Q1 2020 Earnings Call
Thank you for joining okay, Q corporates first quarter 2020 earnings conference call.
Now I'd like to turn call over to your hosts Joe Boutros, Okay cues, Vice President of Investor Relations.
Thank you operator, good morning, everyone and welcome to Okay. Thank you first quarter 2020 earnings conference call with US today or next Sarcone, Okay, acute president and Chief Executive Officer.
<unk> Executive Vice President and Chief Financial Officer.
How did the okay. You website, an okay acute dot com earnings release issued this morning as well as the accompanying slide presentation for this call no. Let me quickly cover the safe Harbor statements. We make today maybe considered forward looking these include statements regarding our expectations, we use hopes intentions or strategies.
Cool events or results may differ materially I know is expressed or implied in the forward looking statement as a result, various factors we assume no obligation to update any forward looking statements.
More information please refer to the risk factors discussed in our form 10-K, and subsequent reports filed with the U.S. She she.
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 and slide presentation.
Felipe everyone has had a chance to look at our AK wish we filed what do you actually see earlier today and there's no. We're planning to file our 10-Q in the next few days and with that I'm happy to turn the call overtures, She nexstar Connie.
Thank you John Good morning, everybody on the call.
This morning, I will provide some high level comments relating to our performance in the first quarter.
Discussed the revenue headwinds, we are facing in each of our segments related to the corporate 19 pandemic.
Provides an overview of the actions we're taking during this very challenging time and finally describe some of them all our industry is experiencing.
The ruble dive into the financials with a key focus on the levers we're pulling across the entire organization to rightsize the cost structure and maximize cash flow you.
Well I'll discuss our liquidity and the strength of our balance sheet before I come back with a few closing comments.
Clearly a lot is changed in the last 60 days as we face this humanitarian tragedy.
Our Hearts go out for all those impacted by the virus both that okay, Q and depopulation March.
The global effort to combat the virus would not be possible without that was on the front line.
Doctors nurses first responders and all that was putting themselves or yes, that's true their communities and the communities where okay to operates across the globe.
Well that I extend a big thank you and offer sincere appreciation from the allocate you family to those individuals for their high ROIC services.
Hey, guys a whole we got off to a great start in 2020 and are pleased with our first quarter results.
In order to understand the first quarter activity one needs to separate the green corporate banking and damage Riyadh of January and February when the month of March.
[laughter] February each of our segments were in line or ahead of our revenue and profit expectations.
[laughter] efforts by governments around the World Cup flattened the infection kindred and slow this brought into fibrous through social distancing itself isolation shopper at home orders and the like I've had a profound negative impact on mobility and miles driven.
<unk> auto repairs and related parts supply has generally been dean in a central service and we have continued to serve the needs of our customers activity levels have to repair shops in North America and Europe, that's drop precipitously.
The speed at which the economic fall from the virus prevention measures as impacted all industries.
Same right never seen before.
It was like operating within two completely separate economy is doing a single water.
We clearly lost operating leverage in March it's the speed of the revenue decline outpacing our ability to reduce cost.
I'm going to use adjusted earnings per share as the proxy.
The fed wherever your today adjusted earnings per share, what's up over 20% relative to the same period in 2019.
While the month of March was down by more than 27 stat, Despite having an additional selling day.
I will quickly address the Q1 results and then provide some detail on the revenue trends, where each of our reporting segments. During the first few weeks of April.
As noted on slide 11.
Total revenue for the first quarter was $3 billion, reflecting a 3.2% decrease on the love a week or did you end the call period of 2019.
Global parts and services or Ghana revenue declined three and a half for sat in the first quarter and 4.7% on a four day basis.
The primary driver for this decrease was a 13.9% per day or Ghana revenue decline and the month of barge when all the stay at home mandates began to take it back.
Hi, Matt earnings for sure perspective, the first quarter results were solid with diluted the P.S. on a GAAP basis, 48 cents compared to 31 cents last year.
On an adjusted basis diluted EPS was 57 cents compared to 56 cents only 2% increase.
With the negative impact to covert 19 on the March 2020 monthly results, we believe showing any year over year, though isn't achievement and just a testament to the strength of our business coming into 2020.
Now onto the segments.
Yeah its witnessed during the financial crisis from 2007 to 2009, the automotive aftermarket is fairly recession resistant.
Exhibiting a decline of only 1% during a period, that's all new car sales fall by 42%.
Oh scrip and during that period declined less than 3%.
Well, what we are witnessing today is entirely different.
As you all know from slide 10 organic revenue growth for parts and services for our North American segment, and the first quarter declined 4.2% or 5.6% on a four day basis.
Looking solely at January and February North America organic revenue was down 1.1%, what's the majority of that negative movement, reflecting our decision to terminate the F.C. a battery contract in the fourth well give last year and to a lesser amount due to a very warm winter season.
PCC estimates that collision liability related to repairable claims in the first two months. So 2020 were down about 4%. So we continued to outperform the market as a whole.
During March we experienced organic revenue declined 13.9% on a pro day basis, what most of that coming into back half of the mom.
Compared to a C.C.C. estimate.
Repairable claims in the month of March being down by approximately 20%.
For the entire order, a 4.2% or Ghana decline.
Significantly less than a 9.9% decreasing collision and liability related auto claims reported by CCC for the first quarter as a whole.
I'd like to highlight that over the last 44 orders through the full year 2019, our North American segment, it's only wetness two quarters of negative growth a track record we are very Paul.
I'd also like to highlight that despite the revenue decline EBITDA margins in North America. It a high of 16% in Q1.
The organic revenue decline for parts and services for our European segment in the first quarter was 3.4%.
Our 4.5% on a per day basis again, this was mostly related to wait 10.3% or 13.7% poor day decline in the month of March.
Importantly, not all regions were impacted by back over 19 pandemic at the same time, creating a different growth profile for each of our European business is in the quarter.
Italy was the first country to report a significant number of coping 19 cases, and the first to lock down the mobility up et cetera.
Particularly in the heavily industrialized area in the northern part of the country.
We saw an immediate impact on our Italian source revenue in the last week of February and the first week of March.
The UK on the other had did not issue stay at home orders until later in the mom and revenue was in line with budget until the week of March 23rd when it began a steep decline.
Lastly, during the first quarter, especially segment had an organic revenue decline for parts and services of 1.4%.
Or 2.9% on a per day basis.
Importantly, when looking at January and February combined specialty witnessed a 4.3% organic revenue growth right with March declining 11%.
It's important to walk at the January and February performance in isolation, given many more concerned that the weakness specialty witnessed in the fourth quarter with excess and clearly that was not the case as we started 2020 very strong.
I'd also like to acknowledge and congratulate our specialty team I'm being ranked the number one national RB parts distributor to do business with.
Number one for having the fastest delivery in the industry both according to our be pros annual dealers survey.
While Q1 results were reasonably strong our industry totally last quarter on a very soft notes and the first few weeks of April where even weaker.
So where we see activity levels in our industry and for our company.
According to IDC report published by Mckenzie and company during the week of March 17 headwinds from social distancing reduce the miles driven in the United States like 40% to 50%.
And accident frequency.
It was down by up to 60% in certain key markets.
Also consumer surveys conducted by Mckenzie showed that U.S. households are trying to reduce their trips by roughly 50% with 45% other respond and expecting to delay any auto repair servicing.
I on Iraq, which provides vehicle trafficking fucking data and analytics reported that across the 98 metropolitan areas. It is currently tracking total travel during the week of April four was down 51% promote it was in the corresponding week in February.
In addition, the U.S. energy information administration has indicated gasoline inception declined to 50% from mid March to April 3rd.
Further evidence of a low volumes in the last month alone a top five U.S. auto insurance carriers have given over $6 billion and rebates to their policyholders because of the dramatic drop and the accident frequency from lower miles driven.
Which are pushing insurance loss cost lower.
Matt Cheat and the automatic insurance claims processor that works with 85 different insurance carriers reported that collusion related claims in late March were down 40% to 50%.
Which could possibly be the bottom of the business in the last 50 years.
[laughter], 40% to 50% dropping claims and repair volume was echoed in a March 27 press released by the Board group, which is one of the largest that myself it was and the collision repair industry.
Well service King another large MISO issue. They released on April 15, indicating they had closed 40 of the repair facilities due to low demand.
Europe is also witnessing similar headwinds according to an Apple mobility trends report.
During the first three weeks of April driving declined over 50% in our top five European markets.
With that as a backdrop it should be no surprise that during the month of pay for all our daily Web you, it's been trending about 40% below 2019 loves it.
In North America salvage revenue has been closer to the 35% down mark with recycled engines and transmissions performing better than collision parts.
Aftermarket collision parts is down more than 40%.
While glass and paint are down about 42% and 36% respectively.
In Europe, the revenue declines in April vary by region, with our operations in Germany, and central and Eastern Europe, reflecting declines of approximately 25%.
The Benelux region being down about 40% so.
The UK being down, 50% and Italy being down over 60%.
When taken together for the month of April we are trending about 40% below last year.
Our especially given that started the months down 40% compared to last year last week saw an uptick in activity and April will likely coming down 30%.
The main question all businesses are facing is how long these conditions conditions will persist and frankly, the answer is impossible to predict.
What we can focus on is the human now and address the dynamics that we can effectively control.
Governments around the globe are trying to figure out both land and how to we opened their economy.
When the Lockdown managers are lifted we do believe vehicles will start getting back on the road, but we don't anticipate miles driven well snapped back to pre Tobin 19 levels immediately.
Over the past week, when you have seen slight increases in activity in most of our businesses relative to earlier in April but.
But those that upticks are relative to the recent lows and it's too early to determine whether they are sustainable.
There is significant uncertainty in the market.
We are working under the assumption that these depressed levels will persist through a good part of Q2.
The man beginning to see a modest rebounding choose free and heading towards more normalized levels in Q4.
Absolutely not back to 100% until sometime in Twentytwenty lot.
That's a pandemic began to accelerate in governments began to implement public safety measures. It was apparent that are mode of operation also needed to change because of the health and safety of our teams are customers and suppliers.
Almost immediately across our global for friends every major operation developing over 19 response team to share ideas and stay in Florida.
Each of our segments has a responsible for pushing valuable information throughout the trends that are helping to ensure we are maintaining its safe workplace.
Our efforts related to enhance hygiene and sanitation.
I feel dispensing and the use of P.P. all has an impact on productivity, but it's the right thing to do.
Simultaneous with these enhanced safety ipads and as soon as revenue began to fall we started to aggressively attack our cost structure.
We have initiated a variety of headcount actions, including the elimination of all overtime and temporary workers.
Extensive employee for Lowe's pro.
Permanent reductions in our workforce.
Decreased the hours for many still on the payroll and participating in some of the social programs offered to employers in several European countries.
Two of these various efforts as of last Friday, we hit effectively neutralize the cost over 16750 employee.
Said another way.
In a matter a few short weeks, we have largely removed the costs of approximately one third of our global workforce.
The numbers are both staggering and incredibly painful.
Particularly for a company that believes our biggest asset is our people.
Payroll related items in aggregate represent our single largest SPD in a expense category. So these very difficult decisions where necessary to protect the long term health of our company.
In addition to the headcount adjustments, we have also instituted salvo reductions affective in April.
Oh eliminate most all discretionary not mission critical spending.
Instituted a ban on business travel.
Accelerated the pace of branch closures bolts temporary and permanent.
And focused on the overall efficiency of our distribution networks and route structures across each segment.
When viewed on a company wide basis over the past few weeks between our conservative actions and normal variable elements. The cost footprint of our company has been temporarily reduced by $80 million to $90 million per month.
Reflecting an annualized run rate of approximately $1 billion.
Well, we don't anticipate actually saving a billion dollars as we will need to bring our people back onto the payroll and add cost back into the business as volumes begin to return to pretty cobot 19 levels. It highlights the magnitude of the cost adjustments we've made.
With respect to the one allocate to effort in Europe.
The new revenue environment has required us to hit the pause button on some elements of the program like the new ERP deployment, which was going to require a large team of people to be in Italy. The location of our next deployment.
We have also delayed some of the other organizational changes.
We have however, accelerated some other programs such as the rationalization of some of our branches, particularly in central and Eastern Europe.
What's revenue running at just 60% are pretty covert 19 levels, it's virtually impossible to gauge the near term benefits of the one I'll take New York program, but we remain convinced it's just a right long term strategy for our business.
I will provide more detail on the cost saving initiatives in a few minutes.
When covert 19 for surfaced in China up back in January.
Immediate concern with the potential impact on the world supply chain I.
I'm happy to report that our supply chain is intact, we have not experienced any major disruptions in terms of inventory shortages or stockouts.
Indeed, we started 20 twond meeting with a high level of inventory as we headed into the seasonally strong selling period.
We have been working with our suppliers secure full availability of our aftermarket product range during the crisis.
Some aftermarket parts suppliers furnishing our various businesses have experienced some reductions in capacity.
We have reduced replenishment orders as our revenue has declined.
Balance we believe we will not have material issues with our aftermarket supply chain going forward.
On the salvage side as miles driven and the number total losses have both decreased dramatically the number of cars available at the auctions. It's has declined as well.
We'll take some time for this particular supply chain to go back up as it can often take up to 60 to 70 days for a total car to reach the auction.
But we're confident that we can manage our purchasing and utilize existing inventory to meet customer demand for recycled products.
I'd like to expand a sincere. Thank you all of our supply partners as they also can front. This pandemic and are working hard to help pause the continue to service our customers.
Like any economic downturn, some businesses will suffer more than others and given the absolute violent nature of this contraction. We believe it will be true even in the historically resistant auto parts sector.
The speed the magnitude of that demand shift will be too much for some of the last fall capitalize distributors to endure.
Already there have been some smaller distributors in the U.S. that have shut the door at least on a temporary basis, while waiting for federal funding to arrive.
In Europe, one of the largest online parts distributors ATP declared insolvency.
Well, Ron a large distributor in France is in bankruptcy and heart a large pomalyst distributor close its doors for several weeks before just reopening this past Monday.
There will be more.
Well it does little in the near term longer term. It means that there will be a natural consolidation of industry demand amongst a fewer number of market participants.
With a leading positions in most all of our respective markets I believe okay. Two is well positioned to take advantage of the subtle shifts in the competitive landscape.
To be sure, but downtown while also impacted repair shops, and we would expect a similar reallocation of demand to the larger better capitalized organization.
We have a close watching our receivables to ensure we get paid for the parts already delivered and installed.
And not unlike doing a great recession, we haven't seen a total collapse of new vehicles SAR across the globe.
In the United States, New car sales fell about 13% in the first quarter and 38% in the month of March.
Into European Union, New car sales were even softer dropping 25% into first quarter compared to last year, what's a 55% decline in March.
We anticipate the April or May results on a global basis, well look more like March then January so the second quarter will likely be very soft as well.
These massive declines in new car sales will ultimately lead to an older car park, which favors the aftermarket parts industry and will ultimately be good for okay Q.
At this point I will turn the call over to varone.
Thanks, Nick and good morning to everyone joining us on the call. What's the difference 60 days can make.
We ended February feeling really good about the start of the yeah, and our prospects from Twentytwenty and now we're working through a global pandemic that has impacted lines and economies in ways that have not been seen in generations.
In these unusual circumstances I will deviate from the usual commentary and focus on forward looking matches as opposed to at least this quarterly results.
Next is already commented on the revenue trends, so I would handle the cost actions, we have taken as well as our liquidity position.
However to start I'm going to briefly discuss financial highlights from our first quarter Huh.
North American reported segment EBITDA margin of 16.1% <unk> 280 basis points improvement relative to the prior yeah.
The improvement is driven by gross margin expansion.
While a portion of the benefit is attributable to the several ongoing margin initiatives increased revenue from precious metals and better pricing really nice sequentially on scrap metal represented the largest incremental group driver.
Continuing a trend discussed on last quarter's school precious metals prices such to record levels in early twentytwenty, providing significant upside in boots on the wholesale and south service businesses.
In April, creating we've seen moderating prices precious metals <unk> no. One knew costs, you know and do not expect to see him out when the upside in the near time.
Overall gross margins in wholesale operations and self service increased by 210, and 90 basis points, respectively. We the father 20 basis points improvement from the mix effect, resulting from the disposal off our aviation business in the third quarter of two times then.
Team.
Europe segment EBITDA margin of 5.7% represented a 160 basis point decrease relative to 2019.
Do note that this includes approximately 70 basis points or incremental transmission expenses incurred in the quarter huh.
Good morning positive note gross margin for the segment increased by 40 basis points.
Negative leverage effect from the sales decline in March as the stay in front of programs began the incremental transmission expenses and sent an unfavorable reserve adjustments push to move ahead expenses up 220 basis points compared to 2019.
Specialty repo introduced segment EBITDA margin of 9.2%, a 150 basis point decrease relative to the prior yeah.
Gross margin declined by 110 basis points due to unfavorable mix the facts and an increase in inventory reserves.
[noise] actually consolidated level net interest expense decreased by $10 million, owing to the Louis average debt levels and a lower average interest rate.
This variance is the direct result of the excellent well our teams have done over the past 18, plus months to focus on cash no, allowing us to pay down debt in the prevailing 12 months.
We have also benefited from the redemption all possible when pre quarters U.S. senior notes in January of this yeah financing it with cash and borrowings from lower cost facilities.
Our effective tax rate was 29.2% for the quarter, which included 250 basis point increase.
Over the annual effective rate zoomed, you're not guidance, resulting in a two cents per share negative effect on adjusted diluted EPS again relative to prior guidance.
The rate increase is primarily attributable to the impact of fluent projected full year pre tax income, which results in higher suspended interest deductions in certain foreign jurisdictions.
We expect volatility in the tax rate this year, given the potential for varying outcomes in our full year results.
Operating cash flows into quarter $195 million, which represented a 10% increase over the same period in 2019 free cash flow of $150 million once a 21% improvement over the prior yeah, leading to a net debt to EBITDA ratio 2.5.
Times based on our credit facility definitions we.
We use our free cash flow along with cash on hand to repay $230 million of DAC and returned 88 million to us from a quarter <unk> in the quarter Huh.
We were happy to see the momentum of 2019 cash flow generation carried through into the first quarter.
Now I don't move into our plans for the remainder of Twentytwenty.
As Nick referenced earlier the drop in revenue during March two case very quickly as governments implemented measures to contain be outbreak.
With restrictions that movement puts in place across multiple countries, we understood the demand would decline for reasons back or outside our control.
And so we shifted our attention to what we could control batches, one reducing costs to reflect the new leveling off market demand and to continuing to focus on cash flow generation.
Each of our segments took immediate action to develop and implemented plan to rationalize their respective cost structure.
Nick described the key aspects, Suffolk cost reductions, which essentially fall into three categories, one personnel related actions.
Variable cost decreases Buffalo diluent projected revenue, including routes consolidations and branch rationalization and pre the elimination of discussion of discretionary and non mission critical spending.
Current estimates indicate run rate savings off roughly 80 to 90 million a month.
More than half that production is attributable to head count related actions as it is the largest line item in our operating costs.
We won't breach the full run rate savings.
During April as we will continue to incur huh employee costs related to paid time off.
On to those are exhausted and the continuation of health care benefits for the period.
Our plans not dynamic and we will be adjusting them based on developments would be outlook on the Qubic 19 virus, we will be diligent in not bringing the expense back Holly and intend to wait for a sustained revenue improvement before adding cost back into the business.
Reinforces the point nickname done here.
The cost actions include the deferral of certain elements of our one how Kikuyu your program also.
The decision to deliver portions of the project, including be establishment of a head office in Switzerland was a difficult one given the long term benefits anticipated from the program.
However, our current focus is to protect our employees and the business. During this market disruption. We are committed to fully returning to the program once conditions have stabilized the deferral along with the impacts of Qubic 19 on our volume compromises and our ability to deliver on.
The margin goals that we presented in our September 10th 2019 Investor presentation.
However, as the phone lift on the duration and the severity of the Qubic 19 induced disruption, we will reassess and communicate the project timeline and our margin expectations.
In addition to the Qubic 19 cost actions. We have also initiated you restructuring program.
These plans reflect a father round off Rightsizing and integration in our North American and European operations and focus on closing underperforming operations.
We expect when kind of costs related to severance.
The t. closures and asset impairment charges amounting to a range of $50 million to $60 million of which approximately 20% will be noncash.
The benefits of the program are anticipated to begin in the second quarter huh, but I'm not projected to reach the full run rate benefit until early next yeah.
We also know what percentage of our overhead costs are fixed versus variable and there's not really a symptom onset.
We have fixed costs, such as facility rent variable costs, such as fuel consumption and sounds commissions.
And then finally hybrid costs that can be adjusted at different levels of activity, but do not flex up and down with every revenue dollar change for example, we maybe able to run a warehouse with 10 employees at this level of revenue.
If the revenue increases or decreases by state, 3%, we may not need to add to poke got any headcount.
However, if the revenue went to declined by 20%, we would expect to reduce our warehouse headcount and potentially the number of drivers to.
Reacting to the pandemic has highlighted this dynamic as we have had to kinda deep into a hybrid cost school in an attempt to align the cost structure with the projected demand.
As shown on slide six full cost reductions in variable and hybrid costs represent approximately 30% of our monthly overhead expenses.
While we were pleased with the team's efforts to reduce costs. It will be difficult only talk a way to profitability, we retain a certain fixed cost base, including facility rent and administrative expenses back will be more challenging to decrease.
Additionally, we must cover approximately 175 million annual depreciation and amortization expense, excluding haven't transition of acquisition related intangibles, which we add back in calculating adjusted diluted EPS and approximately 115 million.
Oh annual interest expense.
Contracting easily flexed.
We are currently projecting the largest negative impact from the cobot 19 virus in Q2 with a gradual revenue and profitability improvement as the year progresses through as you. All know this could easily change and the pandemic and the global responds plays out over time.
Moving to liquidity, we feel between the good position to withstand the cobot 19 disruption.
As I referenced earlier there has been is significant shift in the world in the last couple of months.
On February trying to this yeah, we reported over $1 billion in operating cash flows for 2019, and SEC guidance actually similar level what 2020.
Our net leverage ratio was 2.6 times compared to the maximum allowed ratio of for kind of quarter times.
As our cash flow generation programs have taken hold since 2018 and continued to increase the absolute level of cash being generated by each of our businesses liquidity and debt covenants well no on the list of concerns going into Twentytwenty.
Then the covert 19 outbreak spread across the globe and folks became interested in everyone's ability to comply with respect to financial covenants and retain access to credit pockets.
I will address our liquidity status in two pieces.
Yes, our current liquidity position and efforts to conserve cash and second the compliance requirements for off financing arrangements.
We believe that our current liquidity and although to operating cash flow in future periods will be sufficient to meet our current operating and capital requirements to support our liquidity position during the cold 19 pandemic. We are focused on preserving cash during the expected period.
Off reduce demand.
Action plans to strengthen our current position include approximately 40% reduction or more than $100 million deferral of group driven and non mission critical capital projects.
Reductions in inventory replenishment creates to reflect current demand.
Active monitoring of customer receivables and towns.
The continuation of the European vendor financing program.
Tax payment different rules, where allowable Hans and I share buyback program. In addition to the cost saving measures as previously discussed.
1.9 billion of total liquidity as of March 31st 2020, and 91 million of current maturities, we have access to funds to meet our near term commitments, even if the pandemic effect extends longer than current expectations. We have a surplus of course.
Current assets over current liabilities of over 2 billion, which further reduces the risk of short term cash shortfalls.
Our total liquidity includes availability on our senior secured credit facility, which includes two financial maintenance covenants.
Maximum net leverage ratio and minimum interest coverage ratio.
The maximum net leverage ratio will be four times effective our compliance it to fix it to be filed for the second quarter of 2020.
We are confident that we will be in compliance with the financial covenants and the second quarter due out of an abundance of caution and as an effective insurance policy. We have commenced discussions with our bank group regarding continued access to borrowings under our credit facility if the impact of the Qubits 19 pandemic how.
Yeah, and prolonged negative impact on our profitability.
Our euro notes do not include financial maintenance covenants, and the indentures will not restrict our ability to draw upon on the credit facility no will be indentures proving that our ability to amend the financial covenants under the credit facility as needed.
By limiting our capital spending to mission critical projects and the strategic Central distribution center in the Netherlands, We will preserve cash to support due to do operations, while generating a benefit to our depreciation expense for the.
We will be judicious in balancing the cash generation, while continuing to invest portfolio into the business.
Creating it long term sustainable advantage, and we are confident or being cash flow positive for the full yeah.
Interestingly, while April is expected to be the worst month for revenue and profitability I'm happy to report the company did not need to draw down on the credit facility and instead, we were able to pay down the debt in the month.
Finally, I'd like to close with a few comments regarding our outlook for the remainder of the yeah.
As you know we grew our full year guidance last month, given the uncertainty created by the Cobot 19 outbreak.
Currently there are too many unknowns to be able to provide full year guidance on revenue and profitability measures. However to prepare on March financials. We made a good faith estimate of the full year results based on information currently available and our resumption include is severe short term impact.
Followed by a gradual returned to prior levels by Twentytwenty won.
This projection supports our analyses underlying demand financial statements, including our interim goodwill impairment test other impairment test of intangible assets.
Aspects of the Recoverability of inventory calculation of the annual effective tax rate and evaluations of the realized the ability of deferred tax assets.
The economic impact of the pandemic is dependent on variables that a difficult to protect and in many cases outside of our control. It is possible, but the estimates underlying our analyses may change in future periods.
We are committed to providing investors with comprehensive disclosure regarding our results and future prospects and we will try developments as appropriate going forward with that I would tend to go back to make for closing remarks.
Thank you for around in closing it is clear that our focus on profitable growth enhanced margin and better free cash flow generation positioned us well as we entered this unexpected turnover bats.
Our teams have been agile and have done a fantastic job tackling the cost structure, which is no easy task, especially when confronting the human element of these actions in our culture that is rooted in pride in camaraderie.
Our teams have embraced the idea that not all progress is measured by ground gained but sometimes progress as measured by losses avoided.
And for that I am tremendously proud and thankful everyone's efforts to confront these very difficult times.
What I know is one of the pandemic is in the rear view mirror and the economies around the world settle into the new normal whatever that may be.
There will still be more than 275 million vehicles in the United States in over 305 million vehicles in Europe.
The average age of these cars will increase and the resulting heightened demand for alternative repair parts and accessories will be service by a slightly smaller number of competitors.
Therein lies the opportunity for outtakes you.
Yeah, that's why I have been coaching our leadership teams to focus both on getting that through the near term headwinds and to also keep one eye open for the longer term opportunities to gain market share and create more efficient operating models.
Tom for them that I'll take you will not just survived the pandemic, but will thrive in the post and dynamic economy.
In my communication with a broader employee base I indicated we will get to this together.
And we'll come out a stronger wiser and better positioned organization that continues to be allocate you proud.
Operator, we're now ready to open the call for questions.
At this time, ladies and gentlemen in order to I say question you would need your press star one on your telephone we kindly request that you answered one question maybe into the queue for any further questions. Please standby probably compounded the Q any roster.
Our first question comes from is definitely Benjamin with Suntrust.
Hi, good morning.
Good morning, Stephanie.
Oh really appreciate all the the extra color that you guys provided particularly as you broke out just the performance through the first half through the quarter or more than that and then kind of how is it how it deteriorated in march including the CCC numbers I was hoping.
Maybe you could probably a little bit of color and there was such a strong outperformance versus the industry during those periods, whether it was the.
January through February and then also in March So maybe you could provide some color I might what you believe is driving that outperformance versus the overall just kind of volume numbers from.
CCC numbers I think that would be helpful. Thanks.
I'll take us out of that Stephanie.
Well, we offer to the the north American collision repair industry.
Isn't ability to provide best in class service and that goes to items like.
Delivery times, the number deliveries on time deliveries.
The depth and breadth of our inventory, which what we have nobody else can match and we believe that a you know we have always outperformed the marketplace, because we offer a different value proposition than most of our smaller competitors and I'm, particularly when things.
Started to slow down.
And you know.
A number of businesses were really having to pull and quickly our capital base allows us to continue to provide we believe is world class customer service and overtime that wins.
But make no doubt, we always believed that the depth and breadth of our inventory is perhaps our biggest competitive advantage.
In the North American marketplace.
And the ability to get those parts to our customers are on a on a reliable basis on a very quick basis separates us from so many in the industry.
Got it well for the sake of time I'll pass it on from there. Thank you.
Thanks, Stephanie.
Your next question comes from Bret Jordan with Jefferies.
Hi, Good morning, good morning, Brett and good morning on the a north American gross margin you called out metals scrapping precious metals.
Driving up Big John could you tell us how many basis. Once you picked up on metals. Just so we can get a normal margin run rate.
Yeah, Brett itself, our Enogen great question essentially within our overall salvage operations, we do not breakout precious metals on a call by car or an automotive on a unit by unit basis. What we do know is precious metals alone had close to a 15 million dollar uptick in.
Revenue on a year over year abuses says you think about it from that perspective, you got to do the math in terms of how much of that can actually flowed through there is the cost associated with getting to the precious metals that have found within the salvage vehicles, but again as I said previously also a into law.
First quarter earnings numbers operating teams have just on a phenomenal job in positioning themselves to be able to extract and take advantage of what's happening in the precious market.
In the precious metals market, so again happy with the way they performed in Cana, essentially making making their own destiny from that perspective.
Yeah NFL.
And the cost as a vehicle.
It goes up or falls.
Based on the value of those metals.
And what we've seen is growing indicated in his prepared comments.
Is a those values have come back down not all the way back to where they work began the year, but they have come back again.
Okay. Thank you.
Your next question is all night as Michael Hoffman with Stifel.
Good morning, Michael Thank you Hey, good morning, I hope everybody in your family friends and colleagues are safe and healthy.
[noise] trying to.
Take all of this great data then.
And the first pass quickly trying to adjust a model on the fly.
You'll still be profitable and well into Q, but it's going to be paper said is that the right way to think about it.
EBITDA, Michael it's yeah, Michael its barrenechea.
It all depends in terms of how the credit continues.
As I as Nick mentioned in his comments also the first half of April was a continuation of March which was down almost like 40, 45% in the last 10 12 days we've seen.
Some nice the uptick, but having said that it is still down on a year over year basis, you toward depends in terms of what the outlook is for the month since May and June. We also do know that in the month of April here in the United States. For example, with the folks that we put on furlough, we essentially.
I have allowed.
Our folks to be able to run down the P.T. Rowe balances essentially we are paying them, which we believe will get exhausted by the end to people. In addition, we have continued health benefits for certain period. This is not the time to be pulling the rug from people's from under People's feet.
Given what's happening out in the broader.
Macro economic situation in any case through April we know from a profitability perspective will be challenged but it all depends in terms of how.
May and June comes through what we have said is that we have suspended guidance and again as and when numbers begin to come through for April month, and and again as we go through the quarter. We will update the markets. We do have a series of virtual Mdrs and invested called set up for.
Lead to in the quarter, but again at this point of time, we're not in that position to see as to where Q2 will be coming through it all depends in terms of up the next 60 days play out.
Okay.
All right I'll cycle back and ask the next question. Thanks.
Once again, ladies and gentlemen in order to ask a question you need to press Star went on your telephone.
Our next question comes from Great Craig Kennison with Baird.
Good morning, Craig Good morning, Hey, good morning, Thanks for taking my questions in a thorough slides in review.
You had mentioned a competitive disruption I guess to the extent your competitors are struggling and you are able to take share can you serve that opportunity through your existing operations or would you need to expand branches or acquire businesses in some geographies.
Cover that potential opportunity.
No Craig a great question no. We're convinced that we have the footprint we need in most every market in which we operate.
To to service more customers and with a with more volume.
And as a actually I think both food and I put in our formal remarks.
Actually going to be consolidating some of the branch network across the globe not to gain further efficiencies.
As these volumes have come in we will there is opportunity to get to even a more efficient footprint and we believe a even though some of that it's going to be on a permanent bases that we will still be able to fulfill and even heightened demand.
That will ultimately come out of this.
And Craig I'll, just going to add one more to what a data point toward Nick mentioned.
In terms of the hypotheses that this will end up potentially being a gain share for LTC Q.
I understand it's too early days, but across each of our pre operating segments. We are seeing customers that we havent seen in quite some time and I'm talking a few years. So both in North America and in Europe, and then also in our specialty unit, we are seeing activity from customers that we haven't seen for some time.
And again, you know due to its hard to come by in certain markets, but even where markets are down.
What we're picking up from a market Intel is that we are outperforming our competitors in those specific markets. So back to your hypotheses. It is playing out now.
And then two to the additional point, whether we need to expand up footprint no. We believe up footprint is adequate and in fact, we actually have an opportunity to essentially.
Fine tune our geographic footprint.
You know through this through this period.
That's helpful. Thank you.
Your next question comes from Gary.
Prestopino, what Barrington research.
Right.
Thanks, Hi.
A quick question here in terms of.
Your customer base on the repair side I mean is it more or less the 80 20 rule that you know you're doing 80% of the business with the 20 largest.
<unk> percent across both North America in Europe.
No it's not quite that.
Swayed Gary the.
The customer base is incredibly fragmented I mean, there is in the United States for example, somewhere between 35 and 40000 collision repair shops.
In Europe, there's literally hundreds or thousands of mechanical service and repair shops. So there are bigger entities. There we got the m. episodes on the collision repair side in North America, you got some large chains over in Europe, but it's in the no.
It's not 80 20 or so this is an industry our customer base.
As an industry that is represented by an incredibly fragmented group of Ah of competitors.
So is there any worries on on a short term basis at least with some of these smaller players.
You know falling out of bed year come just close and shop like you were talking about some of the competitive situation.
Other suppliers in Europe that are declaring better yep.
Absolutely whenever you have a a severe economic contraction small enterprises this mom and pop enterprises oftentimes just don't have the capital to a two indoor you know, we actually have sponsored and promoted some educational.
Sessions for North American customer base.
To get them tapped into.
How to best utilize to government programs that are placed the bonds small.
In the medium sized businesses and so.
We ran a and sponsors seminars and I'd say that are a body shop customers could dial in to understand how to navigate a the loan program for an example, because we want them to see them stay consistent.
Okay. Thanks, a lot.
We have a solid went from Bret Jordan with Jefferies.
Hi, Good morning again guys.
You talked about I guess service getting out and shot a number of their branches I think they also delayed a bond payment and recently as well you have any exposure either to them or any other major collision. James you know that you have to worry about as far as getting paid back at accounts receivable.
Hey, Brett it's far enough to let me, let me take that question.
Listen as we closed out the first quarter of 2020, I will share with you and again this is.
The appropriate time to share it with everyone is up the company has never been in a better position in terms of managing our past due receivables again. These things don't happen by accident. We started the program probably the better part almost two years ago, because there was a massive opportunity in terms of the way customer receivables were being.
Managed so again as we closed out we were in a very fortunate position. Thanks to the phenomenal work all of field operators are both here in North America, but also in Europe to your specific question about a wonderful larger customers, we enjoy a great relationship with them and yeah.
We also heard about the news, but I'm happy to report that as of the end of the first quarter. We work current with them across Oh across their receivables balance and then with regards to call. It other customers and stuff listen this is evolving situation as it now Nick mentioned, the fact that we have a fairly fragmented.
Good customer base.
The good news is several of our smaller customers do have the ability to draw upon.
The payment protection, the paycheck protection plan, and we certainly encouraging them to apply to the Sps side of things in any case, but other than that are happy in terms of how we remain close to our customers and again, we are confident on their ability to again.
Gained share to the spirit, but again no no specific issues with the receivable hits as such.
Thank you.
Your next question is gonna be a follow up from Michael Hoffman gets thanks all.
Hi, so circling back I'd like to get the point of clarity if I could on an early question you shared $15 million sort of incremental sales in the quarter for metals, but does that I hear that correctly. So they gave you 100% credit for that cousins all price forget that you had cost a pull that out of that.
To 11 on the EBITDA you still are 15% margins as I am I am I doing something wrong, just want to understand though no Michael I think the Matt the math is appropriate except for the fact that precious metals was close to 55 zero million up when the Euro VI is zero.
Okay.
Absolutely I think that's the piece you've got to think about the second point is what we are currently seeing in April creating of precious metals. They have come off their record highs that we experienced earlier in the first quarter. So again, we do not anticipate that a set of gains to be on an ongoing basis. The other piece would think about.
As as we've always talked about on the salvage side scrap metal prices, while they were down on a year over year basis, it's more kind of the sequential pricing, which matches to us and sequentially scrap metal was up about 23%. So that also helps the overall North America margin. So that's how you should think about this but again precious met.
<unk> was by far the biggest piece, but as I said, we don't anticipate that upside to continue at least not in than in the near term.
But directionally correct money, even without the impact of the metals or our margins would've been up.
Right. Okay. That's just trying to get at that and then and then back to the 80 to 90 million.
Is there a way to think about how that plays out between the two major regions as far as where it comes from where you can get savings and and then how much. If you. If you learn to be leaner how much of that do you get to keep permanently and then I guess can keep a whole billion, but how much do you think you might keep.
Well have its ruin indicated about half of the easy to 90 million is equal we like.
And those adjustments have been made in each of the three segments.
North America.
Specialty and Europe.
We have more people in Europe to start with so you should assume that.
You know a the majority of the 17000 a person adjustment.
Came out of Europe, North America, Nexus and specialty obviously being the smallest or all of our operating heads.
Are working under the orders and the assumption.
That when we get back to 100% of revenue volume whenever that is.
That we should be able to service that was without adding back all 17000 people that there has to be.
Some embedded productivity gains coming out of that process.
We don't have at this point in time, the magic to answer as to whether that's adding back a 99% of our people are 95% or the people are 90% people.
But we do anticipate that we will gain productivity from a human capital perspective in the same with some of the other operating costs again, there are things, we're gonna have to add back.
But importantly, as bruna indicate it kinda do it kind of in arrears is willing to make sure that revenue is there and sustainable and then that some back and it will be a a gradual process as we walked back up what the hope that when we get to the Oh, when we get back to 100%.
We will not have added back 100% of the.
Of the operating expense.
And Michael to go to your specific question of how much of pitches between the two.
Geography, it's roughly half and hub so be 80 to 90 million roughly half in Europe and the other half here in North America, and then with regards to the key categories. Just to reiterate personnel cost is by far the single largest line item overall opex and so that clearly is the boss.
The bulk of fit but then in addition to that we do know that there are certain variable expenses such as Ah you know the spend that we have a home routes and deliveries and fuel and we certainly are picking up that variability also as revenues come in.
So just kinda give you that additional color for the sake of comprehensiveness.
Okay.
And Citron repeating our turn in the same ask one more just.
If I could sort of been if everybody.
The world recovers.
We get we start to me again whenever it is part of it recovers.
We get back to a more a old revenue number in the U.S. from a collision standpoint, or I mean, I get why we would in Europe on maintenance you Gotta, if you're driving your car you got to do the maintenance how do we get back to the old revenue number probably I'm gonna have a whole bunch more above average accidents.
[noise] ultimately a one the miles driven gets back to kind of pre covert levels and people or you know kind of.
Back into their normal routines are you know the accident rates a will.
From a frequency perspective will move back we believe to where they work or pre virus right. Once the once the roads and highways or pull of cars and in other vehicles and that's really what's the key Michael is it's a number of accidents, because that's what drives a repair volumes and off.
Currently what drives the demand for the repair parts that we supplied to the body shops.
Yeah. So we're comfortable that in time, assuming miles driven gets back a that the the frequency will return and that will be a strong driver of our of our revenue you know the $64.
Question is once that all occur right.
You know, there's anecdotal data out there now it's from China. So it's a very different economy right.
But what are you know what the Chinese have reported is that about two and a half to three months after them getting peak from a virus infection perspective.
Miles driven and individual vehicles was at 80% of pre crisis levels.
Contrast that to their public transportation volumes, which were ODAC of 40% of pre crisis levels. So folks at least in China. It clearly view their personal vehicle as being a safer mode of transportation.
Than jumping on public transport.
And that's that's a good sign right. What is to just is that but you know the same could happen here in the U.S., but just because you know the either on a federal basis or on a state basis. Some other restrictions gets lifted nobody should assume that miles driven is going to snap.
Back to pre virus levels, I mean, I sit here and that in the state of Texas in our Governor on Tuesday, I indicated that he was going to quote open up start to open up the Texas economy. This coming Friday, and that's great because there's all sorts of businesses that have been shut down on the same day one of the loop local.
News stations or did a survey of of 3500 residents of Boston and 86% of 'em said it was too too much too soon.
So even though some of the restrictions may be lifted it remains to be seen as to whether residents around the world I'm going to have the courage to actually venture out.
Immediately and get back into their normal routine, we think it's going to be on much more of a gradual return.
Our next question is from the line of Daniel.
Pembro with Stephens, Inc, Inc.
Hey, good morning done now.
Thanks for squeezing me in I think it dropped off for a second so sorry, we touched on this but rune wanted to touch back on Europe, and the one Q or something that stood out to assist the gross margin leverage despite pretty soft sales. There we talked a lot about north America, and the metals pricing, but can you shed some more light or what drove that gross margin improvement in Europe and then.
How you're thinking about the sustainability of those drivers obviously as near term demand trends are pressured yeah.
Yeah, I think a daniel its fun notice for the sake of everyone understanding I think your question was there was a 40 basis point improvement in gross margin across a European segment and the sustainability of that so yes, I'm very happy with the way that has come through the level of discipline that our teams have been.
Putting out.
In Europe in the pursuit of.
Profitable revenue growth and accretive margins that has continued to kind of come true.
In the past, where we may have been kind of what you're seeing and lost time down the rabbit hole that discipline that the team has picked up has been tremendous and up in these could come stances chasing chasing a any and all revenue could become a fools errand and so essentially the teams have been focusing on only pursuing.
Profitable revenue in addition to that as you know.
We've been doing well from a centralized procurement perspective, and those benefits of also crude but just think about the fact that who just being very disciplined from a pricing perspective.
And that was something that was much needed over in Europe. In addition to everything that the team has been doing from a centralized procurement perspective.
Got it.
Thank you.
We will need to bring the calls were closed so just one last question and and then we'll wrap up.
We're a bit over.
Did you have one last question Daniel.
[noise], Nick I think we all John if you know trying anyone on the screen. So I can be all good took shows up.
So back to your take rate.
Yeah, we greatly appreciate your time and attention here. This morning, we've obviously shared a fair amount of of information a there normally we would not provide a but we thought it was important to provide additional clarity and transparency in this great time of uncertainty. So we do appreciate.
Are you participating in our call and we'll be back together again in about 90 days with our second quarter results. Thanks, everyone.
Ladies and gentlemen, thank you for participating you may disconnect at this time.
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