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Solera Holdings (NYSE:SLH)

Q2 2014 Earnings Call

February 05, 2014 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

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

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

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Manav Patnaik - Barclays Capital, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

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

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

Operator

Good afternoon, everyone, and welcome to Solera's Second Quarter Fiscal Year 2014 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 for joining us and welcome to Solera's second quarter fiscal year 2014 conference call. With me 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 commentary on our financial results and a strategic performance update. Renato will then provide you with information about our financial results that is not described in today's press release, and finish with the company's updated 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, but 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 in Solera's filings with the SEC, including our most recent quarterly report on Form 10-Q for the quarter-ended September 30, 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.

We measure constant currency, or the effects on our results that are attributable 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 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 year -- 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 a 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 revenues will be approximately 0.3% and the negative or positive impact to adjusted EBITDA will be approximately 0.4%. 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. Our second quarter growth was 13.4% and 6.3%, including and excluding material acquisitions, respectively demonstrating our continued growth. Our total growth was the highest in 6 quarters and reflected only a partial quarter of contribution from SRS. Including contribution from SRS and other recently completed acquisitions, our second quarter adjusted EBITDA of $97.3 million represented a 40.7% margin. Based on both historical and projected business performance, we are raising our margin guidance for fiscal year 2014 from 40.1% to 41%. Our revenue growth was driven by multiple products, services that leveraged and diversify our portfolio, strategic investments and strong performance and tailwinds in our evolving markets, particularly in Latin America.

Drilling down, revenue per household in advanced markets grew by 13.1% versus the prior year quarter, compared to the 4-quarter trailing average of 10.8%. Primary contributors included, in the U.S.: growth in our Driver Behavior platform and contributions from our service, maintenance and repair platform, driven by SRS; volume growth in the U.K.; and increased penetration and product adoption in both Germany and France. This was net of business and macro-related underperformance in the Netherlands, Spain, Poland and Portugal. Those markets continue to work through to a market recovery.

One of the best performers in the quarter, Latin America, turned in second quarter revenue growth of 23.7% versus the prior year quarter, compared to the trailing 4-quarter average of 15.7%. This growth is due to penetration, growth in the carpark and the expanding middle class in the region. These secular trends are our common drivers in advanced, emerging and, particularly, in evolving markets.

For instance, today, there are approximately 70 million households in emerging markets earning over $30,000 annually. This is expected to more than double to nearly 150 million households by the year 2020. This compares to 120 million and 116 million households earning over $30,000 today in the U.S. and Eurozone, respectively.

In 2013, global new car sales set a new record. 83.4 million units, up 36% from 61.3 million units in 2010. This speaks to the pent-up demand for replacing and upgrading vehicles in advanced and evolving markets, as well as new demand in emerging markets. Sales are widely expected to set yet another record in 2014. Including the impact of infotainment safety technology, we believe that claims frequency in these markets will run 2x to 3x that of advanced markets, leading to growing volumes for the foreseeable future.

In advanced markets, more than 15% of disposable household income is spent on transportation investments. In evolving and emerging markets, the household spends on transportation investments approximately 5% to 6%, indicating tailwind momentum for growth as spending approaches the levels in advanced markets and additional vehicles are added to the household. The result is growth in the carpark driving global demand for collision, service, maintenance and repair services. This demand aligns well with our global footprint in over 68 countries.

Volume growth in evolving and emerging markets resulted in company-wide claims growth of 5.4% versus the prior year period, compared to the 4-quarter trailing average of 3.8%. This is net of the 4% volume headwind we are still navigating through in advanced markets.

Annualized revenue per household in evolving markets is approximately $0.60 today, compared to the $3 in our advanced markets, demonstrating the opportunity to distribute our products and services in the future as those markets continue to develop.

This quarter, we are profiling the service, maintenance and repair, or if you will, SMR, opportunity in the U.S. SRS produced double-digit growth in the second quarter. More importantly, after on-boarding the Identifix and AutoPoint management teams, we are even more confident about our expansion into SMR. We estimate the size of the SMR market to be approximately $2 billion in the U.S. alone, and more than double that in certain key markets we are targeting to expand.

Over the last 12 months, SRS performed 16.6 million vehicle diagnoses, representing more than 7% of the U.S. carpark, and that includes new cars where our applications are primarily used on vehicles a few years old and older. Up to 18% from 2012, we believe that this demand will continue to grow as we target the 200,000 mechanical repair shops in the U.S., which is 5x the addressable market of the 40,000 collision repair shops on our claims side of the business.

Lastly, we look forward to talking more about these opportunities and sharing with you some insights as we continue to execute on Mission 2020. This will be held at our IR day event on February 19.

With that, I will turn the call over to Renato.

Renato C. Giger

Thanks, Tony. While revenue per household is the primary driver of advanced market performance, claims are the main business driver in evolving and emerging markets. We continue to drive strong penetration with a year-over-year claims growth of 14.5% and 74.2%, respectively. Both in line with closed rates in the first quarter of fiscal year 2014.

Our trailing-first-quarter growth in revenue per claim came in at 3.3%, demonstrating increased customer adoption of our high-ROI software and services. Turning to the balance sheet, we ended the quarter with $710.9 million in cash and marketable securities, down from $1.1 billion at the end of first quarter fiscal year 2014. The reduction is primarily the result of the purchase price we paid for our 50% interest in SRS.

Second quarter cash flow from operations was $43.1 million and capital expenditures were $12.2 million, resulting in free cash flow of $30.3 million. Our trailing 8-quarter free cash flow conversion rate is 55.6%. Our free cash flow was impacted in Q2 fiscal year '14 by the additional interest expense in the quarter due to the redemption of the 2018 notes. Excluding this one-time statement, our 8-quarter trailing free cash flow conversion rate would be 56.9%.

During 2Q '14, we've repurchased 9.8 million of our common stock. Since our Board of Directors authorized our stock repurchases in November 2011, we have repurchased 3 million shares or about 4.4% of the total outstanding as of December 31, 2013. Our average price of $48.72 per share gives us a true rate of return of 33.8% based on the current stock price.

Our second quarter net debt-to-EBITDA ratio was 2.7x. Our run rate waste reduction for the second quarter was $2.2 million. For fiscal year 2014, we are targeting about $10 million in waste reduction, up from a target of $5 million in Q1. Based on our positive outlook for the remainder of fiscal 2014, they're raising our guidance as mentioned in our press release. On a constant-currency basis, our updated fiscal 2014 guidance implies a revenue growth rate of 16.5% at the midpoint, or 7.5% excluding SRS, up from the previous midpoint of 7%.

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

Kamal Hamid

Thank you, Renato. That concludes our prepared remarks. With that, we'll now take your questions. Kim, could you please open up the call for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Andrew Steinerman from JPMorgan.

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

I don't think I caught the reason for raising the margin guidance. If you can, please articulate that?

Anthony Aquila

Yes, sure. I think what the way I would look at it for you is similar to our past practices when we've launched new missions. And with us integrating the acquisition companies, as well as driving some operational leverage. We're just getting better leverage, better synergies and you see an increase in margin.

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

And is that like for the base business? Or are you saying anything about the SRS margin for the balance of the year?

Anthony Aquila

No. I'm actually -- we believe there's runway in some of the other areas. But at the midyear, if you think back to our prior practices where we've launched new missions, as we build our confidence, as you could see, we're raising our waste reduction target from $5 million to $10 million. And that's identified and being executed on right now. And just the enhanced leverage that we're seeing in distributing the products and the recovery of volumes that are starting to happen in certain of the European markets. So it's kind of a combination of multiple things, and at this point we're moving it to 41%.

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

Perfect. And, Renato, I think you gave revenue per claims for transactional markets on a trailing 4-quarter basis, do you have the second quarter number?

Renato C. Giger

For the total -- the revenue per claim number was, advanced market, 13.1%.

Anthony Aquila

Versus 10.4% in the Q1.

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

No. I was asking for revenue per claims for all transactional markets, just the second quarter.

Anthony Aquila

Yes, we don't give that, Andrew, but we can take it offline and deal with that special request for you. No problem.

Operator

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

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

To elaborate a little bit on Andrew's question with regard to EBITDA margin. Tony, is there any call out around some of the investment intensity, if you will, as you drive towards your 2020 goals? Or is this pure underlying leverage in the business that you're seeing irrespective of that spend? And I guess, you're seeing something that we didn't necessarily see manifest in the second quarter results because you were -- the margin was down sequentially and down year-on-year. So if you could give a little color on that?

Anthony Aquila

Yes. I would say, look, we're always -- as we told you in the last quarter, if you look at the transcripts, that we were still running in a cautiously conservative position. We were firming up, increasing the waste reduction. But keep in mind that, that 41%, as we raised that, we're still investing over 2% in additional initiatives related to Mission 2020. So we're still pumping out quite a bit of money on those initiatives. So there is no shortfall or trimming of those investments. It's just operating on some leverage and some enhanced opportunities in waste reductions. And things are starting to improve and we like that. Now, of course, this would even be more positive had countries like Poland and Spain and Portugal and some of the other laggards that have not yet quite made it into the recovery zone that could give us a potential of 1.5 percentage points. So we'll continue to work through it, but because we've done the SRS acquisition and the AutoPoint thing with some other acquisitions, we are doing a lot of integration work and that poses a lot of synergy opportunities as we integrate those companies into the region. And we'll keep you posted as we work our way up, hopefully. We will be giving about half of what we continue to find into enhancing EBITDA margins and the other half into reserves and increasing investments even further.

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

Okay. But the net of it is a trend higher that it sounds like it's probably sustainable?

Anthony Aquila

We wouldn't say it if we didn't think so.

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

Right. No, I know you're consistent in that regard. And then, I don't know if you mentioned, Renato, the organic number -- organic revenue growth number in the quarter, it looks like it was 6 and change, is that about right?

Renato C. Giger

Yes, 6.2%.

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

Okay. So it slowed a little bit from the first quarter. And, Tony, I just thought that was maybe a little bit in contrast to your call out of Latin America. Did the Americas' revenue growth slowed there organically. Again, what are the -- maybe you can just parse that region a little bit, as far as puts and takes are concerned? Because Latin America was really strong.

Anthony Aquila

Yes, sure. If you look at kind of the, if you will, the 23.7%, you'd back out about 4.5% for the Serinfo acquisition. And short of that, you're running average was in that double digits. It was in the 15-ish percentile. So it jumped and it jumped because we won some customers. There is increasing car purchases in the region, the accident frequency is more sudden in those regions, as well as the additional services we've been rolling out, VIN decoding and various other things in the claims automation within the region. And generally, as many of you know who've been with us for a very long time, 10 years ago, we were very bullish on the LATAM Spanish-speaking countries, primarily as I gave the example about the middle-class development. And you can see that, that will be the fastest-growing middle-class segment short of the Asia Pac region. So we're well-positioned there. We've got very good market share position. We're integrated with a lot of the major carriers. And in addition to that, this is the first area we will be expanding the SRS solution into. So there's a lot of good things going there. And all those things put together, the region is running well and we're preparing to start bringing some of the basic SRS solutions into the region.

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

Was there any other area in the region outside of Latin America that might have slowed in the quarter, though, because the Americas region, in general, was slower versus the first quarter, I guess.

Anthony Aquila

Yes. So Canada had a tough comp that we had to get -- that's what you're identifying there, is they had a one-time revenue project that they had done for a large insurer on the West Coast of Canada. And that project, they had to naturally grow over that, so that's...

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

Okay. I see.

Anthony Aquila

But from a volume perspective, the volume trends are moving in the right direction in the region.

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

Right. So that -- and that tough comp in Canada goes away in the third quarter, right? So if it were just a project, all else being equal, we should see an acceleration in the Americas revenue growth, that's...

Anthony Aquila

Yes, right. It was like -- it was over a $1 million project so it put a little hurt on it.

Operator

Your next question comes from the line of Gary Prestopino from Barrington Research.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Tony, with the new acquisition, are you using their existing sales force to sell that product? Or have you kind of clipped that onto your sales force that is just selling your overhauled Driver Behavior platform?

Anthony Aquila

We haven't integrated the sales forces at this point. And we're running those channels separately today. Solera takes a very methodical approach to bringing the companies into the Solera group. There'll be some opportunities to cross-sell solutions. The teams are already working on that. But today, we don't see any need to consolidate the sales force. If anything, we want to concentrate on having them sell both products into the different channels.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Okay. And then with SRS, as you take it into other markets, this is a contributory database. I mean, is there a good amount of overlap? You said you're going to conventionally take that into Latin America with car models in the U.S. versus car models in Latin America. And/or, how long would it take you to actually get this database built to the point where you could start actually getting revenues out of it?

Anthony Aquila

Yes. So one of the things we're doing is getting them access to our 7 data development centers. Because we have 7x the development -- data development capabilities that they have because of the global footprint we have on the collision side, so there's a lot of leverage there. We got over 300 engineers, 24 x 7 developing data, and we will enhance that. We will expand their coverage to about 99% of all cars in the United States, which will translate into about 85% in certain LATAM countries. And in addition to that, we will focus on using that marketplace and those data development centers in the Latin-speaking countries to develop that gap. So not only is that advantageous to us, in addition to that, we'll start preparing and we're sizing the data coverage to each of the markets where we plan to go. And so the good news is, in most cases, we're working from a basis of 70-ish percent on the low end, 80-ish percent on the high end. So the gap is not so difficult for us. It gives us a lot of potential. And the LATAM countries are particularly important because you see the Asian cars, meaning, not only from Asia, as in Japan and Korea, but Chinese cars are entering those markets already. So it puts us in a good position for leverage into other countries. And one of the projects we're pushing forward, which is also reflected in the EBITDA guidance is the expansion of even greater coverage of the German carpark. So we're very excited about what SMR is and what it will be in the markets we're targeting.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Is there any other competitors in the market that have a database like you have for this product in the U.S.?

Anthony Aquila

Yes, so there are some competitors. But nobody has -- we recently hired a top consulting -- top 3 consulting firm to do an analysis of our competitive strength. And in the diagnostic category, we are the disproportionate leader. But there are solutions that have kind of a combination of maintenance records, workflow solutions, some other components, of which we have many of those components on the collision side. So we will, not in this fiscal year, but in next fiscal year, we will be integrating that. So not only will we have the best diagnostic, we will give the shops a certain amount of workflow and additional capabilities that don't exist in the market today. Now, globally, nobody really exists. That is the position we plan to invest and occupy and work off of the leverage of our existing platforms.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Okay. And then 2 more quick questions is -- my understanding is you have about 20% of the domestic market in terms of shops, repair shops. To those other 80% -- are they applicable? Can you -- are they big enough to be able to take this product? Or is it a much skinnier market just based on the size of the shop?

Anthony Aquila

So we are doing a -- we've invested in a multimillion dollar project already for them that we will introduce some versions of the product like we did in the collision side for light estimating. We will have light diagnostic products, which will expand the market. But today, about 70% of the 250,000 shops are direct hits for us, if you will. So we think we can expand that through some products that are more suiting, as well as some fleet opportunities, which can be very specific to the fleet itself that companies are running. You couple that with our claims platform, you have a very interesting proposition, which doesn't exist in the market in the United States today.

Operator

Your next question comes from the line of Manav Patnaik from Barclays.

Manav Patnaik - Barclays Capital, Research Division

Just first thing on the guidance. If you could just help bridge -- so the $0.17 EPS increase, was the bulk of that basically the margin guidance increase or are there some other items in there that move around?

Anthony Aquila

That's the 80-20 of it.

Manav Patnaik - Barclays Capital, Research Division

Okay. Fair enough. In the -- so just on -- and I ask you the question all the time, but just in terms of the cash balance that you have, any thoughts around how we should consider or how we should look for you to use that in terms of M&A, like timeframe? Do we see more of these small deals that you've done pretty consistently coming through?

Anthony Aquila

Well, look, I mean, right now we are -- all things, as we've described them to you today, she's growing nicely in the double digits. We're not in a rush to do anything, but we have the capacity. Will we continue to do tuck-ins that fit in our total growth strategy? Absolutely, those are underway. Those will continue underway. So things will move in the right direction with respect to that. We're still navigating a handful of countries that have yet to hit the recovery zone. We think that is going to be coming. We've expanded into Italy and some other countries. We're targeting some other Asian countries. So you've got various activities going there. Now keep in mind, as we geographically expand, we always expense all that. So that's reflected in our views. In addition to that, from the M&A perspective, if you think to the medium- to larger-sized ones, there's a couple interesting acquisitions that we would like to continue to invest in the SMR side and in the parts side, which bridges both between our collision platform, as well as our service maintenance repair platform now. So you'll see us targeting some activity there. In addition to that, we like the AutoPoint aspect, which is connecting us to the driveway of the dealerships. We think that information is key. If you look at the business in the U.K. where we have our HPI business, which volumes were up in the quarter, primarily because you have the car recovery coming in into the market and people are starting to purchase cars again and, of course, you need an HPI check. We see that there can be some opportunities to expand into that as we get the service maintenance repair information. We have driveway solutions with the car dealers. And now we can help car dealers and consumers get more accurate information on the history of the vehicle, the maintenance cost of the vehicle, the typical causes of failure in the vehicle, meaning, very specific as to in -- 20% of these cars have $3,000 repair bills at -- after 15,000, 20,000, 30,000, 40,000 miles in the afterlife. So there's all these opportunities to introduce these products. So we will be investing in companies that will give us that connectivity. In addition to that, big data is starting to become a big focus for us because all of this information is pretty important to some very specific people like insurance companies, car manufacturers, et cetera. So that's going to be the focus. We'll continue to buy stock back to arrest any dilution. And it's executing what we've been telling you guys we're focused in on.

Manav Patnaik - Barclays Capital, Research Division

Again, just generally -- that's very helpful, but just generally in terms of the competition for M&A, historically, and it seems like with all the deals that still keep happening, it seems like there's a lot. So is it -- are there still deals that potentially you run the risk of getting priced out of like you have in the past?

Anthony Aquila

Yes. Well, that's a definite realization for us. I mean, I think we have been, sometimes, too disciplined to your point on price. And have we altered that? I would say, as you saw with us on the SRS deal, we stepped up just like we did in the Explore deal. I think we definitely could have done a better job in that particular instance. But what was important is we found our way to the finish line. And will we be more competitive on that front? On targets that we want, that are very important to our Mission 2020, I think we won't hesitate to be a bit more aggressive.

Manav Patnaik - Barclays Capital, Research Division

Okay. Great. And one last one for Renato. Can you just update us in terms of what we should model in for depreciation? And then amortization for the full year? Any update there?

Renato C. Giger

Yes. The figure that you should use is about $89 million for the full year.

Manav Patnaik - Barclays Capital, Research Division

And that's just amortization, correct?

Renato C. Giger

No, that's depreciation and amortization.

Operator

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

Peter P. Appert - Piper Jaffray Companies, Research Division

So, Tony, a lot of discussion in the market about the pressures in emerging markets getting weaker, can you -- 2 things: one, can you just remind me how big is the exposure, from a revenue and earnings standpoint, for you guys to the emerging markets? And are you seeing anything that would suggest any incremental slowing or slowing on horizons there?

Anthony Aquila

So, definitely, it's a good point in the sense that we are concerned, and that is reflected to the best of our ability. I recently came back in the last few days from Brazil. The fragile 5 countries are concerning to us. Those countries, as they relate to Solera, would be -- now the good news is, we only have a lot -- a good amount of revenue in one of them. But Brazil is concerning to us because when you look at currency and inflation inside the country, and you look at the export, you could have some concern there. India, we have been managing our investments slowly, because we were concerned about that and the signs were there early, plus the adoption of the carpark. And the other one is Turkey, which we have been investing in and we will continue because we do believe Turkey is like entering Mexico was for us 10 years ago. So we will manage that volatility to the best of our ability. So there is, to your point, some concerns in some of those. Now we can talk about some of the other countries in the fragile 5, but they're really not that applicable to us. And Poland, you could -- some say it's in the fragile 5, some say it's not. But to us, it is -- it -- we've been managing it, volumes are off, our business is introducing some new solutions, and so we feel pretty good about the long-term effect there. The impact is, let's say, about $5 million over the next, let's say, for the rest of the year. And that's about 20% increase. Though it's growing. All in all, I mean, we're in a pretty good spot because we're penetrating, so if this situation had been developing and we had penetrated the market, we'd probably be taking a different position right now.

Peter P. Appert - Piper Jaffray Companies, Research Division

Right. Tony, you're saying you're seeing 20% year-to-year growth from these markets?

Anthony Aquila

Yes.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And can you just give me a rough sense of how big they are as a percent of your total revenues?

Anthony Aquila

Let me just give you a quick -- let me just add it up here real quick.

Peter P. Appert - Piper Jaffray Companies, Research Division

And maybe, actually...

Anthony Aquila

We don't slice it into that fragile 5, but just give me a second here, Peter, we'll give you a number. It's about $55 million-ish. We'll get back to you more specifically.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. That's good. So I wanted to ask Renato if maybe you could give us some incremental granularity on the second quarter margin change. The year-to-year decline in margin, can you call out what portion of it is due just to the initial dilution from SRS versus investment spending versus anything else you could call out?

Renato C. Giger

Yes. So the impact from SRS is about, for this, it's only 6 weeks, it's about 30 bps. And we have had investments and we have other acquisitions in that, which is about 30 bps. And then we have investments compared higher than the year before, and that's about 50 bps. And then we had the Allstate impact, still, for the last time, this year it was about 50 bps. So all in all, it was probably between 200 to 250 bps which were impacted by these additional investments. Compared to U.S., it would be close to what we have last year.

Anthony Aquila

Yes. And the thing to think about that, in addition to that, Peter, that is separate from the markets which are still not recovering on the volume side. So you're really working with, if you will, about 5 percentage points.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And just to be clear, Allstate is now gone, that will not be something that impacts you in the second half of the year, correct?

Renato C. Giger

Exactly, yes.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then on the -- so dollar has gotten considerably stronger. You've bumped up the revenue guidance a fraction. How can you -- is it possible to quantify, Renato, how much of an incremental headwind FX has become? Because I'm thinking maybe we're underestimating the momentum in revenues implied by the guidance in the context of how FX has changed in the last 3 months.

Renato C. Giger

Yes. It is -- I can give you the figure compared to when we updated guidance in December when we announced the SRS acquisition. And since then, there was a negative impact of around $4 million.

Peter P. Appert - Piper Jaffray Companies, Research Division

So it's not that big a deal. Okay.

Renato C. Giger

And so the full-year impact is about $4 million.

Peter P. Appert - Piper Jaffray Companies, Research Division

Got it. Got it. And the, Renato, the $39 million charge for the debt redemption, that's actually a cash charge, correct?

Renato C. Giger

Yes, that is.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then last thing, Tony, I know you've addressed this but I'm feeling very dense today so I don't think I'm getting it. The assumption of higher margins for the full year, is it possible to say, specifically, how much is a function of incremental improvement you're seeing from SRS versus just better revenue momentum, leverage from that, or somehow, sort of parse out the specific incremental contributors to the margin upside?

Anthony Aquila

Well, some of it is driven through some of our uptick in waste reduction, which there's a portion of that on the, if you will, the non-M&A-related businesses in the last 12 months. A portion of that, more than half of that is coming from the synergies we're driving on the side of the M&A. For sure, SRS, primarily on the AutoPoint side, which was losing money when we did the deal but is now making money 90 days later through working with the management team, so there's some improvement flow there, they're ahead of schedule. In addition to that, we're seeing some volume, which has got -- giving us that flow-through. We saw upticks in HPI. Another -- the good news is it's not like just one thing, which if it had only been a few things, Peter, I think we would be reluctant to raise. And if you think too in the past when we've done this, we are working with 80-plus-percent certainty when we give that number.

Operator

Your next question comes from the line of Andre Benjamin from Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

First question, I apologize if I somehow missed this, but back to the guidance or the decision to raise the revenue guidance, I think some of the prior comments were focused on the margin and EPS. But how much of the raise of the actual top line was from just recent acquisitions versus some change in fundamental view versus the last time you reported? And for the fundamental view, I guess, could you give a little color on what those may have been?

Anthony Aquila

Yes. So I think if you kind of go back through our comments early on, you saw there some volume -- there are some recoveries going on in certain markets. You've got HPI, you've got Explorer, you've got Title Tech. So you've got a lot of product lines that are getting more volume usage as a result of the recovery and the increase in the car sales. So services that are on the car sales side, we're getting a tailwind on them, we're catching some of that. In addition to that, we've got better penetration in the Latin American market. You're getting more uptake in our solutions and services. In France, we had better penetration into a particular segment of the market. So we gained some share there. It's really a whole bunch of stuff and that's the power of the diversified portfolio, but there wasn't -- if your question is, is there like one thing that's really driving it? No. And we consider that good news.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

And did you enter any new countries in the last quarter? I know you had talked some about you're pushing some of the countries that you're already in the emerging markets. But did you enter any new ones? And does the turbulence in the emerging markets make you rethink at all the pace of hitting 100 countries?

Anthony Aquila

No. We don't think -- we actually think our timing is probably really good to expand, because most of these conflicts and -- we'll catch them well, we believe. The one that caught us a little bit offguard was Turkey, I would say, but we're navigating that and we've reflected what we believe that volatility is. Short of that, prospecting in new countries, we're really focused on Southeast Asian markets. We're prospecting in there and we're preparing to expand, not only there, but we've been going after the North African markets as well. We've been putting boots on the ground, prospecting the Middle Eastern markets, which are calming down. So again, we've got multiple levers moving in the geographic expansion. And as I said earlier to someone's question, it's always to remember that we expense all of that, we don't capitalize it.

Andre Benjamin - Goldman Sachs Group Inc., Research Division

And I guess my last point to Manav's question, at what point would you allow -- I know you're doing some tuck-in acquisitions, but you also expressed some frustration with valuation in the past. So at what point would you allow frustration with not being able to find enough suitable deals to make you consider potentially reducing your cash balance? And if you did so, how -- what would you use it for?

Anthony Aquila

Yes. Great question. Well, certainly, right now, based on the amount of expansion we want to do. As you saw, we bought a company in Italy to help us get into the Italian market. It's one of the largest markets in Western Europe. We haven't entered that market. I think what you would see us do is we would take advantage of where we saw dislocation in our stock price in the buyback side. We might consider increasing the dividend, but we will maintain our focus on the tuck-in category because we are pretty dominant there, because the private equity guys can't play in that level. We would probably accelerate that. We wouldn't accelerate it in any one geography, but we would accelerate it across the globe to mitigate our risk. And in addition to that, I think you'll see us fill out our parts initiative because that works between the service maintenance repair side and the collision side. We think that there is a natural growth in the market as technology can really drive that forward. And in addition to that, you will see us starting to invest more in the property side of the equation as we get our confidence up on the service maintenance repair. So there's really -- there's plenty to do and there's plenty for us to compete in. For sure we're going to hit a couple deals where we're going to be playing up against guys that are purely on the private equity side. And as I said to the earlier question is I will most likely be more aggressive in those stance, but not outside of the comfort zone of what I've already got comfortable with, if you know what I mean.

Operator

Your next question comes from the line of Tim McHugh from William Blair.

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

Just want to ask, on SRS, you talked about improving the margins there already. Did you pick up on the low-hanging fruit? Or I guess is there more low-hanging fruit that you can quickly continue to drive improvement? Or will it be harder from here to continue to drive that up quickly?

Anthony Aquila

And certainly, this will be covered at the IRR Day. But I think the management team has really gravitated towards the Solera Way of operating a business and has really opened their eyes to be able to get better leverage. And of course, half of that leverage we're investing back in the business, the other half we're putting into EBITDA. So there's a reward system for the management teams in that adoption. And let's just say whenever there is low fruit, we never miss the opportunity to grab it. But at the same time, we'll stand on each other's shoulders to get some of the high ones too. So, I would say that it's probably 80-20 already, in the sense of what we have realized, it's probably been on the low side. But a couple of them were bigger -- we shut down a facility that didn't make sense, based on the way we run a business and the synergies we can give them. That was a little higher. So there's various things that you do, but we're not afraid to reach beyond low-hanging fruit, if you know what I mean.

Operator

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

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

Tony, in your prepared remarks you highlighted the SMR market, I was wondering if you can tell us how large of a business that is for you maybe as a percentage of revenues and where you see that going over the next few years?

Anthony Aquila

So it's about, let's say, roughly $100 million today. We believe as we globally distribute this product line, it will certainly be in the hundreds of millions of dollars in revenue in the mix, but we're not comfortable to give you what that number is today. We've got a multimillion dollar market study going on. We have identified the Spanish-speaking countries as a direct hit. A lot of leverage with a little bit of investment, so we're going to go after that. And we've got a few other countries or, if you will, linguistics that we see a lot of leverage based on the carpark. But I would say, if you wanted to say how big could this be, for sure, the SMR business, just based on the facts set, which is it's generally 5x larger than the collision businesses in a country. You could safely say it could be a billion-dollar division just like you have kind of, if you will, on the other side. And when you couple the parts as the bridge, because both of those need parts, you even emerge another pretty big opportunity and the good news is it's in the same wallet.

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

Okay. Great. That's helpful. And then, Renato, a couple questions, numbers-related questions for you. In terms of this fiscal year, I was wondering if you could give us guidance for capital spending, interest expense. And I just want to double check the numbers that you gave out before, is was for both depreciation and amortization or just depreciation?

Renato C. Giger

Okay. So first, the interest you said for this year, the full year forecast is around $106 million. CapEx will be around $40 million, and amortization and depreciation together is $89 million, as I said.

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

And that's both of those together, correct?

Renato C. Giger

It is the amortization piece of intangibles, yes.

Operator

[Operator Instructions] Your next question comes from the line of Gary Prestopino from Barrington Research.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Just a couple of cleanup questions. Tony, the guidance, as I look back on my notes from last quarter, you said you were getting dinged about 300 bps from investments for growth. Is that about where you are right now? Or has that changed at all?

Anthony Aquila

I'd say, some of those -- we're probably running about 200 right now.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Okay, that's fine. And then in terms of your percentage of non-claims revenue versus claims revenue, where is that right now? Do you have that handy?

Anthony Aquila

Yes, it's about 35% right now.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

35%. And then just from some of your comments in Europe, it looks like some of these advanced markets in Europe are starting to pull out of recessionary conditions, is that kind of a correct assumption? I mean, was there a betterment of the performance, sequentially, on a quarterly basis?

Anthony Aquila

And so let me clean up the first one. So if you roll in SRS, you're going to get to about 40% when you have the full effect, based on the growth rate of the non-claim business. So we're very well positioning ourselves for the transition or, if you will, the info safety mechanisms in the auto industry. But with respect to the recovery going -- yes, you saw some countries move into better recovery volumes. Now, keep in mind, this number we gave in the quarter is also reflective of a very bad comp on a year-over-year basis in Europe on weather. Now, we had weather in North America, however, that's a subscription business versus a transaction environment. So we took about a 30 bps hit, 40 bps hit there. So all those things going, now we're hoping weather will enhance in the new -- in this quarter in Europe. And all in all, with the exception of the countries I mentioned, the color on things are a little bit more green than yellow, if you will.

Operator

This concludes our question-and-answer session. I will now turn the call back to Kamal Hamid.

Kamal Hamid

Thanks, Kim. Thanks, all, for joining us. And if you haven't received an invitation to our IR event, which is going to be held on February 19, in New York, please give me a call or shoot me an email and we'll get you an invitation. Thanks so much, everybody. Bye-bye.

Operator

A replay will be available until 11:59 p.m. EDT on February 19, 2014. 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, 75087669.

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Source: Solera Holdings Management Discusses Q2 2014 Results - Earnings Call Transcript

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