IHS' (IHS) CEO Jerre Stead on Q4 2015 Results - Earnings Call Transcript

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IHS Inc. (IHS) Q4 2015 Earnings Conference Call January 12, 2015 8:00 AM ET

Executives

Eric Boyer - Vice President, Investor Relations

Jerre Stead - Chairman and Chief Executive Officer

Todd Hyatt - Executive Vice President and Chief Financial Officer

Analysts

Bill Warmington - Wells Fargo

Andrew Jeffrey - SunTrust

Brandon Dobell - William Blair

Gary Bisbee - RBC Capital Markets

Peter Appert - Piper Jaffray

Andrew Steinerman - JPMorgan

Manav Patnaik - Barclays

Jeff Meuler - Baird

Jeff Silber - BMO Capital Markets

Anj Singh - Credit Suisse

Andre Benjamin - Goldman Sachs

Toni Kaplan - Morgan Stanley

Paul Ginocchio - Deutsche Bank

Joseph Foresi - Cantor Fitzgerald

Operator

Good day, ladies and gentlemen and welcome to the IHS Inc. Quarter Four 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Eric Boyer, Vice President of Investor Relations. Please go ahead.

Eric Boyer

Good morning and thank you for joining us for the IHS fourth quarter and fiscal 2015 earnings conference call. We issued our fourth quarter earnings release earlier this morning. If you do not have a copy of the release, it is available on our website at ihs.com. Some of our comments and discussions on the quarter are based on non-GAAP measures. Our non-GAAP or adjusted numbers exclude stock-based compensation, amortization of acquired intangibles and other items.

Our earnings release includes both our GAAP-based income statement and statement of cash flows and reconciliations to the non-GAAP measures discussed during this call. These reconciliation schedules are included in our release and can also be found on our website. The non-GAAP results are a supplement to the GAAP financial statements. IHS believes this non-GAAP presentation and the exclusion of these items is useful in order to focus on what we deem to be a more reliable indicator of ongoing operating performance. As a reminder, this conference call is being recorded and webcast and is the copyrighted property of IHS. Any rebroadcast of this information in whole or in part without the prior written consent of IHS is prohibited.

Please keep in mind that the conference call, especially the discussion of our outlook, may contain statements about expected future events that are forward-looking and subject to risks and uncertainties. Factors that could cause actual results to differ and vary materially from the expectations can be found in HIS’ filings with the SEC and on the IHS website.

After our prepared remarks, Jerre Stead, IHS Chairman and CEO and Todd Hyatt, EVP and Chief Financial Officer will be available to take your questions.

Before we begin, I wanted to point people to our supplemental material on our Investor Relations website regarding our new financial reporting, including historical information, discontinued operations and our recent acquisitions.

With that, it is my pleasure to turn the call over to Jerre Stead. Jerre?

Jerre Stead

Thank you, Eric. Good morning and Happy New Year to everyone. It’s a pleasure to be with you this morning to share our results from the fourth quarter and for fiscal 2015. With the backdrop of an environment of significant headwinds in one of our largest end markets; energy, we made strong progress in increasing operational efficiency and effectiveness by moving to a global, commercially-based organization focusing on our core strengths and simplifying our portfolio and our priorities.

In the second half of the fiscal year, we began to execute our new capital allocation strategy. We implemented our share buyback program and started to reduce shares for equity compensation, and subsequent to the closing of our 2015 fiscal year, we announced two acquisitions that both reflect our new acquisition model. Ultimately, we delivered Q4 and full year results in line with our expectations.

Since my return in June, we have moved very quickly to take steps that are within our control to drive improved operational execution, financial performance, and shareholder returns. These steps include aligning our organizational structure by industry vertical, embedding our sales organization within the verticals in driving a greater pay for performance incentive structure, instilling more discipline and governance around value-based pricing through tighter standardized processes and controls. With capital allocation, we refocused our efforts on larger M&A transactions and started an ongoing allocation of capital through share buyback program, and we’re committed to reducing the amount of shares being granted to employees by half. We have also conducted a thorough portfolio evaluation and are in the process of divesting certain non-core assets. My great thanks to my colleagues for all the hard work of 2015 and for the great start to 2016 and continuing to drive greater focus and urgency in everything we do.

For Q4, our results were in line with our expectations. The high level financial results which include discontinued operations in the period were revenue of $589 million, up 1% from Q4 of 2014, adjusted EBITDA was $200 million with the margin of 33.9% our highest to-date and represented expansion of 190 basis points year-over-year. Adjusted EPS was $1.68 flat over the prior year.

In terms of our core industry verticals, resources, which include our energy and chemicals teams continues to experience declining subscription growth due to industry dynamics. Our overall resources’ organic growth was also negatively impacted by our non-subscription business. Despite this, we remain encouraged by our performance relative to the overall energy market. We like our industry leading energy assets, which provide tremendous value to our customers and strong margins to our financial performance. In transportation, which includes automotive, maritime and trade, and aerospace and defense teams, we continue to see the benefits of operational improvements and solid acquisition of acquired assets over the last several years reflected in the organic growth of 9% in the quarter and for the full year. Our CMS growth continued to benefit from a prior acquisition and stable performance in the core business.

Now moving on to acquisitions, at the end of December, we completed and announced the acquisition of CARPROOF for $460 million. CARPROOF is Canada’s top source for used vehicle data for the automotive industry and provides us the opportunity to extend our market leading vehicle history report footprint into Canada. We are excited by the multiple growth drivers of the CARPROOF business as well as the accelerated product development we expect by combining the capabilities of CARPROOF and Carfax. CARPROOF has been repeatedly recognized as one of Canada’s best managed companies in Deloitte’s Technology Fast 500 and Fast 50.

On January 8, we signed a definitive agreement for the acquisition of Oil Price Information Service, or OPIS for $650 million. The OPIS acquisition closing is subject to regulatory approval, which we expect by the end of February. OPIS is the most complete source for U.S. refined petro pricing data, news, and analytics. OPIS information primarily serves the downstream energy market and helps to further diversify our energy portfolio. OPIS has continued to grow through the challenges in the energy markets due to the must have nature of its information and analysis for commercial contracts into several trades. Specifically, OPIS is the leader in the rack and retail downstream refined products pricing, and it also has the strong position in the spot market. We expect to continue to see strong growth in these areas as well as future growth contributions from international downstream spot market pricing. Both of these acquisitions provide us with high EBITDA margins and strong organic growth.

We have announced that we plan to divest our OERM and GlobalSpec businesses which we have now placed into discontinued operations. We will complete the sales transactions in the first half of our fiscal year. As we discussed at Investor Day, we took the decision to sell these businesses to further focus our company around core information and analytic assets. These dispositions coupled with the CARPROOF and OPIS acquisitions result in a stronger, more focused portfolio. We are pleased with this progress, and we will continue to evaluate the long-term potential and strategic fit of all of our assets.

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

Todd Hyatt

Thank you, Jerre. Before I discuss financial results, I want to briefly review our reporting changes we discussed at Investor Day. Effective this quarter, we have moved our new reporting segment. Excluding discontinued operations, the segments are: resources, which includes our energy and chemicals product groups; transportation, which includes our automotive, maritime and trade and aerospace, defense and security product groups; and consolidated marketing solutions, which includes our product design, economic country risk, and technology media and telecom product groups.

In our press release and in the supplemental deck posted to our website, we have included quarterly financial information for these segments for 2015 and 2014 and annual information for 2013. Effective this quarter, we have also moved our OERM and our GlobalSpec businesses to discontinued operations. In our press release, we have provided a schedule to reconcile our total or all-in financial results to our financial results, excluding discontinued operations.

Turning to our financial results, including discontinued operations, for the fourth quarter revenue was $589 million, an increase of 1%. Adjusted EBITDA was $200 million, an increase of 7% and represented margin expansion of 190 basis points and adjusted EPS was $1.68, flat to the prior year. Relative to revenue, total revenue growth including discontinued operations was 1% which included organic growth of minus 1%, acquisitions of 4%, and an FX drag of 2%. Excluding discontinued operations, organic growth was flat and included 3% subscription growth and minus 10% non-subscription. In the quarter, subscriptions represented 79% of revenue.

Looking at segment performance, transportation growth was 12% which included 9% organic, 4% acquisitive, and minus 1% FX. Organic revenue growth was comprised of 11% subscription growth and 2% non-subscription growth. We continue to see very strong growth in our automotive businesses and stable growth in the other transportation businesses. Resources growth was minus 9% which included minus 8% organic, 1% acquisitive, and minus 2% FX. Organic revenue growth was comprised of minus 3% subscription and non-subscription of minus 30%. As expected, resources’ organic subscription revenue turned negative in the quarter as our reported revenue growth reflects the earn-out of negative year-over-year subscriptions bookings we have seen throughout 2015. On a constant currency basis, our year-to-date resources organic subscription base which represents the annualized value of subscription contracts has declined approximately $35 million or about 5% on a subscription base of approximately $750 million. The Q4 subscription base reduction was $15 million. CMS growth was 5% which included minus 2% organic, 9% acquisitive, and minus 2% FX. Excluding discontinued operations organic growth was 3% including 4% subscription and 2% non-subscription growth.

Turning now to profits and margins, Q4 adjusted EBITDA totaled $200 million, up 7% versus a year ago. Our adjusted EBITDA margin was 33.9% in Q4 and as expected we delivered strong margin growth in the quarter, up 190 basis points versus last year. Regarding segment profitability, we had strong margin improvement in all segments in Q4 as we completed the transition to our business line operating model and simplified and reduced our centralized marketing, sales support and shared services cost structures. Transportation’s adjusted EBITDA was $79 million with a margin of 40%, up 220 basis points versus last year in part due to strong seasonal revenue and lower marketing spend. Resources adjusted EBITDA was $91 million with a margin of 42%, up 143 basis points versus last year. CMS adjusted EBITDA excluding discontinued operations was $34 million with a margin of 24%, up 530 basis points versus last year due to the acquisition of RootMetrics and improved operational performance.

Turning to adjusted EPS Q4 increased to $1.68 per diluted share, flat over the prior year. Adjusted EPS benefited from solid operating performance what was negatively impacted by higher depreciation expense from capital expenditures and higher interest expense from our prior year debt financing. Our key financial results for the full year 2015 include revenue including discontinued operations of $2.31 billion, up 4% over the prior year with organic growth of 1%, acquisition growth of 5% and negative 2% FX. Excluding discontinued operations, organic growth was 2% with subscription growth of 5% and non-subscription growth of minus 9%. Also excluding discontinued operations, subscription represented 81% of total revenue. Adjusted EBITDA including discontinued operations was $744 million, an increase of 8% and adjusted EBITDA margin was 32.2%, up 130 basis points versus last year and adjusted EPS including discontinued operations was $6.07, up 3% compared to the prior year. Stock based compensation expense was $135 million, down from the prior year amount of $167 million. Our full year free cash flow was $490 million and represented a 66% conversion rate. As we have discussed we are expecting free cash flow conversion to continue in the mid-60s going forward.

Turning to the balance sheet, our year end debt balance was $2.1 billion which represented a gross leverage ratio of approximately 2.8 times and we closed the year with $293 million of cash. Finally in the quarter, we repurchased $102 million in shares bringing our full year buyback to $250 million. We expect to repurchase an additional $110 million in Q1 which will bring our total repurchase amount to $220 million against our $500 million share repurchase program.

Moving to discontinued operations, we have completed the external marketing process for the disposition of our OER&M and GlobalSpec businesses and have received initial indications of interest for these businesses. Detailed due diligence with potential buyers is scheduled over the next two months. We are targeting closing the sell of these businesses in the first half of our fiscal year. As Jerre said earlier, we closed the acquisition of CARPROOF on December 25 and we also signed a definitive agreement for the acquisition of OPIS on January 8, with closing expected by the end of February. The CARPROOF purchase price of $460 million represents a forward revenue multiple of 6.5x times and forward EBITDA multiple of 16x. CARPROOF is a high growth, high margin business and we expect mid-teens growth in 2016 and margin of 40%. This acquisition carries an attractive return profile due to its high growth and synergy opportunities with our Carfax business as well as its attractive Canadian tax rate. It also allows us to efficiently utilize our international capital.

The OPIS purchase price of $650 million represents a forward revenue multiple of 8x and forward EBITDA multiple of 17x. The acquisition carries an attractive return profile due to its high growth as well as tax basis step-up equal to the purchase price, which will contribute approximately $150 million of value over the life of the asset. Taking this tax attribute into account, the implied forward EBITDA multiple is 13x. We expect OPIS to deliver low double-digit growth in 2016 and margin in the mid-40s. We expect 2016 results to include 11 months of CARPROOF and 9 months of OPIS. The 2016 in year revenue and adjusted EBITDA impact for CARPROOF and OPIS is approximately $130 million and $55 million respectively, with post financing adjusted EPS accretion of $0.25. We expect 2017 adjusted EPS accretion to be approximately $0.45. We financed CARPROOF with the combination of international cash and bank debt and plan to finance OPIS with all bank debt. Subsequent to OPIS financing, our debt balance will be approximately $3.1 billion and our gross leverage will be approximately 3.9x. We plan to de-lever throughout 2016 and we will pause our share buyback as we de-lever. We expect leverage to return to the low-3s by year end 2016.

Moving to 2016 guidance, our guidance is on an all-in basis and assumes no further acquisitions, currency movements, pension mark to market adjustments or unanticipated events. We have included a schedule in our press release, which provides a walk forward of guidance, excluding discontinued operations and including CARPROOF and OPIS. The 2015 full year impact of discontinued operations is revenue of $130 million, adjusted EBITDA of $48 million and adjusted EPS of $0.40. The in-year 2016 impact of CARPROOF and OPIS is $130 million of revenue, $55 million of EBITDA and post-financing EPS accretion of $0.25. In total, for 2016, excluding discontinued operations and including CARPROOF and OPIS, we expect total revenue of $2.3 billion to $2.38 billion, with organic growth of 0% to 3%, including organic subs growth of 2% to 3% and neutral organic non-subs growth.

Relative to subs, we expect transportation to continue to perform in line with 2015 growth rates. Resources growth will be negatively impacted by the earn-out of the 2015 energy sub-base decline of 5% and this will result in resources organic subscription growth in the negative mid single-digit range. We expect continued pressure on our energy business in the first half of 2016 with some stability and improvement in the energy end-market in the second half of 2016. Our experts are forecasting the price of oil to bottom in Q1 and to end the year in the $50 range. Relative to non-subs, we expect stable year-over-year performance. Also, embedded in our guidance is a negative FX headwind of approximately 1%. Our total revenue guidance range is wider than normal to account for the continued energy market uncertainty.

We also expect adjusted EBITDA of $770 million to $800 million. This EBITDA represents reported margin expansion of approximately 150 basis points and core margin expansion of approximately 100 basis points at the midpoint. Core margin expansion excludes discontinued ops and excludes the CARPROOF and OPIS acquisitions. The 100 basis points of core margin expansion is expected to come as a result of the realignment to our new business line structure and other operating efficiencies. We also expect adjusted EPS of $6 to $6.30; depreciation of $100 million to $105 million, which reflects higher capital spend over the past few years; amortization of $170 million to $180 million, which is comprised entirely of purchase price amortization; interest expense of $100 million to $105 million, with all-in weighted interest rate of approximately 4%. This reflects higher interest due to full year impact of our $400 million floating to fixed swaps, higher floating rate cost due to the recent rate increases and elevated leverage ratio and higher debt balance; stock-based compensation expense of $120 million to $130 million; and effective GAAP tax rate of 21% to 22% and an adjusted tax rate of 27% to 28%, which includes a tax rate on adjusted items of approximately 33%; and fully diluted average shares of approximately 68.5 million, which assumes completion of $220 million of our $500 million share buyback authorization by the end of Q1. In 2016, we expect a similar seasonal pattern for our financial results, with the exceptions of [indiscernible] being in Q1 this year versus Q2 in 2015 and the biennial Boiler Pressure Vessel Code product not being in our Q3 results in 2016.

In summary, we are pleased with strong growth in our transportation segment and expect this to continue through 2016. However, we expect to continue to operate in a lower growth environment due to energy market headwinds. Our new business line structure provides us with greater opportunity for business simplification and efficiency, and we will continue to deliver strong margin expansion and profit in this lower growth environment. And we will continue to deliver solid cash flow, which will provide us continued capital structure flexibility.

With that, let me turn the call back to Jerre.

Jerre Stead

Thanks, Todd. We finished 2015 executing our committed changes. We completed the transition of aligning our businesses by industry vertical and making other improvements that are enabling us to operate with a greater sense of urgency and focus. We are very pleased with our two accretive acquisitions that we announced, which will extend our leadership of the downstream energy and the Canadian vehicle history reports market. And finally, the strength of our transportation and CMS businesses and the relative resiliency of our energy business will enable us to continue to grow revenue, EBITDA and free cash flow in 2016 despite the challenging energy end market.

With that, Todd and I are ready to answer questions. Let’s start the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Bill Warmington with Wells Fargo. Your line is open.

Bill Warmington

Good morning, everyone.

Jerre Stead

Good morning, Bill.

Bill Warmington

We appreciate the – all the transparency around the discontinued ops and acquisitions and the segmentation, especially with the core business in the guidance. Thank you. So first question, just wanted to ask about the – on the 2016 forecast, you were giving some color around resources, I thought it might be helpful just if you could review the organic growth rate assumptions in each of the segments, resources, transportation and consolidated markets and solutions?

Jerre Stead

Well, we will do that, Bill. I will start and Todd will pick up. As Todd said, we put a wider range around our revenue guidance for 2016, because of the uncertainty of the oil in the energy business. We will hope as the year continues, we will be able to tighten that. As I said, we feel very good about transportation. And Todd will give you that color in just a second, and we will also make sure you are clear on what we expect at this point out of the resources. Todd, do you want to start?

Todd Hyatt

Yes, Bill. I mean, we are not going to provide specific numbers for every segment, but I think I gave a sense of the color for each of the segments. So, if we look at transportation, very high growth throughout 2015, double-digit subscription, and we expect that growth to continue. So we expect transportation, feel very good about how we closed the year, feel good about the forward indicators in transportation, fully expect to continue to have the levels of growth that we saw throughout 2015. Resources on subscription, the negative sub base performance in 2015, which we had negative 5%, sub base net sales growth of 2015 that’s going to earn out in 2016. So, if you take that and couple it with a flat sub base in 2016, that would be a negative 5%. Now we did say or I said, we expect some pressure in energy in the first half of the year, and we expect a more stable environment in the second half. We would expect non-subs and energy, certainly the performance year-over-year is going to improve. We have talked about seeing a relatively stable level of non-subs revenue and energy on a sequential basis throughout 2015, although significant year-over-year impact versus 2014. We would expect in 2016 to have some level of stability carrying forward from 2015, and then we would expect modest improvement in CMS, and I think if you take those and put them together, you end up with the overall ranges that we guided to in the call.

Jerre Stead

Thanks, Bill. Next question.

Operator

Thank you. Our next question comes from the line of Andrew Jeffrey with SunTrust. Your line is open.

Andrew Jeffrey

Hi, guys. Good morning.

Jerre Stead

Hi, Andrew.

Todd Hyatt

Hi, Andrew.

Andrew Jeffrey

Congratulations on really kind of transforming this business, I think at least relative to the way the Street has thought of IHS in the last 12 months. I wonder from a high level, Jerre, given all the moving parts, would it be accurate to kind of schematically characterize IHS’ business? If I look at resources, it’s clearly directly tied to energy CapEx and indirectly tied to the price of oil, so let’s call it, cyclical transports maybe somewhat countercyclical, and that the end markets benefit from falling oil price and I am thinking about auto. And then consolidated is being kind of, I guess relatively cyclical or relatively neutral I guess to the economic cycle. Is that – is it reasonable to kind of bucket your business in that way or is that too simplistic?

Jerre Stead

No, it’s reasonable, it’s simple. And actually, for the first time and we actually laid this out 8 years ago in my office, so I am so glad to have this call today. We were able to get through everything we had to accomplish to be able to give this kind of reporting. And if I were to think about it just as a high level, I think you are quite accurate with your thoughts. The only thing I’d temper that with I think is that automotive, because of our big strength in used autos as well as all of the new, we are really solid. I would say that’s kind of a cyclical period. And in fact, I think that applies for transportation in total. The addition of OPIS helps stabilize on the downstream business, actually the more volatile the business, the better OPIS will do from a pricing index standpoint. So that was the reason we’ve made that move to strengthen our sales and start to neutralize some of the negative impact. CMS, I would agree, particularly our traditional engineering business, which was actually 50% of the company when we took it public in just over 10 years ago, even in the worst downturn of 2009 and ‘10, that grew organically 4% or 5%. With the investments there, we expect that to do better in the future. So I think it’s a very good way of you to think about it. Thank you. Next question?

Operator

Thank you. Our next question comes from the line of Brandon Dobell with William Blair. Your line is open.

Brandon Dobell

Thanks. As you think about the resources space, it seems like you are pretty confident about the back half of the year both from a revenue perspective and most – more importantly, from a new bookings perspective, is there anything sales wise operationally that gives you that excess confidence relative to where commodity prices are right now and how kind of your customers are acting these days?

Jerre Stead

I will start, we are not confident. That’s why the range is the widest it’s ever been. I will also tell you that I told our team, I am going to be here at least until we enjoy the – get rid of the downturn and start enjoying the upturn of energy and oil prices, which might mean I am here 3 year or 4 years or 5 years or 6 years, I don’t know. But I am telling you, we will see it come back. And when it does, please note that Q4 in resources EBITDA margin was 42% despite the most severe downturn we have experienced in years. So that feels good. Todd will give you color, but right now as Todd said, our team which has been very accurate over the years calls the bottom in the Q1 and expects the year to exit somewhere in 50 or thereabout, but not confident. And that’s why we gave the wide range. The last point before Todd picks up, we’re also committed and you heard Todd say this, to delivering the EBITDA and the margins as we have set out with a much tighter guidance on those. Todd?

Todd Hyatt

Yes. I mean I think one of the things that when we look at the second half of the year we would have completely cycled through all of the accounts. So we are still cycling through accounts now. And as companies have made strategic shifts and coverage, that has impacted us and we have talked about that in the past. If a company drops coverage, if they retrench, that has been an impact. And I think as we have cycled through over the year, we – when we look in the forward lens, we see a lot of bad activity really I think companies now getting aligned strategically with their forward strategies. There still will be some level of economic challenge certainly in the tail of the independent business. But when we look out, we do see a couple of things. We see from our experts perspective an improving industry in terms of price point per barrel of oil in the second half of the year, so that will be a good thing. And we see a lot of the customers having cycled through those accounts, a lot of those changes having been made and now reflected in the numbers.

Jerre Stead

Thanks. Next question.

Operator

Thank you. Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Your line is open.

Gary Bisbee

Hey guys. Good morning. A question on the transportation business and I guess in particular auto, can you give us a little color on the drivers of growth there, I think with U.S. auto sales having been so strong, there are some concerns that, that might be peaking and I know you have said in the past not a lot specifically transaction based with the exception of Carfax, but how would we think about penetration of the offerings, new products and what drives the sustainability of that growth? Thank you.

Jerre Stead

Todd, do you want to pick that up, that’s – happy to comment on that.

Todd Hyatt

Well, with autos we have seen growth across the entire portfolio. Growth has been especially strong in North America, as you pointed out. In the IHS legacy product where we have products that provide supply chain management capability in terms of production forecasting I mean that’s important information for part suppliers, for OEMs. And so we have seen good growth there. I think the team, Edward and team have done a good very good job of rolling out new products and capabilities and analytics around the automotive offerings, providing OEMs ability to better manage their dealer networks, to manage and plan their marketing campaigns and their incentive spend. And so we continue to see good strength there. We certainly have benefited from recall activity. We expect that to continue in the used car part of the business where we look at Carfax and now very excited about CARPROOF as well. I mean, that’s a business that has great underlying information. So the VHR business has been a good strong business. But that’s an area where we had new products. We have had used car listing product. I think there is opportunity for a valuation product that I know would be CARPROOF is rolling out in Canada. So a lot of new products there certainly benefit from the industry dynamics, but as Jerre said, because we do have this end to end view of the supply chain and because we operate in both used and new cars, there are some countercyclical elements to our business.

Jerre Stead

Thanks Gary. Next question?

Operator

Thank you. Our next question comes from the line of Peter Appert with Piper Jaffray. Your line is open.

Peter Appert

Thanks. Good morning. So the margin performance in resources, I think has been very impressive in the context of the revenue pressures you guys are seeing, so I am just wondering how you think about the risk to margin in ‘16 given that the continued pressure from a revenue perspective, I guess this is in the context Todd of, you have done so much already, what’s left to do from a protecting the margin standpoint?

Jerre Stead

Thanks Peter. I will start and thanks for the comment. We worked very hard, I commented on it, Todd commented on it, to get the productivity and the improvements that you are seeing, that you saw in Q4 and we have built those into 2016. I feel very good with a high degree of confidence with our entire team to be able to deliver the kind of margin guidance that we gave you despite some of the uncertainty in the energy business. And as I commented resources was 42% EBITDA in Q4. Todd will give you kind of the split-out of how much of it is controllable within the businesses and how much of it is at the corporate level and what we have done. Todd?

Todd Hyatt

Yes. When we look at the margin profile of the segments, about two-thirds of the costs are directly controlled within each of the segments. So that’s product management, product development, sales, marketing and then about a third of the costs are common costs that are allocated, things like occupancy, finance, HR, IT. We have done a good job in the back office space and I think given the scale that we built as a company, we see opportunity to continue to drive efficiency in the part of the business that the third that gets allocated into the segments. I think within – when we look at energy, we look at the margin performance in the year, part of that margin performance has been adjusting resourcing levels to the activity levels in the business. So if we look at non-subs and we look at the lower level of consulting, while it’s not purely variable, there has been some opportunity that we have had to offset some of the revenue underperformance. But we feel really good about the operating model that we have in place and we still believe that we have opportunity within the business to drive a better cost profile in all of our segments. And I think with the transparency and visibility that each of the business line owners have now I fully expect that we will continue to drive successful margin. And I know Jean and his team are very much focused on it in energy.

Jerre Stead

I would just add one thing. We increased Q4 all-in by 190 basis points for our highest margin reported ever as a public company on almost flat revenue. And so the teams are doing a great job and we feel really good about the confidence level to deliver that. That’s why I said earlier, when we see energy come back and it will we will be delivering great results across the board. Thanks Peter. Next question.

Operator

Thank you. Our next question comes from the line of Andrew Steinerman with JPMorgan. Your line is open.

Andrew Steinerman

Hi. Todd, would you be willing to give us gross margin in the fourth quarter, excluding discontinued operations just so that we could understand how the business without just continuing operations is moving into ‘16?

Todd Hyatt

I am looking at the tables. So, let me look at my group of people here. So gross margin, no, he wants gross margin. Andrew, let me get back and I will be happy to provide that to you, but I don’t have it off the top of my head, but I will provide it. We can make sure we file it somewhere.

Jerre Stead

Thanks, Andrew.

Todd Hyatt

We should have gross margin by excluding discontinued ops. I mean, Andrew, when I think of the cost structures of HIS, because we do get the question about gross margin, really the cost structures for this type of business, which is – has significant operating leverage, a level of primary cost being people related cost, we really think in terms of the functional cost buckets. So, we think in terms of product, marketing, sales, development, IT, finance etcetera. So, it’s not, to be honest, an item that we immediately focus on, but by the end of this call, I will give you the number.

Jerre Stead

Thank you. Next question.

Operator

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Your line is open.

Manav Patnaik

Yes, thank you. Good morning, gentlemen.

Jerre Stead

Good morning, Manav.

Manav Patnaik

Good morning. Two-part question on energy basically, so Todd, you talked about the incremental 15 million decline in the sub space and you also talked about you sort of hadn’t cycled through all the accounts yet. So, I was just wondering if you could provide a little color on the components of that decline and how much is left in the cycling through? And then Jerre, just for you, I mean, by buying OPIS, I was just curious if that sort of removes you from what you said it before in terms of trying to go after that, because I guess that would probably create some antitrust issues in our view. So, I was just wondering if you had any comments on that?

Jerre Stead

I will start and then thanks, Manav and then have Todd pick up. Plats is a wonderful business that we have great respect for, that’s not for sale, never has been and never will be. Todd?

Todd Hyatt

So, when we look at the sub base and talk about the pressure in the sub base that we have seen and we talked about this throughout the year, I mean, I would call out really three primary areas. One would be national energy companies that have retrenched into their core markets and have dropped global coverage. And then within the U.S. in the independents, I think once again with some of the larger independents, a focusing of coverage primarily in the U.S. and not outside the U.S. and then in the long tail of independents, really financially distressed companies and those have really been the themes through the year. They are the themes we continue to see. As we go through 2016 to talk about cycling, I think we will see some impact in Q1. When we look at the – at the forward view of sales pipelines and forecasts, we believe that, that starts to moderate. And then coupled with the industry environment, we will see a stable performer as we go into the second half of the year.

Jerre Stead

Thanks, Manav. Next question.

Operator

Thank you. Our next question comes from the line of Jeff Meuler with Baird. Your line is open.

Jeff Meuler

Yes, thank you. I was hoping could you talk about your price realization trends in the busy resources contract renewal season? And then where does – how does $50 oil by year end fall into the guidance range of the commentary for the resources booking outlook in terms of stabilization? At the low end, do you require $50 oil or $50 contemplated at the midpoint, any help there? Thank you.

Jerre Stead

Okay, thank you. Todd?

Todd Hyatt

So, in terms price realization and energy, I mean, obviously in this environment, we don’t – we are not pushing prices. So, there are accounts where we have sent out renewal notices and we have been targeting pricing in energy in the 2% to 4% area. And what – repeat the second part of the question?

Jerre Stead

As the year ends with our comments about $50, what would the impact be in the cycle?

Todd Hyatt

Well, I mean I think we have an energy industry that has retrenched based on where prices have moved to. And in that environment, we have companies who are making decisions so that they can remain – retain a level of profitability. So certainly, as prices move up, that provides a much more stable renewal environment for us. And then at some point, there is a tipping point where companies actually start to invest and evaluate opportunities in other geographies for exploration and production.

Jerre Stead

Which is the key. Thank you. Next question.

Operator

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber

Thank you so much. Just wanted to step back and look at your product portfolio, now that you have been – we will soon close the OPIS purchase and finish CARPROOF and you have got a couple of properties that you are marketing for sale. Are you happy with that product portfolio now as it stands? And if not, where do you think you would be making some additions and/or subtractions? Thanks.

Jerre Stead

Thanks very much. Great question. We are pleased with our progress, very pleased with the acquisitions. Even going back to Peter’s question just for a second on margins, both of those businesses bring strong, strong margin improvement for us, including mid-40s with OPIS. So that will help stabilize the margin and resources in 2016. We owe to our shareowners a continuous view and will always have that and are we optimized to the very best of our ability both from a acquisition standpoint as well as any further changes in the portfolio. The thing we didn’t talk about this morning, there is a lot going on inside of the portfolios too. Example, TMT is reducing by well over half the number of products we have been offering and shifting aggressively from transactions to subscription base. So, there is a lot going on inside, too. Todd?

Todd Hyatt

Yes. Just to follow up on that. When we look at what we have done with the portfolio, we basically had a business line that was heavy enterprise software and then another one that had a heavy advertising element to it. And with these acquisitions, these are very rich deep information service analytic businesses. So, I do think that at a portfolio level, this is a much stronger company and certainly the forward growth prospects that we have from the portfolio changes are significantly enhanced. And then these assets, when we look at CARPROOF sitting in automotive and the opportunity from a product perspective with Carfax that we have now with two very talented teams and then we look at OPIS and we look at really the balancing of the energy portfolio, pricing being an important part of that industry and now having an element of downstream in that portfolio, I think it’s a much stronger, healthier and lower risk portfolio.

Jerre Stead

It will continue to focus on the analytics end, which both of these acquisitions provided us. So, great progress, feel very good about where we are at, and we’ll continue to do our best to enhance it in the future. Thank you. Next question.

Operator

Thank you. Our next question comes from the line of Anj Singh with Credit Suisse. Your line is open.

Anj Singh

Hi, good morning. Thanks for taking my question. Jerre, one on the recent M&A, I think in the press release for OPIS, you had cited that you are looking to add commodity coverage areas in the future to the ones that OPIS currently covers hoping you can discuss some of the areas you may expand into. And then perhaps if you could discuss what drew you to OPIS versus the other asset that’s out there considering it’s slightly more comprehensive commodity coverage? Thanks.

Jerre Stead

No, good question. Thank you. The big focus on expansion is on international. OPIS is very strong in the U.S. in fact, very strong. What we bring to that party, of course is a great international footprint and a great international set of salespeople. So that’s where we would expect to see that. We actually have been working to acquire OPIS for 5 years and we are very pleased to be able to complete it incidentally on my birthday, January 8. So a 5-year birthday present that will fit and fit well. We own the entire business and feel very good about that. The other businesses that you referred to, we will see how that all plays out. We never comment on potential acquisitions. But OPIS was a critical one for us that we have always hoped to have in our pocket, if you will because of their great strength both from an analytics standpoint but on the downstream. Thanks for the question.

Operator

Thank you. Our next question comes from the line of Andre Benjamin with Goldman Sachs. Your line is open.

Andre Benjamin

Thanks. Good morning.

Jerre Stead

Good morning.

Andre Benjamin

I think in the guidance you have said that CARPROOF should grow about mid-teens and OPIS should grow low-teens, so wondering how that growth rate compares to the organic growth of both those businesses in the last few years and could you help us better understand the drivers that you are assuming and how much of that’s already visible due to subscription versus other things that need to happen?

Jerre Stead

Thanks for the question. Todd?

Todd Hyatt

In the case of CARPROOF, I mean CARPROOF has had extraordinary growth over the last 5-plus years, actually over the last decade. So that growth is consistent, but slightly lower than what they have seen in the past. And part of that the numbers get bigger and so the growth rate not quite as high. OPIS has been very, very solid, very stable for a long period of time in this low double-digit or call it 9% to 12% organic revenue growth. The forward view of that, we have a good level of confidence in terms of the ability to sustain those growth levels. When we look at OPIS, it is 90-plus percent subscription. OPIS had a very strong sales year in 2015 and closed the year very well. So I think we are encouraged. OPIS has, along with a great rack business in the U.S., very strong growing at a good spot market business, has a very high growth retail business as well. So when we look at CARPROOF, CARPROOF has driven significant additional VHR volume in the Canadian market. I think the CARPROOF management team has done a great job of transitioning CARPROOF from almost a compliance requirement to a value add for the car dealers in Canada. And we see opportunity to continue to drive growth in the core VHR as well as new products within CARPROOF.

Jerre Stead

Thank you. Next question?

Operator

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open.

Toni Kaplan

Hey, good morning.

Jerre Stead

Good morning Toni.

Toni Kaplan

So it sounds like from Todd’s comments the declines in bookings in resources have been driven largely by the coverage reductions, just want to ask if how retention rates are comparing versus prior years and also just to make sure I understand on pricing, it sounds like you are expecting sort of positive in some cases, maybe downward price adjustments in some cases, so we should think flattish?

Jerre Stead

Go ahead Todd, I am...

Todd Hyatt

Yes. I think on the pricing in energy, 2% to 3%. We have not reduced prices in energy. Companies have made decisions in terms of coverage to reduce the overall revenue, but we have really maintained price integrity in the energy business, I think from a credibility perspective, from ensuring that our customers are equally situated in terms of our BOE pricing model. So if companies have the same level of production and they are carrying the same level of coverage, important that those companies that there is comparability in the pricing. So in terms of as I said the price impact primarily or the revenue impact primarily being coverage change, if we were to look at renewal rates from just a customer, so how many customers did we lose, I think the only customers that we would have lost would be those who went bankrupt or had significant financial difficulties. And once again, this would be more in the tail of the independence. But we have retained our customers through this process, but some of the revenue for certain customers has gotten smaller as they have retrenched and reduced their coverage level.

Jerre Stead

And on the low end, with some of the smaller competitors in Canada and the U.S., those are the ones that are and will continue to suffer significantly as we make sure we provide our customers with ever better service. Thanks Toni. Next question?

Operator

Thank you. Our next question comes from the line of Paul Ginocchio with Deutsche Bank. Your line is open.

Paul Ginocchio

Thanks for taking my question. The stock comp has come down quite a bit from ‘14 into ‘15, it’s going to be down a little bit more into ’16, obviously the unemployment rate in the U.S. is pretty tight and we have seen other people raising minimum wages or salaries, just wondering if you have seen any upturn in churn or inability to recruit. And then just I guess, I am wondering what that decline in stock over the last couple of years means to total comp for the average worker at IHS? Thanks.

Jerre Stead

Okay. So let me start. No, we have not seen and do not expect to see any issues in attracting or retaining great talent. I will give you the best example I can as we made that commitment of moving down to a million shares grant this year and 700,000 shares next year. An important part of that is the opportunity for every colleague around the world to earn shares based on how well we perform on an improvement year-over-year as measured by our customers on customer delight. If you go back 7 years or 8 years, we were giving 50 shares. When we hit those targets and at that time the share price was $45 to $50 a share, so they were receiving about $2,500. You go forward to 2015, we gave 20 shares, continue to operate in that kind of environment. They are receiving that same amount of money. What’s happened is as we drive the performance and we will, despite the energy issue, we will get the return over time for the share owners, which in turn gives the share price we expect to get for our own colleagues. So we do not expect to see that have an impact nor will we. Our business, by the way is not one that’s focused on minimum wages. The average salary worldwide is somewhere north of $80,000 a year, and a significant portion of that continues to be the ability to earn out on an annual basis our bonuses. Thanks very much. Next question?

Operator

Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is open.

Joseph Foresi

Hi, I wanted to kind of ask a two-part question. First, what are you seeing – do you think the energy spending cycle has bottomed and what have you seen from a rate of return in spending in past cycles, in other words how long does it take to return. And then the second part on the acquisition front, what are you seeing from multiples, I would have thought that some of the energy acquisitions would come in at lower multiples, but it seems like OPIS came in at a reasonably high one. So maybe you could just give us some idea of what the rate of return in energy spending might be and then on OPIS what you are seeing from valuation?

Jerre Stead

Todd, do you want to take those up, I will finish.

Todd Hyatt

Well, I think when we look at OPIS, if we are talking valuation of companies that provide services to energy companies, if we look at OPIS in the downstream space I mean OPIS has had a pretty nominal impact from what has happened in the upstream. And if we look at where most of the energy market challenges and headwinds and CapEx reductions have been, it’s really been in the upstream part of the business, so when we look at OPIS, we look at the historic growth, we look at the forward growth and we look at the strategy around that. And then I also talked about the tax basis step-up with OPIS, which very important attribute that provides significant additional value to us. The pro forma forward multiple taking account to the tax benefit was 13x. So, we see that as being a very reasonable value for an asset of this quality with this type of growth prospect in this type of margin profile.

Jerre Stead

And then I will pick up on the first part of your question and we will wrap up for this morning. Most of the energy price cycles have been these, if you will, high, down, back up. This is a deep U and we hope the bottom of the U as we said occurs and it’s for many, many reasons, different than ever before. We hope the bottom of the U, if you will, occurs in the first quarter. We will see that cycle, I think, if you go back even to the 2009, it went from 153 to 33 to 100 in less than 2 years. Well, that’s not the cycle we will experience. And I think as I said we are hopeful that we will end the year at $50. If you go way out to 2020, our teams would be forecasting that there is actually going to be, as demand continues to increase, there will be a real tightening of pricing because the huge capital cuts that Todd has talked about where they have cut 30 – our key customers have cut 30% to 40%. So, I think it will be a different cycle than ever before.

And then the last comment, as we do come out and pricing returns, because of the amazing amount of technology breakthroughs that have gone on with fracking, parallel drilling, etcetera, the price quality of returns of profit for the energy companies is at a lower level than ever before. So, we will see, but this is a deep U that we expect to come out. The critical thing is for us is it’s a great – we are very proud of our energy people, our energy assets. It’s a great business, any business that delivers 40% plus EBITDA margins in the severe downturn, we have got to be very proud of and any business that sees an industry down, in many cases 30%, 40%, 50% of revenue or more and that’s down 4% or 5% is a wonderful asset. So thanks very much.

Todd Hyatt

Can I answer that?

Jerre Stead

Todd, you get the last?

Todd Hyatt

Well, just Andrew’s questions quickly, if you look at Page 8 of the press release, you can – the income statement is excluding discontinued ops. So, the gross margin last year, 2014, was 60.6%. With removal of discontinued ops, it’s 60.8%. When we look at 2015, or – yes, 2015, 62.5%, but you can calculate that on Page 8 of the press release.

Jerre Stead

Thanks, Todd. Thank you all very much. We look forward to reporting our first quarter results. Eric?

Eric Boyer

Yes. We thank you for your interest in IHS. This call can be accessed via replay at 855-859-2056 or international dial-in 404-537-3406, conference ID 9920953, beginning about 2 hours and running through January 19. In addition, the webcast will be archived for 1 year on our website at ihs.com. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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