Solera Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

Aug.22.13 | About: Solera Holdings, (SLH)

Solera Holdings (NYSE:SLH)

Q4 2013 Earnings Call

August 22, 2013 5:00 pm ET

Executives

Kamal Hamid - Vice President of Investor Relations

Anthony Aquila - Founder, Chairman, Chief Executive Officer and President

Renato C. Giger - Chief Financial Officer, Principal Accounting Officer, Treasurer and Assistant Secretary

Analysts

Timothy McHugh - William Blair & Company L.L.C., Research Division

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

Peter P. Appert - Piper Jaffray Companies, Research Division

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

Manav Patnaik - Barclays Capital, Research Division

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

Operator

Good afternoon, everyone, and welcome to Solera's Fourth Quarter and Fiscal Year 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded and will be available for playback. Details for accessing the replay will be made available at the end of the call. At this time, I would like to turn the call over to Kamal Hamid, Solera's Vice President of Investor Relations. Kamal?

Kamal Hamid

Good afternoon, everyone. Thank you all for joining us and welcome to Solera's Fourth Quarter Fiscal Year 2013 Conference Call. With me here today are Tony Aquila, Solera's Founder, Chairman and CEO; and Renato Giger, Solera's Chief Financial Officer.

Tony will begin today's call with the summary of our financial results for the quarter and fiscal year ended June 30, 2013, followed by comments on the factors driving those results. Renato will then provide you with information about our financial results that is not described in today's press release and finish by providing the company's initial fiscal year 2014 guidance. We will then open up the call for questions.

I would like to remind everyone that our remarks during this conference call will contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including, without limitation, those risks detailed on Solera's filings with the SEC, including our most recent quarterly report on Form 10-Q for the quarter ended March 31, 2013.

We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

We also plan to discuss certain non-GAAP financial measures on this call. A reconciliation of Solera's non-GAAP financial measures to GAAP financial measures is included in today's press release, which is available on the Investor Relations section of our company website at solerainc.com. When we refer to analyst consensus during this call, we mean the consensus results on an actual currency basis of certain analysts that cover the company as reported on Thompson First Call.

We measure constant currency, or the effects on our results that are attributed to changes in foreign currency exchange rates, by measuring the incremental difference between translating the current and prior period results at the monthly average rates for the same period from the prior year. Unless otherwise stated, all period-to-period revenue, adjusted EBITDA and margin comparisons are on a constant currency basis.

When we refer to profit margin, we mean our adjusted EBITDA margin. When we refer to run rate waste savings or synergies, we mean savings to be realized over each 12-month period following the execution of these efforts.

Our fiscal year 2014 outlook assumes constant currency exchange rates from those currently prevailing, no acquisitions of businesses, no stock repurchases, and an assumed 26% tax rate to calculate adjusted net income. Consistent with our guidance policy, we do not plan to update guidance during the quarter, but only at our regularly scheduled quarterly or annual conference calls.

To help those of you who track and factor in the impact of the strengthening or weakening dollar throughout the remainder of the year, we would approximate by using the following formula. For each 1% change in the U.S. dollar versus all the foreign currencies in which we transact business, the negative or positive impact to fiscal year '14 revenue will be approximately 0.6%, and the negative or positive impact to adjusted EBITDA will be approximately 0.7%.

Amounts and percentages throughout our remarks reflect rounding adjustments. All information discussed during this call and webcast is protected by United States copyright law, may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of Solera Holdings, Inc.

I would now like to introduce Tony Aquila, our Founder, Chairman and CEO.

Anthony Aquila

Thank you, Kamal. Good afternoon, everyone, and thanks for joining us today. I'm pleased to report that our fiscal year 2013 revenue of $838.1 million and fourth quarter revenue of $218.5 million both exceeded consensus by $2.9 million or 135 basis points in the fourth quarter.

On a constant currency basis, full year revenue growth was 8.5%, while fourth quarter revenue growth was 180 basis points higher at 10.3%, our highest quarterly growth rate in the fiscal year.

We will maintain our cautiously conservative stance as we begin fiscal 2014, consistent with prior year. Our fiscal year 2013 adjusted EBITDA of $359.5 million and fourth quarter adjusted EBITDA of $90.5 million both exceeded consensus by $2.8 million or about 300 basis points in the fourth quarter.

These results bring the 5-year compound annual growth rates for revenue and adjusted EBITDA to 9.2% and 14.1%, respectively. This demonstrates our solid execution in sustainably growing and diversifying our global business.

In fiscal year 2013 and the fourth quarter, we absorbed profit margin impact associated with investments and newly-acquired businesses of about 190 and 140 basis points, respectively.

Despite these impacts, our fiscal year 2013 profit margin was 43%, only 72 basis points lower than the prior year. Our fourth quarter profit margin, which has historically been impacted by seasonality, was 41.5%, down 134 basis points from the prior year.

In light of these additional investments, we are very proud of the fact that our 43% profit margin is in the 90th percentile of similar measures of profitability for information technologies companies in the S&P 500.

In fiscal 2013, we introduced Double-Down, Double-Up Mission 2020, and our LDD, Leverage, Diversify and Disrupt strategy.

In Phase I, we intend to deploy $1 billion to further leverage and diversify our business, and strengthen our infrastructure to support our planned growth in Phase II of Mission 2020. Our Phase I investment strategy targets 3 areas: investments that organically or inorganically leverage our core in the automotive and claim sectors, diversify into the household to grow our addressable market, while maintaining our operating leverage and reducing risk in areas such as property, parts and underwriting, disrupt how value is created in our markets that position us very well for our future; two, investments that accelerate our geographic expansion to take advantage of the rapidly growing carpark and higher accident frequencies in emerging and evolving markets. Today, we are in 63 countries, and we are targeting operations in 100 countries by the end of fiscal 2020. And three, investments in our people.

For example, in fiscal 2013, we invested approximately $7 million, or 83 basis points of profit margin, in the development of our people to advance the execution of Mission 2020, primarily through our executive pre-deployment program and the Solera Institute.

Our annualized fourth quarter revenue per household in advanced markets was $2.79, and grew by 11% year-over-year compared with the prior year fourth quarter, up from 8.5% year-over-year growth in the third quarter. This acceleration reflects growth in our claims-related businesses, particularly in France, and diversification into the household with contributions from vehicle history, vehicle maintenance buying and selling.

Claims growth in our evolving markets was 8.7% in the fourth quarter versus 16% in the prior year period, and claims growth in our emerging markets was 63.6%. Claims growth in evolving markets was impacted by drier weather in most of these markets, the larger claims volume base throughout fiscal 2013 and continued challenging conditions in certain Eastern European countries.

Claims volume growth in emerging markets was primarily driven by 75% growth in claims in the Asia Pac region. In July, we retired our bank debt and further strengthened our balance sheet for Mission 2020 by issuing $850 million in lower cost bonds. Today, all of our debt is fixed-rate, insulating us from a rising interest rate environment. And with the retirement of the bank debt, we have significantly enhanced our flexibility.

We now have over $1 billion in cash, and growing, to execute Phase I of Mission 2020. As we discussed in our last earnings call, let's take a look at the impact of the approximately $1 billion in capital we have deployed in M&A since 2008.

In the fourth quarter, 32% of our revenue was diversified, compared with 27% in the fourth quarter of the prior year, demonstrating targeted progress in adding additional growth levers to our global business.

With our track record of 20 transactions, we will continue to execute our disciplined M&A strategy with its MMC, Management-Margin-Core focus and drill, and targeting a 10% ROIC.

Our expanded M&A team remains focused on executing deals from our pipeline, which is aligned to our Phase I investment strategy. We recently announced a 36% increase in our quarterly dividend, the largest increase on a percentage basis since we initiated our dividend program, taking advantage of our strong free cash flow and demonstrating the confidence we have in executing Mission 2020. Mission 2020 is focused on creating even more accretive opportunities for our associates, our customers and you, our stockholders.

The execution of Mission 2020 will be $2 billion in revenue and $800 million in EBITDA. In closing, we continue to be in active negotiations with the target we mentioned in the bond offering press release, and we will update you appropriately.

With that, I'll turn the call over to Renato.

Renato C. Giger

Thanks, Tony. Tony colored the major P&L items, so I'll talk about balance sheet and cash flow item -- items, and then give you additional detail regarding our initial fiscal year '14 guidance.

Starting with cash. We ended fiscal year 2013 with $464.2 million, which reflects $142.1 million in acquisition purchase price consideration paid net of cash acquired in fiscal year 2013, including $1.1 million in the fourth quarter; $27.9 million in stock repurchases in fiscal year 2013, including $11.4 million in the fourth quarter; and $34.8 million in dividends paid in fiscal year 2013, including $8.7 million in the fourth quarter.

Since our Board of Directors authorized our stock repurchase program, we have purchased 2.8 million shares, or about 4% of the total outstanding as of June 30, 2013, at an average price of $47.74 per share, giving us a cumulative return of 16% based on the current stock price. We have about $49 million remaining in the $180 million program. Based on our current outlook, we intend to continue our repurchase program.

Fiscal year 2013 cash flow from operations was $226 million, and capital expenditures were $33.2 million, resulting in free cash flow of $193.5 million. This represents a 54% free cash flow conversion rate, in line with the 56% conversion rate in the previous year. First quarter cash flow from operations was $53.2 million and capital expenditures were $8.4 million, resulting in free cash flow of $44.8 million.

We ended the year with a net debt-to-EBITDA ratio of 1.9x, compared with 1.8x at the end of fiscal year 2012. After our July bond offering, we have a little over $1 billion in cash on the balance sheet and $1.7 billion of debt. The new bonds bear a 6% fixed interest rate and are due in 2021. The retirement of our bank debt increased our average maturity from 4.7 to 6.5 years, resulted in a blended average rate on our debt of approximately 6.4%. We have no principal maturities until June 2018.

I would note that we effectively offset some of the interest expense associated with the July bonds with a lower effective tax rate of 26%. Headed by synergies we generated through acquisitions completed in fiscal year 2013 and our relentless focus on operational excellence, we achieved approximately $14 million in run rate waste reduction during fiscal year 2013, a $6 million overachievement compared with our initial fiscal 2012 guidance in August last year.

Turning to our initial fiscal year 2014 guidance. We estimate revenues of $882 million to $890 million, adjusted EBITDA of $360 million to $367 million, GAAP net income of $44 million to $51 million, adjusted net income of $158 million to $164 million, and adjusted net income per diluted share of $2.28 to $2.35. This guidance implies a growth rate of between 5% and 6% for fiscal year 2014.

The euro averaged $1.29 for fiscal year 2013, so at today's rates, we expect a slight tailwind from foreign currency. We now estimate an effective tax rate of 26%, 2% lower than our previous estimate. This is due to the U.S. tax benefit associated with the interest expense on the July bonds, proportionally higher forecasted earnings in 4 markets compared to the U.S., and the positive impact of our ongoing tax planning.

The company's actual effective tax rate will be affected by our geographic mix of earnings, which will be influenced by both organic growth and growth from acquisitions. Change in tax loss and their relations might also have a material effect on our effective tax rate.

This midpoint of our guidance includes a negative impact of approximately 300 basis points to our adjusted EBITDA, due to execution of our Mission 2020 Phase I investment strategy and the profit margins of the least -- of the last 7 businesses we have acquired, as these businesses currently have lower margins than our consolidated margin. We expect these margins of these businesses to approach our consolidated margin within 18 to 24 months from the acquisition closing date.

We expect interest rate of about $113 million; depreciation and amortization to be approximately $103 million, of which about $68 million is amortization of intangibles related to completed acquisitions; capital expenditures of about $40 million; stock-based compensation of approximately $32 million; and fully diluted shares outstanding for the year to be 69.5 million. Uses of free cash flow will continue to be: one, disciplined M&A; two, maintaining our dividend policy; and three, disciplined stock repurchases to affect equity dilution.

With that, I'll turn the call back to Tony. Tony?

Anthony Aquila

I would like to close by thanking our 2,700 associates around the world for their hard work and operating discipline in fiscal 2013. While the year had various ups and downs, we are proud that our people worked hard and rallied to finish the year with positive momentum. I look forward to working with all of you as we execute Mission 2020. Kamal?

Kamal Hamid

Thank you, Tony. That concludes our prepared remarks. We will now take your questions. Operator, could you open up the call for questions, please?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tim McHugh from William Blair.

Timothy McHugh - William Blair & Company L.L.C., Research Division

I guess, first, I wanted to ask about the margin. And can you elaborate a little bit more? I think you said 300 basis points of a drag next year. I guess how much of that is acquisition-driven? And I guess, just maybe a little more color on what you're spending and just organically, is there any change on what you're seeing, I guess, from an ongoing long-term incremental margin from what you're expecting in the business?

Anthony Aquila

So the -- Tim, first of all, this is Tony. On the core business, things are running about the same. Primarily, what we're experiencing is the impact of diversification and the increased investment, so we can expand the business from where we are today to $2 billion. And so we've been getting ahead of that investment. If you back all that out, we would be running at approximately 45%. And those investments are associated to people, the M&A, the drag coming in from the inbound companies, which generally takes us about 18 to 24 months to get their EBITDA margins up to our consolidated margins. And then there's a little bit of impact from the continued -- or just let's say, the finishing up roll-off of Allstate. And all that put together, you get the 300 basis points, and it's about 1/3, 1/3, and 1 is about 79 basis points on the Allstate side.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. All right. And then, my one follow-up would just be the -- in terms of the macro trend, revenue growth rate picked up. It seems more U.S.-based than some of the progress on some of the things you described. But I guess more so, Europe, I wanted to ask, is there any -- your view in the broad sense that the demand environment and the macro environment you're seeing in Europe, is it consistent with what you would have said 3 months ago, or just again, better or worse at all?

Anthony Aquila

Yes, I think what we would say is that the shotgun is really starting to happen. And so you've got first-in, last-out, coming in from like countries like Spain. Spain went in first. They still remain in the queue to improve. Although, some of that were last-in or first-out, which is a positive sign. And we're seeing France, and the U.K. improved reasonably well in the quarter. We saw Eastern Europe still skittish. We had a drier season in the fourth quarter than normal. So we saw a little bit of cooling off of growth in Brazil and Mexico in the quarter. So you -- I think what you see is you see a recovery taking shape, but it's a -- it becomes volatile because everybody is coming out in different, so to speak, waves back in expense.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And just one follow-up on that. Why slower in Brazil and Mexico? Is that macro, or is there something specific to those operations?

Anthony Aquila

There's really, really warm weather and not a lot of rain, and nothing alarming other than just a couple percentage points associated to weather. Normally, we see a lot more storms right now. Although the storms have picked up in the last 3.5 weeks, weather has a bigger impact as we expand into these tropical environments.

Operator

And your next question comes from the line of Andrew Jeffrey from SunTrust.

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

First off, could you tell us what constant currency organic revenue growth was in the quarter and how that compared to the third quarter? Did we see a little bit of an uptick there?

Anthony Aquila

We did. What we're seeing in there -- you could see the effects of some of the -- a recovery taking hold in the advanced markets, with the exception of Spain, some of those ones I referred to earlier. And so if we kind of look -- it we kind of take, for example, claims volumes, while we saw the advanced markets were down 3%, on an average of 5 quarters, they were down 5%. Or if we back into that, they were down 4.6%, 4.5%, 5.4%, 5.6% for an average of 5%. So you're starting to see a recovery mounting in the advanced markets. It's really tough for us to say whether the ones that have been more difficultly struck by the crisis, like Spain and Poland and some of the others, whether they will bounce back in the next quarter. But we're optimistic that they will start to recover in fiscal '14.

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

Okay. And what was the underlying revenue growth this quarter?

Anthony Aquila

The underlying revenue growth this quarter was -- we had revenue growth of 8.5% for the full year. For the quarter, we had 10.3%, and excluding M&A, we had -- it was about 4%.

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

Okay. So that was about the same as it was in the third quarter, I guess?

Anthony Aquila

It's about the same. It's pretty consistent with the commentary that we gave you last quarter. It's just that we're feeling a bit better about the recovery.

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

So when you look out to 2014 in your guidance, is there implied modest acceleration? I know you made some acquisitions later in the year, but it seemed like they are relatively small.

Anthony Aquila

Yes. We didn't. Yes, our approach on this, Andrew, is just to be conservative. There's 4 quarters to go. We've learned that being through kind of 2 crises in the last 10 full years, our approach is to take a very cautiously conservative approach just like -- as we have in the past in the first quarter, and get a good quarter under our belt. The fourth quarter and the first quarter are our weakest quarters, if you will, from a seasonality perspective. And we like to get a little bit more data under our belt before we kind of move our guidance accordingly.

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

Okay. And with regard to the diversification efforts, recognizing that you're in ongoing negotiations, is it safe to assume that any significant deals you do from here will boost the household revenue contribution? I think you said it was 32% in the fourth quarter. Is that -- and that -- it sounds like that's pretty central to the acquisition thrust at this point?

Anthony Aquila

Yes, so we like to -- we like these markets we're focusing in on. They are related. They have a lot of leverage for us because they're automotive-related decisions that are made into the household, including the household -- the house itself from a claims perspective. And so that's maintenance, vehicle history, all the kind of decisions that are made at the household. Yes, we would say that it's probably based on the pipeline. Today, we're looking at about a 60-40 split of how that pipeline is distributed. The -- I will tell you, though, that as you all know, multiples are pretty high right now. And so we continue -- while we have $1 billion in cash and we're in active negotiations, we've always been and will always be very disciplined. And where we choose to go into, we will go into areas that have large market opportunities, not only from a growth perspective, but also from a geographic perspective.

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

Okay. And any thoughts on providing us with the historical household -- revenue per household metric so we can get a sense -- I know you've done this the last couple of quarters now, but...

Anthony Aquila

Yes, we've been building that information to you guys, and we continue to give you the claims data in the emerging and evolving markets because those businesses are still very much based on the leverage and penetration of the core automotive services that we have. And then, of course, in the advanced markets, where we have a significant market share, we're diversifying in those businesses, and that's why we've done that. We can continue to reconstruct the past and Kamal and his various activities will give a little bit more historical data. And it's going to show steady growth for the last couple of years, as we have been quietly migrating into this space and then it'll be relatively flat going back beyond that. So as you can see, the effects of the last year's movement.

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

And just one housekeeping item, Renato. You ran through some numbers quickly at the end of your commentary. Could you just go back over what you expect interest expense and D&A to be in fiscal '14?

Renato C. Giger

Yes, interest expense will be $113 million and D&A will be $103 million, of which $68 million is amortization.

Operator

Your next question comes from the line of Behark Shakrihari [ph] from Mont Crisco [ph] Bolton.

Unknown Analyst

Two questions for you, 2 sets of questions. First one, in terms of the countries, new emerging countries, where you're still not breaking even, can you just update us on how many countries there are? And also, in aggregate, how much money you're losing there?

Anthony Aquila

Yes. So the impact that, that has on us is we have about -- probably have about today, with the expansion of a couple of markets we're entering, and we probably have 14 countries that are dragging on us, and the impact of that is...

Unknown Analyst

Sorry, 14, you said 1 4?

Anthony Aquila

That's correct. And of course, if you think back to 2008, when the crisis was, let's say, at its most alarming pace, we paced ourselves. We did not deter our activities, but we paced them a little bit more precisely. And the value of that can bring anywhere from 1 to 1.25 basis points.

Unknown Analyst

One, sorry, 100 to 125 or you mean 1...

Anthony Aquila

Correct. 100 to 125 basis points.

Unknown Analyst

Right, okay. So second set of questions. We're seeing a pretty significant creep in the stock-based compensation expense as a percentage of revenues. And I understand the markets are difficult where you stand. But if I understand correctly, you're guiding for another $32 million this year, which would place you over 4 years from 1.5% of revenues to 3.6% of revenues. Is there a point in time where you feel that we'll reach the limit of what shareholders will be willing to live with?

Anthony Aquila

Yes. Well, if you actually did some analysis, you'd find out that we've been outperforming the market on an overhang basis by about 40% on a multiyear basis. So we've actually done an incredibly good job of using very targeted approach with the total compensation. What you're seeing in the effect of this year is a multiyear grant that is focused on Mission 2020. So I would say, don't do a 1-year analysis, do a 5-year analysis and compare us to anybody in the peer group and you'll see a pretty impressive number.

Unknown Analyst

Okay. So where would be, say, a normalized number over, say, a 5-, 10-year normal environment?

Anthony Aquila

Well, it depends on the missions, frankly, how we're growing the company. We don't look at time-based compensation. We're a very performance-based compensation organization. And so it all depends on what we're doing. But if you look at kind of where we are right now, we've basically done a significant load that will carry us through fiscal '16. So you'll start to see it smooth out for the next couple years. And then...

Unknown Analyst

So in absolute terms, we should see it basically flat for -- until 2016 from $32 million this year?

Anthony Aquila

It depends on acquisitions, it depends on various variable points. But I'll tell you what we can do, we can get off-line and give you a little bit more information. It sounds like you need to get some historical information about the company, as well as tying that to our Mission 2020. Kamal...

Operator

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

Peter P. Appert - Piper Jaffray Companies, Research Division

So Tony, can you tell me what was the headwind from Allstate this quarter? And remind me, how many more quarters do we have to face that, please?

Anthony Aquila

The headwind was about 40-ish bps on the margin so -- but we're done with the Allstate. We've got a little bit of a hangover claims that they're dealing with that are still active during the period in which they're doing business with us. So it's going to be relatively small in the quarter.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. How about from a revenue standpoint in the fourth quarter?

Anthony Aquila

I would imagine it was about 55 -- about 50 basis points in the quarter.

Peter P. Appert - Piper Jaffray Companies, Research Division

And no revenue impact then, starting in the first quarter, correct?

Anthony Aquila

Yes, we think it's maybe less than 10 basis points.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay, got it. Got it. And then, just again, to an earlier question, I think in terms of better understanding the dynamics of revenue growth. Can you quantify what the contribution to revenues in the fourth quarter from acquisitions was?

Anthony Aquila

Yes. So in the fourth quarter, we had a total revenue growth of about 10.3%. If you excluded the absolute M&A activities, it would be approximately 4% growth and the difference would be coming from the diversification and/or the leverage acquisitions that we've done.

Peter P. Appert - Piper Jaffray Companies, Research Division

Got it, okay. And then anything on State Farm to report?

Anthony Aquila

Nothing really significant other than they have picked up some additional services from us, primarily in some decoding capabilities that we've built in Europe. We're introducing them into the North American theater and they started using some of those in some of the regions. But other than that, as far as with respect to their organizational activities and the selection of if they choose to go to a single vendor, there's not been much information circulated on that.

Peter P. Appert - Piper Jaffray Companies, Research Division

Got it. So CCS has changed ownership, looks like Mitchell's going to change ownership. Are you seeing anything different from a competitor perspective in the U.S. market?

Anthony Aquila

We're hopeful that with increased debt levels, it being on the competitive landscape, that they will be focused on a fair value approach rather than a preparing for sale approach, which of course, in today's environment, when you're selling companies, a lot of people are aggressively taking business and trying to get in what they call the add backs. And of course, those -- when you really peer into those businesses and look at what they've done, they've effectively heavily discounted so that they can pass that on and exit that value to the existing shareholders before departure. So we hope that the environment improves. Although multiples are extremely elevated, I mean, we've walked from a handful of deals just because we couldn't get our hands around what the prices we're trading at.

Peter P. Appert - Piper Jaffray Companies, Research Division

Right. And on that point, Tony, the acquisition discussed in the offering that you referenced, I mean, I know you can't give specifics around it but any broad parameters in terms of scale of the transaction you're looking at? How impactful it might be? And I ask this in the context of you took on the incremental date, you're sitting on a ton of cash, obviously. So presumably, you're motivated to get something done.

Anthony Aquila

Yes, but we're not motivated to change our MMC logic. I mean, I think if you look at us, we've been steady performers. We continue to expand our business, diversify our business and invest in our business. We've managed our margin from the 45% into Mission 2020, what we think the executed is in the 40% to 42% range. So look, we're actively in negotiations. I will tell you that it remains in our -- about 20% overlap on our core and 80% in diversification. So it's a very nice segment for us. We think we can do global activities with it. And we're very focused on setting up those growth environments for us that can allow us to continue to reduce waste in those operations, take the leverage that we've already created and operate at or above our targeted 40% EBITDA range in Mission 2020. So we hope to have some activity, but we're not making any promises because we're going to stay very disciplined and we will eventually get those deals done. Because certainly, with multiples the way they are, there's no shortage of deals entering the market for sale. The problem, of course, is just price, right?

Peter P. Appert - Piper Jaffray Companies, Research Division

Right, got it. Okay that's great. And maybe this is for Renato, just one last thing. So the guidance on EPS suggest modest -- a little bit of pressure on the EPS growth rate, I guess. And the key issue, I think, would be just the step up interest expense. Is there anything else that I might be missing?

Renato C. Giger

No, you're completely correct. So the impact from cash EPS and the growth space from the additional interest is $0.46. But if you can see that we have now, according to this new 26% effective tax rate, we get the $0.06 back from that. So the impact -- the maturity of the impact or let's say, all of the impact on the lower cash EPS figure is coming from the interest.

Operator

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

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

Could you make a comment on revenue for claims trends?

Anthony Aquila

Yes, sure. So revenue per claim, basically, what we saw in the evolving markets, Andrew, is that we saw that the increase in evolving markets is probably about 4.1% and that was primarily through the rollout of additional services that are coming out of advanced markets for some innovations that are being done in the localized markets. In Q3, that was not -- it wasn't a very good quarter for revenue growth in the evolving markets. Q3 was pretty volatile in those markets, if you think back to what was being discussed in the global backdrop. In the emerging markets, we see revenue per claim in line with what it was in Q3. It's down because we're introducing some volume-based contracts while we're picking up volume to get ahead of competitive threats in the markets, the revenue per claim is actually coming down a little bit. That's an investment we're making. We'll adjust that as we roll out additional services in the Phase II of the emerging markets. So that's a strategic investment we're making there. And in the advanced markets, we sell revenue per claim while we said we were no longer going to be giving this information, I'll go ahead and share it for this quarter but it grew about 8.3% against Q3, which was about 10%. And that's just because, again, the competitive landscape is pretty aggressive and so we've been rolling out additional services a little lighter on the price, giving some free usage just to position ourselves in the best light.

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

It makes sense. And if I could put in a second question, Tony. When we talk about the expansion into the household market, what in the Solera portfolio today is in the household market that again, is non-auto? So what percentage of Solera's revenue would typify what you want to do in terms of the household market. And as you expand into the household market, is it more likely to be outside the U.S.?

Anthony Aquila

So right now, the activities that are purely at the house, meaning, the house, rather than the decisions. So we kind of look at revenue per household are the decisions made in the household like how you maintain your car, how and when you sell your car, licensing and registration, historical information when you're getting ready to buy a car. Those are decisions that are made in the household and then there is the household itself, which is damage to the house. Those activities are being done and they are being done outside of the United States with the area of doing claims on the home. Decisions made in the household, those are being done worldwide. And of course, all those revenues had gone from 27% to 32% of revenue and things are going according to our plan. While the margins are lower in those businesses, we continue to improve those margins quarter after quarter, distribution point after distribution point. And so all that's going, let's say, according to plan. The part that I would say is a little bit frustrating for us is just that the M&A market is trading at multiples, which is a little bit frothier than we would like. Nonetheless, we managed our financial balance sheet according to our concerns about a rising interest rate environment. While most of our competitors are in a variable environment on their debt, as they've traded, we're fixed and we have pretty low cost capital and lots of flexibility. We want to put that into place and then plus, you've got a $1 billion in cash. So if those right -- if we choose to play in the premium price market for something, it'll definitely be something that we can exploit across our global business.

Operator

And your next question comes from the line of Manav Patnaik from Barclays.

Manav Patnaik - Barclays Capital, Research Division

First question, can you just split that 4% organic growth rate you talked about in the fourth quarter by EMEA and America?

Anthony Aquila

Yes. So the 4% between -- so let's say, of that, about 2/3 of it came from the Americas and 1/3 came from EMEA.

Manav Patnaik - Barclays Capital, Research Division

Okay, fair enough. In terms of...

Anthony Aquila

And the reason for that is just -- it's just they're recovering, right? I mean, one's ahead of the recovery than the other as a group. While we still see islands recovery emerging out of EMEA, it's not at the majority of the percentage of countries yet.

Manav Patnaik - Barclays Capital, Research Division

Okay, all right. And just quickly on the tax rate, the 26% of this year. Looking forward, should that be sort of the rate we should be modeling in, in the outer years or is this more one-time-ish in nature?

Renato C. Giger

No. As your turn now to hide [ph]. No, this 26% effective tax rate is the one we are modeling into the years to come and so you can use that figure instead of the old 28% effective tax rate.

Anthony Aquila

Yes, I mean if you think through our distribution of our business, it would point to you, notwithstanding some changes in the tax code, but just based on the way things are and the way we put our debt together, I can say that we've got a reasonable run rate going there.

Manav Patnaik - Barclays Capital, Research Division

Got it. And then just pointing to some of the recent M&A obviously in the industry, it seems like at least on the vehicle history side for example, a lot of the competitors talking about in expanding their presence, for example, domestically and taking it internationally. You guys obviously have HPI in the U.K. Do you -- I mean, I was just curious in your thoughts. Is that leverageable to be brought in the U.S.? So just around that market, where your thoughts were?

Anthony Aquila

So if somebody was all in one direction, somebody can come in another one, usually, especially if the solutions have 80% commonality. So with respect to the U.S. and the U.K., I would say that the U.K. solutions are much more advanced because I think the government, because the country is exposed to more third world environments nearby, that they need a better history application for fraud detection, rollback of speedometers, all kinds of activities that are relatively benign in the United States but are pretty aggressive in Europe. So yes, it could come in this direction. Unless we see a competitive reason to do it, we are very focused on executing our Mission 2020 expansion plan. We do believe that competition will heat up globally because while we're doing very well in the Americas because we look at the continent, but the U.S. market is not exactly a high-growth market.

Manav Patnaik - Barclays Capital, Research Division

Okay. And just one last one, just to clarify. For the '14 guidance on the top line, the 5% to 6% you guided, how much of that is organic or, I guess, what the M&A contribution implied in there is?

Anthony Aquila

There is no M&A in that. That is purely organic.

Operator

[Operator Instructions] Your next question comes from the line of Jeff Silber from BMO Capital Markets.

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

I just wanted to clarify that last answer. So when you say that there's no M&A in your fiscal year '14 revenue guidance, that's no future M&A, but I'm just wondering for the acquisitions that you've made already, what is the impact on revenues for next year?

Anthony Aquila

Well, first of all, just so you know, before going forward, we never anticipate M&A activity in our guidance, so it's not in there. However, once we have done something because of the -- most of them are highly in the leverage category, we roll them into the bundle very quickly. It's not easiest for us to split them apart, particularly on the smaller transactions. Usually, we might have been working with those companies for a period of time. But I would say, it's going to be consistent to what you saw in the past, where if we look on the full year, M&A and organic were about half and half. If you look at it on a full year basis, I would say it's probably similar, with the exception of us doing a medium to large size transaction, then, of course, it will swing like it did last year as we had rolled in Explore. So you got to cut -- the way Solera works is we'll tend to do a medium-size deal for who we are at that time, and then we'll do a handful of small deals. In the following year, we'll do some small deals, a larger sum of those geographically spread out. And that's because we're very risk adverse and we want to execute very well. I mean, 20 deals, 19 of them have exceeded our ROIC and have integrated very well with the company.

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

Okay, great. And just a couple of quick number questions. I think you had mentioned on the call, the annual change in claims for your advanced markets. Can you just repeat what that was and what that was last quarter as well?

Anthony Aquila

Yes. So in the advanced markets, what we saw was -- and you've got some impacts in the advanced markets. So advanced markets, just to give you a little context. Advanced markets, they do decrease once you penetrate the market. They decrease because drivers get better, cars get smarter and the infrastructure gets mature. And so that generally, prior to -- if you look back 5 years ago, that was 1 to 1.5 percentage points a year. Today, with more intelligent vehicles and the crisis in high fuel prices, it's more like 3% as it was in this last quarter. However, it was higher in the crisis. If you look at the volatility in the auto industry and the credit market, if you look at the last 5 quarters, while this quarter had, let's say, a positive improvement at a negative 3.2% in claims volumes in the advanced markets, the quarter before in Q3 was 4.6%, Q2 4.5%, Q1 5.4% and Q4 of '12 of 5.6%. So that average would be 5%. And obviously, 180 basis points improvement. So you could start to see the markets are recovering. The question is, is what is the real normalized number you need to be dealing with in the advanced market. I think it's somewhere -- as the markets recover, it's somewhere around 2% taking effect for the things I mentioned earlier. Did that make sense to you?

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

Yes, it does and I appreciate that. And actually, just one last one for Renato. Just on the balance sheet, you mentioned it in terms of the new offering that the principle be paying down, I think it was in 2018. Can you just let us know what that is?

Renato C. Giger

The principal, it's $850 million. It's off of the outstanding debt.

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

I'm sorry, 8-5-0, you said?

Renato C. Giger

Yes.

Kamal Hamid

So thanks, everybody for joining us and we'll speak to you next quarter.

Operator

A replay will be available until 11:59 p.m. EDT on September 4, 2013. To access the replay, dial (888) 286-8010 or from outside the U.S., (617) 801-6888, and enter the following access code when prompted: 13291274. This will conclude today's conference. Thank you, ladies and gentlemen, for your participation and you may now disconnect. Have a great day.

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