Hello and welcome to the Equifax Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Trevor Burns, Senior Vice President, Head of Corporate Investor Relations. Please go ahead, sir.

Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begor, Chief Executive Officer and John Gamble, Chief Financial Officer. Today’s call is being recorded. An archive of the recording will be available later today in the IR Calendar section of the News & Events tab at our IR website, www.investor.equifax.com. During the call, we will be making reference to certain materials that can also be found in the Presentations section of the News & Events tab at our IR website. These materials are labeled Q2 2022 Earnings Conference Call. Also, we will be making reference, certain forward-looking statements, including third quarter and full year 2022 guidance to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors that may impact our business are set forth in filings with the SEC, including our 2021 Form 10-K and subsequent filings. We will also be referring to certain non-GAAP financial measures, including adjusted EPS attributable to Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the Financial Results section of the Financial Info tab at our IR website. Now I'd like to turn it over to Mark, beginning on slide four.

Thanks, Trevor, and good morning. Equifax delivered another solid quarter with record second quarter revenue of $1.32 billion, which was up 7% and at the middle of our April guidance, including the negative impact of 190 basis points or $23 million of FX. Constant currency revenue growth was almost 9% at 8.5%. Adjusted EPS of $2.09 was above the top end of our April guidance range with U.S. mortgage market overall, about at the level of our April guidance with U.S. mortgage credit inquiries down 33% versus last year. As expected, the mortgage market decline increased as we moved through the quarter. In the first half of July, mortgage credit inquiries were down about 40% versus last year. Core revenue growth in the quarter of 19% and core organic revenue growth of 16% in the quarter were very strong. Consistent with our expectations, which allowed us to deliver the 8.5% constant currency growth against a 33% U.S. mortgage market decline. Importantly, non-mortgage constant currency growth of 22% was very strong in the quarter and well above our 8% to 12% long-term framework and of course, this represents about 75% of Equifax revenue. Workforce Solutions core revenue growth of 41% was outstanding and above our expectations. International delivered 11.5%, constant currency growth, which was also above our expectations. And USIS B2B non-mortgage growth of 6% was up from first quarter, but lower than we expected. B2B non-mortgage online was strong at 9%. However, our B2B offline business was much weaker than expected, declining 5% in the quarter, and I'll cover this more fully shortly. Second quarter adjusted EBITDA totaled $461 million, up 7% and adjusted EBITDA margins of 35% were above in line with our expectations for the quarter. We continue to make strong progress during the quarter on our EFX…

Thanks, Mark. As Mark mentioned and as shown on slide 16, our guidance now reflects an expectation that the U.S. mortgage market credit inquiries will decline over 46% in the second half of 2022, a continued decline from the down 40% level we're seeing in early July. Our assumptions reflect mortgage originations, 200 basis points to 300 basis points weaker than those levels with the work number inquiries more closely linked to mortgage originations. The reduction in U.S. mortgage credit inquiries of over 46% in the second half is off the second half 2021 reduction over 20%. This level of U.S. mortgage credit inquiries in the second half is over 30% lower than the second half average levels we saw over the 2015 to 2019 period. 1Q mortgage revenue was 29.5% of total Equifax revenues and 2Q mortgage revenue was 24.7% of total Equifax revenues. In 3Q, we expect mortgage to make up just over 21% of total Equifax revenues and about 23.5% in the full year of 2022. As we have shared in prior quarters, slide 17 provides a view of both the number of home mortgages that would have a rate benefit from refinancing on the left and a view of the levels of home purchases on the right. The left side of the slide provides a perspective on the number of home mortgages for which a refinancing would provide a rate benefit, the in-the-money population of mortgages. The in-the-money population is about 1.9 million homes and below the $3.3 million we saw in April. At the current level, mortgage refi activity is heavily driven by cash of refis that are often executed with no rate benefit or rate increase. For perspective, for the most recent available Black Knight data for May 2022, about 95% of re-financings were…

Thanks John. Turning to slide 20 -- 22, the new Equifax is a much different business today than we were in the last recession. We're more resilient and better positioned for stronger revenue and earnings growth. During the 2008 to 2009 global financial crisis, Equifax performed very well and exhibited the resiliency we expect from the data analytics business. In 2009, we saw only a 6% decline in total revenue. Importantly, Workforce Solutions revenue grew throughout the period and showed substantial growth of 17% in 2009 from TWN record additions and their other growth levers, which drove higher verification rates and strong unemployment revenue growth from the growing unemployment levels in 2009. We believe that Equifax business mix is much better positioned for a potential economic event in the future than we were in 2009. Strong Workforce Solutions growth has increased their relative size in Equifax from 16% of revenue in 2009 to almost 50% today with margins above 50%, about 20 percentage points higher than the Equifax average. EWS is benefiting from strong growth levers that are not directly tied to economic activity, including record growth, penetration into new fast-growing verticals like talent and government, system-to-system integrations, deploying new and higher-value products as well as the measured price actions, taking advantage of the scale of the TWN database. Second, completion of the Equifax Cloud will deliver cost savings in 2023 and beyond, we expect we'll drive about half of our targeted 500 basis point margin expansion from 2022 to 2025. The cloud migration cost savings are independent of any economic event and driven by our execution. And third, we're leveraging the cloud to accelerate new product development with a goal of 11% vitality index in 2022, which is over $500 million of annual incremental revenue -- new product revenue…

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Our first question today is coming from Manav Patnaik from Barclays. Your line is now live.

Thank you. Good morning. I just wanted to touch on the strength of non-mortgage Workforce Solutions businesses and kind of the sustainability of that business? And maybe if you could just comment specifically on the Talent Solutions side, just given all the announcements you're starting to see on hiring freezes or layoffs, et cetera. Do you anticipate any slowdown there?

Yes. So it's a great question, Manav. As you know, we're investing heavily in the non -- one of our priorities is to invest heavily in workforce broadly because it's our fastest growing business. And -- as you pointed out, the non-mortgage businesses and workforce are really outperforming the underlying market and delivering substantial growth. And I'll touch on talent first, as you pointed out, a big TAM of $5 billion and our play there is to help digitize the background screeners using our data as we continue to expand our historical data, we can deliver real solutions there. And we haven't seen any impact from the hiring market. As you know, unemployment is still very low. There's still more jobs open. And there are people looking for them. And even in -- if that starts to slow down in the future, there's just so much penetration opportunity for us to really work to help digitize the background screening environment, both with our core work history. As you know, we have $570 million total record. So we have a digital resume on the average American worker that totals five jobs for each individual. So there's just a lot of data and growth opportunity there. And then we're also, as you know, adding data assets to go beyond just that work history and talent, whether it's education, medical credentialing data that we acquired with APRs Insights, of course, the incarceration data that's used in virtually every background screen. And we have a stated strategy to look for more partnerships or M&A to really strengthen the Talent hub. So I don't expect them to grow at the rate they have been over the last couple of years, which is very, very strong. But certainly, there will be a big growth driver going…

Got it. Thank you. That's helpful. And then maybe just to follow-up, like in terms of the M&A pipeline, a lot of these tuck-ins, I guess, it makes sense, but just given -- and maybe just some comments around what valuations in the private market look like and your advertising capacity from maybe larger deals than these tuck-insurance?

Yes. I think as you know, we've tried to be very disciplined about our approach to M&A. We're very -- I use the term bolt-on. You can describe how big bolt-on is. Obviously, Appriss was a larger acquisition, Kount was a larger acquisition last year. But we see a lot of opportunity to deliver very high return bolt-on M&A that are highly accretive to our cost of capital. So it's you start with our kind of capital allocation, we see big opportunities to invest in the core of Equifax and we're doing that. And that's really through our cloud transformation, which we're in the final innings of completing. That was a big project and a big focus of Equifax. That will start tailing off our investment in that over the coming year or so as we complete the cloud. New products, we get very high return on. And then when you get into inorganic, we see an opportunity to continue to do bolt-on M&A that adds very positively, and we are very disciplined financially and looking for businesses that are growing faster than Equifax on the top line that are accretive to our margins and obviously deliver high returns. So those are the kind of M&A that we're doing and we've got a pipeline going forward of deals that we continue to look at that will really add value in the three areas that I talked about during my prepared comments of strengthening workforce, adding differentiated data and strengthening identity and fraud. And as you know, as we go into 2023, 2024, 2025, with our margin expansion accelerating in that 500 basis points to 39% in 2025, our free cash flow accelerates dramatically in the coming 12, 24, 36 months. And we'll continue to run the play of bolt-on M&A where it's appropriate, we'll look for acquisitions that might be at the larger end of bolt-on like an Appriss. But we'll be at a point in the near future where we're going to want to return cash to shareholders. And we've been very clear that when that time comes, that will be a part of our capital allocation strategy as our free cash flow accelerates as we get into 2023, 2024, 2025

Our next question is coming from Andrew Steinerman from JPMorgan. Your line is now live.

Hi, John, it's Andrew. I wanted to check if that 24.7% mortgage revenue figure you gave on the call was for total revenues in the second quarter. And then also, my second question is, again, on a total company basis, what was Equifax's second quarter organic constant currency, non-mortgage revenue growth year-over-year?

So, 24.7% was on total Equifax revenue. And then I don't believe we gave an organic revenue growth for the entire company non-mortgage. So--

Right. But you gave all the segments, can't you total it out for us?

We can certainly follow up with you, Andrew. Trevor or Sam come back to you on that.

Okay. Thank you very much.

Thanks. Next question is coming from Kevin McVeigh from Credit Suisse. Your line is now live.

Hey, Kevin.

Hi, Mark. Hi, John. You know towards kind of project, but any sense of kind of the near-term outlook for mortgage 2022 to 2023. And the reason I ask is obviously, it seems like unprecedented declines, but we're in a much stronger macro environment than we were back in the GFC. Is there any way to frame, do you think you see continued refi kind of cash outs more near-term on the purchase side, just as you think about mortgage within kind of the context of formal recovery given kind of where we are from kind of -- it feels like we're bottoming here.

Yes, I think bottoming is probably in the second half based on our forecast, Kevin, as you know. But it's very hard to really predict what's going to happen with the economy given the inflation rates that we haven't seen and really our lifetimes and what the Fed is going to do to respond to it. Yes, I would make a couple of comments on mortgage, which you know. Look, the mortgage market doesn't disappear, right? There's a core mortgage market that in any economic environment stays there, meaning people move and buy houses. People upgrade and buy houses on the purchase market. And as you know, there's more people still looking for houses in the United States today than there are houses. So there's still quite a bit of demand on the purchase side. So we expect there to be -- is there is any economic environment, a continued purchase market, and John gave some views about how we think about that in the second half. As you point out on the refi side, the interest rate refis are going to be lower or less of those in the second half given where interest rates are because there aren't many opportunities for homeowners to do an interest rate refi but there's a ton of untapped equity in homes in the United States. Over the past 24-plus months, home price appreciation is up almost 30%. And there's about $27 trillion of untapped home equity. And we've seen in economic environments in the past, that homeowners will tap into that equity. If you think about a 5.5% fixed rate mortgage in order to refi into that to access your home equity, which consumers are doing or homeowners are doing. We expect that to continue. And if you think about 5.5% interest rate on fixed rate mortgage, that's a heck of a lot less than an auto loan, a student loan or a credit card. And that's what you'll see consumers do. So it'll be a level cash-out refis going forward. And I know you get that. I think the challenging part is what's going to happen, how far is the Fed going to have to go to slow down inflation with it at 9.1%. So that's a harder part for us to forecast. We did talk about in our prepared comments that we remain confident in, obviously, the long-term future of Equifax. Our goal of $7 billion by 2025 hasn't changed our goal to expand our margins to 39% by 2025 hasn't changed. And we're still investing in the future of Equifax. As we speak, we're making investments that will benefit 2023, 2024, 2025 based on our strong performance, particularly in non-mortgage, which is exceptionally strong.

And actually, that's what I want to follow-up, because it seems like you're still comfortable with those 2025 targets. It's probably mortgage a little bit lighter. Where's been kind of the offset? Is it within EWS or other parts of the business that continue to give you the confidence to push towards those 2025 targets?

Yes, it's certainly, I think, as you know, we raised our non-mortgage or core guidance twice this year, one in February and once in April, that gives us confidence. It should give you confidence. And if you look at our non-mortgage performance and our core growth performance, which includes how we're performing beyond the mortgage market, those are strong numbers. And those give us confidence in our ability. And then if you add to it, during that 2023 to 2024 time frame. In the next 12 months, we're going to be completing substantially the U.S. cloud migration, so we'll be cloud native, and we can take full advantage of that. We'll finish international as we get through 2023 and into 2024. That's another lift for Workforce Solutions. The other thing that should give you confidence and gives us confidence is the M&A that we've done over the last 18 months. We've done 11 acquisitions now with LawLogix. Those are in our run rate revenue or will be. And, of course, the synergies from those acquisitions that we had in our acquisition cases really kick in, in 2023, 2024, 2025, as they really get integrated into our businesses. And then the last point I'd make that gives us confidence is NPIs. The Vitality index that we're delivering, as you know, our long-term frame on Vitality is10, we were 13% in the quarter, we're expecting to be north of 11% for the year. Those are big numbers when you talk about having $550 million of revenue in 2022 from new products. And remember, new products we introduced in 2022 really benefit 2023, 2024, 2025. They mature as we get into those years. So there's a lot of levers that give us confidence around the future of Equifax.

Thank you. Our next question is coming from Toni Kaplan from Morgan Stanley. Your line is now live.

Thanks so much. First, I wanted to ask about the mortgage performance. So last quarter, you talked about EWS outperforming the mortgage market by about 30 points in the year. And for the quarter, last quarter it was about $27 million points above the market. This quarter looks a little bit more like you outperformed by 20 points according to slide 10. So, are you still expecting the 30? Or has something changed to bring that down a little bit? And what are sort of the drivers that lead to that outperformance delta, like why would it jump around, I guess?

Sure. And so I think last quarter, what we indicated, we were up 27% and we thought for the full year, we could deliver something south of 30%. But I think the 20 points is very strong, right? And what drives the outperformance in general is the new products, the price actions, the record additions, and all of those activities at Workforce Solutions is executing extremely well, actually executing faster than planned. The record additions, as Mark already covered, were well faster than planned as we're up to 144 million records. They're all volume dependent, right? So, when we get into hit into circumstances where we see the current year volumes decline substantially. It makes it more difficult to outperform the prior year market because of the lower volumes. So that's all it really is in terms of the drivers that will allow them to outperform the market over the long-term, they're actually outperforming the expectations we had when we started the year. So, we feel very good about how they're performing. We think given the much lower level of mortgage inquiries we're talking about, of mortgage originations we're talking about in the second half, if they're able to outperform at about 20 or I think we just said somewhat under 20% that, that will be very, very strong and consistent with the execution against product price records, system integrations that we've been talking about.

Great. In the guidance, it seems like the main delta on the revenue side is really mortgage, you're expecting essentially the non-mortgage expectations outside of FX, largely on change versus your guidance last quarter. Just if we look forward, if there is a recession or a tougher environment that comes up, just maybe talk about some of the expense levers that you can pull and how you think about when to pull the trigger on that versus continued investment in the business, because obviously, you have a lot of really strong growth opportunities that you want to capitalize on. So, maybe just how are you thinking about downturn playbook and when you would pull the trigger?

Yes, it's a great question, Tony. This is Mark. First off, we don't see that in the second half. You may have a different point of view, but we don't see that in the second half. But to be clear, we think about it a lot, obviously, and we do have levers. First off, we think we're going to outperform the way we did in the past, if there was an economic event. We had a page in how we talked about it in the investor deck, and we talked with you about it before. The difference in the business and levers like continuing to add records at Workforce Solutions and so many other levers in workforce, in particular, identity and fraud business. So, we think about that. But we clearly have the ability to throttle cost if we got into an economic event. In 2022, while we're seeing the pressure from the mortgage market macro and it's also FX revenue, we made the decision to continue to invest, which is I think you want us to do and our investors do, because our core business or non-mortgage business, which is a big part of Equifax is performing exceptionally well, and we want to keep driving that. So, investing in things like new products, investing in completing the cloud transformation, which, of course, that will take a lot of our cost out as we get into 2022 -- I'm sorry, 2023, 2024, 2025, we get significant margin expansion or cost reductions as we complete the cloud and decommission a lot of our data centers. That's kind of a natural recession hedge for us as we execute the cloud transformation. But we've got other cost levers that we could or would pull, and we'll be ready to do that if there is an economic event. But at the same time, we have a lot of confidence in how we would perform in an economic event, you know, because of the changing -- dramatically changing nature of Equifax. Would you add anything John?

No, I just think outside of the investments Mark already talked about in NPI and transformation is kind of the product, technology and then marketing -- product marketing investments we're making. We certainly are looking at all the other expenses, and we're just going to manage those very tightly, right? So even though we don't expect a recession to come at this point in time, so not in the second half of this year, obviously, uncertain about 2023. What we are going to do is make sure we manage very tightly all of the expenses that don't drive that revenue growth.

Thanks. Next question is coming from Ashish Sabadra from RBC Capital Markets. Your line is now live.

Thanks for taking my question. So Mark, thanks for providing the details around the financial marketing services business. I was just wanted to drill down further on the fraud and identity piece, and see you talked about new product innovations there, which could reaccelerate growth maybe next year. So I was just wondering if you could provide some more color on that front or maybe also talk about the pipeline for new deals, particularly on the offline side? And how should we think about those momentum going into the back half but also in 2023 and beyond? Thanks.

Yes. So we've talked about -- we're obviously doing some work to get some new products positioned in the second half of this year to bring the FMS portfolio review business back into a different position. That's clearly a place that we're investing in. I think part of your question was also around broader identity and fraud, which is a different business for us. That's really under the account business, which we're very pleased with. That's a business that performed exceptionally well in the quarter and the half. We see big potential in just a massive TAM around the broader identity in fraud. And of course, as you know, we bought count 18 months ago, and we're still integrating that inside of Equifax and rolling out new solutions. And that's an area that we're investing in new products for both the e-commerce space, but also for our traditional financial customers, and also looking for inorganic or M&A to continue to expand. That's one of our three priorities around M&A is to grow in identity and fraud. And in B2B offline specifically kind of the fraud header business I think some of the real opportunities we have as we get into 2023 is heavily around data fabric, right? As we're able to more aggressively integrate different data assets. Again, it will differentiate our information or header information that we sell into those markets, and we think we have the opportunity to reaccelerate that growth again. But that will happen as Data Fabric completes for USIS.

That's very helpful color. And then going back to slide nine and drilling down further on the questions that were asked on the talent and government side. The penetration there is pretty low on talent, just 10% on the government, it's 20%. You talked about some new state wins there, but just can you talk about again, the pipeline, both on the talent and government side? And how do you drive better penetration in both of those markets? Thanks.

Yes. As you know, these are -- I still call the newer verticals for us in Workforce Solutions, both talent and government. They're big TAMs. Talent is a $5 billion data TAM for us. Government is about $2 billion. We've got big teams in Workforce Solutions focused on that. As we've made -- as you know, some M&A additions to strengthen our capabilities there. We want to do more. That's an area where we want to expand either M&A or partnerships, M&A being like Appriss Insights. Where we got the incarceration and medical credentialing data that's really helping us in both government and talent. The partnership we have with Nestor doing Clearinghouse, where we're bringing education data and we'd like you to do more partnerships or more M&A there. The other really lever for us in talent and government is new products is really bringing new solutions together, combining data elements we have in Workforce. And of course, at the heart of our growth in both of those verticals is our twin data set. Both our 144 million active records or 110 million active individuals in our data set, which is a huge coverage now. And as you know, when we add records, our hit rates go up because remember, in our system-to-system integrations whether it's talent or government or other verticals, they're hitting our database for every applicant or individual that they're trying to process, whether it's a mortgage or a background screen or a social service like rent support or unemployment claims, as we grow our records, that grows the business. And then leveraging our historical data, we just got so much historical data of the 570 million total records which equates to about five and a half jobs for the average American. That's a very valuable instant decisioning data set for the talent space. So, a combination of new products, continuing to grow out our twin record database and continuing to do M&A and having our dedicated teams of growing customers. There's still a lot of customers that don't use our data in government social services and in talent, so that's another opportunity. So, we're pretty energized about the growth potentials in those two verticals.

Thank you. Our next question is coming from Kyle Peterson from Needham & Company. Your line is now live.

Great. Good morning guys. Thanks for taking the questions. Just wanted to touch on inflation. Obviously, it's the highest we've seen in quite some time. Where are you guys kind of seeing it in the cost side of your business? And how much have you guys been able to successfully pass along to clients?

Yes. So, I share your concern, when I think about the 9.1% inflation or 9.4% in the U.K. or pick your market, when I spend more of my time thinking about is what's the impact going to be on the consumer, on our customers. With regards to our cost structure, it hasn't had much of an impact. We haven't seen a big impact in labor. We're still able to attract the people we want inside of -- with some slight pressure on wage rates, but we're still managing that. A big part of our cost structure, as you know, is technology and we're really heading more towards cost savings there as we convert from our legacy infrastructure to the cloud, and we've got long-term contracts in our cloud infrastructure. And with regards to passing it on, price versus inflation were to net positive. We put pricing increases in place earlier this year that give us a net positive margin impact versus inflation is that even with inflation where it is today.

Understood, that's helpful. And then just a quick follow-up, particularly in the unemployment verification, claims part of the EWS business. How should we think about the puts and takes, I know you guys said you weren't currently expecting a recession, but if we do had a new recession, how much of a potential tailwind could that be in a more garden-variety recession, not with unemployment kind of where it was in 2020, but just a little more run of the mill would be helpful.

Yes. It's obviously a positive for us. That business is a lot bigger today than it was in 2008, 2009, obviously, we've got a lot more scale. We're expanding the business with a lot of the investments in people and technology and capabilities as well as the M&A that we've done. So, it will clearly be a tailwind. Obviously, it's a headwind right now coming off 2020 and 2021 when there was a lot of furloughs and layoffs during the COVID environment. I know, John, would you size it in any way.

Yes. Just to give you a perspective, this year, it's a $135 million business, right? So -- and I think during the COVID recession, it increased obviously dramatically. But -- and it basically scales directly with unemployment insurance activity. So it's about $135 million. So, whatever -- however -- as you look at the level of unemployment that could come in a recession, it will scale pretty directly with that.

And that's just one of -- as you know, that's one of many kind of countercyclical businesses. Another -- if you're focused on countercyclical, the other one is inside of our credit business, while prescreens will go down, account management and portfolio management activity goes up in an economic event. Now, we're not seeing that today, because it's -- there isn’t really an economic event yet, but that's a countercyclical element for our core credit businesses. And, of course, we got all kinds of levers in Workforce Solutions. We're going to keep adding records whether the economy is up down or sideways.

Thank you. Our next question is coming from Andrew Jeffrey from Truist Securities. Your line is now live.

Hi. Good morning, guys. Appreciate taking the time. Mark, I wanted to ask you a question about the twin database and sort of line of sight to getting to 2x current records. Do you think you can get there with your current payroll agreements? Do you need to add more? And I know you mentioned they're exclusive today. Can you talk about your comfort with those remaining exclusive sort of in the long run? And just any color in terms of trajectory there would be helpful.

Yes. So, bunch of layers of questions in there. First, I think as you point out, it's a really attractive lever for growth and unique through this business, right? No other beta business that I know of has the ability to add records the way Workforce has been able to do. And, of course, it translates into revenue day one, quarter one, week one, the minute we add them, because remember, we're -- as we're integrated or even through web access, customers are coming to our data set, looking for all of their applicants. And as we grow our hit rates, it really drives the revenue. And revenue -- the records were up 22% in the quarter. We've had very strong double-digit growth for the last three years of growing the data set. And now have 144 million actives and 110 million uniques, which is really powerful in the scale of the data set. Not only is it driving revenue, but it also drives usage, meaning it's a data set that's more valuable. And remember, you think about it, our customers want 100% coverage, because the consumers that they can't identify in our data set, they got to go somewhere else to do a manual verification or do something else that slows down their process. So as we add records to our data set, we become more valuable to them. So, as you know, 50% of our records come from partnerships, 50% come from direct relationships that we have through our employer services business, and we want to grow both. On Employer Services, as you know, we've been making acquisitions. We've done five acquisitions in the last two years to strengthen our capabilities in Employer Services, whether it's in I-9, unemployment claims, work opportunity tax credit. And that's a kind…

Super comprehensive answer. Thanks. Appreciate it.

Thanks. Next question is coming from Andrew Nicholas from William Blair. Your line is now live.

Thank you. Good morning. I think different answers have touched on this already, but I want to ask a little bit more directly about kind of the health of the U.S. consumer and what you're hearing from customers on the core credit side? Are you seeing any signs of weakness across the USIS business as it relates to core credit? Guidance doesn't seem to imply any slowdown there. So, if you could just kind of talk about what gives you confidence in that part of the outlook and the overall state of the economy? Thanks.

Yes. And to be clear, we're not. The U.S. consumer from our perspective is strong. I think you've heard it from the banks over the last week or so, as they talk about their performance. There's no sign. It really goes -- it starts with employment. People are working and there's two open jobs for every person looking for a job, which we've never seen in -- really our environment. You've seen strong wage growth, which is a positive, but it starts with people are working, that's a big deal. There's still a lot of stimulus around, meaning consumers are still spending some of the stimulus they saved over the COVID environment, but there's still access to a lot of stimulus or social services support in the United States, which is benefiting consumers. So, that's a positive. Obviously, inflation is having an impact on confidence having an impact on some spending and having an impact in some of the lower subprime or lower income consumers is having a bigger impact there. But kind of broadly, we don't see the consumer weakening in the second half. We haven't seen our customers thinking about it that way. There obviously -- everyone is watching, but you haven't really seen a change in delinquencies, like card delinquencies are lower than they were in 2019. There's a little uptick in subprime, auto delinquencies, but the consumer is strong and it starts with their working and then add to it, those that are homeowners have a bunch of equity in their home, plus 20%, 25%, 30% versus a couple of years ago, it's untapped. So, those are all equations that are quite positive around the consumer, which is going to make in my view, taming inflation quite challenging because consumers are still out there spending. You've seen the banks kind of credit card spends are up strong double-digits. Consumers are traveling. They're still spending, maybe not a big ticket transactions, but they're still pretty strong and we haven't seen any signs of a changing.

Other thing which has happened since 2019 is that the percentage of consumers that are actually defined as subprime is just down materially, right? So it's down on the order of 20% of consumers and was much higher back in 2019, and that's just the strengthening of credit scores you've seen. So that's very material for people's access to credit.

Well, credit scores were up 15 to 20 points since 2019 still. So a lot of factors supporting the consumer.

Great. Thank you. That's very helpful. And then switching gears a bit for my follow-up. Mark, I think you alluded to growing the work number internationally as part of the three-year 2025 outlook. I understand in the past, you've talked about your right to win there and your relationships with the global organization as being a differentiator. But just kind of curious, do you speak to kind of go-to-market strategy there? Is there any difference in these international markets than what you've developed here through payroll providers and outsourced kind of HR capabilities? Or are there differences in those markets that we should kind of keep in mind that make that go-to-market strategy a bit different abroad?

No, it's very similar. And we could spend hours talking about all the things we're working on. And obviously, expanding workforce internationally is one of the initiatives that Rudy and his team has. As you know, we're in four markets now. We added U.K. in the first quarter. We paused during our cloud transformation to go in other markets we're in Australia, Canada U.K. and India. We paused a couple of years ago when we were doing the cloud transformation, but now that we have a tech stack that we've invested a couple of hundred million dollars in, it makes it easy to enter new markets from a technical standpoint. So that's an approach that we have and why we kind of made our first move into the U.K. following our cloud transformation at Workforce Solutions. The market dynamics are very similar. Mortgage is a place where you want to use it, and you think about the markets we're in, they have mortgage markets, consumer mortgage markets. So, that would be a priority for us when we think about future markets -- and then the talent side is another one, using the data for the hiring process is similar. And as you point out, we have some levers with our current multinationals in the U.S. where we're collecting their records from them directly or through partnerships. But the direct relationships, they want us to do income and employment verification for them in other markets. So that's a positive. And then as you also point out, the payroll processors we do business with today in the U.S., many of them are global, so they want to do this have the same relationship outside the United States. And then in individual markets, there's payroll processors or HR software companies that are unique to so many markets, and we're developing partnerships with them. So it's clearly a part of our strategy. We've got a lot of needle movers in Workforce Solutions between now and 2025. This will be one of the smaller ones, but it's one that we're investing in. I think you'll see more traction out of it, perhaps in 2024, 2025, 2026 than you will see in 2023, 2024, but as you would expect us to do, we're investing in it. And we think we've got a franchise that obviously is -- has a strong market position here in the states, and it's one that we want to take global and take advantage of it because there really aren't other players like workforce outside the United States.

Thank you. Our next question is coming from Shlomo Rosenbaum from Stifel. Your line is now live.

Hi. Good morning. Thank you for taking my questions. Can you dig in a little bit more on what's going on with FMS and the offline? And you said it's like the part where you're doing with fraud and header data, I'm just not clear as to what all of a sudden changed in that business? Is there something competitively that changed in where maybe one of the other bureaus are doing better over there? Or is there anything else happening? And typically, in a certain point in the cycle, you guys would see a pickup in some of the FMS business as well in terms of portfolio reviews. And I want to know, are they starting to pick up because banks are worried about that, but you're not getting them or they're just not happening?

Yes. The portfolio reviews are a constant part of the business. But as you point out, in times of economic challenges, that typically, we see some real pick up there. That hasn't happened yet. The financial institutions really don't view the second half of being economically challenged. It's more in the newspaper than it is in the consumer or their results. I don't know if you want to touch on the header business again?

Yes. I think Mark covered, Shlomo, really what what's going on with the fraud or header business within FMS, right? We're just -- we are seeing lower volumes, and we're seeing lower levels of activity. And for transactions that are occurring, we're looking for seeing smaller volume transactions. So -- what we're doing is what we talked about, which is working to try to enrich our data sets so that we can, again, make it more valuable to drive greater differentiation in that market. But we're just seeing -- we're seeing that market slow currently. And given that it has, we've just made the assumption that's going to stay slow for the rest of the year. And as we launch new products, we'll talk to you about them as we do with anything with NPI, and we can give you a perspective on how we think that product area may grow.

Great. Thanks. Just for the follow-up. The other part of the business that you would start to see slowing down would be the background screening area. And you seeing anything that's indicating that given the layoffs and stuff that you're hearing from some of the bigger technology companies that the polls are really starting to slow or significantly changing?

No, we're not. And remember, when you think about our business, is obviously different than the background screening industry because we're so new in kind of dealing with the industry. We have so much penetration opportunity. It's our view that even if the market slows, our ability to digitize and help background screeners digitize their businesses will mitigate if you will, or offset some of that is an add to new products that we'll be rolling out for the background screeners that include other data elements. So when an economic event happens, and there is some slowdown there, we think we'll be able to offset that with some of the new products as well as penetration because we're fairly new. Remember the TAM for that the talent and background screeners is about 4 billion. And our business is a couple of $100 million. So we've got the opportunity to continue to grow into the data elements of that even in an economic event.

Thanks. Your next question is coming from Craig Huber from Huber Research Partners. Your line is now live.

Great. Thank you. Can you talk a little bit further about how you think your verification service business will do if we go into an elongated recession here? You guys adding more and more records here, a significant part of your business, how do you think it will do in longer recession?

Yes, I think we've been pretty clear. We think it will do pretty well. As we pointed out in the comments and in prior calls, you go back to 2008, 2009, which was a pretty brutal economic event, the toughest, I think we've seen in our lifetimes. It grew through that whole period. I think in 2008, it grew 17% or something like that. And now it's got more levers. Remember, back then, it was mostly a mortgage business. And now it's highly diversified in other verticals, government, talent, it's employer services business and then non-mortgage verticals inside of financial services. And the ability to add records is one of many levers that the business has that we think is what makes Equifax so different today versus our last economic event, if you want to call, 2008, 2009. Our ability to grow is significantly enhanced by workforce being such a big part of Equifax and having so many different levers that are either unaffected by a recession or allow them to actually benefit from a recession like the unemployment claims business.

And then also the 50% or so of records you get from outside the partnerships, you talk about the pitch there that you used to get those records of companies, et cetera. And then also if could you just also touch on the historical records that you've built up in your database, which I believe in total is like 25%, 30% of your revenues that you get is for a historical records, not the current person's employment?

Yes. So, first on the direct records that we have. Remember, it's the core of Workforce Solutions is what we call our Employer Services or Employer Solutions business. And that's where we deliver regulatory and compliance services to companies through their HR managers, and that's where they outsource these activities to Equifax. And that's about a $6 billion TAM. We have about a $400 million business there. And where we deliver those services like unemployment claims management for a company, we do the processing for them. I-9 verification in the onboarding side, work opportunity tax credit, employee retention tax credit. We do W-2 management for employees, meaning if someone needs a W-2, we will deliver it for them. So all those services that are outsourced by an HR manager is what we do as a business. And as you know, as I pointed out earlier, we've invested heavily in our cloud transformation to make those services and capabilities more efficient, more effective and just a better service for the HR manager. So the play there is to continue through our commercial coverage is to drive more outsourcing of those activities to Equifax. And for example, like in unemployment claims, we process either one in four or one in five unemployment claims in the United States that are done by third parties, meaning not individual companies. Most companies still do it today. So we have real scale in these businesses. And then as a part of that commercial relationship where we're delivering these regulatory services to the HR manager in a company, we also do income and employment verification for free. And they will deliver their payroll records to us. But then of course, we monetize. In return, we'll do income and employment verification securely. We'll do it with a high…

And importantly, in nonmortgage verification services businesses, about 50% of the revenue is generated from transactions that involve a historical record, either historical records only or historical records and current record. So it's 50% penetration of historical records in the transaction. So very, very high and huge differentiation.

Thank you. Your next question is coming from Simon Clinch from Atlantic Equities. Your line is now live.

Hey Simon.

Hi. How are everyone? Thanks for taking my call -- my question here. I just wanted to cycle back to the comments you made about the outgrowth of the mortgage in EWS. And I was just wondering, in terms of how to think about the core growth generally that you outlined for Equifax overall. Historically, my understanding was that we should think of that as effectively a static opportunity versus the market that each of those segments play in. But it sounds like, we comments around EWS here that actually, they should be considered to be some level of beta, I guess, to the macro to the six [indiscernible] markets. Is that how we should think about things going forward?

Well, as John pointed out, we can hit it again, is that in the mortgage application process, there's a difference in this market than there is in a normal market. John pointed out that there's more consumers or homeowners that are -- when they're doing a home purchase that are doing shopping for rates. And generally, when a consumer does rate shopping, a credit file will be pulled by the mortgage originator and make sure that consumer can qualify for the mortgage that they're re-shopping on, and then they'll deliver some kind of a response around what rate they can deliver. And the consumer will hit a bunch of mortgage companies in this higher rate environment in order to check rates. And that results in credit holes, which is good for USIS and part of their outperformance, if you will, of the number of poles that they have. Conversely in workforce when you're rate shopping, they don't pull income and employment until further into the application process. It might be when an application is actually filed versus rate shopping. And of course, it's always pulled during the closing of the application. I think John was pointing out a change from a more normal mortgage environment because of rate shopping benefits the credit file and somewhat doesn't benefit the income and employment data. Now of course, Workforce Solutions has all the levers to perform the mortgage market, it starts with as we add more records, we have higher hit rates. So they get more revenue as they add records and records are up 22%. So that's a benefit for them. In any mortgage environment that's still benefiting them today. New products are benefiting them, fuel prices. We did a price increase in January. So that's benefiting their business penetration is still a benefit. Remember, they're only seeing what now, 65% of mortgages, a little over 60% a little over 60% of mortgages. So as they get out there and remember the credit file is used in virtually every mortgage, because it's been around for 50, 60, 70 years, so the ability to drive commercially into those mortgage originators that are not using in our income and employment data from Workforce Solutions. And then as we point out, system-to-system integrations, which have grown dramatically, but there's still a lot of web access. And we know that with web access, we don't get every application from mortgage originators. They're doing manual verification. So you've got multiple levers for workforce to continue to outperform the mortgage market, be it at a bit lower level than in a normal environment.

Okay. Yes. I understand that. And then just when I'm thinking about the entries to the up and the down here. Is it -- would it be fair for me to take the how you've reduced your guidance for revenues and the subsequent flow through to EBITDA. Like if there was mortgage upside, should I expect that same high-level of incremental margin drop through.

Yes. Any change in revenue is high incremental margin up or down? And I think as we pointed out earlier, we've opted to continue to invest in the second half for the future of Equifax. So meaning, as our mortgage revenue came down, we're not taking costs out. We're focusing on redeploying some costs or still continuing to invest going forward. I don't know, John, would you add to that? We see very high variable margins on the upside and the downside. They aren't necessarily always exactly the same for the reasons that Mark indicated, but the variable margins on our revenues are certainly quite high.

Thank you. Our next question is coming from Seth Weber from Wells Fargo Securities. Your line is now live.

Everybody good morning and thanks for taking my question. I actually had a similar question on the margin side. I heard the comments about some increased spending as for the second quarter and through the back half of the year. I was just wondering if you could give us any additional color on what this increased spending is, if that's opportunistic or -- is this kind of the new normal sort of framework that we should be thinking about from a margin perspective? Thanks.

A couple of layers in there. So we still are confident in our plan to increase our margins, so no change in our outlook for 2025 or 39%. No change in the cost benefits that we're going to deliver this year, next year, 2023 from the cloud transformation, no change in the broader margin expansion. In the near-term, we are continuing to invest in new products. Obviously, we're still investing in completing the cloud transformation. We have some additional investments on onboarding. Some of the new partnerships we have for records and Workforce Solutions. So we're continuing to do opportunistic or may be targeted as a better term investments that we think will benefit 2023, 2024, 2025 in 2022. And so there's no question we're doing that. Would you add to that, John?

Yes, just current margins, and we talked about it on the call, right, are being significantly impacted by the large reduction in mortgage, right, and our very high variable margins. So if the question was, has this been the new level of your margins? No, as Mark just said, we expect our margins to reaccelerate as the market recovers. But in terms of the exact pace of that reacceleration, we'll give you guidance on that as we get into each individual year.

Okay. And then just as a follow-up, the guidance for international margin for the year implies a pretty big step-up in the second half versus the first half. Is there something there? Is it just seasonality? Is there something from lower tech transformation spending or something like that, that's happening in the second half versus the first in international? Thanks.

So, historically, you've seen international margins are generally higher in the second half than the first. So we've seen some of that. But we try to be clear on the call that in terms of the level of acceleration in the margins in international. There is some pressure on that because of the fact we're seeing great growth in our debt management business, but that does have lower margins. So we do expect to see the improvement we talked about, but there is a little bit of pressure on those margins because of debt management.

Thank you. Our next question is coming from Heather Balsky from Bank of America. Your line is now live.

Hey Heather.

Hi. Thank you for squeezing me in. Just a follow-up on Toni's question earlier regarding outperformance on the mortgage side for EWS. I'm curious where the softer mortgage market, and it sounds like it's a little bit of a lighter outperformance outlook. Where that lightness is coming from, sort of what is the toggle, sort of, we grow mortgage market that flows through to that outperformance? Thanks.

Yes. So in terms of the drivers of outperformance, it's actually -- the Workforce is actually performing better than our expectations. They've added records faster than we thought. And so that's actually a greater benefit to our performance than we would have expected when we started the year, and they've executed very well on both new products, and then the pricing programs they put in place at the beginning of the year, which tend to go in, in January. So we know about all those, right? The issue -- the reason why the outperformance looks lower than what we saw last quarter is two-fold. One is because all of those factors I just described are all variable with volume. So since volume is declining, like that level of outperformance in absolute dollar shrinks. So that's why you see a smaller outperformance relative to the market because -- and it's just the math and the measurement. The other thing is what Mark talked about, right? We measure the mortgage market. We define it right, as USIS credit inquiries. While since USIS credit inquiries are benefited by shopping and Workforce Solutions isn't benefited by shopping to the same degree, then what we end up having is USIS gets somewhat of a benefit. And so, therefore, the market itself is measured as stronger and that provides a little bit of a greater headwind to outperformance to EWS. We don't think that's -- that in any way indicates they're not performing as well. They're performing extremely well. And as I said, the actual drivers they can control. They're actually outperforming our expectations in terms of record additions products and then obviously, good execution on price. And as Mark mentioned, they're also doing very, very well on system-to-system integration. So we feel very good about the execution that's occurring during the year.

Thank you. And as a follow-up, just given the strong price performance in the market and your expectation next year for a much stronger free cash flow and returning cash to investors, what are your thoughts regarding using your balance sheet today to potentially return cash versus waiting for next year? Thanks.

Yes, it's a great question. We certainly think about it, Heather, but we think the timing is not right for us to do that. As you know, we announced this morning another bolt-on acquisition, which we think will benefit Equifax quite strongly going forward. And we're still digesting some of the M&A we did in 2021. So, it's certainly on our mind when the time is right to return cash to shareholders, both through restarting our dividend and doing a buyback, we don't think the time is right today. But it's coming. As we look to 2023, 2024, 2025 with our margins expanding and our free cash flow expanding, we clearly believe we have ample resources to invest in that bolt-on M&A, but also have excess cash in the future to return to shareholders, and we'll do that at the right time.

Great. Thank you for the -- thanks.

Thanks. Your next question is coming from George Tong from Goldman Sachs. Your line is now live.

Hey, George.

Hi. Thanks. Good morning. In the mortgage space, new purchase originations have been declining relatively sharply in recent months. What assumptions around new purchase oil. Are you inventing in your 46% plus mortgage volume decline forecast for the second half of this year? And how would you frame the downside risk to your forecast?

Yes. So in terms of the way we structure the forecast, we obviously look very closely at the current trends we're seeing. We obviously looked very closely at the last 14 days, right, when we're seeing in early July, and we saw we were down 40%. And we also look very closely at the trends we're seeing and the movements in increase between April, May and June. We think that the forecast that we put together or the estimate we used in our financial guidance is very consistent with what we're seeing in terms of movements in the mortgage market itself. We think it's very consistent with the information we shared on new home purchases and the fact that they're certainly weakening as we go through the year relative to what we've seen earlier in the year, we think it's consistent with that. We think it's also consistent with the very low levels of refinance that are currently occurring and really that refinances at this point, almost completely driven by cash out refi. Also, I think you saw last night that all three of the major parties that forecast mortgage originations refreshed their forecast yesterday evening, Freddie, Fannie and MBA. MBA came out and said they expect originations to be down in the neighborhood of 43.5% and I think all three indicated those origination units, sorry. And I think all three indicated that origination dollars will be down in the order of 46% in the second half. So, we feel like with us indicating you're going to see over 46% reduction in inquiries, which would imply a 200 to 300 basis points, so I think 48% to 50% decline in origination units. We think we've given a very reasonable forecast, we think it's consistent with other third party forecasters. And so, we feel like we've done a fairly good job at encompassing the information we have today. But obviously, to be fair, very hard to forecast the mortgage market and what we'll do is we'll just keep letting you know what we're seeing. And then any changes that we're seeing that that might drive in our output. But, right now, we feel like we've done a nice job of including all the information available, and we feel relatively good about the fact that the other parties have come out and look to be at or slightly stronger than us.

Got it. That's helpful. Gross margins in the quarter fell 210 bps year-over-year. How much additional gross margin pressure do you expect with input cost inflation trends and changes in revenue mix?

Yes, I think the big driver, obviously, for us, what's occurring right now is the impact of mortgage market overall, right? And our -- there really is any inflation impact, George, from our perspective in that margin. It's really the loss of that mortgage revenue is just a big impact on us. That's all.

Got it. Very helpful. Thank you.

Thank you. Next question is coming from Jeff Meuler from Baird. Your line is now live.

Yes. Thank you. So I understand the argument that Equifax on a consolidated basis, including the recession resistance and countercyclical businesses is relatively resilient. I guess, I was surprised that you said that even in your recession-impacted businesses. Do you think they could potentially be flat at the high end of the range in a recession. So -- could you flesh out the argument behind that for us? I'm guessing the short answer is NPI and the other structural growth drivers in verifier. But help us understand how you could potentially be flat in those businesses in a recession?

Yes, I'm not sure when I said that or John said that, Jeff, that we didn't intend to say that. So when we think about our view of Equifax today versus the last recession, we think we're much better positioned. It starts with Workforce being so much larger than it was before. And kind of broadly in Workforce as we point out in 2008, 2009, it grew 17% when Equifax was down 6% and it was a very small business in the scheme of Equifax, and it's got more levers today. So we think workforce is positioned to grow in a recession because of all those levers. So we're very clear on that. And with that being approaching 50% of Equifax, that's a big factor. We talked about identity and fraud being kind of a business that we expect to grow through a recession just because of the digital macro is benefiting there. There's a couple of businesses that are quite uniquely positive in a recession like our unemployment claims business, which is part of workforce. So those are kind of 60% of Equifax. And then the 40% as kind of the rest, which is our credit business is primarily international and USIS. And those are generally impacted negatively by a recession. Inside of that negative impact, I think I tried to say that the negative of prescreens and volume coming down and originations coming down is dampened somewhat not offset, but dampened somewhat by account management increasing by credit line actions and line management actions increasing. So there's more volume there. But we would expect those to have some pressure. Now you also got to think about the timing of the recession, as you point out, which is different in Equifax today than 2008, 2009, if you think a…

Thank you.

Those recession impact the businesses would decline, right? So, yes.

Got it. Thank you.

Thanks, Jeff.

Thank you. Your next question is coming from Faiza Alwy from Deutsche Bank. Your line is now live.

Yes. Hi. Good morning. Thank you. My first question, I just wanted to clarify on the margin impact of mortgages and product development costs. Are you able to size the incremental product development costs? Because it seems like your overall EPS guidance is a lot lower than I would have thought, just given the implied revenue decline from mortgages? So I'm curious on how big of an impact their incremental impact there is from product development costs? And are these new products something that you had planned to invest in, in 2023? And is that something that you're maybe pulling forward this year?

So by far, the largest impact in the reduction in our adjusted EPS, we tried to walk through the drivers, right? But in terms of the margin piece, right, outside of interest and outside of the impact of FX, right? By far, the largest driver is obviously the reduction in mortgage and mortgage has very high variable profit, right? So, that's what's really driving the reduction in our margin dollars and, therefore, driving the reduction in our adjusted EPS. And yes, there is some incremental cost that we're investing going forward in as we invest going forward in new products, but that's not the driver. The driver is really the movement in mortgage, right? What we were trying to do is to give you a perspective on there's a substantial driver, and there are some other things that are impacting margins as well. We talked about investments in the development costs. We talked about some mix issues in international as we grow the debt management business. And we also talked about the fact that we had a little bit of a benefit because our variable compensation goes down. We're just trying to give you a perspective on the different side levers that are playing within a larger impact of the decline in the mortgage market.

Got it. Okay. Thank you for that. And then just as a follow-up, I'm curious if Experian talked about how their now Fannie Mae have certified them for day one certainty. And I'm curious how you think about that? Like is that relevant or important? Like, are there any consideration for your business at all?

Sure. It's Mark here. We're aware that Experian is doing some work and investing around the income and employment space. We don't see them commercially yet, meaning that we haven't seen any impacts from their work that they've done. They've got a -- our understanding is a very small data set compared to our 144 million records or 110 million actives. And so we just haven't seen an impact. That said, it hasn't slowed us down in our investments in technology and products. And of course, in our M&A focus we're one of our priorities, one of our top priorities around M&A is to strengthen Workforce Solutions to ensure that we continue to build the moat and the competitive position around the business. And including the acquisition we announced this morning of LawLogix making that business stronger. So we're clearly focused on continuing to build out Workforce, which is our largest and fastest-growing business.

In addition to Equifax, there have been multiple companies that have had day one certainty for several years.

Yes, for one.

So, this is not anything new.

Thank you We reach the end of our question-and-answer session. I'd like to turn the floor back over to Trevor for any further or closing remarks.

No, I just want to say thanks for everybody for joining the call. If you have any follow-up questions, please feel free to reach out and have a great day. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.