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Solera Holdings Inc. (NYSE:SLH)

Q4 2014 Earnings Conference Call

August 26, 2014 05:00 PM ET

Executives

Kamal Hamid - VP, IR

Tony Aquila - President and CEO

Renato Giger - CFO

Analysts

Andrew Steinerman - JPMorgan

Peter Appert - Piper Jaffray

Andre Benjamin - Goldman Sachs

Manav Patnaik - Barclays

Andrew Jeffrey - SunTrust Robinson Humphrey

Tim McHugh - William Blair & Company

Jeff Silber - BMO Capital Markets

Bill Warmington - Wells Fargo

Operator

Good afternoon, everyone, and welcome to Solera’s Fourth Quarter and Fiscal Year 2014 Earnings Call. Following today’s remarks, we will hold a question-and-answer session. 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 now turn the call over to Kamal Hamid, Solera’s Vice President of Investor Relations.

Kamal Hamid

Good afternoon, everyone. Thank you for joining us and welcome to Solera’s fourth quarter and fiscal year 2014 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 commentary on our financial results and an update regarding our strategic performance and outlook. Renato will then provide you with information about our financial results that is not described in today’s press release. We will then open up the call for questions.

I’d 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 March 31, 2014.

We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or events, conditions or circumstances on which any such statements maybe 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 Web site at solerainc.com.

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 transmitting 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 organic revenue, we mean revenue generated from businesses we have owned for 12-months or more. When we refer to organic revenue growth, we mean the period-over-period change in our organic revenue. When we refer to run rate, waste savings or reductions, we mean savings to be realized over each 12-month period following the execution of these efforts. When we refer to revenue for households, we mean the total revenue generated in advanced markets divided by the number of reported households in those markets. Our fiscal year 2015 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.

All total addressable market, or TAM, numbers presented are from a study by a leading consulting company that we commissioned and refer to the TAM by the year 2020. 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 a strengthening or weakening dollar throughout 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 2015 revenues will be approximately 0.5% and the negative or positive impact to fiscal year 2015 adjusted EBITDA will be approximate 0.6%. 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.

Tony Aquila

Thank you, Kamal. Good afternoon, everyone, and thanks for joining us today to review our fourth quarter and fiscal year 2014 financial results and our initial outlook for fiscal year 2015. Fiscal 2014 was a strong year with outperformance in a number of areas. Let me put the year into perspective. In August 2013, we told you we expected 5% to 6% total growth in fiscal year 2014, comprised of a 3% to 4% contribution from organic growth and about 2% contribution from completed immaterial acquisitions. Our actual results were 4.4% organic revenue growth and an additional 12.4% growth from acquisitions or total growth of 16.8%.

Our fiscal year 2014 organic revenue growth accelerated about 60 basis points compared to fiscal year 2013. To refresh your memory, when we refer to organic revenue, we mean revenue generated from businesses we have owned for 12 months or more. When we refer to organic revenue growth, we mean the period-over-period change in our organic revenue. This acceleration in organic revenue growth was driven in part by performance improvements in a number of our countries and the contribution from businesses that we have owned for more than 12 months. We continue to deploy capital, including almost 400 million during fiscal year 2014 to effectively increase the diversification of our business.

The biggest driver of our diversification efforts was adding mechanical repair to our auto platform, a natural extension of our collision repair business that increases our total addressable market from $19 billion to about $24 billion. As a result of the success of our LDD, or leverage diversified and disrupt strategy, non-claims revenue reached 39% of our business for the first time in fiscal year 2014, up from 27% in the prior year and the subscription mix of our business increased from 36% to 42%. As a result of the momentum we created in the fiscal year 2014 from deeper penetration into the household, we now have the confidence to raise the bar on Mission 2020. As a first step, we are now targeting a 42% adjusted EBITDA margin, which is a 200 basis point increase from our original 40% margin target and represents $40 million of additional adjusted EBITDA. Our next step will be to revisit the Mission 2020 $2 billion revenue goal once we gained further confidence based on our continued execution of the Mission.

Looking at our fourth quarter results, GAAP revenue was $267.9 million representing year-over-year total growth of 22.6% or 20.6% on a constant currency basis. Constant currency organic revenue growth was 4.7%, up 160 basis points from the prior year period and adjusted EBITDA was $109 million or adjusted EBITDA margin of 41.3% which included approximately 60 basis points of impact from businesses acquired in the last 12 months.

Annualized fourth quarter revenue per household in advance markets increased 20.3% to $3.36. As a reminder we decided to use revenue per household to measure the performance of our business in advance markets because the household is a primary decision point for the purchase of services that are supported by our solutions and most accurately reflects the full scope of the services we offer for the auto and the home.

The strong growth in revenue per household was driven by robust performance from our service, maintenance and repair business in the United States as well as positive underlying trends in Germany, United Kingdom and France, partially offset by continued market challenges in Spain, Switzerland and the Netherlands.

During the fourth quarter, we announced the acquisition of the claims related businesses of the Sherwood Group, stock control and I&S as we continue to penetrate the home and auto platforms. Each of these acquisitions was completed during the first quarter of fiscal year 2015. With the acquisition of I&S the number two player in the glass repair and replacement market in the United States, we have rounded out our portfolio to create the United States industry only platform that spans the entire auto repair life cycle, collision claims, mechanical repair, park exchange and now glass. There are about $7 million insured glass claims annually in the United States. Many of these claims occur outside of the collision and are typically outsourced by insurance carriers. Having an end-to-end platform creates significant efficiencies for our customers and their customers and position Solera to increase our share of wallet over time.

We are beginning to operationalize these acquired businesses using the Solera principals. This is a core competency of Solera. For acquired businesses that we have owned to at least 12 months, we have generated over 700 basis points of adjusted EBITDA margin improvement on a weighted average basis. These margin improvements contributed to a 26% weighted average decrease in the aggregate purchase multiple for these transactions and generated an ROIC higher than our five year target of 10%. While the M&A environment remains very competitive, we will continue to aggressively pursue targets and deploy capital in a disciplined manner as we continue to execute our Mission 2020 goals.

Now let me give you an update on our larger transactions. The SRS joint venture, which we completed in November of 2013, through the combination of data and solutions of SRS and Solera, we are uniquely position to create a comprehensive solution for the global service, maintenance and repair market. This was validated in a recent customer forum held in Jackson Hole, Wyoming, which was attended by some of the largest auto dealer groups in the United States. During the forum we received great feedback of our product vision and the value we deliver. Feedback like this from our customers raises the confidence we have in our ability to win in this $4.6 billion global market. We have started our geographic expansion already of Identifix and plan to launch in Mexico in the coming quarters and additional countries to follow.

To summarize, we generated significant momentum in fiscal 2014 by further diversifying our business, including our entry into the high growth SMR market. Based on this momentum we increased our Mission 2020 adjusted EBITDA margin target from 40% to 42%. We expect almost 200 basis points of acceleration in our organic growth rate and we expect to exit the year with an organic revenue growth run rate of between 7% and 8%.

With that, let me now turn the call over to Renato. Renato?

Renato Giger

Thanks Tony. Tony covered the major P&L items. So I will cover the major balance sheet and the cash flow items and additional detail regarding our initial fiscal year 2015 guidance. Starting with cash, we ended fiscal year 2014 with $837.8 million, an increase of $373.5 million from the end of fiscal 2013.

Our cash balance reflects net proceeds of $661.9 million from the issuance of the senior notes of certified $362.1 million in acquisition purchase price consideration paid, net of cash acquired, including $36.6 million in the fourth quarter, $58 million in stock repurchases, including $23 million in the fourth quarter and $47.2 million in dividends paid, including $11.8 million in the fourth quarter. Our first quarter fiscal year 2015 cash balances will reflect purchase price consideration paid for the three acquisitions we completed during the quarter-to-date.

Fiscal year 2014 cash flow from operations was $248.5 million, and capital expenditures were $34.4 million, resulting in free cash flow of $214.1 million. This represents a 51.6% free cash flow conversion rate, in line with the 52.2% conversion rate in the previous year.

Fourth quarter cash flow from operations was $29 million and capital expenditures were $6 million, resulting in free cash flow of $23 million. We ended fiscal year 2014 with a net debt to adjusted EBITDA ratio of 2.5 times compared with 1.8 times at the end of fiscal year 2013. For fourth quarter we received net proceeds of $158.7 million from the issuance of senior unsecured notes due 2021 with a 6% fixed income rate.

During the last two years, we have taken steps to increase the average maturity of our debt, locked in attractive fixed interest rate. Today our average maturity is 7.2 years. Our blended interest rate is 6%. None of our principal matures until 2021 and our covenant package provides us with increased operating flexibility. In fiscal year 2014, we generated approximately $24 million in run rate waste reduction. In fiscal year 2015, our initial run rate waste reduction target is $8 million to $10 million.

Turning to our initial fiscal year 2015 guidance, we estimate revenues of $1.15 billion to $1.17 billion, adjusted EBITDA of $466 million to $480 million, GAAP net income of $35 million to $49 million and effective tax rate of 26%, adjusted net income of $219 million to $229 million and adjusted net income per diluted share of $2.17 to $2.32 [ph]. Our revenue guidance implies an organic growth rate of between 6% and 6.5%, up about 155 basis points compared to our fiscal year 2014 organic growth run rate of 4.4%.

As Tony mentioned, we expect to exit fiscal year 2015 with an organic growth run rate between 7% and 8%. Our revenue guidance includes contributions from the businesses we acquired during the first quarter of fiscal year 2015, Sherwood cost control and I&S. The midpoint of our adjusted EBITDA guidance includes approximately 80 basis points of negative impacts from recently acquired businesses that have lower margins than our consolidated margin. We expect the adjusted EBITDA margins of these businesses to approach our consolidated margin within 18 to 24 months from the acquisition closing date.

For fiscal year 2015, we expect interest expense to be about $111 million, depreciation and amortization to be approximately $152 million, of which about $106 million is amortization of intangibles related to completed acquisitions and capital expenditures to be $55 million to $60 million, higher than in the past due to substantial system upgrades at several recently acquired businesses, stock based compensation of approximately $40 million and fully diluted shares outstanding for the year to 69 million.

Uses of free cash flow will continue to be disciplined M&A, dividend payment and stock repurchases pursuant to our repurchase program, primarily to offset equity dilution. Regarding M&A and consistent with our past practices, we typically complete a larger transaction every 18 to 24 months. However we are actively searching for a larger transaction and if the right large opportunity presents itself earlier, in that cycle [ph], we will be ready.

With that, I will turn the call back to Kamal. Kamal?

Kamal Hamid

That concludes our prepared remarks. We'll now take the questions. Operator, please open up the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Andrew Steinerman with JPMorgan. Please proceed.

Andrew Steinerman - JPMorgan

Could you just state again what the organic revenue growth was of the fourth quarter of the year and is that a comfortable number to the 5.6% number that we had from the third quarter? What are the drivers of any differences?

Renato Giger

So the fourth quarter organic growth rate was 4.7% and it was 5.8% in Q3 and this decrease was mainly leading to some negative weather impact most of countries now?

Andrew Steinerman - JPMorgan

I didn’t catch it because -- what was the deceleration.

Tony Aquila

This is Tony, Andrew. The deceleration comes from the seasonality associated to the weather patterns, because we’re picking up about 1 or 1.5 from the weather and so that’s the change.

Andrew Steinerman - JPMorgan

Okay. And was that included then, how do you have the confidence that the fiscal year is going to be one of acceleration?

Tony Aquila

Yes, so the underlying movement in some of the countries like the UK and of course as we lap, some of the smaller businesses start to come in and we’re bundling up the line, we’ve got three countries that are kind of dragging on us right now only. So that number continues to decrease. We think that there's some stabilizing factors that are starting to happen there and for every percentage point that we gain in the advanced markets on the claim side, as the markets improve and more car sales happen, therefore more accidents happen in the future. In addition to that we’ve got Suncorp, we’ve got some rollouts going on with some customers and things of that nature, just kind of -- as we’re very conservative. So is that enough strings to pull that lead us make the confidence statement of our exit rate.

Andrew Steinerman - JPMorgan

Right, okay. And could you just make a comment about how claims did in the quarter in the advance markets?

Tony Aquila

Yes, so in the advance markets, if we look at -- they're still down and some of that is being driven primarily by them, stating in the Netherlands are really the ones that are giving us the most problem. Some of that is a bit of a product shift we’re driving and repositioning the product portfolio in one of them. So that’s an activity driven by our own moves as we reposition that product portfolio and the rest of it is driven by just the market conditions as it recovers, but overall we saw about 7% down in the advance markets but we saw the evolving markets accelerate into the 6% range of growth and then the emerging markets where growing at a 100% plus. And so you roll all that together, the total claims movement was positive, about 4.5% to 5%.

Operator

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

Peter Appert - Piper Jaffray

So Tony or Renato, the big increase in the minority interest, can you remind me what’s driving that and what does that number look like next year?

Renato Giger

It’s Renato here. So the increase in minority the fourth quarter was linked to the cleanup we did in the SRS. SRS had much better net profit and anticipate because as I said two of them [ph], acquisition related and tax related expense another consequence, minority expense swept out. Next season minority expense will be about the same as it was for this year.

Peter Appert - Piper Jaffray

On a full year basis?

Renato Giger

Yes.

Peter Appert - Piper Jaffray

Okay. And then Tony, on the expected acceleration of organic revenue growth, do you have an estimate of what portion of the increase is a function of the annualizing of the recent acquisitions?

Tony Aquila

Yes, so we’re picking up -- we’ll pick up about 3% or so from the lapping and the rest of it is just embedded in the business and of course Peter, what we were signaling in the earlier comment was that for every percentage point that we improve in the advance markets pick up about close to $1 million. And we’re seeing good signs there. Of course, it's still a little bit volatile with the Russia situation and some of the noise that’s in there, but if you look at the car sales and you look at the behaviors in there, things are returning to a bit of normality. In addition to that fuel prices have stabilized and we’ve been spending time in the various countries and we are starting to see people kind of level out now. We do think that there will be a continued amount of pressure in the advanced markets as the smaller claims, which we’re introducing a solution for that have found an alternative and a more manual process to save the transaction fees but we believe we'll pick that up in the coming 12 to 18 months as well.

So all things equal, knowing our style, we’re feeling pretty good about things. In addition to that, we’re taking and harvesting some of the services out of the Service Maintenance Repair side and being able to drive some lift in additional transactions that we couldn’t get before. Couple that with we have expectations that the glass we’ve been offering in France and other some generic versions of the glass as we prepare to expand the glass business.

So, the pipeline is looking good from a product mix for revenue growth per transaction and so that’s kind of why we feel the way we do, because there maybe still some pressure on the collision side, but we can capture some claims we couldn’t get before. In addition to that, we can start to introduce some of the mechanical aspects, which we couldn’t have, which we didn’t have before until we acquired the assets in the JV.

Peter Appert - Piper Jaffray

Got it. And Tony on the glass business, I had a thought that that was going to be maybe accretive as much as a dime to earnings. This is my number not yours obviously, which made me think of the cash EPS guidance look particularly conservative. Could you comment on that?

Tony Aquila

Look there is us, at the beginning of the year from that side, there is still a little bit of conservatism but it’s reflected based on what we can see right now. Of course, we just got our hands on the asset effectively. And we’re in the early phase. Although we were able to -- we’ve got a good three weeks work in that already, we think that there is, as I just mentioned, some additional things we can do with that asset, but we have not reflected that yet, Peter.

Peter Appert - Piper Jaffray

So you’re not assuming any incremental contribution from the glass business at this point?

Tony Aquila

No.

Operator

And your next question comes from the line of Andre Benjamin with Goldman Sachs. Please proceed.

Andre Benjamin - Goldman Sachs

First question, back to the M&A contribution, I was wondering if you can maybe parse out how much of the contribution we think about coming from SRS versus some of the other acquisitions that you’ve completed over the last six months? I'm just trying to think about the quarterly contribution as we flow the organic -- as SRS flows in organic third quarter next year?

Tony Aquila

So we think there's a quite a bit of stuff this year in fiscal ’14. So if we kind of broke it out, I think we would say, if you take the number I said before, I think the mix would be like 70%-30%, distributed 70% towards the SRS side and 30% towards the bucket of the others. Although you did have a series of a couple assets close, just most recently on the back of the I&S deal. So that mix will probably shift more 60%-40% or if you will maybe even 50%-50% depending on how much we can distribute efficiently in the first year across our geographies.

Andre Benjamin - Goldman Sachs

And then as I think about the EBITDA margin trajectory, if I did my math right, I think next year is beyond 41%, the guidance for 2020 is not that much higher but 42%. Just thinking, should we assume flat as we model the next couple of years, as you continue to invest or should it snap up in 2016. I know it’s early but just as you’re thinking about the investment cycle, I don’t know if you have any view there.

Tony Aquila

If you look at SRS, we put $2 million into that business like in the first quarter. In reality -- let me backup for a second. If we turn to look at the embedded business and assuming -- if the 700 point average that we get through these businesses within the 12 to 18 months, it would point to that this would consistent to prior missions, where the margins would continue to go up.

Now if you back all that out and you said, well let’s just push the investments and the acquisition headwind associated to their lower margin versus ours and as we get them there, but you'd kind of be taking -- you’d be adding into today’s number about 2.5 to 275 basis points. So if you kind of think about eventually, we'd catch up to that.

Now the wildcard and the reason why we’ve taken a conservative approach is because just about every asset we look at has the same profile. And so it takes us some time. So depending on the weight that has, of course as we get bigger that weight become smaller, henceforth why margins continue to drift up, even while we’re absorbing these guys. So I think that the likelihood of us to maybe pull that in even a little sooner, is going to be predicated based on the deal flow that’s inbound.

Operator

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

Manav Patnaik - Barclays

Just firstly can you help breakdown that 4.7% organic growth for the quarter between the actual organic growth for EMEA and America?

Tony Aquila

Just a second, I will give you that.

Manav Patnaik - Barclays

And then if you can just for the full year as well, I think you said 4.4 for the full year what that should average out there?

Tony Aquila

Okay, let me give you the answer for the 4.7. The Americas organic growth is about 3.3 and the EMEA growth is about 5.7.

Manav Patnaik - Barclays

5.7, okay. So basically most of that revenue impact you guys talked about was an Americas phenomena?

Tony Aquila

No, it was spread out. We had some in parts of the United States and we had some in central, primarily the western part of Europe. As our geographies expand, we now have partnered with the largest insurer in Australia. So our revenue distribution with weather patterns will improve. That’s also something we did not put in at this time in our outlook. So -- but we are trying to get a better seasonality mix of weather as we continue to globalize the business.

Manav Patnaik - Barclays

I guess and maybe I have it wrong in my model but for Americas in the third quarter the organic growth there was 8.5%, is that correct? And so I was just wondering the 500 basis point decline what was that in addition to the weather then?

Tony Aquila

That figure is correct, it’s about 8.5% was the second quarter -- the third quarter, sorry.

Manav Patnaik - Barclays

So the 500 basis point decline in Americas then was weather plus some other things?

Tony Aquila

Well weather was a small part of that. It’s probably about 0.75 point and the rest of it was just a lapping. And we can give you a little bit of a breakdown on the North American mix and we can give you offline probably. Because we have to build it for just like a 0.50 point, it’s 0.75 point there.

Manav Patnaik - Barclays

Got it.

Tony Aquila

The good news is it’s not if you are searching is it one thing? No. But is it across a bunch of different things that we were lapping or other things in some products concessions we made for a couple of customer extensions and some things like that. So we had a whole bunch of things there.

Manav Patnaik - Barclays

And then on the margin guidance, it seems like the implied decline is a 100 basis points to 150 basis points you said, 80 is from the acquisitions that you are making that’s going to dilute the margins. So is the remainder just proactive investments maybe if you can give us some more color on that?

Tony Aquila

So we got to beef up infrastructure we are doing because the platform is pretty robust in the United States. In addition to that, we are putting a North American SMT into place. We’ve that stands about eight executives. In addition to that, we put a couple of million bucks in various projects we are kicking one off right now for I&S. We are starting to accelerate the investment in some of the strategic positioning for the portfolio or if you will the platform so we can get more integration sooner as now we have more offerings like in North America. So we kind of plan to spend a bit more money and so that’s why you are seeing and that’s why if you kind of think of that once we get through that like we did in the SRS side and if you were to normalize things, the business is doing about 45%.

Manav Patnaik - Barclays

And then one last one from me just on the free cash flow conversion over the last couple of years, it’s been coming down at least on a reported basis and it seems like 52 was the last two fiscal year. So what should we think of as the EBITDA conversion, free cash flow EBITDA conversion I think in the past you talked about a range of 55 to 65, is that still applicable or for this year should we be thinking more or like the low 50s?

Tony Aquila

Yes, I think you should right now -- it’s where we are today, so probably 350 to 353, that’s about the conversion rate we have right now.

Manav Patnaik - Barclays

And that’s what we should think about for the years ahead or is that just specific to this year?

Tony Aquila

Yes, I think it’s what I would think about for the next 12 to 18 months, because some of these things that we are launching we have more cost associated to them. And so it takes us a bit of time to get that database in place and some of those costs are -- once we get it there then they start to drop. And I think again depending on the acquisitions we bring in as we are now investing our free cash flow, it’s going to range between 50, I would say, to be safe, thinking through Mission ’20, it’s going to range between 50 and 60.

Operator

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

Andrew Jeffrey - SunTrust Robinson Humphrey

Thanks for taking the question. I hate to harp too much on the organic revenue growth dynamics, I am just trying to understand the really bullish comments on the acceleration especially in the context of SRS having, or Americas, I guess, having slowed in the fourth quarter. Tony it sounds like weather was really a pretty meaningful impact because you’re thinking about 3 points of growth from SRS on top of what should be a pretty stable base in the core business. I mean, is that about right? Is the blended organic revenue growth coming up primarily because you anniversary the SRS deal?

Tony Aquila

Well, that’s a big lift into right. I mean we’re already at 45,000 shops in the United States and as we lapse that of course plus some of the product offerings that we have that we’ve already gotten indications or actual agreements with customers. So you know us. I mean how we are on these things.

But yes SRS has a -- and to be more specific Identifix and then AutoPoint in addition to that we got really good performance coming out of our driver experience side on the titling the Explore product line on the driver behavior platform. The platforms are really starting to get as I said with the first set of questions is we’ve been able to build up a good set of product portfolio to add to the platform which will drive revenue per transaction which gives us that organic lift.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. So there is -- when you talk about the platform it sounds like you’re starting to get. Is it right to think about that as a cross sell or is it price to value? What’s the mechanics? What are the mechanics by which you monetize better?

Tony Aquila

So that’s a great question because in reality in some cases with some customers it’s both. We’re already in discussion with the power of the platform because now they can pretty much handle just any transaction. So of course in those discussions you get them a bit more value as well. And you make the win-win scenario. And that’s the whole -- that's the whole, that’s been always the strategy and it’s now just more the pieces are there which you then have -- the customer has more to select from. And returns on those the value of those services are four to one to eight to one so the adoption rate just become more bullish about the embedded or the step up of the organic growth rate.

Andrew Jeffrey - SunTrust Robinson Humphrey

Does that mean that -- and I am thinking specifically of North America. But as you sell the platform does that mean that North America can go back or specifically to being more of a transactional business or can we start to think about it more in transactional terms as I know historically that hasn’t been the case?

Tony Aquila

Right it hasn’t been the case. But if you look at kind of our mix shift on subscription it went up because of those services are primarily sold that way. However, when the body guys use the mechanical assets that gain additional transaction fee which raises the revenue per transaction. But significantly it’s off the base of the subscription. And then the same happens when mechanical shops want to access the collision product we’re only going to be charging them a transaction fee. So they’re not doubling up on subscriptions.

Now maybe someday we give them a platform that accesses all and there is subscription fees running a range based on their usage, so kind of hybrids out. And that’s why you start to see the demand is going up because we have so much to offer mechanical shops the guy comes in he’s got a door latches problem and the glass is broken and before that would have been a transaction to another provider. And today with Solera they can do all that with us. So that’s why -- and we’ve gotten indications already as we start to look at these customer mixes and how we can bring pieces together for them at a value and perspective as well as volume perspective. It gives us a lot more confidence.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. And you mentioned some challenges in Europe and you called out a few countries, yet your EMEA growth accelerated in the quarter. Is that a function of revenue per household or is it a function of sort of market weighting? What’s driving, I guess I am asking about the auto claims business versus the perhaps the more holistic household facing business?

Tony Aquila

Yes. So like if we kind of take, if we look at like the UK I mean that business for the first time our portfolio or if you will our platform which expands, it mimics our strategy in the U.S. They are behind on a few pieces like glass and some other things, total loss in other elements that were in the process of dealing with, but if you look at that, that business came up about 9%, that had a 9% drag a couple of years ago during the crisis.

So we are turning those things around as we get the product mix and that spans from vehicle checking to SMR to collision and all of those uptick. Now there was some pretty bad weather patterns there, but nonetheless there is still a pretty solid if you will kind of 7-esq percent that’s in that business.

So it all kind of loops back to kind of what our outlook is and if you kind of look at, we got a explore platform which is the portion of the North American activity that business had similar characteristics, those group of businesses with some headwind on the collision side as that market consolidates, you probably read about a lot of consolidation of multi store owners and private equity going into that. However that offset by speaking up a whole bunch of mechanical shops and now it will be offset even further as we pick up a whole bunch of glass shops and we then end up with the most diverse networks in North America so instead of fighting it out collision shops we’re interacting with the provider we can offer on glass, mechanical body third party claims review.

The platform just so much and that’s why to your earlier point I think what you’re asking is does U.S. start to become a growth business. I think if you think back to what we said over the years you’re starting to see it come true.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. Thanks I appreciate it.

Operator

And your next question comes from the line of Tim McHugh with William Blair & Company. Please proceed.

Tim McHugh - William Blair & Company

Thanks. I guess can you give us a sense as I mean your hedge around but SRS willing into the numbers if a mid-teen start to grow still from an organic perspective a fair number to think of for them and if you want to estimate the impact?

Tony Aquila

I’d say in the mid-teens range and in the high singles on the dealership side or if it will, we’ll be introducing what that platform will be called to my comments with respect to meeting with car dealers.

We think the car dealerships are repositioning their offering in North America to be a full service offering like you see in Germany and other countries and that’s being driven by the OEMs and some other things. So that business is growing in the high single digits. We can get that continues and we think we can port that line with our acquisition down in Central America and some other things we’ve been picking up assets that’s kind of fit in that category so we can develop a global platform like we did on the collision side and we’ll continue to drive that.

So that kind of gives you the opportunity to grow and that will be a subscription transaction hybrid probably most likely a 70/30 mix of subscription in transactions particularly in the advance markets because we don't want the volatility. We give up a little bit of value and give it more towards the customer to drive some more loyalty but it stabilizes any risk at volume kind of what we experienced in the '08 era.

Tim McHugh - William Blair & Company

Okay. So for the overall there was the mid-teens kind of fair for Identifix but you’re saying high single digits for the dealers, does that blend those two together for overall SRS?

Tony Aquila

Correct.

Tim McHugh - William Blair & Company

Okay. And this is a bit of a nitpicky one but in terms of currency I guess you said prevailing exchange rates but there is change quite a bit in just the last month I guess so, is it -- as of today, is it quarter end I guess how should we think about that?

Tony Aquila

So we give you spot rates, and we try to shift, we have a good track record of kind of observing the EBITDA line because we have such a big human capital we can throttle up or down to kind of naturally hedge out some of the risk, but currency is definitely at its most volatile short term however I think long-term it probably doesn’t trade much differently than it is right now just for what that risk when you think of the European policy. So we have set ourselves up to be able to absorb some on the bottom line and of course the top.

Tim McHugh - William Blair & Company

Given where it sits today how much of a drag is that factored into your guidance for ’15?

Renato Giger

As Tony said, spot rate of today right, so if you used a (132 of 165) [ph] for the which are the two biggest one outside of the U.S, we said that every percent in change of these currencies eat away 0.5% revenue. So that means every percent change on the euro eats away about $6 million. So when it was at the beginning of July it was 136, right now it’s 132 down by itself which is 2% into a 16 -- into a $12 million.

Tony Aquila

And if you look at the forward curve it kind of gyrates but yet they are kind of projecting out right around where she is now, maybe a couple of cents down. Not that we necessarily always believe that but we try to have the ability to absorb some natural volatility if you will by shifting our resources around to be able to absorb that. And it’s a relatively large business now in the UK and so we don’t see that currency as volatile as the euro naturally and that kind of stabilizes some of the risk from our perspective too but we live in the world we live in. So some gyration can happen.

Tim McHugh - William Blair & Company

I guess a last question just on the balance sheet. I guess after you funded the acquisitions that closed early in Q1 and I guess if you took into account working capital and cash spread around the world, can you give us a rough number how much if you will excess cash do you have after the bond raise that kind of gives you some fire power going into the year?

Tony Aquila

Yes, so you are talking about from a tract perspective, is that your kind of question?

Tim McHugh - William Blair & Company

Yes, I mean I guess as we look, I mean there is a lot of cash on the balance sheet but I am assuming you can’t use all that. And so if we think about you having a potential this year besides cash flow, I guess how much you have sitting there that can be tapped for deals?

Tony Aquila

Yes, so look, I mean there is a couple of things to think about with respect to that. Obviously, we are very sensitive to managing and we worked hard and we paid a premium to kind of get ourselves into shift the bonds, to kind of get into a covenant like environment and then of course we drove down the cost of those and extended the duration and we are trading at near investment grade. But the way we kind of structured everything not just from tax efficiencies that we’ve driven in the business aside. We are about $0.80 on the dollar accessible at any given time. So we have a lot more access to cash than I think the typical company does with our distribution. But this is years of work in kind of making that. In addition to that, now that we’ve kind of got ourselves into the realm we want to as we go out and look at deals, our dry powder is actually in a lot of different, the obvious one that you just saw. But in addition to that, now that we’ve kind of got ourselves where we want, we can layer in some floating capital which we couldn’t do before because of the covenants that we had before. So our flexibility is pretty high and of course the ability to do offerings or whatever.

So we don’t see any issues there. We worked hard to get the status we have to keep the leverage low and obviously we are very focused on accelerating the improvement in the margins in the acquired businesses as well as the distribution to kind of really solidify our outperform the exit rate of organic growth that we are targeting.

Operator

And your next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Jeff Silber - BMO Capital Markets

Looking at your organic growth target for the end of the year. You finished this year, this past year at 4.7%, you are expecting to exit fiscal ’15 at 7% to 8%. Should we expect sort of I guess the straight line run rate roughly from 4.7% to 7%, 8%? Are there any fits and starts on a quarterly basis we need to know about?

Tony Aquila

Yes, I mean there is still some seasonality in the business. I mean we are trying to smooth that out by entering into the more of the South-East Asia corridor and pick up some of that which will smooth out some of the seasonality. But there is about 1 point to 1.25 point that will ebb and flow from quarter-to-quarter, depending on the weather patterns which is the impact of particularly in our transactional markets, which is still 60% of the business. So -- in most of the emerging and evolving markets, we tend to start with the transaction, it’s very good for our clients and of course when weather hits, it’s also very, very good for us.

In addition to that, the one thing that is in there is that tomorrow work with everybody on is we closed the I&S deal to get clearance from the government and everything took a little bit longer. So that was about a $5 million hit from where we projected to close as to where we closed, because we just closed that one. And we projected to close it before the end of the fiscal year. So, there is just -- it’s a big portfolio now, it’s well over a billion and you have a little bit of movement.

Jeff Silber - BMO Capital Markets

And can you just remind me in the current fiscal year which quarter you’re going to anniversary some of your larger acquisitions that’ll be moved as the organic growth number?

Renato Giger

SRS will be analyzed in Q2. We bought them last November so that was the first month so that’s when they’re going to anniversary.

Jeff Silber - BMO Capital Markets

Okay. And the other ones are relatively smaller?

Tony Aquila

Well, you’ve got nine deals throughout the year so you got -- again it’s getting back to the size of the company in the portfolio so you’re lapping stuff pretty regularly.

Operator

(Operator Instructions) And your next question comes from the line of Bill Warmington with Wells Fargo. Please proceed.

Bill Warmington - Wells Fargo

Good evening everyone. So, a couple of quick ones here at the top of the hour, the first is just wanted to adjust, make sure I am adjusting the balance sheet correctly for the acquisitions that closed after June 30th so just one ask with the cash and debt impact was on those.

Renato Giger

So we closed Tony said IMS by the end of July is around 300 million and that one being by the end of -- it was before of the fiscal year so total that in the balance sheet is correct there is adjustment from there it’s only on the cash side that doesn’t paid we closed the deals after.

Bill Warmington - Wells Fargo

Got you. And so what’s the cash impact then?

Renato Giger

It’s about 300 million.

Bill Warmington - Wells Fargo

Okay, got it. And then the other question was to ask you talked about a very active M&A pipeline. Just wanted to ask what your thoughts were on the potential of another transaction before the end of calendar 2014?

Renato Giger

We’re looking at quite a few deals right now we’re pretty selective obviously because we’re watching the mix and the timing and to meet our targets as well as our strategic desires to acquire certain assets globally. So I think we’re trying to have enough ways to accelerate or to operationalize the other assets we’ve got enough of the mix going on that we can work on a couple of different ends. But the appetite is growing. I mean you can see us, we’re absorbing deals and we’re improving those operating metrics in those companies at a faster pace than we ever have. And that’s because we’re really operationalizing Mission 2020 which is deploying a lot of capital to pick up these other lines of business around the if you will the home.

And in addition to that, I think what we will work very hard to achieve is to give you some TAM data around the households and our offerings in each of the advanced markets. So that you can kind of look at it, those $3.36 good what is the share of wallet in that house in that country and so I think it can be easier for you guys to model Solera. And we’ve migrated the business into a whole new category if you will so it could be a little bit more difficult to you guys and we’ll work to kind of make that easier. But the appetite remains constant and we did nine deals in ’14 we might take a little breather here for a quarter or so as we focus on IMS and the expansions, the geographic expansion of the SRS assets and a few of these little tuck-ins that we have been concentrating on. But the deal flow will be relatively steady.

Bill Warmington - Wells Fargo

Got it. All right, last question was wanted to ask what kind of lift in revenue per household is embedded in the 2015 guidance?

Tony Aquila

It’s about 7%-esq in the advanced markets if you will it just all kind of links together. It’s pretty tight and I think what we just need to work on is giving you a way to kind of understand this new category and what the addressable market is.

Operator

And there are no further questions at this time. A replay will be available until 11.59 p.m. EDT on September 9, 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, 69559419, I repeat, 69559419. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. To you all, have a great day.

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Source: Solera Holdings' (SLH) CEO Tony Aquila on Q4 2014 Results - Earnings Call Transcript
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