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Executives

Andrew Schulz - Vice President of Investor Relations

Scott C. Key - Chief Executive Officer, President and Director

Todd S. Hyatt - Chief Financial & IT Officer and Senior Vice President

Analysts

Manav Patnaik - Barclays Capital, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Jeffrey M. Silber - BMO Capital Markets U.S.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

IHS Inc. (IHS) 2013 Updated Guidance and Closing of R.L. Polk Acquisition Conference August 13, 2013 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the IHS Inc. to Discuss 2013 Updated Guidance and Closing of R.L. Polk Acquisition. My name is Shequana, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Andy Schulz, Vice President of Investor Relations for IHS. Please proceed, sir.

Andrew Schulz

Thank you, Shequana. Good morning, and thank you for joining us for this special conference call. We issued a news release earlier this morning. In addition, we posted to our website a supplemental presentation relevant to today's call. If you do not already have a copy of these materials, they are available on our website at ihs.com.

As previously announced, IHS has completed the acquisition of R.L. Polk for $1.4 billion. The transaction was 90% cash or $1.26 billion and 10% equity for the issuance of about 1.3 million new shares of IHS stock in exchange for all the outstanding shares of R.L. Polk. As many of you know, we are in the midst of our third quarter, and it is not our intent to preview earnings. However, we will provide you an update to the guidance we gave on our last earnings call, which will give you a full view of our anticipated 2013 performance.

Some of our comments today are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation and other noncash charges and other items. The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the elimination of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance. We provide a reconciliation of non-GAAP measures on our website at ihs.com.

As a reminder, this conference call is being recorded and webcast and is the copyrighted property of IHS. Any rebroadcast of this information, in whole or in part, without the prior written consent of IHS is prohibited. Please keep in mind that this conference call may contain statements about expected future events that are forward-looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from expectations can be found in IHS's filings with the SEC and on the IHS website.

After formal comments, we will open the call for Q&A. Scott Key, IHS President and CEO; Rich Walker, Executive Vice President of Global Finance; and Todd Hyatt, Senior Vice President and Chief Financial and IT Officer, are on the call and will be available to answer your questions.

With that, it is my pleasure to turn the call over to Scott Key. Scott?

Scott C. Key

Thank you, Andy. Good morning, and welcome to all of our investors and IHS colleagues on this call. I'd like to extend a special welcome to our new colleagues at R.L. Polk. We are excited that the transaction is completed, and you now are officially part of the IHS family. I also want express my sincere thanks to all of our colleagues who worked so hard on closing this transaction, the largest in our company's history.

Our integration team has already begun its work. We are making solid progress, and we look forward to a thoughtful, efficient and very successful effort over the next 8 quarters. Our main objective on today's call is provide an overview of our integration plans for the R.L. Polk acquisition, as well as outline the significant contribution we expect from R.L. Polk in 2014, highlighting the value and positive earnings accretion we expect from this terrific asset now that it's part of IHS. In addition, we will provide an update to the guidance we gave in our last earnings call and give you a full view of our anticipated 2013 performance.

So let's move on to R.L. Polk. In June, we spoke extensively about the compelling, strategic rationale for this acquisition and the significant shareholder value we expect to create. Today, I want spend a couple of moments discussing our integration plans now that the acquisition has closed. Recall that R.L. Polk consist of 2 divisions, the Polk division and CARFAX. The Polk division and IHS Automotive will be combined into a single organization and will be the leading provider of global automotive insight and analysis. A team of integration leaders from IHS and Polk have already begun mapping our integration to a single IHS Automotive team, and we're already taking action on the first steps. The CARFAX business has organic growth and margin expansion momentum, upon which we will build in the U.S. and we will extend globally. With CARFAX, we will focus on supporting and enhancing the current performance as we also enable scaling globally. We will also leverage CARFAX aftermarket data to create new analytics in combination with IHS's deep automotive production and supply chain information.

Given the magnitude of the integration activities, we expect integration benefits beginning in 2014 and to be fully realized over the next 6 to 8 quarters. We will also be very effectively use the remaining months of 2013 to ensure we build a solid foundation and momentum into 2014, so we have a lot going on now that will set a great foundation for our 2014 performance as we close this year. R.L. Polk and IHS Automotive are highly complementary, and there are multiple revenue synergy opportunities, many involving cross-selling Polk products to IHS customers, as well as Polk product extensions. As discussed, we also see incremental revenue opportunities on the CARFAX side. Among the most attractive is the opportunity to capture CARFAX's extensive aftermarket information and push it upstream into the automotive value chain and create new integrated analytics. Given our subscription-based business model and the time it takes to recognize revenues as we develop and bring to market new offerings, revenue synergies are expected to be more of a story as we exit 2014 and into 2015.

Turning to our overall guidance. We do not intend to preview Q3 performance as we still have several weeks to go in the quarter. However, I do want to provide some color on what we have seen since the last time we were formally together during our earnings call in June. Let me briefly outline our views of the current macroeconomic environment then give you some color on IHS.

Many of the trends and dynamics we discussed in June remain, and we see continued pressure and uncertainty in corporate spending. Calendar year-end companies recently reported their Q2 earnings, which were generally characterized by weak earnings performance accompanied by virtually no revenue growth outside of the financial industry. Further, many companies regardless of region express cautious or reduced forward outlooks. Many of these companies are our customers. In EMEA, despite very recent signs of a bottom to the contraction in Europe, many German companies' earnings have been below expectations in the recent period and their outlooks for the remainder of 2013 were lowered amid cost management and reduction programs. We see similar trends in APAC's key economies, and much of this continues to be driven in part by lower growth and domestic demand in China. We see the most encouraging signs in the Americas, in North America in particular, where corporate earnings and revenue growth are still declining but there are initial signs of stronger fundamentals.

Now let's discuss how this impacts IHS regionally. We see similar pressures on new business formation and corporate spend in each region as corporations continue to deliver earnings ahead of revenue growth, and this is restraining our organic growth in the very near term. This is particularly true in EMEA and APAC, where we continue to see longer sales cycles and the delayed renewal with some contracts. On a positive note, in the Americas, our largest geography, we have seen stabilization with our subscription offerings and now see a solid foundation in our performance, strengthening in pipelines as we approach year end.

Speaking broadly about our subscription business, we are benefiting from the improved visibility into our performance and key growth drivers as a result of our completed global finance, sales and forecasting systems. We see continued strong renewal rates, price traction and uplifts in our core markets globally and in large subscription contracts in particular, which make up the majority of our business. Consistent with the macro environment, we see higher churn and lower new business formation in many of our non-core end markets and for smaller subscription contracts that are a small portion of the business but a moderating overall, again, in growth rates. So what this means is we are still tracking to 6% organic subscription growth for the full year. With respect to our non-subscription revenue, we see improvement in some areas with continued variability consistent with macroeconomic trends.

To sum it up, as we look at roughly 100 days to our November 30, 2013, fiscal year-end, we continue to make solid progress in our core industry sectors with consistent overall organic growth as we head into the back half of the year. Despite the lower corporate spend environment and the uncertainty that remains macroeconomically, our organic revenue growth is solid, and we remain focused on our path to build from current levels in 2014 and beyond. As outlined in June, we have discrete cost items in investments through the remainder of 2013 that are impacting margins in this lower growth environment. In addition, we continue to have a drag on margins from acquisitions we made over the last 4 quarters as their margins expand to accretive levels more slowly than anticipated on slower revenue growth, and this was reflected on our Q2 call, as well as in today's guidance. As we include R.L. Polk for 2013, we expect full year IHS margins at roughly 30.5%, reflecting also our build of the business, continued integration of acquisitions made over the last year and investments in key programs to drive future growth. And like our customers, we are managing our cost closely as we continue to invest in long-term growth. This will put us on a clear path of margin expansion in 2014, consistent with our commitment to 100 basis points in annual margin expansion.

We are excited about the value we are creating through the combination of IHS and R.L. Polk, and we are making great early progress on R.L. Polk integration that will create momentum and positive value for customers and for shareholders as we enter 2014. Regardless -- regarding R.L. Polk for 2014, we expect revenue to expand 8% to 10%, representing positive accretive growth to IHS; and we expect margins to expand 200 basis points to 300 basis points, representing roughly 20% growth in 2014 adjusted EBITDA for R.L. Polk.

Todd is now going to provide some more specifics around the financial details of the transaction, what to expect more broadly from R.L. Polk in 2014 and give our updated guidance for 2013, then Rich, Todd and I will look forward to your questions. Todd?

Todd S. Hyatt

Thanks, Scott. As Andy mentioned, the acquisition purchase price of $1.4 billion was paid with 90% cash and 10% stock. A key feature of the transaction is an attractive financing plan that included cash on hand, our existing revolver and a new $700 million 5-year unsecured term loan facility that is an expansion of our current bank credit facility. In line with our fiscal policy, we will use the strong, combined free cash flows to rapidly reduce debt from about 3.7x leverage at close to about 2.5x leverage over the next 6 quarters.

R.L. Polk is a growing business with about $400 million in annual revenue. Similar to the IHS business model, approximately 75% of its overall revenue is subscription, with 90% plus renewal rates. R.L. Polk is growing at the mid- to high-single-digit rate accretive to the current IHS organic growth rate. R.L. Polk has an adjusted EBITDA margin in the mid-20% range. Like IHS, R.L. Polk has mild seasonal impacts. It tends to enjoy its best quarter seasonally during the first calendar quarter, and its last calendar quarter tends to be its weakest quarter.

Let's now review expectations for R.L. Polk's performance in 2014, as outlined by Scott. We expect the legacy R.L. Polk business to grow 8% to 10% in 2014 from the $400 million revenue run rate delivered in its 2013 fiscal year. We expect to realize margin benefits from integration beginning in early 2014, lifting R.L. Polk's mid-20s margin by 200 to 300 basis points for full year 2014, a 20% EBITDA increase at the midpoint.

R.L. Polk adds to our cash-generating ability, and the combination creates a significant IHS cash flow engine. With the addition of R.L. Polk, we expect our conversion of adjusted EBITDA to free cash flow to be in the mid-60s on a forward 12-month basis, improving as we rapidly delever. We expect the acquisition of R.L. Polk will be significantly earnings accretive and will add between $0.40 and $0.50 of adjusted EPS in 2014, excluding the amortization expense of acquisition-related intangible assets.

Before we move to guidance, I want to briefly cover a change we are making to the calculation of adjusted EPS. From this point forward, our adjusted EPS metric will exclude the impact of the amortization of acquisition-related intangible assets. We believe this adjustment will help investors more clearly assess IHS's ongoing cash earnings and facilitate easier financial comparisons to other information services companies, almost all of which defined as non-GAAP measure in a similar fashion. To provide complete transparency to the impact of this change, we posted a supplemental deck to our website. This deck includes quarterly reconciliations of GAAP EPS to adjusted EPS under the new methodology.

Now let's turn to our updated 2013 guidance, which includes the addition of R.L. Polk. Our guidance is on an all-in basis and assumes no further acquisitions, currency movements, pension mark-to-market adjustments or unanticipated events.

For fiscal 2013, we expect all-in revenue in the range of $1.8 billion to $1.82 billion, all-in adjusted EBITDA to be in the range of $540 million and $560 million and all-in adjusted EPS to be in the range of $4.75 to $5 per diluted share. As we look at our combined performance with R.L. Polk for 2013, we expect adjusted EBITDA margin of roughly 30.5%. IHS has substantial long-term margin expansion potential, and we continue to target an annual core margin expansion of 100 basis points in addition to the previously discussed margin expansion from R.L. Polk.

In the supplemental deck posted to our website, we have presented the detailed impacts of the change in adjusted EPS methodology and updates to our 2013 guidance. Further, our updated 2013 adjusted EPS guidance reflects the impact from increased adjusted EBITDA, interest and depreciation expense, along with the incremental shares issued for the R.L. Polk acquisition. For further details on guidance, please see our release and the supplemental deck we posted to our website.

I do want to provide some transparency to discrete items that will affect the 2 remaining quarters differently. We expect minimal impact to our Q3 performance from today's guidance update other than the impact of one-time financing cost of $5 million incurred in the current quarter and the ratable impact of the depreciation and interest expense increase.

Finally, looking at margin, we are focused on improving upon 2013 levels. Our margin performance in 2013 is impacted by the following factors: lower-than-expected revenue growth, discrete one-time expenses, continued investment in the key programs we have outlined to support future growth and slower-than-expected margin ramp for certain acquisitions reflective of the lower revenue growth environment.

Looking ahead, we are confident we can accelerate margins. Specifically, we continue to have solid subbase business at 6% growth, and our largest industry sectors continue to perform well. We believe our investment initiatives will enable us to accelerate revenue growth next year and beyond, our infrastructure investments enable us to adjust our cost structure and drive improved efficiencies to ensure margin expansion even in a lower growth environment, and R.L. Polk will create additional margin expansion given its high growth and cost synergies. IHS remains the cash flow generation story, which is supported by a solid subscription-based business and a clear path for continued margin expansion for many quarters to come.

Thank you, and let me turn the call back to Scott.

Scott C. Key

Thanks, Todd. In summary, the R.L. Polk acquisition establishes IHS as the vital strategic information, research and analytics partner to OEMs, top-tier industry suppliers and dealerships in a growing global automotive industry. It provides IHS with the unique and complementary information, research and analytic asset, which supports the entire set of stakeholders who touch the vehicle from the cradle to grave. As we have outlined, it is positive financially and very accretive for IHS shareholders in 2014 and beyond, positive and accretive revenue growth, strong adjusted EBITDA growth, margin expansion and accretive earnings.

As a final comment before we turn to your questions, I will build on Todd's comments on the fundamentals of IHS's value growth. As we navigate short-term uncertainty in global markets, in corporate and government spend, IHS remains a margin expansion, cash generation and growth story for the long run. As we include Polk in our financials, we are delivering multi-year margin expansion and will continue this expansion for many years to come as we continue to build and grow IHS. IHS fundamentals remain solid, with growing subscription-based revenues, with high renewal rates, leading to solid cash flow and earnings growth and long-term margin expansion potential as a result of a fixed cost base, and these fundamentals remain as we look to 2014 and beyond.

And with that, we'll be happy to answer any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Manav Patnaik representing Barclays.

Manav Patnaik - Barclays Capital, Research Division

Let me ask the first question just on the -- can you give us a sense of the geographic mix of R.L. Polk today and sort of tie that to the international expansion that you guys seem excited about, just some more color on what the market opportunity is, what the competition looks like, et cetera?

Scott C. Key

Sure. Thanks, Manav, and I appreciate the question. This is really a large opportunity for us. So as you know, the Polk division, as we've discussed, is the same customer base as IHS but an expansion of complementary data that allows us to expand from production all the way to the point of sale. Now Polk, as you know, in that area, is a 50-year-old business, so well developed and well known. But interestingly, as IHS has about 30% of our automotive revenue not coming from APAC because of the shift in production there, there's only a very small portion of Polk's revenue coming from APAC. So we have the infrastructure in place, the sales force in place and the relationships in place both in Asia and in Latin America, India, which, of course, as we saw recently in the news, will continue to be the largest markets for automotive growth and light vehicle sales. So we're in a great position in the Polk division to rapidly expand with existing infrastructure in IHS and build on our presence. So that's a great opportunity there. On the CARFAX side, that 97% of their revenues right now is in the U.S. despite the fact that actually a long track record, 5 to 7 years of building a base in Europe. And in fact, revenues are starting to grow from that long-term investment and the progress they are making there. So of course, we have global infrastructure, very strong automotive presence in Europe and elsewhere as we've said. So CARFAX, we will enhance their performance in the U.S., double-digit growth here, great margin profile, which is expanding. And we will use our scale to help them accelerate their growth into Europe and then start to create footholds in Asia, so really leveraging our infrastructure and a great opportunity for us to build.

Operator

Your next question comes from the line of Joseph Foresi, representing Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

One question but 2 parts. First, as you look at the growth rates for Polk, maybe you could talk about the long-term profile there. And then I think you had mentioned a 200- to 300-basis-point potential margin expansion within Polk, maybe you could talk a little bit about the levers there.

Scott C. Key

Yes, thanks so much for the question. So in terms of growth, it's really 2 stories here. We've got a high growth CARFAX business, as we said, in double digits. And that's really many, many years, 5-plus years of that trajectory and a whole lot of market headroom in the U.S. to continue that growth and then, as we said, scaling internationally. So we feel great about that, a consistent growth delivered over a long period of time that we will just enhance and build on with a lot of headroom. On the Polk side, interestingly and we've talked about this, their organic growth is kind of in the low-single digit. You compare that to IHS Automotive, which has got growth in the high-single digits as we've built a great global platform. So we really see an opportunity to accelerate the Polk division's organic growth to our growth rates that we're seeing in IHS Automotive as we discuss our infrastructure globally, common customer set. So really, that's the opportunity that we see, and that's part of the 8% to 10% growth profile we see in aggregate for R.L. Polk in 2014. And of course, that's accretive to IHS's current growth rate. So it's a good story of accretive build. In terms of margin, CARFAX, very high margin business, and we've talked about that in the Q2 call, so accretive to IHS today, measured in the mid-30s or so, so continuing to build on that margin. On the Polk side, of course, more in the teens and diluted to IHS's current margin, but that creates this opportunity for expansion. And primarily, as you know, we have now built a single common global infrastructure with which we can integrate Polk, too. And that's really the great opportunity for us and the perfect timing for this acquisition. So that 200 to 300 basis points is just a start, that expansion, and that represents the 2014 path. And then you will see us continue to expand that margin in 2015 as we look at this 6 to 8 quarters to bring it to accretive. But as I've said, we have made great progress already, so a lot going on right now. And our goal is to get as much of that behind us as we get to December 1 and start our 2014 fiscal year.

Operator

Your next question comes from the line of Jeff Silber, representing BMO Capital Markets.

Jeffrey M. Silber - BMO Capital Markets U.S.

Actually, a 2-part question, mostly numbers related. In looking at your guidance update, you say there's about $0.15 in changes to adjusted EBITDA, depreciation and interest expense. If you can break out that $0.15 between those are 3, I'd appreciate it. And then I'm just curious what changed or what drove the change in calculating or the way that you defined adjusted EPS? Why now? Why not when you reported last quarter, et cetera?

Scott C. Key

Yes, great questions. So I'll start and then I'll ask Todd to build on that, particularly in terms of the breakdown of the change. And of course, we posted some supplemental material which walks you through each of the pieces. In particular though, just a brief comment on EPS and our adjusted EPS and the exclusion of amortization in intangibles, first, that's pretty much assets and acquisitions are 100% of an amortization. And as we look across our peer group, nearly every single one of them reports adjusted EPS in this way. And so it really allows us to have much more clear comparison, and it's a much cleaner view of our EPS performance. And so those are the reasons to make this move now particularly as we bring significant acquisition, and that changes that amortization profile. With that, I'll let Todd comment on the other question.

Todd S. Hyatt

Yes, the breakout of the EBITDA depreciation, interest expense in expense dollars, EBITDA is $10 million; depreciation, $5 million to $6 million; and interest expenses is $21 million. If you take that total net expense amount in tax effect, you should be able to get to the $0.15.

Operator

Your next question comes from the line of Andrew Steinerman representing JPMorgan.

Andrew C. Steinerman - JP Morgan Chase & Co, Research Division

I just wanted to get a sense of the $400 million from Polk. I think we called that a current number. How much revenue will Polk contribute? I think it's in the 4.5 months that will be in place in 2013.

Scott C. Key

Andrew, thanks, and thanks for the question. Yes, and they had posted their results for their fiscal 2013. So you have that right about $400 million in revenue and about $100 million in EBITDA. So that's the 25% margin we've talked about. Obviously, we're translating much different fiscal years in a private company into a public setting and then into our November 30 year end. So we try to keep it pretty simple for the stub period and to give you a clearer sense of growth in 2014. So we're talking about 8% to 10% growth on that 400 basis for 2014 and, of course, 200 to 300 basis point to margin expansion with respect to that $100 million in profit in 2014. So we try to keep it as clean as possible. As you said, we'll have about 4 months -- full 4 months in this year, and within that just a whole lot of integration activity going on, where we try to get a lot of this behind us and set a clean footing for 2014. So that was really our goal in creating a single view of 2014 but ensuring Polk and then a -- and a clear view and a common view of IHS for 2013 as we close the year. So that's where we sit, and we look forward to the expansion in growth and the accretive earnings, revenue and EBITDA we'll see next year. Thanks, Andrew.

Operator

Your next question comes from the line of Andrew Jeffrey representing SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Scott, I wondered if you could talk a little bit about if you get a little more specific vis-à-vis your second half organic revenue growth outlook. It sounds like perhaps, second half will look a little bit more like first. And then is there a -- how do you think about the relationship between global GDP growth and IHS's organic revenue growth? In other words, for every 100 bps of global organic revenue growth acceleration, for example, what do you think -- what's the translation into IHS's performance?

Scott C. Key

Great question. So first, in the second half, despite where we see the world right now, a lot of strength in our core businesses, and those continue to grow, very high renewal rates, as we said, on large contracts. And so we're just making good progress with our best customers, and what that translates into is a real solid continuation of our 6% organic growth on the subspace. And of course, that's 4 to 5 points above where global GDP is trending right now and, certainly, that distance above the U.S. It's interesting, though, as you think about that. So again, the comments that we made, where we see moderation in our growth is that in our end markets and it's in smaller contacts. And it's driven by things we see going on right now in Europe, where corporate spend is restrained, what we see happening in Asia. Government spending right now -- the reduction in government spend in the U.S. is the largest single dollar reduction in the last couple of quarters that we've seen since 1980. So these end markets are moderators around small contracts and high volumes of small contracts of our overall growth. And so I think that gets to your second question on GDP. So we see solid progress and great growth in energy, in chemicals, in automotive, so our core markets working well. It's this long tail that really in -- and I would say our -- some areas of our nonrecurring business that we see this macroeconomic over-imprint. And as conditions improve, we said we're seeing slightly -- we think we're seeing a bottom now in Europe. As conditions improve, we'll see that long tail stabilize and renewal rates rise and, of course, that will be an elevator. So I wouldn't say there is a direct one-to-one comparison in terms of GDP. We're always hitting 4 of the 5 points above overall GDP growth rates in our performance. And that moderating effect starts to go away as companies more broadly in our end markets and governments start to spend. So I appreciate a great, great question though.

Operator

Your next question comes from the line of Jeff Meuler representing Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Just a clarifying question, when you referenced another 6% organic growth that you're still tracking towards, is that intended to be a 2013 number? Or was that intended to be -- to say that your growth is still roughly in the range where the underlying subscription growth was exiting Q2? And then just to be clear, are there any changes on an organic basis to the guidance? Or shall we view all of the adjustments as being exclusively for R.L. Polk?

Scott C. Key

Yes, thanks and great questions. So the 6% is intended to reflect the trajectory of our subscription base for 2013 for the full year. And so we started the year roughly at 7%, and we're excited to see in this environment that very stable, as I said, positive uplifts, really strong renewal rates in our core markets. And so that really underlies the overall performance of IHS, so 6% full year view as we head in the back half on our subspace, and that's a great place to be. Relative to your second question on an overall organic, I would say this: we are being both pragmatic and a bit cautious as we think about end market performance and nonrecurring performance as we move into the back half, and that's what's reflected in our guidance. We want to ensure that we always set clear expectations, and then we deliver those expectations and put ourselves always in a position not only to meet them but to exceed them when we can. So we see positive performance in a number of our nonrecurring revenue areas. And as we said on the Q2 call, we see good momentum and positive pipelines with product releases and other things as we were heading into Q3. So I would say consistent view of our subspace and the overall revenue perspective, we've got a variable external environment that we're being pragmatic about as we head into the second half of the year. And really now, with only 100 days left in our financial year, we're focused on 2014 and setting a great foundation with Polk and the overall business to expand margins and to deliver to the growth that we laid out, which is incremental to current levels in 2014. So thanks so much, appreciate the question.

Operator

You have a follow-up question from the line of Joseph Foresi representing Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Just one last quick one, maybe give us some parameters around the cash flow generation from the Polk acquisition.

Scott C. Key

Yes, I'll start and then I'll have Todd add to my comments. One, we are very focused on acquiring subscription-based businesses that have very predictable revenue streams with high renewal rates and as a result, strong cash flows. So Polk fits right into that category. In fact, it's, like IHS, about 75% subscription-based, and so very predictable, long-term relationships with customers, very high renewal rates and consistency with that many decade-long customer base. That's true for Polk and CARFAX, so as a result much like IHS, very solid and predicable cash flows that build as the subscription base build. So, Todd, comments you have on the cash?

Todd S. Hyatt

I think the cash profile, as you said, Scott, is similar to IHS in terms of the underlying business model, that Polk is a heavier U.S.-based business than IHS, so it does drive a higher tax rate. But we believe there are strategies that we can employ to manage our cash tax at a rational level to ensure that we can continue to deliver high cash flow conversion. And the capital spend profile for Polk is very similar to IHS. Think of it as 4% to 5% of revenue.

Scott C. Key

Great. And I think it's important to realize, and as we've said previously, the cash flow engine that we are creating here with the combination. And we talked about as we exit next year and go into 2015 $0.5 billion in free cash flow as a result of the combination, so a really powerful addition for us and put a lot of value for us in the long run.

Operator

Your next question comes from the line of Peter Appert representing Piper Jaffray.

John D. Crowther - Piper Jaffray Companies, Research Division

This is John Crowther on for Peter. I have just a quick 2-part question here. So you talked about high -- I think it was -- or I'm sorry, low double-digit growth for the CARFAX business in the U.S. with lots of headroom there, just wondering what -- maybe you could walk through some of the growth dynamics there that is sort of allowing that long runway for that business. And then on the international side, I think you said that we've got 5 to 7 years of investment already in sort of building out the international markets, and wondering if maybe you could relay some comparatives or differences between the U.S. market and international market that would impact adoption of that in the international markets, or some things that we should be keeping an eye on in terms of adoption in international markets.

Scott C. Key

Thanks, I appreciate the question. And it's a good one because it's really about the fundamental value proposition at CARFAX. So it starts with building the information base. And regardless of what market you're in, the leverage comes from having 100% of the fleet -- the used fleet in any given market in the database and, of course, that's where they are in the U.S. So 100% of every used car out in the market is in the database. So once you've done that build, then you go begin a period of monetizing the value of that information as you go grow revenues. And that's why CARFAX has so much headroom in the U.S. So that period of build ended about 4, 5, 6 years ago when they captured all that information, and it's really that U.S. -- we've talked about this in the past, is about $1 billion market for CARFAX. The market itself is much larger than that, but their opportunity to capture is about $1 billion and only a quarter away -- a quarter of the way to that goal. So that means a lot of headroom of continued growth in the U.S. And then they've also -- and that's within the current margins that we talked about, have been making in investment in building that similar base in other countries, the U.K., Europe, Scandinavia. And so they're in the stage of that 5 to 7 years of build and then beginning to monetize. So that really is -- it creates the opportunity for CARFAX on the -- in the long term and the near term both with the U.S. and markets internationally, so real positive potential growth story.

Operator

At this time, I would like to turn the call over -- back over to Mr. Andy Schulz for closing remarks.

Scott C. Key

Yes, just before we go back to Andy, a couple of questions that we've got on growth rate and the guidance that we've updated. What's embedded in our guidance is, of course, Polk, and we've got, as we said, a lot going on in integrating and bringing this great asset. We gave you 2014. So you have a very clear view of its performance and the accretive nature at all levels for IHS. And that tells you that actually, it was a great value in terms of the purchase price as we look at the fundamentals of next year, and we're quite excited about it and everything on track there. I feel great about Polk. Also embedded in the guidance is, I think, a very positive view that despite what's going around us in the world, 6% consistent subscription growth at IHS, which is, of course, a big driver of our cash flows. Also, in our revenue guidance and our update is some pragmatism with regard to end markets, like government, electronics and media, where we see Europe in corporate spend in the short term and where we see Asia in corporate spend in the short term. So these are all reflected in our guidance and the organic expansion. So we're trying to make it clear that we are being pragmatic about our forward view of revenue as we close this year and set us up for next year, that it's a strong substitution base embedded in Polk and then some pragmatism and a little bit of caution with regard to those end markets that have a lot of uncertainty. And so we're trying to be very clear. And then our goal, as always, will be to deliver through those expectations as we -- in Q3 and report out in September and then finish a strong year and prepare for next year. So I appreciate all the comments and appreciate the support in what is a build of a great business. Andy?

Andrew Schulz

We thank each of you very much for your interest in IHS. This call can be accessed via replay at (888) 286-8010 or international dial-in +1-617-801-6888, passcode 89163265, beginning in about 2 hours and running through August 20. In addition, the webcast will be archived for 1 year on our website at ihs.com. And as always, you can contact IHS Investor Relations with any follow-up questions. We can be reached at (303) 397-2969. Thank you. We appreciate your interest and time.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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