Credit Bureaus' Wide Moats Can't Be Breached

Simple Businesses With Wide Moats Credit bureaus have a relatively simple and attractive business model: They take consumer credit information from lenders and other sources, aggregate this data to form a complete-as-possible picture of consumers' credit history, then sell this data back to lenders and any other businesses that find the information useful. The data in the credit report is the input for a scoring system (with FICO being the dominant scoring system in the U.S.) that provides an overall quantitative rating on the consumer.

The participants and the structure of credit bureaus differ around the world, but one global commonality is that the industry tends to be concentrated, with a limited number of credit bureaus in each market. As with other database businesses, costs are largely fixed and customers value breadth of information (TransUnion, for instance, has information on over 1 billion consumers globally, derived from 90,000 data sources).

We think a wide moat surrounds the credit bureau business. The data is critical to users’ consumer credit underwriting decisions, and the price of the services is very small relative to the loan amounts at risk. We estimate that North American credit bureau industry revenue equates to about 2 basis points of consumer debt. With only limited competition and many clients using more than one credit bureau, the credit bureaus have little incentive to compete on price, which has led to a stable oligopolistic structure for the industry. We also think there are high barriers to entry, since replicating the databases of the leading credit bureaus would be incredibly difficult. Given that lenders are more concerned about the breadth and accuracy of the data than the price, owing to the risks they are trying to avoid in the underwriting process, we believe the credit bureaus sit atop very powerful intangible assets. This advantage shows in all three companies’ returns, which are well in excess of any reasonable estimate of the cost of capital.

While all three companies have their roots firmly planted in their North American credit bureau operations, they have expanded into new areas and geographies over time. Their mixes differ, but the expansions can largely be grouped into three buckets: international, consumer, and new verticals/decision analytics. As a result of these efforts, revenue by end user has shifted to the point that traditional lenders no longer make up the bulk of the business.

In our view, the fundamental attractiveness of credit bureau operations is fairly clear. However, the U.S. market is mature and the companies’ positions in the U.S. are stable. As such, we think the success of their expansion efforts will be the deciding factor in how Experian, Equifax, and TransUnion perform on a relative basis going forward, especially as they have used mergers and acquisitions fairly aggressively to implement their strategies.

International Markets Offer Opportunities to Replicate Moats and Grow The structure of credit bureaus differs in markets around the world in ways that can limit the potential for Experian, Equifax, and TransUnion to set up and expand their businesses. First, a country must have a big enough consumer lending market to justify the expenses of setting up a credit bureau. Both the country's population and the percentage of people accessing credit play a role.

Second, regulations in a number of countries don’t allow for the sharing of consumer data with third parties, or there is already an entrenched public option (either governmental or organized by lenders) available. This type of solution is often referred to as a credit registry to distinguish it from the profit-motivated service that the credit bureaus provide. China, for instance, is essentially a nonstarter for the credit bureaus for these reasons.

Additionally, regulations around the types of data that the credit bureaus can collect have an impact. In many countries, credit bureaus are only allowed to use negative data (such as missed payments), while other countries allow these companies to use positive data (like on-time payments) as well. Being able to use only negative data does not preclude credit bureaus from operating, but it does restrict their ability to create a full picture for clients and limits their ability to add value for lenders and consumers.

Finally, Experian, Equifax, and TransUnion prefer to enter new markets by acquiring companies. Building a credit bureau database from scratch is a lengthy and complicated process with an uncertain payoff that will take years to realize.

Despite these hurdles, the three major credit bureaus have actively sought and found opportunities to replicate their core business model in other countries. Outside the United States and United Kingdom, Brazil is by far Experian’s largest market, and the company has the largest revenue contribution outside the U.S. among its peers. Equifax has a sizable presence in the U.K. and holds a dominant position in Australia through its 2016 acquisition of Veda. Although TransUnion’s international operations are significantly smaller than its peers, it has a solid position in Canada and a leading position in India.

The growth of the middle class in emerging-market economies has been and should continue to be a long-term secular trend favoring the credit bureaus. With populations in developed regions expected to stagnate in the coming decades, growth prospects for the credit bureaus’ legacy operations in more developed markets are limited, and as such, new markets will be necessary to maintain solid growth.

But it will take time to realize this opportunity, as the credit bureaus need to build their presence as well as their database assets, and the lead time on this process can be long. While credit bureau coverage is essentially complete in developed countries, it remains spotty in emerging markets.

Further, the structure of international credit bureau markets differs in important ways from the U.S., which is distinctive. While the number of credit bureau companies in a particular market is always fairly low, monopolies are not generally viable in larger markets like the U.S. At a minimum, because consumer credit markets rely on a functioning credit bureau operator, the risk of economic disruption is too great to rely on only one operator. Additionally, we believe lenders prefer to have more than one option. On the flip side, the credit bureaus themselves have shown an eagerness to enter markets that have enough scale to support more than one company. We’ve seen this dynamic at play in Australia recently, as Experian was invited into the country to supply some competition for Veda (which was later acquired by Equifax). However, the fixed costs associated with operating a credit bureau are a limiting factor, and smaller markets are sometimes served by a single company.

While the number of meaningful participants in any sizable market is typically two or three, the U.S. is unique in that the three leading companies operate basically at market share parity. In foreign markets, this is not necessarily the case; typically there is one dominant provider.

Understanding these different dynamics is critical to understanding the profit potential of different markets. For small markets, the credit bureaus may face no effective competition, but revenue and margins may be limited by the fixed costs associated with the business. For larger markets, the profit potential might be dramatically larger, but establishing a dominant position early is key. The costs of operating a credit bureau are essentially fixed and not directly related to share. In our view, most foreign markets probably have structural margins lower than in the U.S. (the largest market in the world), but if a company can build out a dominant position in a relatively large foreign market, this is not necessarily the case. Experian’s margins by region highlight this difference. Its margins in Latin America and U.K./Ireland are on par with North American margins, despite the fact that revenue in the first two regions is roughly 30% that of North America. Europe, the Middle East, Africa, and Asia-Pacific, which contains smaller and more nascent operations, is barely profitable.

Conversely, international margins for Equifax and TransUnion, which don’t break out margins by specific regions, are materially lower than the U.S. as a whole. So while some individual markets can be as or more profitable than the U.S., international markets on the whole are likely to generate lower margins for the credit bureaus given their smaller size, although the gap should narrow a bit over time considering that emerging markets will grow at a faster rate and the credit bureaus will scale their costs in newer markets. Over the long run, we expect international margins to improve on a relative basis as the credit bureaus move past the investment phase in more nascent markets.

While India represents a huge opportunity for the credit bureaus, there are a substantial number of other markets that could boost their growth. Notably, given the nascent nature of many of these markets, there is additional room for growth by replicating the ancillary services and new verticals that the credit bureaus have developed domestically. This can be seen by looking at Experian’s revenue makeup by region. While revenue is fairly diversified in the company’s more mature markets in the U.S. and the U.K., Experian’s emerging-market regions rely more heavily on traditional credit bureau and decision analytics products, with the company generating no material consumer service-related revenue in these regions. This should change over time, though, as Experian is currently rolling out a consumer offering in Brazil. In our view, these ancillary services should provide another leg of growth even when the company’s international markets start to mature.

We see a long growth runway for the credit bureaus in emerging markets. We believe this is the most value-creative long-term growth opportunity for the industry, as these operations are inherently moaty and essentially replicate services in which the credit bureaus are already skilled. Overall, we give the edge to Experian in these efforts, as it has been the most internationally minded and has already cast the widest net of the three companies. TransUnion’s Indian operations cannot be ignored, though, as they put the company in a strong position in what looks to be far and away the most lucrative opportunity for the credit bureaus over the long haul. Additionally, we like that TransUnion is aggressively expanding its global footprint through other deals, like its recently announced $1.4 billion acquisition of Callcredit, the second-largest credit bureau in the U.K. While Equifax has a solid international position overall, it does not have any individual emerging-market operations significant enough to drive overall results at this point, in our view.

In Consumer, the First Is Now Last but Has a Plan to Be First Again On a stand-alone basis, we do not think that the consumer operations of the major credit bureaus look as moaty as the rest of their business. In many cases, the credit bureaus rely on partners, and the consumer side has proved to be more prone to regulatory interference and to competition as it has evolved. However, we view the consumer segment as a natural extension of credit bureaus' core operations, providing an additional path for monetizing the moat surrounding the companies' data assets. In this light, we see consumer operations as supporting the companies' wide moats as opposed to diluting them. While the allure is obvious, the shift from the core business-to-business model to a business-to-consumer model has not been without challenges, and the model in this area has shifted over time. With Experian, Equifax, and TransUnion deriving 20%, 12%, and 22% of their revenue from these businesses, the course forward will be a material driver of overall results.

There are essentially two sides to the consumer business--direct and indirect--with the key commonality between the two being that free credit reports and scores are offered to lure in consumers. In the direct channel, companies sell credit monitoring and identity protection services to consumers directly through their own websites and under their own brand, while in the indirect channel, the credit bureaus partner with another company to provide these services. This has historically taken the form of simply white-labeling the services on a financial institution’s site, for instance. Increasingly, though, this channel is characterized by partnerships with newer entrants such as Credit Karma, which controls the customer relationship but offers free credit scores and related services from one of the credit bureaus.

Historically, Experian has generally been the most aggressive in exploiting the opportunity that exists to monetize business-to-consumer offerings. With strong positions in the U.S. and U.K., Experian’s consumer revenue base is roughly twice the size of this segment at both Equifax and TransUnion. Because all three companies have had essentially the same opportunity to expand in this part of the market, we think Experian’s outperformance is a tribute to its management. Experian’s leadership position has been challenged the past several years, though, as the market has shifted. While its peers have largely continued to see solid growth in their consumer segments (although it should be noted that Equifax saw a dip in 2017 due to its data breach), Experian’s revenue has been declining since 2014.

We see this as a combination of two factors, one temporary and idiosyncratic, and one structural. First, Experian’s primary brand in the consumer segment was historically Freecreditreport.com. In 2014, Experian was forced to switch over to the Experian brand when regulators ruled that its use of the term "free" was misleading, as the free credit report was clearly a lure to upsell consumers into paid services. As a result, the advantage that the company enjoyed from its first-mover advantage and leading brand was mooted to some extent. However, we view the transition to the Experian brand as a one-time event that simply reset revenue at a somewhat lower level.

More important has been the entrance of new types of competition and the emergence of a new business model. Credit Karma is the leading example. As opposed to the traditional credit bureau model, which uses free credit information as a platform to sell credit monitoring and identity protection services, Credit Karma uses free credit information to advise consumers on the best available credit options given their credit situation. The key difference is that from the consumer’s point of view, Credit Karma is completely free, as it makes its money through referral fees from lenders.

Credit Karma has enjoyed strong growth. The company says revenue grew 50% in 2016 to reach $500 million and it is already profitable. That level of revenue would put it ahead of Equifax’s and TransUnion’s consumer revenue. But while it’s the largest new entrant, Credit Karma is not the only company eyeing this space.

In our view, a shift toward a Credit Karma-like model looks inevitable, as the business model pushes the cost to lenders, and Credit Karma’s ability to reach profitability suggests the model is sustainable. We think the credit bureaus have two viable options: They can either partner with Credit Karma and its peers or compete with them. Either way, the credit bureaus maintain a large degree of control over the eventual evolution of the industry, as they control the credit data that makes the business model work. As a result, we don’t see companies like Credit Karma as necessarily disruptive to the credit bureaus, although their rise presents a fork in the road strategically.

TransUnion has already made its choice. It was Credit Karma’s first credit bureau partner (with Equifax coming in later as a second provider) and has partnered with many of the other new entrants as well. In our view, the choice to partner is relatively low-risk and can be quite profitable for the credit bureaus as they shift from owning and operating their own business toward simply collecting fees for providing credit information to other sites. TransUnion, which we believe has the highest portion of its consumer segment revenue coming from relationships of this type, enjoys very strong margins in its consumer segment. Additionally, the divergence in results between TransUnion and Experian in recent years highlights the fact that the choice to partner is likely to lead to higher growth in the near term, as TransUnion rides the draft created by Credit Karma’s expansion.

Equifax is in the weakest position in the consumer segment, in our view, and partnering looks like its only truly viable option. The company was never particularly strong on the direct side, and we believe that its brand is now impaired after the 2017 data breach. Paying a company that just suffered a massive breach to protect your data looks like a hard sell for the foreseeable future, and we think current management is debating whether to continue to expend capital in this direction. That said, Equifax does have relationships with Credit Karma and LifeLock that should help to shore up its indirect operations.

Experian is charting a different course. On the direct side, it is shifting its efforts toward identity protection, as it believes credit monitoring customers are more transitory and likely to be lured away by free models; this will put its direct offerings more in line with companies like LifeLock. The company believes there is still strong potential among customers who are willing to pay for a more robust service. In our view, Experian is sacrificing near-term results in an attempt to capture more value from this segment over the long run. The company’s 2014 decision to offer FICO scores instead of VantageScore in its consumer offerings is an additional indication that it intends to act aggressively to maintain its dominance in the consumer segment.

Experian’s early efforts appear to be on track. IdentityWorks, the company’s identity protection service, launched last year and now has over 200,000 paying customers. LendingWorks, which offers a service similar to Credit Karma, is in an even earlier stage, but the company intends to start putting marketing spending behind this effort this year. As quarterly results show, Experian’s efforts are at least moving the company toward stabilization in the U.S. (even as the company still has a ways to go to eliminate the gap with its peers). The company’s U.K. business, which was hit somewhat later by the same trends that affected its consumer business in the U.S., remains difficult. However, in March, Experian announced the acquisition of ClearScore, a U.K. company similar to Credit Karma with 6 million users. The deal is expected to close later this year and should provide a platform for Experian to replicate its U.S. strategy.

Expansion Into New Verticals Can Be a Mixed Bag Expanding into new verticals or upselling existing verticals on new solutions present, by their nature, a more diffuse opportunity for the credit bureaus. The revenue impact of these efforts is too large to ignore, but a comprehensive discussion of all of these efforts is beyond the scope of this article. We will focus on the opportunities that we think are most meaningful. Overall, we believe the credit bureaus have been relatively disciplined in pursuing opportunities that play to their strengths and that enjoy the capital-light nature of legacy operations. To this end, we don't believe these expansions as a whole have materially diluted their wide moats, and in some cases, they have strengthened them. We see the main opportunities as serving the insurance and healthcare industries and providing employment verification.

TransUnion has built a solid business serving insurance companies. It provides services that help insurers validate an applicant’s address, the members of the household, and the vehicle to be insured. It also helps insurers determine the appropriate rate for auto policies through credit scores (which have been found to be predictive of driver behavior) and screens for ticket and accident history (a quick and inexpensive way for insurers to determine if they need to order a more expensive motor vehicle report). In healthcare, TransUnion follows a similar model, and Experian entered the space in 2013 through its acquisition of Passport Health Communications. On the front end, identity and insurance are verified to estimate the payment amount for the patient, with credit scores used to determine capacity to pay. On the back end, TransUnion helps healthcare providers recover on uncompensated care.

We like that these business models closely resemble the credit bureau model (and directly involve credit scores, which elevates the business past public data). While the credit bureaus don’t provide separate disclosures on these businesses, the overall trend in margins and returns on invested capital suggests that they have not diluted profitability or the companies’ wide economic moats.

Equifax has pursued a more interesting opportunity. In 2007, it acquired TALX and embarked on a completely new line of business with two parts. The first provides payroll-related and other human resources services, such as processing unemployment. It also assists with compliance with the Affordable Care Act. In our view, this side of the business is mostly important for establishing corporate relationships. The second part is the most attractive. In this business, Equifax operates a database that allows lenders and other interested parties to verify an individual’s employment and income. This business, in our view, is very similar to the credit bureau business in that it benefits from limited competition, especially as employers will be hesitant to provide such sensitive information to new providers. For both lenders and companies, it speeds the process of employment verification and lowers costs.

When Equifax first entered this business, management estimated that it had records covering 20%-30% of nonfarm payroll, mostly with large companies. Over the years, though, it has added more midsize businesses, and management now estimates that it has 50% coverage. We believe this improvement in coverage has increased the hit rate for lenders, which has made the service more valuable, and this dynamic has accelerated growth recently.

It took roughly a decade for Equifax to fully unlock the business’ operating margin potential. In our view, this displays the patience often needed to build a moat around a database business and speaks well to management’s willingness to invest for the long term. Also, the segment has shown impressive scale now that growth has accelerated, with operating margins roughly double those when the company entered the business. At this point, operating margins have reached the level of the company’s legacy domestic credit bureau business, suggesting that this business benefits from a wide economic moat as well.

Equifax's Wide Moat Has Not Been Breached It is impossible to discuss Equifax and the industry's outlook without considering the massive data breach recently experienced by that company. While significant uncertainty persists, we believe that, on the whole, Equifax's results following the breach confirm the wide moat that surrounds the business.

On Sept. 7, 2017, Equifax announced that hackers had accessed its systems from mid-May to July and taken massive amounts of consumer data. The company became aware of the intrusion on July 29. While a breach of this magnitude was always going to result in negative attention, management’s handling of the breach inflamed the reaction. The gap between internal recognition of the breach and the public announcement drew criticism. Additionally, some executives had sold stock in the interim, which raised concerns about insider trading. Further, it came to light that the breach was due to a vulnerability in the software the company was using, and a patch to address this vulnerability had been available a few months before the breach. Equifax offered free credit monitoring to those affected by the breach, although this effort was not without complication and criticism itself. While breaches can be difficult to avoid for even the most diligent companies, we think it is clear that Equifax’s safety measures were inadequate and management was not prepared for the onslaught of bad press.

As a result, CEO Richard Smith, who had led the company since 2005, announced his resignation. He was later replaced by Mark Begor, who came to Equifax from Warburg Pincus but before that had a 35-year career with General Electric and led its retail credit card business, which is now Synchrony. He also served on the board of Fair Isaac. His background looks like a reasonable fit with Equifax’s business, with extensive experience in consumer credit markets and some direct experience with credit scoring. An outsider CEO was somewhat of a necessity, in our view, given the intense negative publicity surrounding the breach.

By their nature, credit bureaus tend to be controversial with the public. Given the size of their databases, errors are to some extent unavoidable. Further, consumer complaints about inaccuracies cannot simply be taken at face value by the credit bureaus, since the affected consumer has a vested interest. This results in numerous cases where the credit bureau is criticized for inaccurate information and for either not removing or being tardy in removing this information from credit reports. The number of consumer complaints directed at the credit bureaus exceeded those directed at the big four banks during 2015-17. However, consumer complaints historically have had little impact on the credit bureaus, as the system works effectively for their customers, the lenders. While Equifax’s breach is a unique event that drew much more public attention than the industry is used to, the credit bureaus’ historical ability to withstand consumer complaints points to the solidity of their market position, in our view.

Still, it is clear that the breach will have a meaningful impact on Equifax and potentially the industry. We think that the potential impact of the breach can be broken down into four categories: fines/lawsuits, lost business, increased costs, and regulatory changes.

While the actual level of fines or lawsuit payouts that Equifax will have to make related to the breach remains uncertain pending investigations by the Consumer Financial Protection Bureau and the Federal Trade Commission, as well as any state-level investigations or lawsuits, past breaches have historically led to fines that have been material in size but still manageable for the companies that were involved.

We estimate that Equifax will ultimately pay out $500 million as a result of lawsuits and fines related to the 2017 breach. This is above the typical historical level, but we think a higher estimate is warranted given the magnitude of the breach, the sensitive nature of the information, and the publicity surrounding the breach. Estimating the size of potential fines and lawsuits with any precision is difficult, but as long as the size is not sufficient to induce financial distress (a scenario that we see as unlikely), the ultimate magnitude is not terribly material to our long-term fair value estimate. If we doubled our estimate, our fair value estimate would decline only 4%. In our view, the size of any fines or lawsuit damages is the most uncertain aspect, but also the least meaningful from a long-term perspective.

Immediately after the breach, the intense public scrutiny raised some fears that lenders might terminate their relationships with Equifax. We’ve always believed that the wide economic moat around each of the credit bureaus would prevent something like this from happening, and this appears to be the case so far. While growth did stall in the wake of the breach, as the publicity made it difficult for the company to pursue new business, management’s first priority was to reassure clients that Equifax was fully capable of not only recovering from the breach but maintaining existing relationships. Equifax has thus far avoided any major client defections, and we think the risk of any major loss of revenue on this front has largely passed.

Overall, we think the underlying business has performed well in the wake of the breach. In the core domestic segment, revenue was down only 1% in the fourth and first quarters, while the consumer segment was down 2% and 3%, respectively. We think the damage to the company’s brand in the consumer segment will be more long-lasting, but Equifax has never been overly reliant on this segment, which accounts for only 12% of revenue. Management expects operations to start to return to normalcy in the back half of the year, suggesting the impact on revenue will be both relatively shallow and transitory.

Equifax has largely laid out the near-term costs it will face as it works through the impacts of the breach, as well as estimates for recurring costs as it moves to shore up parts of its business that were clearly not prioritized enough in the past. New recurring IT and security costs, combined with higher insurance costs, will come to about $50 million annually. Additionally, Equifax expects one-time costs of about $200 million (net of insurance) in 2018. These costs relate to remediation of the breach, but also to efforts to rationalize and upgrade the company’s data infrastructure. Equifax expects the one-time spending to stretch into next year. We think being aggressive in beefing up security is in the company’s long-term interest, and at about 7% of overall revenue in 2018, these costs look manageable.

In our view, the most concerning potential outcome of the breach is a major regulatory change affecting the structure of the industry. To date, the only real response has been a move to make credit freezes free for consumers. This is not a significant event for the industry, as credit freeze revenue is not material. Still, while we think that the risk of dramatic change has waned, Equifax and the industry are not completely out of the woods. The CFPB and FTC are pursuing investigations (and there are state-level discussions as well), the conclusions of which would be the most likely to prompt any material regulatory changes for the industry. However, to some extent we think that Equifax was lucky with the timing of the breach, given the Trump administration’s aversion to regulation and the fact that the CFPB (which we think would be running point on this in more normal times) is headed by a person that had previously called for its dissolution. While significant uncertainty remains, we think events following the breach have largely played out in a positive way. Barring major regulatory change, we think the issue will be manageable for Equifax and dissipate over time, and the company’s wide economic moat has aided the company in this situation and remains intact.

Experian Has Lagged but Has a Plan to Reassert Itself In recent years, Experian has been the weakest performer in terms of top-line growth for a couple of reasons. First, its consumer segment has been hit with regulatory changes and the shift toward newer entrants. Additionally, the strong growth it had enjoyed in Brazil started to slow as this business matured and the macroeconomic backdrop there weakened. We expect growth to pick up a bit as the company moves past the consumer headwind and its more nascent international operations contribute more to overall revenue. The net effect of our assumptions is a revenue compound annual growth rate of 6.5% over the next five years.

We think the scalable nature of the credit bureau business model allows for ongoing but modest margin improvement over time, so long as the company can achieve reasonable growth and investments in more nascent operations are at a reasonable level. We think Experian will fit this profile, which will allow for EBITA margins to improve at an average pace of 50 basis points annually over the next five years.

Breach Dominates Equifax's Near Term, but Long Term Has Points of Strength The impact of the breach will dominate Equifax's near-term results, and 2018 is shaping up to be a year of lost growth and some margin retrenchment. However, barring a dramatic regulatory response, we expect the company to start to move past this in the back half of the year.

Even without the breach, we expected Equifax’s growth to slow in the coming years. Its results have been boosted over the past few years by the strength of the workforce solutions segment, driven in part by ACA-related compliance work that is starting to drop off. We expect revenue growth in employment verification to slow a bit as well as the company moves past the benefit it derived from expanding its employment coverage. Finally, a relatively weak position in the consumer segment will likely also be a bit of a drag. As a result of all of these factors, we expect growth at Experian and Equifax to start to converge over time. We project a revenue CAGR of 6.1% over the next five years.

Increased security and IT costs will reduce margins in the near term, but over time we expect the scalability of the business model to reassert itself. We projected EBITA margins to improve, on average, about 10 basis points annually over the next five years.

TransUnion Has the Hot Hand, and India Creates Long-Term Opportunity Of the three, TransUnion has clearly had the strongest performance over the past few years. In our view, TransUnion was somewhat sleepy under the ownership of the Pritzker family, but it has been aggressively playing catch-up since. Its smaller size, partnerships with new entrants in the consumer segment, and product innovations should help it maintain this edge the next few years. Additionally, the acquisition of Callcredit will provide a new platform to replicate the strength it has seen in the U.S. in recent years. While we expect growth to ultimately move toward a level closer to Experian and Equifax, we think TransUnion can outperform in terms of the top line for the foreseeable future.

TransUnion has also seen strong margin improvement in recent years. While this was due in part to strong growth and the scalable nature of the business, management also led an initiative to modernize its data infrastructure, which reduced costs and improved the company’s nimbleness. We expect the rate of improvement to slow significantly as these benefits have largely been realized and the company is now entering more of an investment phase. We project EBITA margins to improve at an average annual rate of about 25 basis points over the next five years.