Q2 2020 LKQ Corp Earnings Call
Today.
At this time I would like to welcome everyone to the Okay. Q Corporation second quarter 2020, <unk> earnings Conference call.
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After the speaker's remarks, there will be a question and answer session.
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I'd now like turn the call over to joke Butcher, Vice President of Investor Relations you May begin your conference.
Thank you operator, good morning, everyone and welcome to allocate cues second quarter 2020 earnings conference call with us today or Nick Sarcone, Okay, accuse President and Chief Executive Officer Amendment, <unk> Executive Vice President and Chief Financial Officer.
Please refer to the okay Q website. It Okay Q Corp Dot com for earnings release issued this morning as long as the accompanying slide presentation for this call now let me quickly cover the safe Harbor some of those statements. We make today maybe considered forward booking. These include statements regarding our expectations beliefs hopes intentions or strategies.
Actual events or results may differ materially from those expressed or implied in the forward looking statements. As a result, 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-Q, one subsequent reports filed with the S. You see.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in todays earnings press release in slide presentation.
Hopefully everyone has had a chance to look at our 8-K, which we filed with the FCC earlier today as normal we're planning a file our 10-K in the next few days and with that Im happy to turn the call over to our CEO Nick Zarcone.
Thank you Joe and good morning, everyone on the call. This morning, I will provide some high level comments related to our performance in the second quarter before discussing some of the key industry metrics that are impacting the revenue trends in each of our segments.
Rune will then dive into the financials, but the key focus on the impact of the measures. We initiated in late March across the entire organization to rightsize the cost structure and maximize cash flow you also discuss our liquidity and the strength of our balance sheet before I come back with a few closing remarks.
So much has happened since the pandemic began sweeping across the globe and while some of you made sense. The worst is over others likely be all we are still in the center, where the storm it all depends on where you live.
But one thing is universal.
Oh and incredible data gratitude to those on the front lines, but doctors nurses first responders and all those clean themselves or risk to serve their communities and the communities where I'll take you operates across the globe.
To them I extend a great big Thank you and offer sincere appreciation from the LK Q family for their hard work services.
In light of the environment, our second quarter results were very strong.
Materially ahead of our expectations when we chatted 90 days ago on our first quarter call.
Our ability to quickly in successfully navigate through incredible decreases in demand to report strong margins and earnings in the even better cash flow is a testament to the courage of our global leadership team to make the hard decisions to protect our company.
As you all know by now the efforts by governments around the world flattened the infection curb had a profound negative impact on mobility.
With the material drop in miles driven activity levels at repair shops in North America in Europe dropped precipitously as did the demand for repair parts.
As economies around the globe began to open up and mobility use of all types increased so did the demand for the parts, we supply and we ended the quarter on a much wider note and how it began.
As noted on slide eight total revenue for the second quarter was $2.6 billion, reflecting a 19% decrease from the level recorded in the comparable period of 2019.
Global parts and services organic revenue declined 16.8% in the second quarter, while currencies and the net impact of divestitures and acquisitions accounted for a 2.1% decrease.
Importantly, the low point in demand was the first half of April.
Well, we are still below 2019 levels on a consolidated basis, we have seen continuous improvement with each passing month with April same day revenue being down approximately 30% compared to 2019, maybe down 13% and June down less than 8%.
From an EPS perspective.
The second quarter diluted earnings per share on a GAAP basis up 39 cents compared to 48 cents last year.
On an adjusted basis diluted EPS was 53 cents compared to 65 cents or an 18.5% decrease like revenue EPS improved in each successive month of the quarter with May and June clearly, reflecting the benefits of the cost reduction programs implemented.
In each of our segments.
As you will note from slide 12 organic revenue growth for parts and services for our North American segment, and the second quarter declined 22.5%.
According to CCC collision and liability related repairable claims in the second quarter were down 42%.
The continued outperformance of our north American organic growth relative to repairable claims growth combined with the OE supply chain disruptions in dealer closures during the quarter give us confidence that aipu is increasing and we are gaining market share. Additionally accord.
Into the U.S. Department of transportation.
What's driven in the U.S. were down 40% year over year in April and 26% in May June results are not yet available, but we expect they will be better than may, but still down about 10% compared to last year.
To put our performance and the miles driven decline into perspective.
Our softest period during the great recession came in mid 2008, when miles driven decline just 3.9% relative to the prior year.
I would also highlight that despite the revenue decline the segment EBITDA margin in North America was 14.8% the highest second quarter level achieved in the last five years.
North America operational efficiency efforts have resulted in permanent cost reductions of approximately $80 million annually, which includes head count reductions closure of over 30 locations and the elimination of redundant or end of life fleet assets no longer needed.
Our North America team has done an outstanding job of managing their cost structure and being very disciplined on operational matters.
Lastly on North America during the second quarter, our recycling business is processed over 169000 vehicles, resulting in among other things the recycling of 780000 gallons of fuel 425000 gallons of waste oil 340000 tires and 158000 battery.
Importantly, every ton of new steel made from scrap steel feedstock conserves about 2500 pounds of iron ore 1400 pounds of coal and 120 pounds of limestone.
The global leader of recycled vehicles during the second quarter, we processed about 260000 tons of scrap steel, which preserved significant levels of natural resources reduce the demand for scarce landfill space and played an important role in reducing air and water pollution.
Now, let's turn to Europe.
As you are aware when cobot initially hit Europe, many countries within the European Union close their borders to non essential travel and implemented severe locked down measures to combat the virus.
As a direct result travel demand fell across Europe, resulting in fewer cars on the road almost no traffic congestion and a corresponding decline the demand for service and repair parts.
According to Iran, Iraq, a leading traffic analytics data provider since the lowest point every European country continued to increase the rate of miles driven throughout Q2 with 10 out of the 19 countries analyzed getting back to pre cobot levels of travel by mid June.
The pre cobot levels of January and February reflects seasonal low points.
So while up on a pre cobot basis, we are still below 2019 levels on a seasonally adjusted basis.
That said, it's good to be headed into right direction.
Organic revenue for parts and services for our European segment, and the second quarter decreased 16.6%.
As I stated on our Q1 call not all regions were impacted by the cobot pandemic at the same time or to the same degree creating different growth profiles for each of our European businesses.
This difference in growth continued in the second quarter as drivers began to get back on the road importantly, all of our European businesses experienced a recovery in May and June from the April lows with Germany, the Netherlands recovering the fastest.
In the UK in Italy lagging.
In Western Europe early on Italy was the hardest hit by Covance.
Looking at miles driven Italy reached a low the week of March 23rd with miles driven being down 76% relative to pre cobot levels.
Since its low miles driven in Italy has grown at an average weekly growth rate up 14%, but slowed in the back half of June just 8% weekly growth.
Despite that growth in the recovery relative to pre cobot levels in certain large markets like Roman Milan miles driven are still down over 20% relative to their seasonally adjusted 2019 levels.
In the UK miles driven and reached below the week of April sex with miles driven being down 74% relative to the pre cobot levels.
According to eye on Iraq. The UK has the slowest recovery of miles driven out of the 19 countries studied and at the end of June was just at 67% of its pre cobot level.
Germany saw lots of a reduction in Italy, and the UK travel in Germany dropped to 40% of its pre covered level. The week of March Thirtyth and by the end of June rebounded to 98% to pre cobot levels.
In light of the major economic crisis facing the auto industry due to the cobot pandemic. The European automobile manufacturers Association has radically revised its 2020 forecast for new passenger car registrations expecting it to decrease by 25%. This.
Actively means that the industry Association expects new car sales in the European Union tumbled by more than 3 million vehicles from 12.8 million units in 2019 to some 9.6 million units this year.
These massive decline to new car sales will eventually lead to an older car park, which favors the aftermarket parts industry and will ultimately be good for I'll take Q.
Lastly on Europe on May 31st stall group are holding sold 100% of the shares up its telecommunications business called stall Gruber communication Center. While this was a small transaction. It again reinforces our ongoing commitment to rationalizing our European asset base and the divestiture of non core.
Businesses.
Let's move on to specialty during the second quarter, our specialty segment had an organic revenue decline for parts and services of just 1.4% performance well above our expectations importantly, when looking at April and May combined specialty witnessed a 10.4% organic.
Revenue decline on a per day basis with June exhibiting organic growth of 14.1% on a per day basis, a clear sign that April what's the bottom.
See my estimates that the impacted cobot industry sales will likely be down 12% for the full year 2020, but clearly our specialty segment is tracking far better when compared to this industry expectation.
The RV side of the specialty business showed particular strength during the back half of the quarter.
We believe the surge in demand for RB related parts and accessories is due to customers looking for safer and alternative forms of outdoor and leisure travel.
According to if sauce research.
46 million Americans plan to take an RFP trip within the next 12 months.
In light of the Cobot crisis, it's clear that RFP travel and camping provide an appealing vacation option for families and their travel choices.
The performance of our specialty segment in the second quarter underscores. The fact that the segment is far less cyclical and we believe the market appreciates. This quarter also highlights the point that even when many consumers scale back or delayed non essential purchases.
Vehicle and RV enthusiast, well always find a way to keep pursuing their passions.
On the supply chain front, we are generally in a good position the salvage auctions were a little thin and prices were up a bit but overall there were no major issues are self service business was having some difficulty finding an adequate level of vehicles at reasonable prices earlier in the quarter.
As some of the city in pounds were closed and open Sri purchase volumes were down but over the last few weeks purchase volumes have rebounded.
And our Remanufacturing business has experienced some tightness in the supply chain with respect to some domestically sourced parts that are needed to rebuild engines and transmissions.
In Europe, we've seen a few warning signs with respect to the availability of certain products from select suppliers, but we are leveraging our pan European network to move inventory to where it's needed.
And then the specialty segment the combination of certain suppliers being closed early in the quarter because of the pandemic and the surprisingly strong industry demand has created a bit of a backlog situation.
Our strong inventory position coming into the pandemic has been an advantage for specialty and we are working to rebuild our inventories to avoid any potential stockouts.
So where do we go from here.
Clearly benefited from a solid rebound in demand during the quarter.
As noted by the detail on page five of our presentation revenue of our North American and European businesses were down just 14% and 8% respectively on a year over year basis in the month, the June compared to being down, 34% and 29% respectively in April.
That said the pace of improvement has slowed materially and progress in the first few weeks of July has stalled as we have experienced slight revenue declines on a week over week basis with the year over year declines widening.
Especially is still up a bit in July compared to last year, but not at the same level of June.
Hopefully this is just a temporary setback, but with the wave of outbreaks occurring around the globe the range of outcomes for the back half of the year is still wide and uncertain.
Sure in the United States, the uptick and positive test results in many states, including Florida, Texas, and California has prompted reversals of several economically opening plans and even cities that have managed to suppress the virus or taking precautions.
Those reversals, including widespread decisions to move forward with virtual schooling could negatively impact mobility and put pressure on our ability to attract adequate labor.
In the second quarter, two recovery benefited from the Cures Act, which injected trillions of dollars into households, and businesses somewhat offsetting the economic impact of widespread closures.
As key components of that law begin to pays out we may start to truly see the potential impacts of the rapid uptick in unemployment, making the view for the balance of the year, even foggy or.
While it is difficult to predict we do not anticipate getting back to 2019 revenue levels in our North American and European segments until sometime in 2021, meaning continued negative revenue comparisons to 2019 levels over the back half of the year.
The specialty business should track prior year revenue levels in the third and fourth quarters.
As to our profits and cash flow, we exited the second quarter at levels that are not sustainable as reported we leaned on our people hard at the start of Q2, placing thousands on furlough and having most all salary personnel, taking a 10% to 20% reduction in pay.
We have reverse those downward adjustments and move forward with normal merit increases beginning in Q3, albeit on a delayed basis. In addition, the majority of those furloughed are now back on the payroll. So we can serve the current level demand.
On the cash flow from we have been very effective and turning our inventory into cash and taking advantage of tax payment holidays, but we will ultimately need to replenish our inventory levels to sustain this renewed level of revenue and pay our taxes that said, we do anticipate achieving permanent productivity improvements in terms of mark.
Gems and working capital across our businesses.
At this point I will turn the call over to rone.
Thanks, Nick and good morning to everyone joining us on the call. When we reported a first quarter results in April we were facing a great deal of uncertainty about how the pandemic would play out across the globe.
We spent the last few months operating in a very volatile environment, making plans and adapting those plans for the rapidly changing conditions.
While the detailed actions shifted over time, we did not weve in our key objective to protect our employees the communities in which we operate and the business.
In my remarks, I'll discuss the actions we took to manage the business during the second quarter and to position the company for ongoing success to eventually emerge even stronger.
So before I get into this topic I will cover the financial highlights from our second quarter.
As Nick described the negative impact of Qubic 19 on revenue was not as severe as our internal full cost suggested as we entered the quarter.
The favorable revenue outcome combined with the benefits of aggressive cost reductions.
Produced a solid profitability and cash flow result for the quarter.
It takes a special set of circumstances for me to describe roughly 20% decreases in segment EBITDA dollars and adjusted diluted EPS as these solid results.
We knew that quarter over quarter comparisons difficult as a result of the cobot 19 impact on Twentytwenty when revenue declines by 622 million a decrease in profitability in dollar terms is inevitable.
Since group didn't make sense has the benchmark we had to think differently about what defines success in this environment.
We challenged our field teams to drive margin improvement and be as efficient as possible in operating that businesses and when we look to the segment EBITDA percentage as an indication of their abilities to scale the business model and achieve leverage when revenues declined.
With the level of fixed in hybrid cost and the business maintaining the segment EBITDA margin in a period of falling revenue is a significant accomplishment.
Our segments Bruce to the challenge and the second quarter with North America, and specialty reporting quarter over quarter improvements and Europe, finishing within 30 basis points of 2019.
A large portion of the favorable result is attributable to an earlier revenue recovery than anticipated due our segment teams deserve a lot of credit for delivering on the cost savings initiatives by taking swift and decisive action.
As you'll see on slide 17, North America achieved a segment EBITDA margin of 14.8% or 40 basis points better than a year ago.
Improvement is driven by a 110 basis point growth in adjusted gross margin attributable to the positive impact of cost reductions in Cogs from Rightsizing actions higher precious metals prices as well as other margin improvement actions.
Although the income producing incremental 50 basis points from business interruption proceeds received in the quarter related to prior fire loss.
Overhead expenses were up 120 basis points higher than the prior year, primarily due to the leverage impact from the quarter over quarter revenue decline.
Hi of bad debt expense of $5 million contributed to a 40 basis points uptick to the higher overhead percentage in dollar terms overhead expenses were down $81 million year on year.
On slide 20, you'll note Europe's segment EBITDA margin of 7.4% represented 30 basis point decrease relative to 2019.
Adjusted gross margin improved by 100 basis points going to margin improvement initiatives, including cost offsets in Cogs and reduced inventory write downs.
Overhead expenses were unfavorable by 110 basis points, primarily due to higher bad debt expense of $10 million or 80 basis points and the negative leverage effect on fixed costs from lower revenue.
Specialty on slide 20, pre reported a segment EBITDA margin of 12.9% it 20 basis points increase relative to the prior year.
Gross margin declined by 120 basis points due to primarily unfavorable mix effects related to both channel and product.
Had expenses were favorable by 150 basis points attributable to personnel cost actions taken over the prior 12 months. Unlike the other segments the leverage impact was nominal as organic revenue declined by just 1.4%.
At a consolidated level restructuring expenses totaled $31 million with $6 million of inventory write downs recorded in cost of goods sold.
The restructuring charges related to our ongoing programs to eliminate underperforming assets and cost inefficiencies benefits of the programs already be realized and are projected to reach to full run rate benefit early next year.
Net interest expense decreased by $10 million due to lower average debt levels and the lower average interest rate.
This variance continues to reflect the excellent work our global teams are doing to generate cash which has been used to pay down debt in the trailing 12 months of approximately 800 million.
We also benefited from the redemption of a full and three quarters, you're senior notes in January of Twentytwenty financing, it with cash and borrowings from lower cost facilities with the year to date debt pay down the early redemption of the US senior notes has been fully neutralized.
Last quarter, we stated that we expected volatility the tax rate this year given the potential for varying outcomes in our full year results, we certainly saw a little bit volatility in the second quarter.
Our effective tax rate was 25.7% for the quarter, which included a 200 basis point decrease compared to the annual effective rate used in the first quarter.
The rate change resulted in a two cents per share pick up positive effect on adjusted diluted EPS for the year to date adjustment to the provision.
The rate decrease is primarily attributable to the impact of higher projected fully a pre tax income and geographic mix benefits. We expect the tax rate on the full year basis to be approximately 28% a little bit higher than our original guidance of 27.5%.
Operating cash flows was 718 million a 56% increase over the same period in 2019.
Free cash flow of 686 million was the 66% improvement over the prior yet.
Leading to a net debt to EBITDA ratio of 2.2 times based on the credit facility definitions we.
We used our free cash flow to repay $552 million of debt in the quarter.
Listen under normal circumstances, these would be exceptional numbers under the present circumstances I believe these are amazing members. The second quarter operating cash flow figure is higher than every annual figure in the company's history with the exception of last year.
Granted there wouldn't nonrecurring benefits in the second quarter numbers, such as the tax deferral that will largely unwind in the second half of the yet due to generate this level of cash during a period of lower profitability in higher degree of uncertainty is truly remarkable.
These results were made possible by the decisive actions that we took since mid March to protect the business from the cobot 19 disruption.
I'm now going to expand on what we've done to deed to protect our business and our plans for the remainder of the yet.
In my remarks last quarter I stated that our focus would be on what we could control that is one reducing costs to reflect the new level of market demand and to continuing to focus on generating cash flow and ensuring adequate liquidity.
I believe the numbers we've reported for Q2 support that we were successful in both objectives.
Regarding the cost actions, we focused on three areas personnel related actions variable cost decreases that follow from lower projected revenue and Ted other cost takeouts, including routes consolidations branch rationalizations and elimination of non mission critical spending.
We had estimated that the cost reductions would be 80 to 90 million if revenues were down 40% to 45%.
Looking at slide six you can see that we reduced our quarterly SGN expenses by 18% or $162 million.
Sequentially, while revenue declined 12% sequentially from Q1.
Thus, creating a leverage benefit from our overhead expenses.
As expected the majority of the benefits came from has now cost actions, including fellows reductions in force and salary cuts we generated roughly a further $10 million in cost savings in Cogs again largely related to personnel expenses.
The total savings for the quarter off approximately $175 million was lower than the quarterly run rate savings, we mentioned last quarter as a result of a couple of factors.
First we paid out vacation balances and medical benefits for our furloughed employees in April and dust did not realize the full benefit of the cost actions that month.
This was anticipated and communicated 90 days ago.
Second and more importantly, the projected revenue decreases of 40% to 45% did not materialize. So our variable costs decline was lower than expected as we brought back some of our workforce earlier than anticipated due to the revenue recovery.
We were happy to put up people back to work as revenue increased and we still manage through quick and decisive actions to drive SGN expenses to 28.1% of revenue compared to 30% in Q1 of Twentytwenty.
This type of leverage was significantly better than what we had modeled at the start of the quarter and is a testament to the strength of our team and the resilience of the business model.
Outside of a significant year over year increase in bad debt expenses, a $14 million caused by the economic conditions facing our customers. We are pleased with the trend in our overhead expense management and believe that we are delivering on our plan as evidenced by the results achieved in the second quarter.
To be clear not all these cost benefits of sustainable as we transitioned into the second half of the year.
Some of the cost actions as Nick mentioned, including temporary salary reductions bypassed Meritor awards and government reimbursement will begin to fall off in July we do not expect to go back to the pre covert cost structure has our teams have done terrific work during the pandemic to identify productivity opportunities.
That can be says teams going forward and we will be very judicious in how we return cost to the business. So we do not get ahead of the revenue recovery.
Switching over to liquidity, while we felt comfortable with our position in April we decided that strengthening our balance sheet would be a critical element of riding out the covert 19 disruption and positioning the company for long term success has the duration of the held crises was and remains open ended.
As a result, we focused on preserving cash by implementing an action plan that included reductions in inventory replenishment creates to reflect demand projections active monitoring of customer receivables in terms continuation of European vendor financing program and approximate 14.
Percent reduction or more than $100 million deferral of growth driven and non mission critical capital projects tax payment deferrals, where reliable and a hole in our share repurchase program. In addition to the cost savings measures.
Each of these items generated benefits in the quarter.
We scaled back inventory purchases and producing operating cash inflow from this element of $453 million in the quarter.
Focus on collecting receivables led to a net inflow for the quarter of 59 million.
The vendor financing program over in Europe had in mind the impact for the quarter, but saw an increase of supply of participation, which will yield future benefits capital spending decreased approximately 30% compared to Q2 of the prior year and income tax payments and other tax deferral such as Vito.
He created approximately $175 million to $185 million in cash savings in the quarter.
We didn't repurchase any l. kikuyu stock and the result in free cash flow was used to repay debt, which will yield ongoing interest expense savings apart from increasing our overall liquidity.
During the second half we get back some of the timing related benefits. Most importantly, we plan to increase inventory levels to support the service and fill rate requirements of our businesses based on the better revenue projection in the balance of yes.
While we expect to be able to operate effectively at the lower inventory balance than we exited 2019. The June figure is not sustainable for us to maintain our service levels based on what we've seen currently and coming off the low points in late March in early April.
The income and other tax deferrals have already started to reinvest in July as we made our estimated us federal tax payment and will largely unwind in Q3 in Q4.
We expect to generate positive free cash flow in the second half, though not at the level close to what we've achieved in the first half of the.
Relative to March 31st our liquidity position is significantly stronger to the cash generation in the second quarter and the amendments to our credit facility executed in the quarter.
Total liquidity defined as cash plus availability on a credit facilities was 2.5 billion as of the end of June an increase of almost 700 million compared to 90 days ago.
You'll recall that we amended our credit facility out if an abundance of caution to reduce the risk of reaching the net leverage covenant if the pandemic had a severe and extended effect on profitability.
Internal models had suggested that we would be able to beat up payment obligations through the pandemic do there was the risk that we might exceed the maximum four times net leverage ratio initiative year downside case.
However, the debt repayments during the quarter drove a reduction in the net leverage ratio to 2.2 times compared to a maximum net leverage requirement currently in force of almost five times.
With the amendment and the better than forecasted performance in the second quarter. We believe we have significantly reduce the risk of a covenant breach on the net leverage.
From a capital allocation perspective, our focus remains unchanged, especially as the fog owing to the pandemic is yet to lift.
Apart from continuing to invest in our business by continuing to deliver industry, leading fill rates service reliability geographic footprint and warranty on our products to extend our leadership position in the markets. We serve we plan to continue to pay down debt and the share repurchase plan remains suspended.
Finally, when we withdrew fully a guidance in March we cited the uncertainty regarding the impact that could would have on the world.
Full months later that uncertainty is to present, especially with respect to the duration and long term effects of the pandemic and the range of potential outcomes is wide.
While our solid Q2 results are behind us with several learnings for our teams on what is possible. There is the risks to the second half with a spike in cases, and the lingering possibility for a stall already rolled back into reopening of economies across North America and Europe.
As a result, we're not providing financial outlook for fiscal Twentytwenty. At this time. However, we expect the falling elements for Twentytwenty on a fully basis.
One effective tax rate for the year in a range of 27.5% to 28.5%.
Interest expense of 95 million to 105 million.
Depreciation and amortization of approximately 265 to 275 million on a GAAP basis.
In 165 to 175 million on an adjusted basis.
Which excludes amortization of acquired intangibles.
And finally, we believe we have sufficient liquidity and flexibility to meet the needs of our business and will deliver yet another excellent performance in free cash flow for the full year off a minimum of 700 million.
This recognizes the fact as I mentioned, a few minutes ago that income tax payments and other tax deferral, such as VIP created approximately $175 million to $185 million in cash savings in Q2 and will largely unwind in the second half.
With that I'll turn the call back to Nick for his closing comments.
Thank you burn in closing, it's clear that our focus on profitable growth enhanced margins and better free cash flow generation positioned as well as we entered this unexpected turn of events.
Our teams have been agile and have done a fantastic job of tackling the cost structure and delivered with tenacious focus this quarter generating solid margin and free cash flow in the midst of a negative growth environment.
Well, we can focus on is the hearing now and address the dynamics that we can effectively control and that focus was validated by our second quarter results.
My continued communication with our broader employee base I have indicated we will get through this together and come out a stronger wiser and better positioned organization that continues to be LK Q proud.
Clearly our teams across the globe have embraced this message and for that I am thankful and proud of each and every one to efforts to carry our mission forward regardless of the hurdles presented.
The global team has done a terrific job of responding to the conditions created by the pandemic and I'm highly confident and durability to continue to create successful outcomes.
Lastly, I want to announce that we will be hosting our third investor day. The morning of September 10, and we look forward to your participation.
Given the pandemic this will be a virtual event and we will issue a press release in the coming weeks with details for the session with our broader global leadership team.
Operator, we're now ready to open the call the questions.
Thank you.
Reminder, you May press star one on your telephone to ask a question.
Ill ask that you limit your questions to one and re queue for any additional questions.
Try your question please press the pound or hash key.
First question. This morning comes from Michael Hoffman from Stifel. Please go ahead.
Hi, Thank you so.
I just want to make sure I understood Nick your your.
Comment about the June and at a down about an eight july's soon some leveling little pull back so the way we should think about this is.
Accused probably not as good as June, but it's clearly better than twoq.
Good morning, Michael and thanks for the question.
Absolutely as I mentioned in June the organic revenue trends were down 14% for North America, 8% for Europe and up 14% for specialty.
And indeed based on what we've seen thus far July has given up a bit in both North America in Europe, and even more so in specialty so if the current trends persist.
You'd be looking at an environment, where north America's probably off 15% or so Europe off 10% and specially being flat with last year.
We would hope obviously that the world will make continued progress both in terms of controlling the virus and opening the economies.
But right now there is little hard evidence, so thats going to happen.
Our next question comes from Stephanie Benjamin from Suntrust. Please go ahead.
Hi, good morning.
Good morning, good morning, Stephanie.
Are you.
Obviously, they tremendous cost cutting initiatives that came into place and the second quarter.
And you walk through that a lot of those are going to kind of reverse.
As you get to Threeq, you can you walk us through what we would expect to be sustainable at these new revenue levels as we look to Threeq you the cost cutting initiatives.
Yes, absolutely Stephanie good morning, and thank you for the question I think that is a very very relevant question to ask and you know as you kind of go back in terms of 90 days ago. When we were talking about how we will see in Q2 play out and really what actions. We had initiated it was the key parameters held that was what.
What level of demand, we would be seen so long story short it really depends on the level of demand recovery do we are clearly focused on retaining savings through operational efficiencies and frankly as we all loan to do more with less. So for example in the second quarter, while we had roadmaps as significant.
Can be higher cost management set of actions it was predicated by revenue levels being down call it 40% to 45%.
And that's what the 80 to 90 million was related to on a monthly basis.
We ended up 19% down 650% to 60% better than what we had initially anticipated due I think from a cost takeout perspective in the second quarter. We set we pushed hard and not just on the income statement from a cost management perspective, but also assumed the balance sheet that you'd noted so as you kind of think crew on.
For the remainder of the Yep.
It all depends on the level of demand recovery that we see and then clearly as you know we have a restructuring program that is currently underway and that's really will be permanent cost savings in any case. So late in 2019 and then also at the end of Q1, we had called out restructuring charges those off.
Proceeding as expected the really the full run rate comes towards the backend of the yet.
Our next question comes from Gary Prestopino from Barrington Research. Please go ahead.
Gary Good morning, I don't think we can hear you may be on mute.
And you hear me now.
Yes, we can hear you now Gary yes, I'm sorry about that.
You had worked just get back these expense reductions sitting at about 80 million permanently in North America that you think you're going to keep I think I got it that downturns.
As you were talking is that correct.
That is correct Gary.
Again, Thats a combination of people expands closing some facilities getting rid of some.
Excess distribution assets and alike.
And then just very quickly and that's that's an annual number Gary.
Okay. So so that as.
The 162, so far that's quantifiable cause I could pick it up on the on the park.
And you kind of danced around that a little bit I think this kind of environment. We just we're trying to get to handle or what exactly is permanent and what isn't that just real second secondly could you just maybe give us an idea of.
What situation. It is a Europe at Turner economy, still being locked down or are they get a better.
You asked for still behind Us.
I'll take the back half of that question and indeed.
The European economies are more open than the United States and I think you're seeing that in some of the miles driven.
Differences.
Fuel consumption and the like.
That said I mean, we have seen some spikes in Europe in particular cities or particular countries. So.
The virus is not gone from the European landscape.
Obviously, you're probably well aware of what's happening in this country with incredible spikes both in positive cases and fatalities.
In many many states.
In the U.S so.
Pretty big regional differences.
Here in the us, but taken as a whole Europe is doing better than we are.
Our next question comes from Bret Jordan from Jefferies. Please go ahead.
Hi, Good morning, guys, Hey, good morning.
The U.S. collision business, where you seem to be really outperforming the repairable claims number could you give us any color as to what might be driving that as that is that share gain again alternative other alternative parts or increase alternative parts within the repair mix.
Yes, there's there's not one magic bullet there Brad the reality is.
CCC Repairable claims down 44% our volumes in North America down 22%. So obviously good outperformance. We think there are a bunch of different contributing factors first.
The always were shut down for several weeks both are manufacturing facilities and many of their dealers were also closed for a few weeks as well. So if you can't get an OE part to the shops.
They they tended to then go to alternative our usage.
So just like the GM strike helped us in the fourth quarter of 2019, we believe there was some not a huge but some benefit from the OE disruptions caused by the pandemic here in the second quarter. Obviously, we remained open and we had high level to inventory and we're eager to serve.
All of the customers who were looking for parts.
Keep in mind that half of the salvage business is really mechanical parts as opposed to collision parts and theres no doubt that the mechanical parts.
Form better during the quarter end, our remanufacturing business, which really cells remand engines and transmissions was particularly strong in the.
In the second quarter, and then some service, which normally doesn't get a lot of fanfare actually performed quite well they had.
Year over year increases with admissions the number of people actually paying to come into our yards and in the in the revenue from selling parts.
Both those metrics being up on a year over year basis.
So.
Just want to reemphasize that.
No negative growth in 2020.
If the sector returns to 2019 levels, probably sometime in 2021.
We're going to show really solid year over year growth, but off of a low base in 2020.
And probably not to be sometime until 2022 until we have a true apples to apples comparison.
While you didn't ask at longer term, we do not see the pandemic, it's causing a fundamental shift in the organic growth in our industry again, while there will be a couple of years of not having good apples to apples comparisons we think that the.
The core.
Core attractiveness of alternative parts stays firmly in place.
Our next question comes from Craig Kennison from Baird. Please go ahead.
Hey, good morning, Thanks for taking my question. Good morning America pandemic, Hey, Nick could be good to hear from you obviously the pandemic as the big story on the quarter, but I'd love to hear about your progress on one LK Q Europe there comes down to.
Procurement or SKU reduction or route.
Optimization, just love to hear what you're doing on that front, yes, absolutely Craig.
We believe that the core operational efficiencies identified and communicated to the market last September are still valid and achievable.
We obviously did not anticipate the pandemic.
That was going to have such a profound impact on our demand. So while the longer term benefits will be achieved the exact timing and sequencing of all those various initiatives that we set forth back in September will likely shipped around a bit some of the items are getting pulled forward. While other items are getting pushed back.
As we talked about in September right, a number of the items that we had on the on the drawing boards and we're working towards really involved the plane groups of our existing employees at work and project teams.
The come together in a really collaborative fashion.
And to work on projects. In addition to their day jobs, given the travel restrictions and the need to have a 120% of everyone's focus on dealing with the issues caused by the pandemic.
Some of those project teams quite frankly were put on the sideline during the second quarter, because there was more important that focus on the here and now as opposed to.
Margin improvements over the next two to three years.
Happy to say effective July Onest, all those project teams are back up and running there are a little bit behind original schedule, but they're back up and running.
Some of the items like procurement, which you highlighted.
Well.
We've seen the starting point shift because of the pandemic when your volume of parts purchase all by 15% to 20% because of the pandemic.
We have some pretty serious discussions to be had with our suppliers. We think ultimately it's all going to come back in line, but the timing may be off a little bit.
But rest assured we believe there is still 300 basis points of margin improvement in Europe.
And that was based on the starting point of around 8% EBITDA margins right.
That pandemic has not only compress the revenue, but obviously there was negative leverage.
As a result of the fact that some of our cost our fixed in nature. So we're really driving forward on two fronts.
One is to get the starting point back to that 8% level and then second to get the benefits of all the discrete initiatives that we identified as part of the one okay. Q program. So we're going to be working hard on both fronts are in France, our CEO of Europe is going to be joining us on investor.
Good day this coming September 10th and part of his presentation will cover a very detailed update on the one LP Q program, but hopefully that gives you a little bit a sense as to where we are.
Our next question comes from Daniel Embryos from Stephens. Please go ahead.
Yes. Thanks, guys. Appreciate all the color. This morning. Good morning, one of the follow up on something I think you mentioned last quarter over and just the competitive backdrop, obviously, we've seen from smaller bankruptcy it across Europe.
I'm sure. Some your competitors in North America are struggling you're gaining share there, but how is the competitive landscape shifting our prices going higher are you seeing it easier to push those through any kind of update there you can provide.
Yes, I think it's a great question and again it again is given the pandemic thats sweeping through their up a bunch of puts and takes that are coming through so for example in North America. You know when this kind of started off while at the end of March beginning of April for example, there were a number of businesses that kind of close their doors.
Simply put because they were going to stand show to items. Other measures same thing over in Europe. Also then we did see in North America. For example, when the Kazakh the PPP came out we saw a number of our competitors reopening their doors and they were out that opened for business and so again that.
The competitive landscape picked up.
But if you think about where on North America business ended up coming through with revenue declines versus say, what the CCC data would stage.
We have significantly outperformed what the metrics that they should be measured against all and again they are out there a number of different elements, but the one key element that I'll share with you is as we knew that Oems, but close for certain time into second quarter number the dealerships, but closed also in the second call.
For a certain period of time and hence the parts departments LK Q being an essential business was open and went when customers needed parts guests, who they called and this is really where the resiliency of the L. Kikuyu model comes through in terms of having a phenomenal geographic.
Print the service reliability, and an unmatched breadth and depth of inventory. So thats kind of played out in the second quarter and as I said, when we had the GM strike colds in the back end of last year in many ways you kind of make your own destiny and that's how the North America team has been incredibly agile and nimble.
No.
Across across the pond in Europe.
Similar situation. It is very fragmented markets out there, but as you know we have market leadership positions in several markets and out that also our teams did an outstanding job both in terms of having the availability and also being open for business, where they were allowed to do show. So we believe we did kind of.
Share over in Europe, but again, it's a difficult to get numbers from a European perspective to be able to direct you in terms of what level of Gainshare took place how that and then finally for our specialty business. We know for example.
Those of us into us we love the outdoors. The RV market has been doing incredibly well a number of our suppliers, who kind of reported over the past few days have also kind of reported strong demand coming through and again it kind of goes back to saying how is that what folks taught would be perhaps one of the most.
In a cyclical business in an economic downturn is performing so well and it really comes back to folks have a certain level of income that's kind of put aside either going out fortune comps. So it's going to movies traveling and as those activities have been curtailed folks have really gone forward in kind of living out that passion.
And that's really is what we've seen so again from that perspective that business has done incredibly well and kind of being the market leader in what we do on the specialty side, we've done incredibly well out there also so I hope that kind of gives you a good overview across each of our segments in terms of will the market landscape is.
Our next question comes from Michael Hoffman from Stifel. Please go ahead.
Oh, Thanks for coming back at me so when you.
Mandatory requirements of the safety inspections, and they kind of have programmatic timing of when that happens what's your thoughts about.
How much of what happened into Q with some of that.
As opposed to we've just for driving more.
It depends on the timing of the quarter clearly Michael in April the mandatory inspections were not unilaterally, but many many countries were put on a temporary hold as each of the government's was trying to figure out how to deal with a pandemic.
Right and getting your car inspected wasn't the highest priority at the time.
By time, you got to the back ended the quarter many of those.
Those temporary.
Delays in the inspection process.
Were were removed and so folks were absolutely are having to get their cards and to get inspected to get there the registrations renewed and alike.
So that was a little bit of it but theres no doubt that miles driven has come back very significantly in Europe, I mean, whether Italy from being down 74% at one point in time to today, probably being down 10 to 15, 20%.
That's a huge recovery, Germany going from down 40% at its slow to maybe being down 10% today. So theres no doubt that the recovery in miles driven.
Probably the largest factor in driving the revenue, particularly in the back half of the quarter.
Okay. Thanks.
This concludes our training session for today ill now turn the call back and Nick Sarcone for concluding remarks.
Well as always we greatly appreciate the time and attention that you've given us here. This morning, hopefully the information provided it gives you good sense of what's going on here at allocate Q and importantly, we look to continue to the discussion the morning of September 10th when we have our analyst day again.
That will be a virtual format and will run problem view, the better part of about five or five hours or so and we'll have all of the operating heads of our businesses from across the globe as part of the the lineup for the presentations. So we can go in depth on each of the three businesses as well as.
Hit the high points from a corporate perspective, a strategy perspective, and a financial perspective, so look forward to sharing that with you in September and again, we thank you for your time and attention here. This morning.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may now disconnect.
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