployment platform across TransUnion globally. With that as our destination platform, we're able to now migrate and consolidate our various applications around the world, be it credit applications, marketing, public record-based investigative solutions, onto this common core. As we do that, we're gonna achieve really significant economies of scale.
The cost return on that program in these two initiatives overall is very attractive. But more importantly, we're going to be able to innovate much faster than we've been able to historically, and we've done pretty well historically. So I think, I think perhaps, you know, the growth momentum in the portfolio, in our ability to control and improve margins and drive profits is not fully understood.
Okay, that's great. Maybe I'll start by jumping into the announcements. Yesterday, the cost initiatives, which will take out cost savings of $120 million-$140 million, this is in 2026, half of which will be realized in the current, coming year, 2024. You talk about Project Rise, and you talk about the Global Centers of Excellence, GCCs. My question is, when you add up, that, that, kind of the $60 million-$70 million for 2024, you get out about a quarter, $0.25 of EPS. Like, should, should I be raising my 2024 estimate by $0.25? In other words, Project Rise is not new. Like, we've been hearing about cost savings coming in Project Rise, you know, for, for years, and they are coming in.
Is this all incremental savings when you talk about these numbers together? You can imagine, I would love if you could separate the incremental savings between incremental savings in Project Rise versus the increased use of GCCs.
Yeah, sure. So, let me characterize, you know, the financial dynamics of the restructuring programs, and then we can talk about 2024 later. You know, the way you should think about this is, again, twofold. One is, a technology, consolidation, modernization, called OneTru, which is gonna save costs and speed innovation. And then also, you know, a rework of the, of TU personnel to, to capitalize on the GCCs. Collectively, on a cash basis, the way I think about it is, we're spending over the next two years, an incremental $300 million.
Incremental to Rise. It'll take a couple of years to fully execute on these initiatives, and at the end of which, we will deliver ongoing an additional $200 million in EBITDA. So it's a $300 million investment with a two-year execution period to produce $200 million more in EBITDA ongoing. And all of that is incremental to Project Rise.
I would just... So it's $120 million-$140 million of incremental EBITDA, and then a reduction in the CapEx-
CapEx, yeah.
-which makes up the remainder up to the $200 million?
Yeah.
I think what's important about the CapEx piece is, you know, if you go off the 2023 base, that gives you $70 million-$80 million of reduced CapEx.
Right? So it's cash that we can deploy, shareholder-friendly ways, presumably. But it's a gift that keeps on giving, right? If we take that long term structurally to 6% of revenue, then that should grow over time. That reduction in capital is actually a bigger number as we have a larger revenue base, right? We're continuously generating saving capital that we would have spent.
Right. And also, Aaron, I ask you if we could break out, let's take the middle, the 130. Could you break it out between, let's say, a higher savings than expected originally from Project Rise versus increased moves to the GCC locations?
Yeah. So none of the 120-140 is associated with Project Rise.
Oh.
1:20 to 1:40 is entirely-
GCC.
incremental. It's either related to the further—the evolution of the technology program.
Oh.
for the organizational optimization, largely with the GCCs. So $120-$140 is above and beyond anything contemplated in Rise, which the savings for Rise were always, you know-
Okay.
fairly modest. We had guided to $20 million-$30 million. Much of that has been realized over the past several years, so there's not like there's a big, Rise nut sitting out there to-
Right. This is not about the cloud, this is about technology rationalization plus GCC.
Exactly. Yeah. If you look... Again, those of you who followed, we've been outlining this vision for our tech evolution-
for a long time. Part of it was getting, you know, those applications that we felt should run in the public cloud to the public cloud on a common software foundation. But across 30 different markets, we operate a lot of redundant software.
It's just a function of any business's rapid growth. Now there's a chance to consolidate it on a proven, functioning, next-generation platform, which is OneTru, and take a lot of economics, but also improve product development velocity. And look, one thing I would stress is that this is not a theoretical undertaking, right? We're not building OneTru. OneTru exists right now. It's a consolidation of our credit, our marketing, and our fraud signal-
those three addressable markets that we moved into, that we outlined on Investor Day on March 15th, 2022.
Right.
It's real. We can demonstrate it. It's running. Now the question is: how do we start moving things into it so it becomes more of a consolidation, not a build-out effort? Yes, it is one of the reasons we acquired Neustar.
Okay. When you look back over the last two years, Chris, are you reassured that the amount of innovative growth investments that needed to be made have been made?
Look, I'm really confident, right? These are two sides of the same coin. Sometimes investors will say, "You did a lot of M&A, and you increased your debt," and unfortunately, we went into a market slowdown. But the benefit of all of that was a bunch of acquired innovation to complement the internal innovation that we had already been on the journey for. And today, we think we can set a standard as the player that has the most evolved credit, marketing, and fraud assets running on a common platform and available across a series of interrelated products. And with this, as we complete the consolidation, our innovation pace is gonna increase considerably. So yeah, I feel like we have got between our acquisitions and our internal development, we have enough for a generation of growth, right?
The challenge has been digesting it all and doing it in a market that is slowing down.
But, you know, we're pulling that off. We're continuing to grow despite volume retreats in parts of the credit market and parts of advertising and marketing services. And we think as we get through this, we're gonna, you know, top-line compound and deliver a lot of profits.
So obviously, TransUnion doesn't exist in a vacuum. There's two other publicly traded companies in the consumer credit bureau and adjacencies market. We heard from Experian yesterday. My question is, now that you look at your guide and, just a moment ago, you called it a reasonable opportunity for outperformance and very conservative. My question is, you know, is this like when... Like, I don't remember those type of quotes on the conference call when I go back to TransUnion. Is this that some time has passed since the TransUnion conference call, and now you realize that consumer credit isn't decaying like you assumed in the guide?
Well, what I would say is, and I think we have said publicly, and I believe we did emphasize on the call-
We're public now.
Yeah. Is that, you know, because of the downturn we saw in September-
... in portions of the U.S. lending market, we were purposefully conservative in how we guided the fourth quarter.
That's right.
We took from September, we extrapolated, we put margin for error around that. What I can tell you is, after one month plus of experience, we're pleased with how the quarter's developing, right? And we tried-
Not just for you, but for the, like, the backdrop, right?
Yeah, I would say for the backdrop as well, right. And look, there's been much discussion about, you know, our market positions or the composition of our portfolio-
Yeah
... versus others. I think, you know, what you can see is because of all the share that we've gained in the U.S. over the past decade, in other markets as well, like Canada-
-like India, et cetera, our share is broadly reflective of U.S. financial services. However, we've had particular success in financial services. We still estimate... Excuse me, in fintech.
Right.
We still estimate that we've got 75% market share.
Right.
After, you know, almost 70 basis points of rate increase over the course of the year, Fintech paused in the third quarter.
Yeah.
They're getting their legs underneath them, but there's no reason to believe that they won't return to growth with stability, and especially with rate easing, if it happens, we should all knock wood on that, in the coming year, right?
I agree.
So, um-
Yeah. So let me ask you a portfolio mix question. So obviously, you've had big success in fintech lending. As of 2022, it was about 14% of U.S. markets, financial services for TransUnion, so it's a market that they do dominate. My question is: we know that mix is different than your peers, and right now it's bad, in the future, it's gonna be better and outperform your peers. But my question is, when you look at your portfolio within financial services U.S., outside of fintech lending, do you think that TransUnion has a larger mix of, let's call it, lenders that have subprime consumers? Like, I believe your auto lending is more skewed towards used car, and also smaller banks, which is not necessarily subprime consumers, but you can imagine JPMorgan is, you know, taking away their deposits.
So my question is: do you feel like there are meaningful mixes, differences between TransUnion, Equifax, and Experian, that lend itself to a different observation about the consumer credit market currently?
... You know, I would say not really, and not so much. I mean, other than what I mentioned, which is, we are overweight in Fintech.
Yep.
And I think we've explained why that is-
Yep.
And how there's a bit of a network effect, given the richness of our file and the number of inquiries that we see the activity in that marketplace. We estimate at this point that we're roughly tied for first in U.S. market share. You know, that's a big shift. And you're right, the larger banks, where we have our fair share of the business, have weathered this downturn better than the smaller banks, right? And there was this upper migration of deposits. However, that's reached an equilibrium.
Yeah.
There'll probably be some downward migration, given the higher rates being offered further down than in the larger institutions. But if you examine the third quarter performance of the three bureaus and their projections for the full year, and you remove the dissimilar elements, right? Because-
What are the dissimilar elements besides for fintech?
Well, for example, TransUnion does not have a corporate credit reporting-
Yep.
-business.
That's right.
We include our batch business and our core financial services. Somebody else includes batch elsewhere. We separate direct-to-consumer.
Right.
Some people include direct to-
You're talking about the segmentation.
Right.
Yeah. I understand.
If you pull out all those piece parts and do a like-for-like comparison, which of course we do, all the bureaus are performing in a relatively consistent way in terms of growth, right? And I think, again, that perhaps is something that not all of the market understands, because it requires a bit more knowledge to really parse that out.
Mm-hmm. And what about my comment about auto lending, right? You guys skew more towards used car, that point where you-
Yeah, I don't think we really skew-
No?
more toward used car. What I think is because of a shortage during the COVID times of new cars, the market consumption skewed toward used cars.
That's right.
Right? And that also boosted used car prices and all of that, but now that manufacturing's come back online, there's more of a balance between those.
Okay. Looking at your auto insurers and your tenant screeners, what sort of needs to happen in those end markets for them to kind of improve going forward in your revenue base?
Yeah, well, those are two important components within the emerging verticals-
Mm-hmm.
in the U.S. markets, which is half of U.S. B2B. And, I think both of those present attractive upside opportunity over the long term. Look, in the insurance industry, it's very clear that marketing activity has fallen dramatically, and it's because policy-level economics have not been positive, and they're working hard to get those positive. They're getting rate increases.
Mm-hmm.
Now, with some, you know, decline in the rate of inflation, which was driving their risk and replacement costs and all of that, we're going to get back to a point where large carriers can resume their marketing volumes. So a large business for us, insurance, which is roughly a quarter of the emerging verticals, has been growing low single digits when, you know, it's really on a long-term trajectory to grow high single digits and sometimes even a bit more. So that's just a market dislocation due to inflation and also rates that will get sorted out in time and is likely at a bottom. I think the rental screening market will become more robust in the near future. There's a ton of new apartment units coming on.
With that availability, you'll start to get resident movement and momentum, and that'll increase the velocity of screenings. Now, for TIO in particular, we've gone negative in this segment because we were completing a negotiation with the CFPB around the types of information that we could offer to tenant screeners in the future. And so we have had to stop providing certain types of information. Like, there are several states that we can no longer provide criminal records because they don't meet the accuracy and the currency standards that the CFPB has now guided through this resolution with TransUnion. But remember, these are not unique requirements to TransUnion.
This is the CFPB issuing guidance or policy through enforcement, and the FTC was very clear in our settlement, where they said: "This settlement reflects guidance for the rest of the industry." So if TransUnion has to pull back from providing certain categories of information because they don't meet this new CFPB standard, that's an industry-wide issue. So both the other suppliers in the industry, but also the main customers, will be at legal and compliance peril if they don't adapt similar practices.
Okay. And did you say state by state? Because like, if it was CFPB, it would be the whole country.
It is, but every state has a different standard for their criminal records-
Oh.
-for their court adjudications, for whatever it may be.
I got you.
Sometimes it's a case where, you know-
I got you.
Yeah.
It really depends on what records are available.
Look, there's a maze of complexity that underpins the information that we provide to landlords, right?
Yeah. I got you.
The good news is, having, you know, just come out of our annual, you know, rental screeners conference and talked to some of the largest property managers in the country, credit information continues to be-
Essential
... the most predictive element of their screening set.
Totally agree. I know it's sort of silly to talk about a recession because our economists say we're not going into a recession. But surely, over the many years we've talked about TransUnion's portfolio being able to weather a recession, and I forgot, if you guys call it, revenues could be flattish in recession or maybe, I think you say, positive in a recession. And so my question is, from this base that we're at right now of growth, if there was a recession along the way, maybe next year or the year after, do you still stand by that the portfolio will weather a recession well and resiliently to the top line, organically?
Yes. What I would say is, look, I don't—I mean, I understand recession and soft landing and the varying perspectives over the past 18 months of what we were gonna experience and where we're at. But for a material number of our markets, volumes have been going negative for almost two years now, and the diversification in the portfolio has allowed us to continue to grow low single digits and expand profits, right? So arguably, we've been weathering the recession, and the portfolio has been performing as intended during a clear market slowdown.
Right.
Right? So the U.S. growth softened materially after being a growth engine for a decade, but the international business has been booming. In addition to that, the direct-to-consumer business, for reasons that we've, you know, discussed a lot, is troughing. Instead of being a drag on the portfolio, we expect in 2024, it's gonna make positive contributions to portfolio growth.
Do you mean that they'll grow, or they'll grow as much as the portfolio?
I mean, it will contribute to growth, not necessarily as much as the portfolio.
Back to positive.
But don't... Yeah, exactly.
Positive.
They'll be contributing instead of dragging. And look, in the U.S. markets, which the two big pieces are U.S. financial services and emerging verticals, again, almost 50/50. While the growth rate has been slowing in financial services, there's still a couple of lines that will remain positive, a couple of lines that'll be positive to perhaps declining, depend on what we experience. Then the emerging portion is positioned to grow and offset that. So the diversification is happening real time and has been happening for many quarters now.
Okay, so I have more questions, but we can take a question from the audience if you want. Go ahead, Palmer.
Just going to bring a microphone over if you don't-
Yeah.
For the-
No, let him just repeat the question. Go ahead.
We just need a microphone.
Repeat the question.
Yeah, the question was really about pricing and to the earlier, you know, comment that part of the portfolio momentum that we've got is both our, you know, consistent annual price actions, which are positive each year and will remain positive this year, in part, given the inflationary pressures, which, you know, make our customers more understanding of the need to raise some rates. And then, third-party service providers of scores and other services are also increasing their prices, and often, you know, we benefit from that as well.
Okay. And when you say that we'll raise prices this, this year, did you mean 2024?
Sure. Yeah, just as we did in 2023-
Yeah.
and 2022, and perhaps
Okay.
even more so given
Got you.
the inflationary environment.
Other questions? Okay, go ahead.
Thank you. How meaningful would rate cuts by the Fed be to your business next year, assuming they happen, let's say, midyear, not in the context of a recession?
I'm sorry, would you say that again?
Yeah. Rate cuts by the Fed, how meaningful would that be to your business in 2024? Let's say, if that happened midyear next year, not in the context of a recession, more in a soft landing scenario.
You know, in the U.S., really, since the second half of 2021, there's been volume declines across all loan origination categories, right? But despite that, there's still been a fairly robust level of lending activity because consumers have remained healthy and highly employed. My point is that over this period, a lot of loans have been issued that have a fairly high interest rate, and if the Fed takes meaningful rate cut actions, many of those loans become eligible for repricing, whether it's mortgages that get refinanced or increased revolving card balances that get consolidated. And that is typically an area where the Fintechs have been very aggressive in pursuing that opportunity. So rate cuts will yield material origination benefits and volume benefits for TransUnion in the industry.
We have about 30 seconds left.
Yes, sir.
Okay, so why don't we turn it back to Chris? Like, you know, we've asked you a lot of questions. You probably anticipated some questions that we didn't ask. You know, what should we be asking you about that we haven't? And, you know, in particular, as you answer questions, you know, just what products do you think will be good revenue movers as we head into 2024?
Yeah, look, I'm optimistic across the portfolio, you know, both geographically but also in the product solutions. And I think OneTru is a really important step forward in the industry. Having realized this, I believe we are the only player that is offering services across this portfolio of credit, marketing, and fraud, data and analytics, and that that is gonna become the next generation that all other bureaus and players are gonna try and pursue. And the good news is, you know, we've been able to create it using this acquisition as a vehicle, while also driving material growth and material improvements in the profitability of the acquisition, Neustar itself. And so I think that's gonna be good for the overall competitiveness of our business and the return we're gonna get on our deal making.
Awesome. Chris, Andrew, Greg, thank you so much. We appreciate it.
Thank you.
My pleasure.