Q3 2019 Earnings Call
At this time I would like to welcome everyone to the allocate Q corporations third quarter, 2000, and Mike <unk> earnings Conference call.
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Suppressants Investor Relations you May begin your conference.
Thank you operator, good morning, everyone and welcome to Okay accused third quarter 2019 earnings conference call with US today are Nick Sarcone, Okay, accuse President and Chief Executive Officer.
On the Royal Executive Vice President and Chief Financial Officer.
Please refer to the okay, Q website and okay, Q Corp. dot com for our earnings release issued this morning as well as the accompanying slide presentation for this call.
Now let me quickly cover the safe Harbor some of the statements are we make today maybe considered forward. Looking these include statements regarding our expectations beliefs hopes intentions or strategies actual events or results may differ materially from those expressed or implied in the forward looking statements. As a result of various factors, we assume no obligation to update.
Any forward looking statements.
For more information please refer to the risk factors discussed in our Form 10-K , and subsequent reports filed with the FCC.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in todays earnings press release in slide presentation.
Hopefully everyone has had a chance to look at our 8-K wish we filed with the FCC earlier today and as normal we're planning to file our 10-Q in the next few days and with that I'm happy to turn the call over to our CEO Nick Zarcone.
Thank you Joe and good morning, everybody on the call. This morning, I will provide some high level comments related to our performance in the third quarter, and then barone will dive into that segment and related financial details before I come back with a few closing remarks.
We believe Q3 was a strong quarter for our company and we're very pleased with the result, despite facing some ongoing macroeconomic headwinds, particularly in Europe .
Each of our three segments showed important improvements in their respective operating metrics, particularly with respect to EBITDA margins, which on a consolidated basis showed a year over year improvement for the first time in several quarters.
That gives us confidence that our disciplined approach to the market and keen focus on enhancing margins well continue to create positive outcomes.
During the quarter, we repurchased 3.9 million shares of our stock for a total of $101 million, reflecting an average price of about $26 to share since we implemented the share repurchase program last October our total repurchases have aggregated 13.2 million share.
Errors for a total of $352 million or an average price of approximately $26.66 a share.
I am pleased to report that this week, our board approved an additional $500 million to the repurchase plan and extended the time period to October 2022.
With that we have almost $650 million up capacity under the amended plan.
As noted on slide five revenue for the third quarter was $3.15 billion, an eight tenths of 1% increase over the $3.12 billion recorded in the comparable period of 2018.
Parts and services organic growth for the third quarter increased 2.3% on a reported basis and when adjusting for one more selling day in each of our operating segments. The increase in organic revenue growth for parts and services was positive nine tenths of 1%.
Acquisitions added eight tenths of a percent of growth, while currencies had a negative impact of 2.3%.
Net income was $152 million compared to the $134 million for the same period in 2018, an increase of 13% year over year.
Diluted earnings per share for the third quarter was 49 cents a share as compared to 42 cents for the same period of 2018, an increase of 17% year over year.
On an adjusted basis net income was $189 million, an increase of 6% that's compared to the $177 million for the same period last year.
Adjusted diluted earnings per share for the third quarter was 61 cents as compared to 56 cents for the same period of 2018, 89% increase we are pleased with the level of these EPS growth considering the marginal uptick in revenue.
Now, let's turn to the quarterly segment highlights.
Got you will note from slide seven organic revenue growth for parts and services in our North American segment was 2.9% in the quarter, a nice sequential uptick from Q2 and against a tough Q3 comp year over year.
When adjusting for one more selling day in the quarter North American organic revenue growth increased 1.4%, which was also a sequential uptick from Q2.
We continue to perform well in North America, especially when you consider that collision and liability related auto claims increased just five tenths of 1% in the quarter.
Encouragingly. This CCC data represents the first quarterly year over year increase from Repairable claims since the third quarter of 2018, the uptick in frequency is related to an increase in miles driven more severe and frequent whether in certain markets.
And the ongoing increase in distracted driving.
Consistent with the year to date results during the third quarter the growth in recycled products was higher than that for aftermarket, though the aftermarket line showed improving trends as we move through the quarter.
Again, our north America's team's focus on profitable growth drove excellent year over year margin improvements.
Segment gross margins were 44.2% and EBITDA margins were 12.8%, reflecting improvements up 100 basis points, and 60 basis points, respectively, when compared to the third quarter of 2018.
These are among the best third quarter margins, our North American team has achieved in five years. Furthermore, when removing the self service business, which experienced the grade this downward impact on margins from the continued steep decline in scrap prices gross margins and EBITDA.
Margins for the rest of our North American segment were up 120 basis points and 80 basis points respectively.
The strong margins are evidence that our focus on profitable revenue is working.
I was just mentioned scrap metal pricing tumbled during the quarter and placed pressure on Q3 results.
As for Rune will discuss this will unfortunately set an even higher hurdle with respect to our fourth quarter results.
We also continued to grow our parts offerings with aftermarket collision S.K. you offerings and the total number of certified parts available growing 5% and 10.3% respectively year over year in the third quarter.
As evidence that we continue to take share during the quarter. Our team successfully negotiated a new three year contract with a top tier customer.
Under this new agreement LK Q will be the primary provider of alternative for replacement parts for this customer across the United States with incentives to grow their annual volume with us.
Additionally, during the quarter the team launched a regional pilot program with a top five insurance carrier to be their preferred supplier for all recycled parts.
As part of this program, we are highlighted within Cccs estimating platform to show our parts first in the search function and our specifically designated as the approved supplier for this carrier.
Well, we don't anticipate this pilot program to have a material impact on our results. If eventually rolled out on a national basis. It could provide an uptick to our salvage volumes.
Lastly on North America.
During the quarter, our glass business PGW NFC, a mopar mutually agreed to and the agreement related to the distribution of batteries to the FCC a dealer network.
Similar to rationalizing our asset base, we are continuously looking at our product portfolio to assure we are focusing on profitable revenue.
Well I think this agreement will negatively impact our organic revenue growth in Q4 and throughout 2020.
It will have a nominal impact on earnings in both periods and will improve the future operating margins of our PGW business.
Moving to our European segment organic revenue growth for parts and services in the third quarter increased 2.1% on a reported basis and seven tenths of 1% on a same day basis.
Acquisitions added 1.3% of revenue growth to the European results, while the strong dollar resulted in a negative impact of 4.6%.
As noted by other public companies with European exposure, the softer economic backdrop continues to create an industry headwinds.
That said our performance on a relative basis appears to be strong, which gives us confidence that we are gaining share while we don't disclose country by country detail.
On a same day basis, we witness positive organic revenue growth for each of the markets in which we operate except for Germany, which was essentially flat and Italy, which was down.
The Italian market continues to face significant macroeconomic headwinds.
Across the continent, we expect trade disputes with the U.S., along with Brexit related uncertainty to continue to weigh on the European economies.
With respect to Brexit as most of you know on October 28 European leaders agreed in principle to extend the Brexit deadline until January 31st 2020.
We continue to closely monitored the Brexit situation to ensure our UK business is positioned accordingly with appropriate inventory levels.
As most of you on the call are aware on September 10th we provided the investment community with an overview of our European strategy.
The call focused on our transformation into a sleeker more agile organization, which internally we refer to as one allocate you Europe .
As I stated on the September call going forward, we will begin to operate Morris I think all business as opposed to a collection of independent businesses.
Today, we are by a wide margin a largest most profitable distributor of automotive parts in Europe with metrics that are unparalleled in the industry with respect to the number of countries in customers served the number of locations operated SK use offered and total revenue generated our.
Goal now is to optimize all aspects of one allocate you Europe .
Importantly, during Q3, we experienced a 90 basis point sequential improvement in EBITDA margins compared to only 20 basis points of sequential growth in 2018.
The margin improvement is entirely consistent with the expectations, we set forth during our call last month.
And as for Rune will discuss the improvement is after covering approximately 10 basis points of transformation expenses.
As Europe has become a larger portion of our global revenue and as part of our Board's ongoing director refreshment process on October Threerd, We announced the addition of Patrick Berard to our board of directors.
As CEO of rights out group Patrick has a successful track record of leading global B to B distribution networks.
His operational knowledge and experience of the European markets will provide tremendous value to the board and the organization as we continued to execute our one okay Q Europe strategy and we welcome. His addition to our board.
Alongside Robert hands, or who joined our board in 2016, Patrick represents the second addition to the board with extensive experience in the European markets and distribution.
Now, let's move onto our specialty segment.
During Q3 organic revenue growth for parts and services for our specialty segment increased 1.5% on a reported basis and was generally flat when adjusting for one more selling day as we continue to face unfavorable market conditions in Canada on the plus side the rollout of our.
RV OEM warranty programs continues to yield positive results and were well received at the RFP Open house event in Elkhart, Indiana in September .
Additionally, the team finalized a designated supplier agreement to be the aftermarket parts and services provider to cap at genuine truck where stores.
Moving on the corporate development for third quarter was quiet with no acquisitions closing during Q3.
On the first day of Q4, we closed on the acquisition of another diagnostics and calibration business in North America. This represents our second transaction in the services sector and it's consistent with our strategy to become a leader and the diagnostics and calibration market.
During the third quarter, our development team continued to make solid progress with our assets held for sale efforts and ongoing rationalization of our asset base and the divestiture of noncore businesses.
On August eight we announced the divestiture of our recycled aviation parts business Aero vision International.
Additionally on October 1st we announced that we merged our subsidiary Auto Kelley Blue Gary up with elite car, creating one of Bulgaria, leading distributors of automotive spare parts.
Okay Q now owns a 20% equity interest in the combined business.
Finally during Q3, we continued our efforts in rationalizing our branch network in Europe by closing six underperforming branches in Western Europe , and two in eastern Europe .
And with that I will now turn the discussion over to prune, who run through the details of the segment results and discuss our updated 2019 guidance.
Thanks, Nick and good morning to everyone joining us on the call.
Overall, we are pleased with our third quarter performance, especially related to improvements in segment EBITDA margin and strong free cash flow generation. These are exciting times for us as the field teams have embraced our key financial priorities of profitable revenue growth margin expansion.
Free cash flow generation the results speak for themselves.
Seeing the positive momentum carrying through the third quarter enhances our confidence about LG accused strategic priorities and our ability to deliver on them.
Before diving into the results, let's talk with the key financial highlights.
Operating cash flows into third quarter was $327 million, the second highest quarterly amount in the company's history trailing only the most recent previous quarter that being the second quarter of 2019.
Segment teams are doing it pre mendis job managing trade working capital to deliver strong operating cash flows. After two historically high quarters of cash flow generation, we do expect to see a softer fourth quarter in terms of operating cash flows I will cover the full year outlook in the guidance discussion.
Free cash flow for the quarter totaled $262 million or 126 million higher than the same period in 2018 and $800 million only September year to date basis, while the absolute number of free cash flow is important.
We are also actively analyzing the efficiency of our cash flows and what level of earnings we can convert to cash on a sustainable basis looking at slide number 25, you can see positive trend into free cash flow to EBITDA conversion ratio. This year on the programs we put in place.
In the second half of 2018.
This year's growth trajectory is well above our initial expectations and while that ratio will moderate in the fourth quarter I'm very encouraged about the improvement relative to the last five years.
The strong cash flows enabled us to buyback 3.9 million shares of L. Kikuyu stock for approximately 101 million in the third quarter.
Looking at Slide number 26 for the program to date, we have patches 13.2 million shares at an average price of $26.66 a healthy discounts to recent to creating levels.
Additionally, we paid down debt by $109 million into quarter, and 391 million in the nine months through September pettitte.
By doing so we were able to decrease on net leverage ratio to 2.6 times, which is the same level as the first quarter of 2018, the last quarter before we acquired style Gruber.
Getting back to the pre acquisition leverage ratio following the company's largest ever transaction within five quarters is a terrific accomplishment.
This of course does not reflect the active share repurchase program I referenced earlier.
Returning cash to our shareholders, while reducing our net leverage ratio speaks to the strength of our business to generate strong cash flows Nick mentioned to 500 million don't expansion to the share repurchase authorization, which is supported by our expectation of sustained strong cash flows and the success of our share repurchase.
Program to date.
Now a couple of consolidated and segment results similar to last quarter to save myself. Some websites and also as the accompanying earnings deck is largely self explanatory when I referred to net income and diluted EPS. Please note that I will be referring to the amounts from continuing operations attributes.
So to L. Kikuyu shareholders. In addition, Nick covered the details on net income and earnings per share. So I will not repeat please turn to slide 12, and 13 of the presentation for a few points on the consolidated third quarter results. The consolidated gross margin percentage decreased 20.
This is points quarter over quarter to 38.1 do please note that the reported margin includes $17 million in restructuring related costs classified in cost of goods sold which represents a 50 basis point negative impact on gross margin.
Setting aside the restructuring we saw improvement in the quarter driven by a 100 basis points improvement in North America.
Restructuring and acquisition related costs in operating expenses were $9 million as a result of ongoing expenses related primarily to the restructuring initiative, we announced last quarter.
Interest expense was favorable by $9 million or lower by 21% compared to the third quarter of 2018, we into low interest rates in average debt balances and some favorable translation effect.
Moving to income taxes, our effective tax rate was 28.1% for the quarter, which reflects the incremental expense for the year to date catch up caused by a change in our estimate of the annual effective tax rate. We increased the estimated reached 27.5% up from 27.
Percent this quarter, primarily due to a shift in our projected geographic allocation of income.
Equity in earnings of unconsolidated subsidiaries, which relates mostly to investment in mechanism and reflected income of $4 million versus expense of 20 million in the third quarter of 2018, you'll recall that we recorded a 23 million dollar impairment charge on a mechanism and in.
Best mid last year.
Now please turn to slide 16 for highlights on segment performance, starting with North America.
Gross margin was 44.2% or 100 basis points higher than last year for the most bought the margin expansion reflects the continued benefits of initiatives in both are off to market and salvage operations as well as efforts in our lost business to be recognized for our quality.
If service and breadth and depth of inventory and also the ability and successfully to renegotiate underperforming contracts.
While the self service operation was a drag on segment gross margin with a quarter over quarter decreased due to scrap pricing the impact was not material on a year over year basis.
Sequential changes in scrap prices had an unfavorable impact of $8 million for the quarter compared to a negative impact of 7 million in the third quarter of 2018, creating a $1 million year over year negative swing.
With scrap creating at even lower levels in October we are anticipating a fab hit in the fourth quarter.
Operating expenses increased by 50 basis points relative to the prior year to 32% for the third quarter of 2019.
We picked up is selling day, the ship, which had a positive leverage effect, but that was several offsetting factors that pushed expenses higher than a year ago Fest incentive compensation contributed to a 50 basis points increase year over year.
Last year this segment fell behind in its bonus targets, causing downward revisions off the bonus accruals, whereas this strong performance generated upward revisions in the third quarter.
Second as mentioned previously facilities expenses continued to trend higher this year due to expansions and rate increases related to renewals.
Facilities expenses increased by 40 basis points relative to a year ago on North America team is actively working on monitoring underperforming locations for potential rationalization.
On the positive side North America showed positive leverage in other personnel costs through lower insurance claim costs as well as disciplined hiring and implementation of the cost reduction plans I described last quarter.
In total segment EBITDA for North America, and the third quarter was $166 million up 12 million or 60 basis points higher than the prior year.
Closing out in North America, I'd like to recognize the team for following through on the pursuit of the profitable revenue growth objectives.
Year ago, we disclosed is 70 basis point decrease in segment EBITDA margin in the period with 5.2% organic parts and services revenue growth.
This year North America has recovered almost the full of variance in margin with organic parts and services revenue growth of 1.4% on a per day basis. It disciplined approach of focusing on profitable revenue growth has been a significant enabler of the year over year margin improvement.
Moving onto the European segment on Slide 19 gross margin in Europe was 35.3% down 130 basis points relative to the comparable period of 2018.
As Nick previously noted we recognized restructuring expenses in the United Kingdom for branch and brand rationalization related to the Andrew page operation.
These expenses represented in negative 120 basis points impact for the quarter.
Outside of these charges the segment gross margin was roughly flat with lower margins in our central European operations due to pricing and mix, mostly offset by benefits of 30 basis points from centralized procurement and improving margins in the United Kingdom.
With respect to operating expenses, we experienced it Tony basis point increase on a consolidated European basis versus the comparable quarter from a year ago.
Personnel expenses represented the largest portion of the increase primarily related to the timing of bonus accrual adjustments wage inflation and the negative leverage effect caused by lower sales growth.
Well the third quarter of 2019, there was a 10 basis point headwind associated with the ongoing transformation efforts related to the one L. Kikuyu Europe program.
The relatively low amount in the quarter reflects that many projects in the early stages and all the cost are currently being capitalized for example in the ERP program.
We expect the operating expense portion of these costs to increase in the fourth quarter and going forward into 2020 .
European segment, EBITDA totaled $125 million it 3.6% decrease over last year as shown on slide number 21 relative to the third quarter of 2018, both the Sterling and the euro weakened by 5% and 4% respectively against the dollar caused.
A negative effect from translation.
The net effect on GAAP EPS this quarter was not material, but represented about a penny headwind on adjusted EPS.
Segment, EBITDA was 8.6% for the quarter down 20 basis points compared to the same period last year with about half of the decrease attributable to transformation costs.
We remain confident in our ability to deliver the outcomes detailed in our September 10th one L. Kikuyu Europe coal and expect to finished the full year within the previously disclosed segment EBITDA margin range of 7.8% to each 0.3%.
Turning to the specialty segment on slide 22, the gross margin percentage declined 80 basis points in Q3 relative to the comparable period of 2018.
This amount 40 basis points related to unfavorable product mix, while 20 basis points resulted from higher metric product costs as a supplier discounts were lower than realized in the prior year.
On the other hand operating expenses improved by 130 basis points with reductions in personnel and freight costs more than offsetting higher selling expenses.
The improvement is partially attributable to the leverage benefit from an additional selling day in the third quarter in 2019.
Segment EBITDA for specialty was $45 million up about 6% from Q3 of 2018 and as a percentage of revenue was up 50 basis points to 11.5%.
With that backdrop of flu revenue growth the specialty team has taken decisive action as evidenced by the year over year decrease in operating expense dollars and continues to evaluate the cost structure to protect the segment margin.
Let's move onto liquidity and the balance sheet as presented on slide 24, you will notice that operating cash flow for Q3 was $327 million or 70% higher than a year ago. Our key working capital accounts that is trade receivables inventory and payables.
Those generated cash inflow of $58 million in the quarter compared to an outflow of 64 million a year ago.
The purchasing teams continue to take a disciplined approach to inventory given soft trading conditions.
Which has contributed to a year over year improvement in working capital.
That said, we anticipate inventory to represent a use of cash in the fourth quarter as we take advantage of buying opportunities and built inventory for the expected seasonal revenue increase going into Q1.
Do note that while we are making solid progress on the vendor financing program in Europe , we do not expect meaningful benefits to be gets into the new yeah.
Capex for the quarter was $64 million, resulting in free cash flow for the quarter of 262 million, an 800 million on a year to date basis.
Finally, moving to slide number 27 as of September pets, yet, we had $433 million of unrestricted cash, resulting in net debt to for about 3.5 billion.
Now I would like to provide an update on our annual guidance. Please note that guidance assumes that scrap prices and foreign exchange rates hold at current levels.
As Nick noted earlier, we are pleased with the third quarter results.
North America continues to perform well despite the ongoing challenges in scrap metal prices. Our specialty segment is continuing to create new service offerings that have one industry wide to claim and is being decisive and cost given the revenue outlook.
We see challenges with European economic conditions, holding for the remainder of the year and despite the underlying business being resilient. The management team is adapting to the softer market conditions by accelerating the integration and cost efficiency programs. In addition to simplifying by totally evaluating various.
Programs that may not deliver benefit in the near term.
As you'll recall detailed the European actions web provided at a comprehensive briefing on September 10.
As mentioned earlier, we expect scrap metal prices to continue to negatively impact our results in the fourth quarter.
Despite this backdrop, we're holding be adjusted EPS at the midpoint of $2.34 wireless appreciating some headwinds in Q4 from scrap metal prices and FX had the current levels.
We are increasing I expected cash flows from operations for the year by $150 million at the low end to 950 million and by 125 million to hit $1 billion at the high end.
I would run you through the updated guidance figures.
Organic thoughts and services revenue growth revised to 25 basis points to 100 basis points for the full year to take into account to the actuals for the most recent quarter.
Diluted EPS on a GAAP basis is updates to a range of $1.69 to $1.76 accounting for the first half activity primarily related to the noncash impairment charges as well as restructuring charges incurred through September .
Adjusted diluted EPS in a narrower range of $2 Toti, one to $2 Coty, seven and so $2.34 had the midpoint.
Cash flows from operations has been increased to a range of 950 million to a billion dollars and capital spending range is narrowed to 242 260 million.
In summary, the third quarter had several highlights showing where actions are bearing fruit such as north American margins and generating strong free cash flow. That's funded the ongoing share repurchase program and the materially higher debt paydown.
While the softer macro conditions in Europe , and the ongoing downward pressure in scrap gives us pause for thought we believe there is resiliency in the model to adjust to the market conditions and deliver on our commitments overall, we remain optimistic about prospects for the future.
Now I'll turn the call back to Nick for closing remarks.
Thank you barone for that financial overview.
In closing I would like to review a few of the key initiatives discussed on previous calls that we'll continue to be points of focus during the balance of 2019 and as we began our 2020 budgeting process.
First we will continue to integrate our businesses and simplify our operating model.
We will continue to focus on profitable revenue growth and sustainable margin expansion.
Third we will continue to drive higher levels of cash flow, which in turn give us the flexibility to maintain a balanced capital allocation strategy.
And fourth we will continue to invest in our future.
And if you can see from our third quarter results. These programs and targets are gaining momentum throughout the organization.
And our teams are diligently working towards achieving their respective goals.
We have well thought out plans.
Our focused on crisp execution, and we are achieving positive results.
I want to thank our over 51000 team members, who daily endeavor to overcome the short term variables that are out of our control by tackling opportunities to drive organic sales aggressively pursue market share gains implement operational efficiency.
Fees to enhance the productivity and profitability of our organization and to provide industry leading customer service.
We believe that one combined these factors will create long term value for our stockholders.
And with that operator, we're now ready to open the call for questions.
Thank you.
As a reminder, he would like to ask your question. Please press star followed by the number one on your telephone keypad.
We ask you limit to one question and re queue for follow up.
Our first question. This morning comes from Craig Kennison from Baird. Please.
Hey, good morning. Thank you for taking my question and apologies for the background noise.
Good morning, Greg.
Hi, good morning.
The cash flow [laughter] story, right now and I'm curious.
To the extent.
We're drawing down inventory on a per location basis. If you will have you seen any impact on fulfillment rates or have you been able to sustain those.
Film at rates.
Greg Good morning, its of our Enogen listen I think it's a great question and as I said in some of the upfront remarks. The teams have just been doing a phenomenal job on the trade working capital program.
As for as a quick memory Geauga trade working capital comprises inventory payables offset by trade receivables and as we've said we were in any overboard position in several locations as we have optimized overall distribution.
Including the level of inventory that we were holding in several sites. We've certainly seen it reduction the other piece to note is as we've always talked about as indeed as revenue becomes a little bit softer.
And again this is in line with the pursuit of profitable revenue. So the quality of revenue inventories will also get re adjusted and that's really is what's happening to your specific question with regards to are we seeing any stockouts scenarios.
When you drop in fulfillment rates absolutely not.
This would be done very very carefully in terms of where we were holding excess inventory inventory that was not moving for example, and you're going to give you. One specific example, you would have noted that we took the coldest restructuring for Andrew page operations in the United Kingdom again, as part of the branch and brand right.
Finally position.
There was inventory that frankly did not fit with future plans for that business and that's really how it's taking place, but no we see no drop off in any fulfillment rates.
Our next question comes from Bret Jordan from Jefferies. Please go ahead.
Hi, Good morning, guys good morning.
It could you talk about the impact from this up yet Chrysler battery distribution shifts I mean, I guess what was it what would be the revenue comparison with it exiting the business.
What's the margin benefit I think those were sort of profitable sales and then what's the timing on it doesn't impact the fourth quarter or is that a 2020 shift.
Yes, Thanks, Brett.
We started.
The FDA agreement in January of 2018.
As we ran through last year.
Clearly the impact on organic growth, it's about 1%.
In a positive fashion. So that's basically what we're going to be giving up over the over the next 12 months it will start a bit here in Q4.
It won't be a full impact probably 70 to 80 basis points of pressure on organic and then we'll obviously the full revenue.
Give back if you will will occur in 2020, but again the reason for not renewing that contract is that wasn't meeting our internal.
Kind of hurdles as it relates to margins and returns and I think the folks that up CA appreciated that.
So it was a.
Amicable kind of separation if you will.
As I indicated in my prepared remarks, while we'll have an impact on.
Our organic growth the impact on earnings is not will be nominal and so margins will be going up by getting rid of that low margin business.
Our next question comes from Stephanie Benjamin from Suntrust. Please go ahead.
Hi, Good morning, everyone. Good morning, Stephanie.
I touched on it what you're seeing in the North America aftermarket business.
To salvage really outperforming but you were seeing some acceleration on the aftermarket side is the news throughout the quarter is that more a function of just seeing some easier comps or how should we kind of think about the performance of really the strength in the salvage and then what's going on in the aftermarket. Thanks.
Sure on the salvage side, obviously, we have a leading position.
We've been able to buy cars.
Total losses at a reasonable price and so our our margin in that business are are strong and we do they will continue to be strong on the aftermarket side of the business again the growth early in the quarter was a little bit slower we showed progress during the quarter the early.
Returns here in October look very good.
As relates to aftermarket product, we think some of it.
Again has to do at the dips towards higher Aipu by the insurance companies and obviously aftermarket products, our largest share of the alternative marketplace.
We've seen a little bit a positive movement out of the folks Dom and Bloomington at state farm.
Nothing to ride home about but again the movement in the positive.
Direction, if you will and then.
Actually the GM strike has helped us a little bit.
As well so theres a number of things that are kind of gentle tailwinds.
In the aftermarket business and we're anticipating that they will continue in Q4.
Our next question comes from Michael Hoffman from Stifel. Please go ahead.
Hi, Thank you very much further questions happy Diwali.
Room.
[laughter] last weekend.
Yes I was.
Yes.
Cash flow from operations is at one of its best percent of revenues ever where can that go and how do I think about that progressing into next year.
Great question.
Michael and really appreciate.
The kind wishes for devalued. So it is a big event in the into calendar.
Again for those of you celebrate Halloween and my family celebrates olefins happy Halloween to everyone. We certainly enjoying great L. Kikuyu weather here in Chicago Needless to say.
Yes. This is with regards to.
Cash flow generation this is something that.
We've talked about with the markets for quite some time. This case of operating up businesses with a tremendous amount of focus.
Again as I kind of said in some of my upfront comments.
The pace at which our field teams have taken over this initiative has has.
Being phenomenal we.
We are thrilled about it and it really gives us various options. If you think about it the way we have deployed the capital over the last year last four quarters, it's been a balanced capital allocation strategy not only have we bought back $352 million worth of L. Kikuyu stock. In addition to that last 12 month.
So you've paid down close to $426 million on our debt that we've been carrying also.
In addition to that as we think about going into 2020 .
There will be the seasonal uptick with regards to revenue and so we are seeing at this point of time certain buying opportunities in all three or four segments.
South America wholesale Europe , and also specialty and we will judiciously deployed that cash.
And with regards to the share repurchase program given the success of that program as we announced earlier. This morning. The board has re upped that for a fed the 500 million. So at this point of time, we have those was $650 million of capacity and then again in the debt Paydown will continue.
We don't talk about Corp Dev.
Transactions in any case, but we have made a commitment that there was no large platform transactions that when the pipeline and it really will be kind of going back towards our debt paydown share repurchases and things along those lines I think the one piece that.
I'm not sure very many people have noticed but at the high end of our operating cash flows in the de upgraded guidance, we calling out a billion dollars of operating cash flows in the current fiscal year and we think that is tremendous it doesn't happen overnight.
And again, just really massive tanks to our field teams for really getting back.
In terms of fed to focus on this initiative as we think going forward.
Various options to move forward in terms of how we deploy the cash.
There are plenty of four tentatives anime.
Happy to report that.
There are a number of very exciting opportunities of what we can do we would certainly give further guidance when we give guidance for 2020 in terms of more robustness in terms of how we plan to deploy that capital, but as of now we do have several levers that we could deploy that.
Cash.
And Michael one of the things going forward.
That has had almost no impact thus far is the vendor financing program as Brian indicated in his prepared remarks that will really begin to kick in next fiscal year and so that will be in an incremental lever that we will have on a going forward basis.
Our next question comes from Daniel Embryos from Stephens. Please go ahead.
Yes. Good morning, guys. Thanks for taking my question.
Good morning, Daniel.
One follow up on the revenue rationalization you guys have done a great job kind of rationalizing unprofitable business in both the U.S. and Europe , you mentioned, the FDA contract, but how far along are we in that process is there still.
Further business that you think you can rationalize in Europe , and then same question for us as well.
Yes, so in the us.
We think we're we're largely done again, we spent a lot of time last year early this year really focusing on on profitable revenue growth and margins gross margins in our North American business clearly.
The FCTA contract.
Didn't fit within that those parameters. So again, we decided to exit.
In Europe , it's less of a product line review and more of a.
Kind of a country by country review I mean part of the reason for exiting Bulgaria.
Was that it was are incredibly low margin.
Opportunity, we still have some other businesses that are being held for sale.
In Europe .
And they are lower margin businesses as well.
We continue to monitor will continue to monitor both on a product line basis, and a kind of a legal entity basis. The find opportunities. We're looking forward. It's just those activities are businesses just are not going to return the level of margins and return on capital that we believe our shareholders.
And desire and we will continue to be aggressive in kind of printing opportunities. There's there's no one big material.
Item out there Daniel its kind of kind of putting some smaller.
Mrs and or or lines of business.
As a reminder.
A question. Please press star followed by the number one on your telephone keypad.
Our next question comes from the line of Chris Bottiglieri from Wolfe Research. Please go ahead.
Hey, good morning, guys.
Good morning, Gresik the question.
So at first I would like great job on the free cash flow in North America margins really impressive.
And they want to focus on Europe that with that said.
Relative to the guidance that you gave a 910, it's one of the a sense for it looks like kind of a steep implied ramp in Q4.
Did something change at all at the margin 40 gave that guidance. There was always meant to be Q4 weighted.
And then.
At the midpoint anyway, and then this is related thought.
I don't speak Dutch, but it seems like you've made some branding efforts.
In the Netherlands in Belgium, with rebrand to force was hoping you could kind of comment what you're doing there and kind of what that means for the overall portfolio. If you see a broader range.
Rebranding taking place thank you.
Yeah, So I'll start and Broon can can fill in.
The results for the third quarter for Europe , where exactly in line with our expectations. When we set forth the guidance back at September 10th.
And in yes, we anticipate that Q4 will be a.
A decent quarter for us in Europe , and so there's no change if you will in the kind of the quarterly progression.
What we anticipated back on September 10th.
As it relates to your comment in the Netherlands enforce the reality is while we refer to some tore as the broader organization.
In the Biloxi region, and Thats name at the holding company our go to market.
Brand has always been force and that's been the case for many many years I think what you may have seen is.
You know some programs where that kind of as bubbled up to the surface.
But there's really been no change there that's always been our trade name in the Benelux region.
Our next question comes from Ryan Merkel from William Blair. Please go ahead.
Hey, good morning. Thanks, Good morning line. So good morning, I I wanted to follow up and EBITDA for Europe , and the fourth quarter. If I could I'm. Just curious do you think you can expand margins year over year awards, the macro still too much to overcome.
So Ryan as Bernard Yes, we do believe we can expand it doesn't give you a couple of.
Due to point shipping through first full from the Investor discussion, we had seven weeks ago on the 10th of September with regards to Europe . We're very careful in terms. If you know how we were putting forward the cadence of the margin progression not only for 2019, but for the next few years also nothing has changed on that front.
Even including the macroeconomic piece it has been playing out exactly the way we talked to to be you will probably recall in the second quarter, we had called out to restructuring plan and the restructuring plan essentially was to contemplate across all three of reporting segments optimizing.
In the infrastructure costs, given the macro economic outlook with regards to revenue. We know that there was a second level of revenue that we needed.
Given the relatively high fixed cost nature of the European business and with regards to that we have been taking action.
Undertaken in third quarter, we will see some of those benefits come through also so overall.
It was planned along those lines and we do fundamentally believed that our European business will be wouldn't the range of the seven needs to be eight three that we had called out seven weeks ago. So nothing has changed from that perspective and on a year to date basis were at seven eight in Europe . So it.
The fourth quarter does not need to be.
If you will add to hit the guidance that we set forth on September 10th.
We have now any queue at this time I'll turn the okay.
Thank you operator, well take everybody on the other ended the call. We greatly appreciate your time and attention. We understand this is a very busy reporting season and we appreciate you spending this past our with US again, we look forward to.
Chatting with everybody again in late February as we announced our 2019 year end results, which I believe it's going to be on February twentyth.
And.
We're looking forward to a a good conversation that as well so thank you and I will talk too soon.
This concludes today's conference. Thank you for your participation you may now disconnect.