Q4 2019 Earnings Call
This time I was like telecom ever wanted that Kikuyu corporations fourth quarter and full year 2019 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks that would be a question and answer session. If you'd like that's the question. During this time separate press Star then the number one the funniest telephone keypad. Please limit questions to one question and requeue for father, what I would like to turn the call over to Joe Boutros, Vice President Investor Relations.
You may begin your conference.
Thank you operator, good morning, everyone and welcome to Okay accused fourth quarter on full year 2019 earnings conference call with US today are Nick Sarcone, Okay, accuse President and Chief Executive Officer ever Ruben Roy Executive Vice President and Chief Financial Officer. Please refer to the Okay. Q website, an l. King Q Corp. Dot com.
For 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 that 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.
All right in the forward looking statements as a result in 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 in subsequent reports filed with the FCC. During this call. We will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP.
Non-GAAP measures is included in todays earnings press release, as well as a slide presentation.
Everyone has had a chance to look at our 8-K, which we filed with the FCC earlier today and as normal we're planning to file our 10-K and the next few days and with that I'm happy to turn the call over to our CEO Nick Sarcone.
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 quarter and then rumo dive into the financial details and our 2020 guidance before I come back with a few closing remarks.
Q4 was a strong order for our company and we're very pleased with the results as we mentioned at the outset of 2019, we were focused on a few key initiatives I am proud to say our segment teams have embraced and executed on each there was more opportunity ahead.
And we will continue to work hard to move the company forward.
Let me reiterate the key initiatives, which continue to be central to our culture and objectives as Weve entered 2020.
First we will continue to integrate our businesses and simplify our operating model.
For example in 2019, we launched our one LP to Europe program and provided a clear roadmap to drive the business to double digit EBITDA margins. Additionally, in 2019, we divested our airplane recycling business and merged auto Kelly, Bulgaria when thinking about.
They're.
Thereby removing a couple of low margin noncore businesses Omar line up and freeing up management time.
Second we will continue to focus on profitable revenue growth and sustainable margin expansion.
In 2019, we were able to grow margins, despite facing low revenue growth and macro headwinds in Europe.
With our team's doing an exceptional job addressing cost with their productivity efforts.
North America in particular witnessed year over year improvement and segment EBITDA margins, a 100 basis points in 2019.
Third we will continue to drive higher levels of cash flow, which in turn will give us lots ability to maintain a balanced capital allocation strategy. In 2019, we generated record cash flow from operations over $1 billion and free cash flow of nearly 800 million.
Reflecting year over year increases, a 50% and 73% respectively.
Last year, we paid off $301 million worth the data and we purchased 10.9 million insurance of our stock for over $290 million.
And fourth we have and will continue to invest in our future in 2019, we may two strategic acquisitions, and the automotive diagnostic space, which positions our north American business. We at the forefront of this rapidly growing market opportunity and will allow us to continue expanding.
Customer offerings.
As noted on slide five total revenue for the fourth quarter was $3 billion, reflecting growth of two tenths of 1% a slight increase which recorded in the comparable period of 2018.
Parts and services organic revenue growth for the fourth quarter was nine tenths of 1%.
Acquisitions added.
20 basis points of growth all currencies had a negative impact of 1% for total parts and services revenue growth a onetime for 1%.
Net income during Q4 was $140 million compared to $40 million for the same period of last year, an increase of 247% year over year.
Diluted earnings per share for the fourth quarter was 46 cents compared to 13 cents for the same period of 2018, an increase of 254% year over year.
On an adjusted basis net income was $167 million, an increase of 10% compared to the $151 million because the same period of last year.
Adjusted diluted earnings per share from fourth quarter was 54 cents compared to 48 cents for the same period 2018 be 13% increase.
We are again I'm pleased with a level of bps growth considering the marginal uptick in revenue.
Let's turn to some of the quarterly segment highlights.
As you will note on slide seven organic revenue growth for parts and services in our North American segment was 2.5% in the quarter. This organic performance includes a benefit from the G.M. strike, which was partially offset by declines in our glass and heavy duty truck business.
Yes.
Excluding these dynamics organic growth would've been 1.3%.
We continued to perform well in North America, especially when you consider that according to CCC collision and liability related auto claims decreased 1% in the fourth quarter.
Also according to the U.S. Department of Transportation our performance in Q4 was achieved all miles driven in the U.S. were down 110th of 1% year over year in November.
Related to our recycling businesses I am proud of the impressive environmental efforts of our North American team in 2019.
Between our full service and self service salvage businesses during the year, we processed over 887000 vehicles, resulting in among other things the recycling of 4.2 million gallons of fuel 2.6 million gallons of waste oil 2.5 million type.
Errors and 630000 batteries, all reflecting solid increases over 2018.
This effort is a key pillar of our mission of being a responsible stewards of the environment and a true partner with the communities in which we operate.
We also continue to grow our purchase offerings with aftermarket collision S.K. you offerings and the total number of certified parts available growing 4.9% and 10.0% respectively in 2019.
Lastly on North America during the quarter, we continued the development of our mobile App based delivery manifest management system, which we call in touch mobile.
In touch mobile is a proprietary internally developed platform that will automate delivery management and route to county procedures that we are converting from a manual to paperless process.
And touch mobile will also enhance the customer service experience improved route and driver efficiencies and simplify various accounting functions.
We are excited about this implementation and optimistic about the central productivity old generate.
At the end of Q4, 85% of our full service an aftermarket locations. We're live on the system.
Moving to our European segment.
Organic growth for parts and services in the fourth quarter was 1.2%.
Acquisitions in Europe added seven tenths of 1% of revenue growth.
While the strong dollar resulted in a negative impact of 2%.
As noted by other public companies with European exposure, the soft economic backdrop continues to create an industry headwinds.
Indeed, our performance on a relative basis appears to be strong, which gives us confidence that we continue to take market share.
Well, we don't disclose country by country detail in the fourth quarter, we witnessed positive organic revenue growth in each of our markets in which we operate except for Germany and Italy.
Actually relates to the one okay to your program, we continue to gain operational momentum on multiple fronts and the segment is performing in line, but the metrics and multiyear plan, we set forth last September.
I've stated in the past talent acquisition and the Buildout of our organizational structure is a key component implementing our one LK to your program and in Q4, we made very good progress on the talent.
Going forward, we are implementing a recently announced European organizational structure of key functional departments, including private label, which we're now calling components.
Product management and procurement.
Hi chain.
And information technology.
On the operational side, we have announced both a new CEO or we are Italy, who came from the outside.
And the promotion of an internal person to lead the stall Gruber organization.
On the corporate side, we have announced the recruitment of a human resources leader for all of Europe.
And also appointed leaders for information technology product management procurement and components.
[noise] implementation of these strategies will promote to harmonization of processes and infrastructure the implementation of best practices and the establishment of common standards in each of the functions.
We believe this will position the business to achieve better results make faster and better decisions and work more efficiently.
Supporting the organizational structure in Q4, we identified zoo, Switzerland as to future home, our European segment corporate office.
We expect to officially opened the office in mid 2020.
With a key initiative of investing in our future. We began the construction of our new Central distribution center or our force business in the Benelux region.
Located in the Netherlands, This new facility will enable us to consolidate the activities ups five small existing distribution centers into a single location, which will have automation similar to that found at T. Two in the UK and Sulzbach Rosenberg in Germany, albeit.
Slightly smaller scale.
Regarding Brexit, our UK operations have taken necessary precautions to protect the interest of our customers for every milestone of this exit process, we haven't sufficiently deep inventory from European and Asian suppliers strong supply processes and significant measures.
Plays to provide our customers with the service they expect promos even in the face of Britain's recent departure announcement from the common market.
In fact, we believe the size of our business and its industry, leading processes will enable us to continue to expand our market share in the UK and the Republic of Ireland.
Acting that's a key partner for our customers even in the pace of what could be a moment this change.
Yes, Europe has become a larger portion of our global revenue and there's a part of our board's ongoing director refreshment process.
On December six we announced the addition of Exev you pain to our board of directors.
As the former group Chief Executive Officer of Netherlands, based SEPA logistics.
Good day viewers' experience with building a global business across both developed and emerging market will add tremendous value at the board level into our operating teams as we continue to execute on the one allocate you your program.
Lastly in Q4, we opened three new branches in eastern Europe into new branches in Western Europe.
Now, let's move onto our specialty segments.
During the fourth quarter specialty reported a total revenue decrease of 6% a performance well below our expectations.
The primary drivers for this decline were twofold.
First two major suppliers altered their go to market strategies, which essentially bypassed wholesale distributors for a portion of their volumes.
We believe these are isolated cases, and not reflective of a broader trends.
Second in the fourth quarter, a few companies who use our specialty unit to go orders. They received through online marketplaces witnessed impactful interruptions during the critical selling period of late November and December.
These interruptions were related to these companies having their sales halted temporarily due to intellectual property complaints submitted to the marketplace facilitators.
Today. These companies have had varying degrees of success countering those claims in getting back online.
Confronted with these headwinds our specialty team is aggressively seeking new business by expanding our product line and targeting new and relevant customers. Additionally, especially continues to focus on measures to rightsize their cost structure, given the topline challenges, helping to offset some of the reduction in EBITDA margin.
Yes, it's a 2019 sema show worn announced at Ford Motor Company is offering a worn winch towards 2000, 20-F, 250, Anup Threefifty Super duty trucks.
These new Winches will be available as a factory orderable option or a dealer installed after sale accessory I'm properly equipped super duty models beginning in mid 2020.
Additionally, at the Chicago Auto show this month cheap announced that the New limited edition 2020, Jeep Wrangler JP P. 20 is a equipped with a worn rubicon xeon winch, along with warrants proprietary spider a row.
That's where as announced that specialties RBS Oh last month, we continue to expand our RV OEM warranty program with the addition of Winnebago.
The rapid adoption of our OE warranty program offerings to top two manufacturers is a clear validation of our unrivaled distribution network in customer service capabilities.
It was a relatively quiet quarter from a corporate development perspective.
We closed on two transactions in the U.S.A. diagnostics and repair service provider in a niche business that manufacturers and distributors distributes replacement been labels with a total net consideration of $13 million.
In addition, we announced the execution of a definitive agreement to sell the company's equity interest in two Czech Republic hole, So automotive arts distributors and that's pending regulatory approval.
Finally, as you are aware the Corona virus has generated significant headlines which has led the many questions regarding our supply chain.
First I'd like to say that on behalf of allocate you our thoughts go out to all those impacted by the virus.
Clearly with this outbreak everyone is in unchartered waters and is it simply too early to say what interruption companies could face across the business world.
The kroner virus outbreak occurred just prior to the Chinese new year.
As a normal course of business and anticipating the annual shutdown related to the Chinese holiday, we had already procured and we see most of the Chinese manufactured products needed for the first quarter.
Importantly, our segment teams are proactively monitoring the situation and our in constant dialogue with our supply chain partners to help assure we maintain continuity in our operations and effectively manage the inventory levels, we need to service our customers.
And I will now turns of discussion over to Peru, who run you through the details of the segment results and discuss our 2020 guidance.
Thank you make and good morning to everyone joining us on the coal.
Overall, we are pleased with our fourth quarter and full year performance as it relates to progress.
He financial priorities of profitable revenue growth margin expansion and free cash flow generation.
Resetting the team's focus to these priorities, while implementing large scale changes to our compensation plans was a formidable task and we are incredibly pleased with how quickly the organization adapted to these progressive changes to deliver solid results in 2019.
With North America in his strong position and the one L. Kikuyu your program picking up momentum we are excited about our prospects for twentytwenty and beyond.
Before diving into the results, let's start with the key financial highlights.
The consolidated segment EBITDA margin for Q4 improved 80 basis points relative to the prior year.
This was led by the North America segment, which not only generated the highest fourth quarter margin in the previous five yes, but the highest by 120 basis points.
Europe and specialty were roughly flat, although Europe faced a 30 basis point headwind from transmission expenses.
Q4 was a relatively low revenue growth quarter. So the ability to maintain all grew margins speaks to be improved resilience of the business.
The restructuring programs, we implemented early in the year have certainly helped in this regard and help kick start the focus on cost and productivity.
As we guided last quarter. After a couple of historically high quarters of cash flow generation. The expected moderation of operating cash flows occurred in the fourth quarter.
That said, we will still be able to add approximately 100 million in operating cash flows for the quarter to finished the year well over $1 billion.
A record high for the company.
We are cautiously optimistic going into the year as reflected in our original guidance of 775 million to 850 million, but to finish over 1 billion is a tremendous accomplishment.
I want to thank our team members across the enterprise for the reference in making this a reality.
What was anticipated to be a three year journey has taken us a little over a year.
This is the L. Kikuyu culture that I'm immensely proud off.
I will now cover our consolidated and segment results.
Similar to last quarter to save myself, some words and the accompanying earnings deck being largely self explanatory when I referred to net income and diluted EPS. Please note that high we'll be referring to the amounts from continuing operations attributable to L. Kikuyu shareholders. In addition, Nick covered the deep.
Sales of net income and earnings per share so I will not repeat.
Please turn to slide 12, and 13 of the presentation for highlights on the consolidated fourth quarter results.
The consolidated gross margin percentage increased 100 basis points quarter over quarter to 39.7% would be improvement primarily coming from North America.
Please note that the reported margin includes 4 million in restructuring related cost classified in Cogs, which represents a 10 basis point negative impact on gross margin.
There is little bit of rounding impacting the components. The adjusted gross margin, which excludes restructuring is up 120 basis points.
Overhead expenses increased 40 basis points to 29.7, primarily driven by North America and higher transmission costs in Europe.
Restructuring and acquisition related costs was $16 million as a result of ongoing expenses for the initiatives, we announced in the second quarter of 2019 and acquisition integration.
Interest expense was favorable by 4 million a decrease of 11% compared to the fourth quarter of 18 going to lower interest rates and lower average debt balances.
Other income was favorable by 18 million of which nearly all the variance relates to changes in miscellaneous gains and losses from acquisitions and divestitures as well as impairment charges.
Please note that these items are excluded from my calculation of adjusted EPS.
Moving to income taxes, our effective tax rate was 26.5%, which reflects a reduction in expense for the year to date catch up caused by the finalization of the annual effective tax rate.
Equity in earnings of unconsolidated subsidiaries, which relates mostly to our investment in mechanism in.
Reflected income of $1 million versus expense of 46 million in the fourth quarter of 2018.
You'll recall that we recorded a 48 million impairment charge on the mechanism and investment a year ago.
Please now turn to slide 16 for highlights on segment performance, starting with North America.
Gross margin was 46.1% or 260 basis points higher than the prior year.
The margin expansion reflects the continued benefits of initiatives in both are off to March 10, salvage operations as well as efforts in not lost business.
Two additional items in the quarter to destroy new highs one.
Positive revenue impact from the GM strike drew a favorable mix impact on gross margin and too precious metal prices had reached record levels, providing a boost to revenue per vehicle.
Salvage operations.
Folding scrap prices remained a drag on segment gross margin sequential changes in scrap prices had an unfavorable impact of 9 million for the quarter compared to a negative impact of 5 million a year ago, creating a 4 million dollar a year over year negative swing. However, self service was able to show either.
Quarter over quarter margin improvement due to the positive impact from sales of precious metals I referenced earlier.
Operating expenses increased 90 basis points to 32.5% in the fourth quarter.
As previously referenced the North America segment produced 2.5% organic growth in parts and services revenue, which had positive leverage effect, but there were several offsetting factors that pushed expenses higher than a year ago.
Fast incentive compensation contribution the 50 basis points year over year increase strong operating performance required upward revisions in bonus accruals pushing expense higher than a year ago.
Second bad debt expense had an unfavorable impact of 30 basis points due to be perfectly clear. This wasn't a deterioration in collections. This yet as the variance is largely attributable to a high level of recoveries in Q4 of 2018 and so in negative.
Year over year comp.
Ted again on the sale of a four month Nashville facility, a year ago Drillbit 30 basis point increase in overhead expenses as we did not have a similar again.
This past quarter.
Finally as mentioned in the last few quarters facility expenses continue to trend higher this year due to expansions and rates increases related to renewals, creating a further 20 basis points impact Favourably North America showed positive leverage of 10 basis points in other personnel costs through lower insurance.
Claim costs disciplined hiring and the implementation of the cost reduction plans described in the second quarter.
In total segment EBITDA from North American the fourth quarter was $180 million up 27 million, a 180 basis points higher from the prior year.
Closing out on North America, we know that we can count on events like the GM strike or record high precious metal prices to be present every quarter. We undeniably saw a margin benefit from both these items.
I don't want to discount the margin achievement as pure good fortune and the only thing goes sometimes you have to make your own luck and the North America team deserves credit for being ready to serve the market when the GM strike disrupted supply.
Being disciplined operators and seizing available opportunities the North America team was able to deliver a fantastic quarter.
Moving onto the European segment on Slide 19 gross margin in Europe was totaling 6.6% down 10 basis points relative to the comparable period of 2018.
Restructuring expenses in the UK represented in negative 20 basis points impact for the quarter.
Outside of these charges. The segment gross margin was up 10 basis points with benefits from higher pension seeing rebates, mostly offset by lower margins Benelux eastern European and Italian operations due to lower prices and product mix with respect to operating expenses, we experienced a 10.
At this point decrease on a consolidated European basis versus the comparable quarter a year ago.
For Q4 2019, there was a 30 basis point headwind associated with the ongoing transformation efforts related to the one l. Kikuyu Youre program.
Personnel expenses were favorable in 2019 by 40 basis points due to restructuring program savings and the benefits of hiring freeze across the segment.
[noise] European segment, EBITDA totaled $108 million or 90 basis points increase.
Last year.
As shown on slide number 21 relative to the fourth quarter of 18, the pound Sterling was roughly flat bill the euro weakened by 3% against the dollar causing in negative effect from translation overall, there was a two cents headwind on adjusted EPS for the quarter with roughly equal parts come.
From the impact of transaction gains losses and translation.
Segment, EBITDA was 7.6% for the quarter up 10 basis points compared to the same period last year and includes in 30 basis point headwind going to transmission expenses I referenced earlier.
On a fully based his segment EBITDA was 7.8% within the range. We communicated on September 10, the one L. Kikuyu Europe coal and to be clear. This figure includes 20 basis points of transformation costs for the year.
Turning to the specialty segment on slide 22.
The gross margin percentage declined by 100 basis points in Q4 due to equal impacts from sales mix, including a decrease in revenue from drop shipments sales and timing of adjustments for customer rebate accruals.
On the other hand operating expenses improved by 50 basis points with reductions in personnel and freight costs more than offsetting higher bank of expenses.
Segment EBITDA for specialty was $25 million and as a percentage of revenue was down 10 basis points to 8.4% with that backdrop off your revenue decline in the fourth quarter specialty team continues to take action to control costs as was evidenced by the year over year decrease in <unk>.
Since dollars.
Let's move on to liquidity and the balance sheet.
As presented on slide 24, you'll note that operating cash flow for 2019 was roughly 1.1 billion or 50% higher than 2018.
A key working capital accounts that is trade receivables inventory and payables generated cash inflow of 46 million for the year compared to an outflow of 205 million a year ago.
Purchasing teams did great work in driving this improvement by applying a disciplined approach to inventory in soft trading conditions and working with our vendor partners to improve payment terms.
Capex for the year was 266 million, resulting in free cash flow of 798 million, a 73% increase over the prior year.
To put this into perspective, our 2019 free cash flow was higher than 2018 operating cash flow. Despite a 16 million year over year, increasing capex.
As discussed last time, we analyzing the efficiency of our cash flows and what level of earnings we can converge to cash on the sustainable basis looking at slide 25, you can see positive trend into free cash flow to EBITDA conversion ratio. This year based on the programs we put in place in the second half.
2018, we made significant strides this yet to move this ratio closer to where we believe we can operate over the long term.
There is further opportunity to improve conversion, though we do not expect 2019 growth percentages to repeat at the same rate in 2020.
In line with our ongoing Judiciousness on capital allocation and capital structure, we concluded that redeeming, our 600 million foreign three quarters US dollar bonds do you in Twentytwenty pre using cash on hand, and lower cost revolver debt was the best use of our liquidity.
The cash generated during the fourth quarter was used to pay approximately 200 million off the bond redemption costs with the remaining funds provided by our credit facility.
Additionally, we took the opportunity to exercise it purchase option on on North America headquarters in line with our long term commitments to the Nashville area.
We continue to believe that a balance sheet is in good position to support our business objectives.
And finally moving to slide number 27 as of the Petty festive December we had $523 million of cash on hand, resulting in net debt of about 3.5 billion.
Net debt leverage ratio remained level with the third quarter at 2.6 times, but still represents good progress from the 2.9 times rate as of December of 2018, we believe we'll be able to decrease the stat again in twentytwenty.
Now I would like to detail our annual guidance, but twentytwenty.
Please note that the guidance assumes that scrap prices and foreign exchange rates hold at current levels and be annual effective tax rate is 27.5%. Additionally, the guidance assumes no material disruptions associated with the United Kingdoms exit from the European Union the Karuna virus.
Greg or any escalation in trade was or tariffs.
We believe North America is poised to carry its strong performance in two twentytwenty.
We expect that Europe will continue to face some challenging economic conditions do with the one l. Kikuyu your program and the various restructuring initiatives should take hold and produce further benefits.
Multi is actively seeking new revenue streams to combat the recent weakness and in the interim we remain focused on rightsizing its cost structure for the revenue expectation.
We have set organic often services revenue growth at 50 basis points to 250 basis points.
Please note that would the leap year, we have an extra selling day in the first quarter and will hold that for the full year.
Also please note that exiting the low margin FC a battery contract will be a headwind of approximately 30 basis points on global organic and approximately 90 basis points on North America America organic growth in Twentytwenty.
Diluted EPS on a GAAP basis is a range of $2 20 to $2 PEGI to while adjusted diluted EPS is a range of $2 46 to $2.58, we're projecting solid business growth from a margin improvement efforts, especially in Europe as this.
Skus last September we expect to take a step forward in our drive to double digit margins by producing is segment EBITDA margin for Europe in the range of 8.5% to 9.2%.
Starting from a 7.8% base in 2019, the high end of the range will be a stretch, which we remain confident in our ability to finished within the range.
Additionally, we should benefit with lower fully our interest expense going to the ongoing debt paydown.
Cash flows from operations reflect a range of 1 billion to 1.150 billion.
The midpoint of guidance is roughly on par with our 2019 actual figure keep in mind that 2019 cash flow growth was approximately 50%. We reached a 1 billion dollar Mark in operating cash flows a few years ahead of my expectations, meaning we benefited from significant.
Working capital enhancements that we can't count tone to repeat each year at the same level. We believe we can sustain the new elevated level of operating cash flows with continued focus on create working capital management and the implementation of the vendor finance program in Europe.
And finally capital spending is set at a range of 250 million to $300 million a modest increase from the current tier level.
And so finally in summary, the fourth quarter was a solid overall resolved with strong performance by North America, offsetting some softness in Europe and specialty.
The fourth quarter reinforced that we need to be disciplined in cost control to manage through low growth periods.
We believe that our restructuring programs focused on productivity and the one L. Kikuyu Europe project have increased the resiliency of the model and positioned us for future success overall, we remain optimistic about prospects for the future.
With that I'll now turn the call back to Nick for closing remarks.
Thank you barone for that financial overview.
In closing 2019 turned out to be a solid year par company.
Our north American operations extended its record of improving operating margins.
The European team designed and began the implementation of one now Kikuyu Europe.
Multiyear program that we believe will lead to enhance levels of productivity and profitability.
Especially team brought into its industry, leading effort in supporting the warranty programs of the RV Oems and was diligent in honing its cost structure.
And all the businesses made significant progress.
What counts most generating cash indeed over $1 billion of cash from operations, which we used in equal measure to reduce our leverage and repurchase our shares.
None of this progress would have been passed all without the collective efforts of the 51000 people I am proud to call my colleagues and co workers.
To the men and women of allocate Q I offer my sincere thanks and appreciation for all you did both serve our customers and work in the best interest of our shareholders.
And with that operator, we're now ready to open the call for questions.
Thank you.
If you like to ask the question Press Star one on your telephone Keypad tour, which are your question. Please.
Please hold while be composites Ronnie roster. Thank you.
Your first question comes from the line as Daniel.
Please go ahead.
Yes, Hey, good morning, guys. Thanks, taking my question good morning, Daniel Good morning.
One version on the North American gross margins, obviously really strong in the fourth quarter. You noted some of the Tailwinds more transitory record metal prices GM strike, but things like the freight backdrop do seem to be getting better heading into 2020. So can you help us think about the gross margin trajectory for the company as we head into 2020 as the way that.
With index.
Absolutely Daniel and good morning to you, but also to everyone else joining us on the call. This morning, I know, it's fairly early specifically onto the west coast.
And with regards to North America, as Nick and I mentioned earlier, we really happy with the we on North America business has continued to perform and execute against its margin enhancement initiatives.
You'll recall, we started this entire program way back in 2018, and let me from the third quarter of 18 onwards, we slowly, but surely continued to execute and move the needle up.
The fourth quarter of 2019 as I was basically are about was it was significantly better than even our expectations clearly the GM strike was not planned it was not in the budget for example, but the agility and the nimbleness of our aftermarket team to be able to capitalize on.
That opportunity gives us greater amounts of satisfaction that we have the right operators at the helm. In addition to that if you think of fit from a salvage perspective. That's another business. If that has really continued to perform very strongly across north America across the entire yet.
Then with the record high precious metal prices coming through yet again, our salvage business both on the full service, but also on the self service the essentially.
Changed certain processes in terms of being able to harvest. This precious metals again, capitalizing and the agility coming through of being able to capitalize on that opportunity and Thats really is key for us as we move forward into 2020, we are certainly not banking on those record high.
Prices of precious metal is continuing as you know the GM strike has ended and so yes.
Overall 14 points of segment EBITDA margin.
Is significantly richer than what we would expect to be the usual cadence associated with that.
If you wanted to try and bracket in terms of what the precious metals and say the GM stride benefited in the quarter I fully give you roughly about.
120 basis points.
Off that.
The uptick that we had.
We certainly large part to fit was due to precious metals, but also due to.
The GM strike. So if you can think of it year over year 180 basis points move up I'd say about 120 off that 180 was related to precious metals and also the GM strike, so think about from that perspective.
The business without those two elements probably would have still been up.
At least 60 bips.
On a year over year basis, so again continuing to execute on its margin enhancement initiatives. So just want to put that piece and in terms of the 14 points was not the new normal.
So please do not include that into your Twentytwenty multi going forward. There was some elements in the molecule that we were able to capitalize on.
Thanks.
Your next question comes from the line of Stephanie Benjamin with Suntrust. Please go ahead.
Hi, good morning.
It's a little bit on some of the weakness that you've been seeing really last couple of quarters in Italy, Italy, and Germany also note some new leadership changes there as well so maybe if you could kind of discuss what's driving some of the slowdown Mac grill little bit more company specific transitional issues and.
Just side of the some of the plans in place, where we might expect to see some improvement there and some timing would be helpful. Thank you.
Good morning, Stephanie this is Nick.
The macroeconomic conditions in Italy, I think is no surprise anybody it's very poor.
The the country has been in recession now for several quarters.
And that is absolutely flowing through the.
The overall market dynamics.
We are seeing and all of our competitors as we talked to people.
At trade shows and just in the business in general there has been a downdraft in overall activity.
That said we did believe.
That we needed a leadership change and so we have brought somebody on board.
From the outside to head up the Italian operation.
Actually it's an individual that worked with aren't fronds up Mali and the work under Arne for about a dozen years, we're very confident in his abilities and believe that we will be able to.
Move that business forward as we migrate through 2020.
The German marketplace, obviously, a big market.
Again.
Experienced some overall softness.
The.
The leadership change there is not necessarily related to the performance of the style Gruber business, which overall was good during 2019, but more of a recognition.
That we needed a single leader within the style Gruber business there the structure. When we acquired the business was there were three kind of leaders who shared responsibilities and we just needed.
Single headed that business and so.
We made that change.
Early early this year.
You know, we're not expecting the budget. If you will does is not assuming that there's going to be a market uptick.
In either the Italian there the German markets, though we do anticipate that we will be able to get better economic better organic growth in both those countries and than we did in 2019.
Great. Thank you for the color I'll leave it at that.
Okay great.
Your next question comes from minus Craig Kennison with Baird. Please go ahead.
Good morning, and thank you for taking my questions Warner greatly appreciate it good morning.
We do appreciate the comprehensive slide deck and seven am call. So thank you for that.
Wanted to touch on this specialty business, you've got so much good news, but there was unexpected weakness in that category.
Yes, I want to understand should we expect weakness for at least the next three quarters as you kind of anniversary the impact of.
Relationship that.
That has exited and then to what gives you confidence that theres.
That changes not part of a broader trend where you could get disintermediated more broadly. Thank you sure sure Craig.
Yes, well built into the plan is an assumption that the specialty business is going to be relatively flat during.
2020, maybe even down just a touch based on as you indicated that need to anniversary some of these changes.
We highlighted kind of.
Two key customers.
One of which.
Is the result of an acquisition, we're one of our customers was the acquired entity and the acquire or always went through act.
And so when they when they bought our customer they just put their volume through their direct.
Distribution system.
We don't think we think thats a one off.
The other entity it has a very unique market position with an incredible brand name and they had the ability to take some not all their volume, but some of their volume back internally and again, we think its unique related to their their brand identity.
As opposed to anything else. So we're not and we don't see it as an ongoing as ongoing trend.
Thank you.
No problem.
Your next question comes from the line of Michael.
Please go ahead.
Thank you very much.
Next well run and Joe.
On the cash flow.
If I follow the massive what's in the guidance make an assumption about DNA. So the midpoint of net income 695 gets a 320 for DNA approximately.
I'm at 10 15 on cash from ops, So that says you're going to get another positive incremental not as great as 2019, I get it but working capital still helping.
Are we looking at that correctly.
Yes, I think Michael good morning, as foreign on share listen.
You've kind of followed us from a cash perspective for the past few years and stuff and all I can say his hand, Q, yet again to a broader.
Colleagues across all of fell Kikuyu for just a tremendous results coming on from a cash perspective to give you a little bit more another kind of get to your specific honesty in any case.
When we put in place working capital metrics and really what we call internally for a few folks is trade working capital. This is inventory plus the receivables offset by payables the underlying quality and I think you can kind of web to map out through the public cables. If you put out of that in any case is.
The company has made progress on all three fronts. It wasn't just a case of pushing up payables it wasn't as the CUSIP.
Totaling backhaul being more judicious on the inventory we've picked up days inventory on hand in terms of low up on these inventory on hand, we've pushed deep you up a little bit and we've also gotten some.
Yes, so down, albeit very little because we havent changed any terms on a customers. All we've really focused on is collecting past due receivables right.
But the ship.
Scale at which our business has been able to deliver on this is as I said I am just tremendously pleased with that and see if you think of fit from a.
EBITDA conversion level to boost CF, yeah, I mean, thats, a high percentage versus where we have historically been in 2018 be moved up in 2019 be moved up significantly and to kind of give you a rough math just on create working capital it was down 250 million across inventory receiver.
Bulls and payables. Despite the fact that reported revenues were up 630 million, it's going to go back to why Investor day in May of 2018, you kind of recall I kind of showing a trend to everybody in terms of how trade working capital as a percentage of revenue had been steadily increasing for the preview.
Five years up to kind of north of 24 cents in the revenue dollar that is the one that be focused on and by focusing on those vice specific items not confusing everyone. In terms what people trying to do we've made a tremendous amount of progress and so as you think about yes, we do expect to grow some but as I.
Set it's at this point of time, we're now in a sustainability mode. Okay. How do we continued to.
Hit the conversion levels that we were able to achieve in 2019 I do not expect this level of.
Trade working capital a decline in 2020, but again there was certain elements that we had to get reset.
Which we've been able to do and not the case is continuing to deliver on the sustainability of EBITDA conversion. So that's really where we are but I think your math roughly holders.
Thank you.
Your next question comes from the line of from Jordan with Jefferies. Please go ahead.
Hi, Good morning, guys good morning.
On the working capital conversation around can you give us an update as to where we are on payables I guess, specifically on the European side of the business I think your accounts payable were a little bit.
Higher than they were in the prior year, but.
Clearly versus the O'reilly is of the world much lower so I guess, what's the thought there yes. So I'll give you alluded to two key points out that Brett number one as I've said in my previous response, we've made progress both across all three elements of trade working capital. So days inventory on hand has come down deep PEO has.
Moved up and then Dsos is marginally down by about a day.
But depot is up by about four days for the entire enterprise acoustic I think if it from that perspective, and as we think of the cash conversion cycle. We've picked up the better part of seven to eight days in terms of where we were even say a year ago right. So great progress on that front and from two years ago that much more specifically to your question about.
How is the European payables program coming along listen it is it is coming along right at expectations.
Two key elements that I talked about the end outcome really is to ensure that we have.
Better payment terms across our European business no difference to see some of the big box folks enjoy out here in North America business clearly your baby noted for the better part of a decade into half almost kind of two decades. We were just kind of getting started a year ago.
And really where we've come through is.
We focus on the largest markets with regard to the vendor financing program and really does it as the two kind of alternatives for our suppliers.
The end result, being we need better payment terms at a number of us suppliers of either signed up to the vendor financing program, which is great news and there are others, who said listen you're going to go through the entire.
Process of getting.
Invoices going to anybody that Elaine connecting to potential situation. It's too complicated we will give you the terms that you're looking for it at the end result is we are seeing.
With contracts that are essentially kicking in for Twentytwenty, we are seeing that.
Payment terms being extended inline with what our expectations up and then we're going to close the loop for you.
If you're going to go back to the September 10th one Okay Q Europe call that we had we evolve specific in terms of water level off a cash we anticipated generating which was about 200 million by the end of 2021, we are right on track.
Very confident that 2020 will play out exactly the way we planned.
The team has made tremendous progress out that and yeah happy with how things are progressing.
Thank you.
Your next question comes on line of Chris.
I think the area with Wolfe Research. Please go ahead.
She got it.
Quick question in Europe margin targets.
Guys gave the analyst day back in September kind of gave some annual targets for the next couple of years.
Obviously macro remains really challenging.
Some leadership changes just kind of curious what your latest thinking is that those are still the right targets and kind of like what you've learned as you delve deeper to those plans. Thank you.
Good morning that Chris.
As we indicated in our prepared remarks.
One LK to Europe program is on track and on plan.
The expectation is that.
The kind of the guidance. If you will that we provided on September 10th related to the margin accretion over the next couple of years that those Rangers are still valid.
As Bruna indicated in his comments.
2020 getting to the top top end of the range is going to be a bit of a stretch.
Within the range, we are comfortable in so really there's been no change I mean, it's it's only been the better part of a.
Little bit more than a quarter that we're into the program.
Were affecting the changes that we believe were necessary.
To get us to to the promised land. If you will we are making progress.
There are going to be some things that are not going to go according to plan.
And they're going to be some other things that actually do better than than we expect and so we're we're taking it on a quarter by quarter basis, but by and large we're comfortable with the guidance provided back in September.
Thank you.
Your next question comes online.
Sam.
Okay. Please go ahead.
Good morning, Thanks for taking my questions. Good morning, Scott Scott.
It's going back to specialty.
You outlined the issues that happened in the quarter, we expect that to continue I guess or at least for the next couple of quarters, but you. Then said that you would expect organic sales to be flat. So I'm, assuming you're expecting some of these like the additional RV OEM warranty program that some of the positive developments CMO.
To maybe just talk about how that will progress to.
Actually offset what seems to be a pretty sizable losses sales.
This past year. Thanks.
Yes, so ill during 2019.
The specialty group started.
Supplying the.
Oh, we manufacturers actually theyre dealing that work with a with warranty parts.
Because we can do a four efficiently than the OEM east can do themselves again that was a slow ramp.
Now we're at the point, where we have every major OE manufacturer in the borrowing if you will where we are the leading and the supplier of their of their warranty parts and so we will get a positive benefit of that.
Through 2020.
As each of those programs ramp up and anniversary we've got some other.
A key elements, we talked about warned which is our winch business with several new programs that we think are going to provide positive benefits and then the you know the historical legacy of the specialty group, which is the.
Kind of the automotive accessories.
That businesses is doing okay, and so we do believe that there's going to be some Gibson some takes which has taken as a whole will largely offset each other.
Got it thank you.
No. Thank you.
There are no further question at this time I will turn the call back first.
Oh, the presenters for closing remarks.
Well as always we greatly appreciate your time and attention, but we know that this reporting season is incredibly busy for all of you and.
The time you spent with US is greatly appreciated we are looking forward to a very good.
Good and productive 2020, we will come back together in about 60 days to report our first quarter results.
And again I, just want I reiterate to all the and the men and women of allocate Q.
We really appreciate everything they have done and we'll continue to do to make our company.
Yeah performed well and.
And serve our customers and our shareholders. So with that will bring to call to a close and thank you for your time and attention today.
This concludes today's conference call you may now disconnect.
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