FA - NASDAQ

Good day, everyone. My name is Leo, and I will be your conference operator today. I would like to welcome you to the First Advantage Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. Hosting the call today from First Advantage is Stephanie Gorman, Vice President of Investor Relations. At this time, all participants have been placed in a listen-only mode to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Please note, today's event is being recorded. It is now my pleasure to turn the call over to Stephanie Gorman. You may begin.

Thank you, Leo. Good morning, everyone. I'm joined on our call today by Scott Staples, our Chief Executive Officer; and David Gamsey, our Chief Financial Officer. As you may have seen today, we announced the definitive agreement to acquire Sterling Check Corp. We will first discuss the transaction, then cover First Advantage's fourth quarter and full year 2023 results as well as our 2024 outlook. Then we will open the call for questions. In the Investors section of our website, you will find a press release on the Sterling acquisition, in addition to our earnings press release and slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on our Investor Relations website. Before we begin our prepared remarks, I would like to remind everyone that our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in our filings with the SEC, including our 2022 Form 10-K and our 2023 Form 10-K to be filed with the SEC. Such factors may be updated from time to time in our periodic filings with the SEC, and we do not undertake any obligation to update forward-looking statements. Throughout this conference call, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable efforts appear in today's earnings press release and presentation, which are available on our Investor Relations website. I will now hand the call over to Scott.

Thank you, Stephanie, and good morning, everyone. This is an exciting day for First Advantage as we announced our agreement to acquire Sterling. This strategic and accretive acquisition will benefit customers and investors and drive long-term value creation. I'll start by walking through an overview of the rationale behind this acquisition. Against the backdrop of a highly fragmented large and growing market for our services, adding Sterling to First Advantage will allow us to further strengthen our high-quality and cost-effective background screening, identity and verification solutions for the benefit of customers of all sizes across industry verticals and geographies. Our product offerings are highly complementary, which should unlock upsell and cross-sell opportunities and enable improved customer experiences across our combined customer base. The transaction will enable us to increase investment and drive innovation in key development areas of our business, like artificial intelligence and next-generation digital identification technology, all with the goal of helping our customers hire smarter and onboard faster. With this investment, we will be increasingly well positioned to meet the evolving needs of our customers, deliver an even better customer and applicant experience and do so more efficiently by leveraging best practices and technologies from both companies. With the addition of Sterling, First Advantage will have a more balanced revenue mix across customer verticals and geographies, which will reduce seasonality and improve resource planning, operational efficiency and resilience across macro cycles. This acquisition is also compelling from a financial perspective for First Advantage, for Sterling, and for investors of both companies. It's just the beginning of a new value creation journey. As David will cover in more detail shortly, we are acquiring Sterling for approximately $2.2 billion in cash and stock. The combination of our companies is expected to generate at least $50 million in run rate synergies in the first 18 months to 24 months with potential material upside. This positions us well to both reduce cost for our customers and create long-term value for our shareholders. We expect the transaction to deliver immediate double-digit accretion to adjusted earnings per share on a run rate synergy basis and to accelerate our objectives to drive long-term profitable growth. And importantly, we're excited about bringing together the world-class talent of First Advantage and Sterling. We have two high-performing cultures that share a dedication to delivering excellent customer experiences. We look forward to building on that together to deliver substantial value for our customers and shareholders through this acquisition. As the CEO of the combined company, I personally look forward to welcoming the talented Sterling team to First Advantage. Overall, this combination is a transformative step for First Advantage in all our stakeholders. Turning to Slide 5, which highlights some key metrics of our combined company. This acquisition will create a combined company with approximately $1.5 billion in revenue that conducts over 200 million background screens annually and serves 80,000 customers across more than 200 countries and territories. From a geographic perspective, First Advantage and Sterling have complementary international footprint, deepening our local presence and advancing our growth in attractive geographies like EMEA, APAC, LATAM and India. If we look at the verticals where our customers operate, Sterling has strength in serving employers in health care, industrials and financial services, which make up over half its business today, while First Advantage particularly excels in the transportation, retail and e-commerce verticals. Together, we will have greater product and vertical diversification that generates cross-selling opportunities and reduces seasonality in our business, which will enable more accurate planning for greater operational efficiency. And the combination is expected to greatly reduce customer concentration by diversifying our customer base. Together, we will be able to better support companies as they manage risk and hire the best talent. Turning to Slide 6. The combination of First Advantage and Sterling's technology products, data and capabilities will further enrich our offerings across background checks, digital identity and biometrics, verification solutions, drug and health screening, continuous monitoring and beyond. We expect feature functionality that will reduce turnaround time and cost for customers. We see exciting opportunities to use our complementary portfolio to sell incremental products and services to both companies' customers. For example, we expect to be able to bring First Advantage's I-9 and WOTC offering to Sterling's customers and certain of Sterling's digital identity solutions to First Advantage customers. We'll also have an opportunity to bring First Advantage's leading automation expertise to Sterling. We expect that as we find new ways to utilize our technologies and capabilities, the combined company will be able to leverage First Advantage's AI-driven intelligent routing and proprietary data assets to reduce reliance on third-party data providers, advancing our commitment to delivering cost-effective solutions to our customers. This transaction also creates the opportunity to accelerate innovation in ways that will meet the dynamic needs of customers and deliver an elevated applicant experience while also improving operational efficiencies. For example, with greater capacity for investment, the combined company will accelerate innovation focused on artificial intelligence, impacting both the front-end applicant experience and the back-end fulfillment process and other technologies that will shape this industry over the long-term. Similarly, the transaction will enable greater combined investment in next-generation digital identification technologies, building on our existing services and the acquisition of Infinite ID. Digital identification has been a core part of First Advantage's strategy and bringing together our identity verification and identity fraud solutions will enable First Advantage to further innovate in delivering state-of-the-art digital identity solutions to our customers. Overall, our acquisition of Sterling will accelerate our strategic objectives toward sustainable long-term value creation for customers and shareholders. Our enhanced growth opportunities and improved diversification set us up to deliver a stronger, more comprehensive value proposition to customers in a large, growing and highly fragmented $13 billion market for our services. And this combination enables accelerated investment in our products to fuel innovation and growth. I am confident that this acquisition is the right step to create meaningful value for First Advantage's current customers and shareholders, and those of the combined company. I will now turn the call over to David to discuss the financial details of the transaction.

Thank you, Scott. Turning to Slide 7, I'll take you through the financial aspects and structure of the transaction. Total purchase price consideration for this transaction is $2.2 billion. The consideration will include $1.2 billion in cash, 27.15 million shares of newly issued First Advantage common stock and the assumption of Sterling debt, which will be retired at closing. This translates to a purchase price of $16.73 per share, which represents a premium of 35% to Sterling's closing price yesterday and 26% premium to the 30-day VWAP. We will be acquiring Sterling at a synergized adjusted EBITDA buy-in multiple that represents a discount to First Advantage's current trading multiple. We expect the transaction to deliver significant total shareholder return in the long run. This transaction essentially doubles First Advantage's revenues and adjusted EBITDA, and we expect the transaction to deliver immediate double-digit accretion to adjusted earnings per share, assuming run rate synergies. I'll discuss the pro forma profile in more depth shortly. It also provides greater trading liquidity for investors, creating an even more compelling opportunity for investors in this industry. Within 18 months to 24 months after closing, First Advantage expects to achieve at least $50 million in synergies as identified by our team and supported by an adviser. These synergies would be driven by a reduction in third-party data costs and efficiencies across operations, product and technology and SG&A, including the elimination of duplicative public company costs, such as the combination of insurance programs and one audit and one set of tax returns. We see potential for upside on the expected synergies value over time. We have secured fully committed financing for this transaction with $1.8 billion of new seven-year term debt. The new financing is in addition to the existing debt on our balance sheet. I'll talk through the balance sheet impacts of the transaction in more detail shortly. Regarding timing, the transaction is expected to close approximately in the third quarter of 2024, subject to required regulatory approvals, clearances and other customary closing conditions. We cannot control the exact timing, but we will be prepared to close as soon as all approvals have been received. First Advantage shareholders will own approximately 84% of the combined company and Sterling shareholders will own approximately 16%. There will be approximately 173 million diluted shares outstanding. As a result of the transaction, we have suspended purchases under our share buyback program. Our primary focus upon closing will be on integration, synergies, deleveraging and most importantly, on our customers. The acquisition of Sterling is a significant step forward in our value creation playbook. It is just the beginning. We have the leadership team, industry expertise, technology and systems to successfully execute and integrate this transaction and deliver shareholder and customer value. Now turning to Slide 8. Our proposed acquisition of Sterling generates a strong pro forma financial profile. Using the year-end figures that First Advantage and Sterling reported today, we will have pro forma $1.5 billion in 2023 revenues and $473 million in combined EBITDA, including expected run rate synergies. This represents a 32% adjusted EBITDA margin, which is approximately 100 basis points above First Advantage's current margin. We expect to generate double-digit EPS accretion on a run rate basis with continued ability to compound EPS at teens growth rate over time. Now on Slide 9, I'll focus on how the transaction impacts our capital structure. First Advantage will assume and retire Sterling's outstanding debt at closing. As previously mentioned, this along with the cash consideration portion of the purchase price will be funded through a new $1.8 billion seven-year term loan and cash on the balance sheet. We have already secured financing commitments for this new facility from a consortium of banks. Additionally, as part of this financing agreement, we will be upsizing our current $100 million revolver to $250 million and extending the maturity date to 2030. Net leverage at closing will be in the range of 4x depending on the exact timing of closing. The debt will be covenant-light, consistent with our current agreement, further reducing risk and increasing flexibility. Our long-term goal is to reduce and maintain net leverage between 2x and 3x. Our expected liquidity at closing and our combined company's ability to generate cash flow will leave us with greater than 2.5x interest coverage, ample room to achieve our capital allocation priorities and deleverage organically over time. For context, pro forma combined cash flow from operations was approximately $300 million based on actual 2023 results. Our well-built financial foundation and resilient business model have supported our history of strong adjusted EBITDA margins and robust operating cash flows, creating a healthy balance sheet that has given us the flexibility to acquire Sterling. Looking ahead, and as previously mentioned, we expect First Advantage to continue compounding EPS at a teens growth rate over time through the combination of top line growth, ongoing synergy capture and significant deleveraging via strong organic free cash flow generation. We will continue to selectively and strategically invest in the business to fuel long-term organic growth and to successfully integrate Sterling, particularly to drive the innovation that we know will most benefit our customers. Consistent with our historical capital allocation strategy, going forward, we plan to focus our uses of capital on prudent deleveraging towards our long-term net leverage target range, which will help support earnings growth. Now let me take you through our full year and fourth quarter results as well as our stand-alone First Advantage 2024 outlook. Turning now to a recap of our full year results on Slide 12. We are pleased with our overall annual performance coming in within 1% of our original 2023 guidance ranges for revenues and adjusted EBITDA and performing in line with what we communicated for adjusted net income and adjusted diluted EPS. This is further evidence that we continue to be diligent and successful at controlling what can be controlled within our business despite the challenging macro environment. Revenues grew sequentially throughout the year in every single quarter, including Q4, coming in at $764 million, a decrease of 5.7% from the prior year, with constant currency revenues of $766 million. For the year, Infinite ID, which we acquired in September 2023, contributed approximately $3 million to our revenues. As we have discussed throughout 2023, we have been pleased that our upsell, cross-sell, new logos and attrition rates have broadly aligned with our historical revenue growth rates. Our base growth, which is more sensitive and correlated to changes in the macro environment, declined on lower volumes. We believe that when the macro environment stabilizes, our base growth will normalize to our historical rate of 2% to 4%. In our Americas segment, revenues of $673 million or 87% of consolidated revenues were down 3.1% from the prior year. In our International segment, revenues of $97 million or 13% of consolidated revenues were down 21% from the prior year. On a constant currency basis, international revenues were $99 million or down 19% year-over-year. Adjusted EBITDA for the year was $238 million, and our adjusted EBITDA margin was a robust 31.1%, representing year-over-year expansion. Our adjusted effective tax rate was 23.5%. Adjusted net income was $146 million and adjusted diluted EPS was $1. Looking now at our fourth quarter results on Slide 13. The fourth quarter exemplified the continued strength of our flexible business model, disciplined cost management and investments in technology and automation, which were key drivers of achieving a record adjusted EBITDA margin of nearly 34% and strong cash flow from operations of $57 million. Our fourth quarter revenues were $203 million, a decrease of 4.7% from the prior year. Given the mix of our domestic and international businesses, currency had little impact on fourth quarter results with constant currency revenues of $202 million. For the quarter, Infinite ID contributed approximately $2 million to our revenues. We continue to make great progress building our customer base during the fourth quarter and the year. We had 10 bookings in the fourth quarter of $500,000 or more of expected annual contract value and [46] for the year, of which approximately half were new logos and the other half were upsell cross-sell. That said, total base continued to be under pressure in the fourth quarter, declining $28 million or 13%, driven by peak season ending earlier than expected and continued macro-driven weak performance in our India and APAC markets. We are well positioned to take advantage of the upside from a market recovery when it materializes. The base decline for the quarter was partially offset from upsell and cross-sell, which contributed $12.7 million or nearly 6% to our performance. Revenues from new customer logos contributed an additional $8.3 million or approximately 4%. In our Americas segment, revenues of $182 million or 89% of consolidated revenues were down 3.1% from prior year. This quarter held up relatively well, which is primarily attributable to our broad-based resilient customers. All of our fundamentals remain strong. As a reminder, JOLTS data is correlated to our Americas-based growth. Looking at December 2023 JOLTS data, openings and hires increased slightly month-over-month and remained relatively high by historical standards, but separations declined. Employers are holding on to talent longer. Quits fell to the lowest monthly level in nearly three years. These declining hiring trends continue to impact our Americas space, which for the quarter was down 12%. In our International segment, revenues of $22 million or 11% of consolidated revenues were down 16% from the prior year. On a constant currency basis, international revenues were $21 million or down 18% year-over-year. The decrease was due primarily to base weakness in India and APAC, offset in part by relative strength in EMEA. As a reminder, our direct exposure to China is less than 1% of our total revenues and has little impact on our business. In the fourth quarter, India was down approximately 36%, given our regional exposure to BPO and IT services-related businesses and APAC was down 21%, driven by the financial services sector and other regional market dynamics. We achieved a record consolidated adjusted EBITDA margin of 33.7% on adjusted EBITDA of $68 million, which represented an improvement of 140 basis points sequentially and 60 basis points on a year-over-year basis. This is another proof point that our business remains resilient in the face of top line headwinds. Our adjusted effective tax rate was 21.2%, which reflects a onetime favorable adjustment. Adjusted net income was $43 million, and adjusted diluted EPS was $0.29, which includes a $0.02 negative impact from our August 2023 special dividend. Now turning to Slide 14. I'd also like to highlight that in 2023, we generated operating cash flows of $163 million, ending the year with $214 million of cash on the balance sheet. We continue to return capital to shareholders through our $218 million onetime special dividend and repurchasing $59 million of stock as part of our buyback program. We spent $41 million on the acquisition of Infinite ID, growing our vertical capabilities and expanding our product suite. Additionally, we spent $28 million on capital-related investments. In December, we entered into two new interest rate swap agreements that take the place of our existing interest rate collars that mature today. Now moving to Slide 15 and a discussion of our outlook. In developing our stand-alone guidance for 2024, we considered many factors. First was the current macroeconomic environment, including the softening in hiring trends and the reduction in employee churn. These dynamics were partially offset by discussions with our customers who are becoming more optimistic and seem ready to start investing in new growth opportunities. On top of this, the Sterling acquisition announced today will require significant amounts of management time and resources to complete and integrate. As such, the midpoint of our guidance reflects a conservative posture towards growth and profitability in 2024. For First Advantage on a stand-alone basis throughout 2024, we expect sequential quarter-over-quarter growth for revenues, adjusted EBITDA and adjusted EBITDA margins similar to 2023. We expect customer retention to remain in line with our strong historical performance of around 97%. We also expect continued execution of upsell, cross-sell and new logo growth consistent with historical trends and long-term targets. The midpoint of our guidance range assumes that there will be further macro-driven base declines, with base remaining negative in the first three quarters, though improving sequentially and then turning positive in Q4. However, assuming the economy begins to recover later in the year and into 2025, we are extremely well positioned to benefit. For 2024, we expect to generate full year revenues in the range of $750 million to $800 million. Based on the midpoint of $775 million, this results in positive year-over-year organic revenue growth. This includes revenues related to Infinite ID, which is expected to contribute approximately $7 million in the first eight months of the year as we approach the anniversary of the acquisition at the beginning of September. At our midpoint, we expect to maintain full year adjusted EBITDA margins of approximately 31% and adjusted EBITDA in the range of $228 million to $248 million. This is after considering approximately $10 million in increases in employee wages and benefits and normalization of management incentive plans, as well as approximately $7 million in new investments in product, technology and sales. We are continuing to selectively invest in our business to strengthen our client relationships and to bring them the best possible offering in the industry. At the midpoint, we expect our 2024 adjusted net income to be approximately $135 million and adjusted diluted EPS of $0.93. We have provided an adjusted diluted EPS bridge on Slide 16 that walks you through the puts and takes in comparing 2023 results to what we expect in 2024. This is very important to understand. On a like-for-like basis, after adjusting for impacts, including our 2023 onetime special dividend, expiring interest rate swaps and the positive impact from our 2023 share buybacks, adjusted 2023 EPS would have been $0.92. We expect diluted EPS expansion at the midpoint of our guidance range in 2024 when taking into account these and other items. We have also provided a summary of selected 2024 modeling assumptions in the appendix including a range of $30 million to $33 million of capital expenditures, of which $3 million relates to a new U.S. criminal data AI project and $4 million relates to a large-scale computer refresh project. The balance, consistent with 2023, primarily relates to capitalized software development costs. Looking now at the quarterly phasing of our 2024 guidance. We expect Q1 year-over-year consolidated revenues to decline by approximately 5%. We expect sequential top line improvement as we move throughout 2024 with Q2 results coming in relatively flat year-over-year. We expect positive overall growth in the second half of the year more heavily weighted toward Q4. We expect our Q1 adjusted EBITDA margin to be between 27% and 28%, which is consistent with the first quarter of the last three years. Starting with Q2, we expect adjusted EBITDA margins to be above 30% and to improve in the second half of the year following a similar pattern to 2023. Overall, we are extremely well positioned to benefit when the macro environment improves. Please note that we expect to provide guidance on the combined company after the Sterling acquisition closes. Let me now turn the call back over to Scott before we open the line for questions.

Thank you, David. I want to acknowledge the great progress our First Advantage team made throughout 2023. I'm especially proud that we did not take our foot off the gas pedal even as we continue to navigate an uncertain macro environment and evolving labor market. We are well positioned to weather the current environment and benefit greatly once it stabilizes and starts to improve. We are excited about today's definitive agreement to acquire Sterling, which will allow us to extend our high-quality and cost-effective background screening, identity and verification technology solutions for the benefit of customers of all sizes across industry verticals and geographies. Looking forward, we remain focused on long-term profitable growth and maximize value for all stakeholders. With that, we will open the line for questions.

[Operator Instructions] Thank you. Our first question is coming from Shlomo Rosenbaum of Stifel.

Just -- first of all, just when you're combining two of the top three companies in the space, I just wanted to get your take on your considerations around the DOJ on this and the work you've done over there. And then I just have a follow-up in terms of just the combination.

Yes, Shlomo, so I mean, first of all, I'll tell you, we've hired some great experts in the space who will guide us through the process. But let's keep coming back to the market on this, because this is a large $13 billion market, and we've always told you how fragmented it is. I mean there's lots of competitors of all sizes and shapes across the world. We think we got a great case, but we'll let the experts guide us through the process and we'll see where it takes us. But like I said, this is a very large but very fragmented market, lots of competitors.

Okay. Just -- and then just in terms of the combination, you point to $50 million in synergies. Is that all cost synergies? And can you talk a little bit more about just on the ground practically, the combination of the two companies, how will you accelerate organic revenue growth? Like what would the -- if you could just give some examples? Hey, they have this customer, we could sell this to, you have that customer, I could sell that to. Can you just give us some on-the-ground examples of why this makes sense?

Yes. David, why don't you take the synergy part, and I'll take the second part of that.

Okay. So Shlomo, from a synergy perspective, the $50 million, at least $50 million, that is from a cost perspective basis. We think there is upside relative to revenue synergies from a cross-sell perspective, and Scott can give you some specific examples relative to that. We think we can get that $50 million in 18 months to 24 months. Some of it is very low-hanging and we're going to go get right away.

Yes, I think just to answer your cross-sell, and it's actually probably, I think, a broader question that you're asking. I think one of the things that we really like is the complementary vertical exposure or overlap actually. So just think about it. As we said in the script, Sterling's largest verticals of health care and financial services and business, commercial services, et cetera, map really well to our large ones, which are transportation, retail, e-commerce. So we really love the fact that their vertical strengths match so well to our vertical strengths. And now we've got potentially a much -- obviously, a much larger customer base with 80,000 customers. And we feel like are -- we have our I-9 product, our WOTC product could be sold across the Sterling base and their digital identity solutions across our base, et cetera. But again, we're talking about early days here. We've got to sit down and map this all out, but we think there's great opportunities for what I just walked you through.

We'll take our next question from Ashish Sabadra of RBC Capital Markets.

Just wanted to drill down further on the cost synergy front. I think there was a reference to a reduction in third-party costs. I was wondering if you could provide any more clarity on that front? And then also during the last question, there was a reference to certain low-hanging fruits. I was wondering can you provide color on that front as well?

So Ashish from a third-party data perspective, as you know, we have our Verified database, and we have our SmartHub technology that's AI-driven. And that allows us to use our own database and other sources for employment and education verification. Sterling does not currently have access to that database or to that technology. And we believe that we can help drive down costs once we can integrate them into that SmartHub technology. As far as low-hanging fruit, there are a lot of opportunities, right? We're only going to need one audit. We're only going to need one set of tax returns. We're going to consolidate our insurance programs. You eliminate one complete public company cost scenario. So there are a lot of really easy costs we can go after really quickly.

That's very helpful color. And as we look out to 2024, thanks for providing some good commentary on trends by quarter. I was just wondering if you could also provide some color by end markets or verticals, where are you seeing better hiding strength versus verticals which are still weak in '24?

Yes. Ashish, the story really hasn't changed here too much. It's been kind of like a repeat for us over literally maybe the last year, where we still continue to see good strength in the transportation and home delivery verticals. Retail, e-commerce actually kind of flattish for us. But keep in mind, as we've said many, many times, our retail, e-commerce footprint is really more of the large discounters and the online e-tailers. And those are -- there's still obviously a high demand for those companies' products and services because of inflation and things like that. All year long, verticals like staffing and financial services have been down and continue to be down. And the one vertical which I missed when I talked about positive is health care. Health care has done really well for us this year and especially over the last quarter or two. So yes, in the end, it kind of all washes out with exactly what we've given you with results and guidance. We expect sort of more the same from those verticals, at least for the first three quarters.

We'll take our next question from Andrew Steinerman of JPMorgan.

I wanted to ask a little bit about the SmartHub and the identification of third-party costs being -- I guess you just listed it top. You listed before operational efficiencies. Is the reduction of third-party costs, which I understand is usually passed along to the customer, bigger savings for -- is it the bigger savings for FA than the operational savings across your products, et cetera. And so my question is on SmartHub. Is it that up to the customer if they select to use SmartHub or not for your verifications?

Yes. I mean, technically, it would be up to the customer, but I can't point to a customer that doesn't want to use it. So again, think of it as really a router. It's really a fantastic piece of technology because it's got algorithms built into it, and we've been working on it for four-plus years, maybe even five years now. So it's got some AI-driven technology in it. It touches the algorithms. But all it really does, Andrew, is it gives our customers choices. It gives their applicants based off their criteria. It gives the customer choices as to where to go find that data. So I can't remember or think of a customer that doesn't use it. But at the end of the day, what we're really offering is multiple data sources and of course, our own data. Our data continues to grow. We add to it every quarter. We add to it every month. And it's a good data source. And with the Sterling acquisition, we'll be able to tap into their data as well, which they don't currently leverage. So we aren't able to quantify that yet because we obviously haven't got into what exactly those records look like and stuff. But we're pretty -- feeling pretty good about where we how - where and how we can leverage this going forward.

Scott, the other part of my question was, you listed the reduction of third-party cost before efficiencies in operations and products and technology and SG&A. Like are you saying the reduction of third-party cost in that $50 million target savings is going to be bigger than the efficiencies that follow in that list?

I think -- I don't think it would be bigger. It's just how it was written. I think we'll get way more out of efficiencies. As David mentioned, there's duplicate tax and insurance and all that kind of stuff. So no, I don't think it's a bigger number. It's just how it was written.

Yes, that makes more sense to me now.

We'll take our next question from Manav Patnaik of Barclays.

I was hoping just to touch on base growth. I know you gave us some directional color for the year, but just I was hoping you might be able to quantify what you're assuming for '24, just because it sounds like for both you guys and Sterling, the base growth got worse than what you guys kept guiding to. So I was just curious if that was changes in the large customers that I know you talk to regularly or was it the tail end that kind of came short of what you expected?

So base growth, consolidated base growth was down 13% in Q4, which was greater than we anticipated. As a result of that, we're taking a pretty conservative posture to it. If you look at the midpoint of our guidance for 2024, we're projecting base to be down a little over 5% for the full year. But it's more in the 9% to 13% negative range in Q1 and then improving sequentially from there. But again, down about 5% for the full year.

Okay. And then perhaps just -- can you just talk a little bit about pricing trends currently? I know it's not a big part of the algorithm, but does bigger scale help in that equation?

Pricing in this industry has been very consistent and very stable. We've had no conversations with Sterling about pricing, nor will we until after closing.

[Operator Instructions] We'll move next to Kyle Peterson of Needham & Company.

Great. I just wanted to touch on balance sheet and capital allocation. Obviously, the leverage is going to come up a bit with this transaction. But I guess how quickly do you guys feel you can delever the balance sheet more towards that target range maybe in -- whether it's kind of a status quo macro or if we get some improvement? But yes, I guess where can you get from the 4x to the 2x to 3x?

So Kyle, we're going to have two primary objectives post closing, integration and deleveraging. So we throw off a lot of cash. You can see it in our numbers. Combined, we had over $300 million -- about $300 million of cash flow from operations. We will be utilizing that to delever as quickly as possible.

Got it. That's helpful. And maybe just a follow-up in terms of some of the other competitive benefits after this deal. It seems like you guys will be kind of the clear #1 player in the screening space. I just wanted to see if you guys had some thoughts on whether it is kind of how you guys are going to go to market or the value prop of having more scale globally. Maybe just anything in terms of how you guys think it will influence the sales process or ability to kind of push the snowball down the hill on new logos and upsell, cross-sell.

Well, I think there's just a lot of customer benefits here. Sterling does some things really well. We do some things really well. And when you combine them, it's good for the customer and how we was able to launch sort of best-in-breed products across the customer base. Kyle, again, we're still really early days on this, and we've got a lot of planning to do. And so it's hard for me to sit here today and tell you exactly what that landscape will look like. But we just feel like, again, I'll go back to it many, many, many times because this was a key component in us wanting to do this deal was just such the great -- the complementary of the verticals. Again, what -- the verticals they are very strong in are not the same verticals that we're very strong in. And it just makes a good story, I think, for the market.

That makes sense. And congrats on the transaction.

We'll take our next question from Heather Balsky of Bank of America.

Another question on the acquisition. And you talked about the diversification in your customer mix just now. I was hoping you could help us just think about that from your -- in terms of your long-term strategy. I know you've talked a fair amount a lot about your high-growth vertical strategy, and that's kind of driving outsized growth. I think once you're a combined company, kind of how do you think about focusing on higher growth verticals, kind of where the Sterling have higher growth? How much of your business will be in that kind of higher growth area? And then are there parts of your business or parts of their business you might want to prune in order to get the right growth profile?

Heather, I think I can work backwards on that. I don't -- again, we're still very early days on this. And obviously, over time, we'll give you more insights into go-to-market strategies. But I don't think there's going to be a need or reason for pruning. If you think about what we've always messaged to you guys about our strategy of high-volume hiring, and I think if you look at, again, across transportation, retail, health care, even staffing and hospitality, although very low numbers for us, that kind of strategy sort of maps to about 71% of our revenue. And if you look at Sterling and you look at their verticals and especially I'll point out health care because their health care vertical is really strong. If you think about I think about our verticals. So again, if you look at transportation, that's 24%. If you look at retail, e-commerce, that's 22%. Health care for us, 15%. But if you look at Sterling, you're looking at health care of 23%, and they're manufacturing in industrials at 18% and things like that. So I think when you combine the two organizations, you're going to bring obviously some of those numbers down and some of those numbers up. But I think in general, as far as we can tell from our discussions, their strategy in health care is very similar to us where it's high volume hiring, stuff like that. So I think there's just a great sort of complementary vertical story here. But it's really more to come. You're going to have to be a little patient with us as we wait for closing and then can give you more information about go-to-market strategies and stuff like that.

That's really helpful. And on -- for your business on international, can you just help us think about sort of the line of sight you have in terms of stabilization there? Any green shoots that you're seeing in APAC and India?

Yes, great question. So as we, again, talked to you guys about for literally all of 2023, international has been a drag on the business. And again, let's separate it too, because EMEA has actually done pretty well. So when we talk about international, we're really talking about India and APAC. And India and APAC have been down as David mentioned in his remarks. But I would tell you that starting in Q4 of 2023, we actually started to see stabilization in APAC and India. And obviously, we're hoping that, that continues. It's still early days on stabilization. But we think we hit bottom sometime in 2023, and now we're starting to see stabilization and maybe even slight improvement. It's still a bit early days to call it a trend. But again, I think we're starting to see India and APAC come back a little bit.

We'll take our next question from Scott Wurtzel of Wolfe Research.

Just wanted to go back to the synergy side, and appreciate the color on sort of what the low-hanging fruit is on the cost side. So just want to maybe touch on what on the cost side is maybe going to require the most work. And you also mentioned that revenue synergies aren't embedded in the $50 million. I'm just wondering also if there's anything on the cost side that isn't embedded in the $50 million of synergies.

Well, Scott, as we said, we think we can get at least $50 million, and we think we can do that over 18 months to 24 months. Longer term, there's a lot of opportunity relative to combining fulfillment operations, looking at best practices, refining processes, utilizing AI. As we said, we're launching a $3 million AI initiative relative to U.S. criminal data. We hope the outcome of that will be something special that will also help drive productivity and reduce costs. So when you're putting two companies together like this, there are a lot of opportunities. We're going to take best practices. We have a whole team of black belts internally that we're going to be using -- utilizing to identify best practices and best processes. We'll be using some outside advisers to assist us with that as well. And we think there's just a lot of opportunity on a longer-term basis. But we're going to go really hard and fast at that first $50 million.

Got you. That's helpful. And then just wondering, I think you just mentioned it in your answer, but just wondering if you can expand on what some of these incremental investments in AI could look like as you sort of realize the savings associated with the synergies?

Yes, Scott, let me jump in there. I mean I don't think we want to give you too much information for competitive reasons on what these projects are about. But I will tell you, in general, we are looking at all aspects of the business of where we can leverage AI and not only how it improves the candidate and customer experience and the offering, but where it potentially also can reduce headcount. And I think we've mentioned to you in the past or to others in the past of where we've already rolled out AI in our call centers with our CLICK. CHAT. CALL. initiative that we announced a couple of quarters ago, which not only has improved our CSAT scores but has allowed us to reduce headcount because people are clicking and chatting with AI chatbots, but these are live AI chatbots and things like that, but less of the phone. So we think there's a similar type of story across fulfillment on the U.S. criminal side. But again, we're going to sort of keep the secret sauce on that to us, and we'll keep you posted as we actually roll out things.

Understood. Congrats on the deal.

[Operator Instructions] We have a follow-up from Shlomo Rosenbaum of Stifel.

I want to chip a couple more in, if you don't mind. Scott, one of the critical areas in combining two companies that are background screeners is making sure you don't have a lot of client losses post the deal. And given the complexity of the integration of an acquisition that is close to your guys' size and all that's involved in that, how are you going to really minimize any client losses? And then I have a financial one for David.

Shlomo, great question, and probably the most important question that we've been talking about. So I'll give you a couple of high-level things, but we are -- again, we're early days, and we haven't mapped all this stuff out. So first of all, we are going to have a dedicated integration team. This is all they're going to do. And we're going to staff it with some of our best people. We're going to bring in third-parties. We're going to take advice of a lot of folks on this. And probably, as you know, from some of the history of this industry, some of the biggest challenges have been not in maybe the integration of operations or sales or any kind of the functions of the Company, but it's really been the technology integrations that have hit snags. And I will tell you right now, we are going to take a very conservative approach on tech integration to minimize client loss. We are not going to force large customers onto platforms they don't want to be on or technologies they don't want to be on. We've got -- we've got a, what I would call, a very theoretical and high-level strategy at this point, which we will obviously start refining literally starting tomorrow. But we have to obviously wait until close before we can actually get in and really do any of the heavy lifting and even some of the heavy planning. But in general, we're going to -- not going to -- we're not going to break eggs on the customer side because we're going to take a smart approach to the technology.

Okay. And then just from the financial side, David, when I do the math using kind of end of year '23 numbers and you assume $50 million of synergies, I'm getting closer to 4.5x leverage. Is the difference the assumption of free cash flow from both companies for another two-plus quarters?

That's right. So it all comes down to timing. If it closes June 30, if it closes September 30, both companies throw off a significant amount of cash quarter-over-quarter. Plus there will be a minimum amount of cash on the balance sheet of at least $150 million, maybe up to $200 million at closing. So from a net leverage perspective, that will drive that down even further.

I see no further questions in the queue. I will now turn the call over to Mr. Staples for closing comments. Please go ahead.

Yes. Thank you, operator. And thank, everyone, for your time this morning and for your ongoing support. Take care.