Q3 2020 LKQ Corp Earnings Call
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Thank you operator, good morning, everyone and welcome to allocate cues third quarter 2020 earnings conference call with US today are Nick Sarcone allocate cues, President and Chief Executive Officer, and Bruce Williams Executive Vice President and Chief Financial Officer. Please refer to the Elk in Q website. It okay, Q quote dot com for earnings.
Release issued this morning as well as the accompanying slide presentation for this call. Let me quickly cover the safe Harbor.
All of the statements that we make today may be considered forward. Looking these include statements regarding our expectations beliefs hopes intentions or strategies actual events or results may differ materially from those expressed or implied in the forward looking statements as a result of various factors we just.
We have no obligation to update any forward looking statements for.
For more information please refer to the risk factors discussed in our form 10-K, and subsequent reports filed with the FCC.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation.
Really everyone has had a chance to look at our 8-K, which we filed with the FCC earlier today and as normal we are planning to file our 10-Q in the next few days and with that I'm happy to turn the call over to our CEO Nick Zarcone.
Thank you Joe and good morning to everybody on the call. This morning, I will provide some high level operating highlights related to the third quarter before discussing some key metrics that are impacting the revenue trends in each of our segments.
Martin will then dive into the financials will be key focus on the impact or the measures. We initiated in late March across the entire organization to rightsize the cost structure and maximize cash flow.
We will also discuss our liquidity and the strength of our balance sheet before I come back with a few closing remarks.
It's hard to believe that just six months ago. In early April we were facing revenue declines of 40% to 45% as economies around the world went into lockdown.
Today, we are enjoying a material improvement in demand.
Year over year margin improvement in each of our segments and over a billion dollars or free cash flow generated in just the first nine months of this year.
In light of the challenging environment, we have confronted throughout the year our team delivered a terrific outcome in the third quarter.
These results clearly highlight the true strength ability to.
This performance was achieved in the midst of having to make mission critical decisions to protect the business while simultaneously maintaining the morale of our most important asset our people.
I could not be prouder of the effort of team I'll take you.
As noted on slide four total revenue for the third quarter was $3 billion, reflecting a 3.2% decrease from the level recorded in the comparable period of 2019.
Global parts and services organic revenue declined 4.5% in the third quarter, while currencies and the net impact of divestitures and acquisitions collectively accounted for a 1.1% increase.
Notwithstanding the soft revenue environment, our team reached a monumental milestone by delivering the highest level of quarterly earnings in the company's history.
During the third quarter diluted earnings per share on a GAAP basis was 64 cents compared to 49 cents last year, a 31% year over year increase.
On an adjusted basis diluted EPS was 75 cents compared to 61 cents for a 23% increase.
Now on to the segments.
As you will note from slide six parts and services revenue in North America declined 12.1% during the third quarter with organic revenue growth for parts and services declining 11.3%.
The lower organic demand is reflective of reduced levels of mobility as evidenced by meaningful year over year declines in both vehicle miles driven and fuel consumption.
According to CCC collision and liability related repairable claims in the third quarter were down 24%. So again, we are clearly outperforming the claims data.
When looking at product specific data, while Baltimore down our salvage revenue trends outperformed aftermarket largely due to the demand of our mechanical parts.
Dominantly engines and transmissions.
Still our aftermarket collision based revenue performed materially better than the CCC statistics for repairable claims, suggesting that we continued to experience share gains in the collision marketplace.
There was particular strength in our remanufactured product line as many market participants were disrupted by the components suppliers ability to provide product.
Given the depth and breadth of our remanufactured parts inventory, we were able to keep pace with demand and believe we gained share from our directory NAND competitors in the third quarter.
I would also highlight that despite the revenue decline as segment EBITDA margin in North America was 17.6%.
Highest quarterly level achieved in the company's history.
Also North America operational efficiency efforts continued to capture the $80 million in annualized permanent cost reductions that we've discussed over the past few quarters at the end of the third quarter over 90% of those cost actions have been completed with the balance scheduled to be.
Finalized in the fourth quarter.
Marillyn will dig deeper into the puts and takes of these numbers shortly.
Regarding the competitive landscape.
As many of you on the call no in August Auto nation announced that it will be closing its aftermarket collision parts business.
This headline is both a commentary on the difficulty of growing a profitable aftermarket parts business.
And more importantly, a true testament to the strength adults 18 is aftermarket collision parts operations with our market, leading fulfillment rates service reliability nationwide coverage and unrivaled depth and breadth of inventory.
From a supply perspective, we have minimal issues sourcing product for our aftermarket crash parts business and our Taiwanese supply partners are well positioned as we prepare for the winter season.
We have seen some tightness getting adequate space on ships for containers, causing some delay on product coming in from Taiwan, and an uptick in freight expense.
Pending on the supplier on products, we have witnessed delays anywhere from one week to 30 days.
Having said that our overall inventory is in good shape and heading into right direction.
On the salvage front auction volumes are still depressed, but we've seen a slight increase in activity over the past month.
We did experience a rapid uptick in pricing during the quarter as used car prices surged in the past quarters, we surface at the auctions.
But our team has done a fantastic job at combating these price increases by harvesting more parts per vehicle and executing our price optimization strategy.
When combined with the rise in precious metals prices.
Our efforts have allowed us to recapture a significant portion of the increased pricing at auction.
As we enter Q4, we have seen little change in pricing, but we are optimistic that this trend will reverse over the next few quarters as volumes return to historical level.
While these pricing dynamics may put some pressure on salvage margins in the near term when taken together with our productivity gains over the longer term, we believe North America EBITDA margins will settle out well above 2019 levels.
Now, let's turn to Europe.
Total revenue for our European segment during the third quarter rose, 2.2% compared to the prior year.
Organic revenue for parts and services in the third quarter decreased seven tenths of 1%, while the negative impact of acquisitions and divestitures was a negative 1.5% and currencies added 4.5%.
Throughout the quarter, most regions witness stronger than anticipated volumes, a very encouraging trends.
As I stated at our second quarter call not all regions were impacted by the cobot pandemic at the same time or to the same degree, creating a different growth profile for each of our European businesses.
This difference in growth profile continued in the third quarter, but the variability in growth across the businesses, we're not as disparate.
When compared to Q2.
Importantly, certain key markets, such as the UK, Germany, and the Netherlands posted single digit organic revenue growth on a per day basis.
With September generally, reflecting the best month of the quarter.
Italy continued to be the softest region, posting the largest year over year declines.
Followed by the central and Eastern European operations, which collectively were also down on a year over year basis.
In the UK, we have completed the restructuring of the Andrew page branches with nearly 30 unprofitable branches closed and all remaining branches running on EPS IP infrastructure.
While this branch restructuring likely cost us a bit in terms of revenue growth.
Enable the DCP the post double digit EBITDA margins for the first time in the last 17 quarters.
As the leading aftermarket mechanical parts distributor in the UK.
We believe the DCP has the best margins in the market given that scale advantages and the operational efficiency as a result of our investments.
Local management has done a terrific job of delivering on the key operational initiatives of profitable growth and enhanced margins.
Additionally, our Brexit contingency plan is in place and being in thoughtfully executed despite the significant uncertainty around the Brexit negotiations.
The team continues to effectively manage any safety stock risk in the UK.
Our European team continues to rightsize their inventory levels in the midst of the lower demand.
As of late we have seen softness in sourcing product broadly across our supply chain and daily We actively review line by line, our inventory levels to ensure our customer service and fulfillment rates continue to be industry, leading I am happy to report at this time.
Neither of those has been impacted largely because of our levels of safety stock.
Lastly on Europe, the execution of our one allocate to Europe program remains on track.
As mentioned at our September 2020, Investor Day, we have pulled forward some activities relative to the original plan and have seen slight delays and other areas again, we've accelerated our platform rationalization.
Innovation and shared services development.
Talent acquisition efforts and the build out of our digital strategy.
While our ERP harmonization projects procurement and product and yield management activities.
Have been delayed by a quarter or two.
In total we remain comfortable with both the magnitude and the cadence or the margin improvements set forth in the comprehensive review that R&D and Neonic provided last month during the Investor day event.
Moving on to specialty.
During the third quarter, our specialty segment had total revenue growth of 1.4% composed of organic revenue growth for parts and services of 1.1% and acquisitions and currencies, making up the balance.
Given some industry wide inventory challenges, our organic growth rates were clearly hindered by the lower availability of product to meet the robust demand and we believe the lost revenue due to significant gaps in the supply chain.
That said, we believe that our market leading position allowed us to fare better than our competitors and as you would expect we are in constant communication with our suppliers to work with them and help wherever we can to get more product out on the road over.
Over the past few weeks, we have seen an increase in product recedes and we have finally started to increase our specialty inventory levels with sales growth rates, increasing as a result.
In particular, we are encouraged by the expanded RV season, with this particular product group continuing to perform well.
From a corporate development perspective during the quarter, we acquired a mobile diagnostic business that provides our existing diagnostics business entry into the Virginia market and also add some technicians that will serve key markets throughout North Carolina.
Also during the quarter stalled we were entered into an agreement to divest its 51% ownership stake in two small businesses located in Poland.
These transactions represent our ongoing effort to rationalize our asset base through the divesture of non core lower margin businesses, and finding new opportunities to grow our customer offerings.
The net consideration related to these transactions was negligible.
From an EPS fee perspective during the third quarter, our recycling businesses process 209000 vehicles, resulting in among other things the recycling of 990000 gallons of fuel.
581000 gallons of waste oil.
542000 tires and 191000 batteries.
During Q3, we also processed approximately 286000 tons of scrap steel.
You can see that our businesses help preserve significant levels of natural resources.
Reduced the demand for scarce landfill space and reduce air and water pollution, all of which helps protect the environment.
So where do we go from here soon.
Similar to the second quarter, we have clearly benefited from a solid rebound in demand during Q3, but.
But as widely publicized there has been a researcher in cold cases across the globe with positive test rates, reaching all time highs. It is impossible to predict how the recent surge may impact our business.
Does it depends on how the governments around the globe react.
Some countries are headed back district Lockdowns.
The most appeared to be focused more on curbing certain activities. So.
Doctors attending sporting events and other group functions limiting any restaurant dining and utilizing virtual schooling, all of which will continue to dampen mobility.
While the horizon of the overall market demand remains foggy, we are hopeful that the industry will not return to the extreme market conditions experienced early in the second quarter, but.
With that as a backdrop, we do not expect any material improvement in mobility or overall industry demand in the fourth quarter as there are no catalyst the parent to drive meaningful increases in miles driven.
Until improvement is evident in our business.
We remain intensely focused on controlling our cost and generating significant levels of cash flow.
And at this point I will turn the call over to Barone.
Thank you Nick and a very good morning from BLT Q offices in Chicago to everyone joining us today.
Very excited to speak with you. This morning on our third quarter results.
When I joined LP Q in October 2017, I saw a market leading business with an opportunity to become even stronger by becoming disciplined and more rigorous in the application of key management principles Sims.
Since then falling is very successful consolidation phase in the company's evolution, we shifted our focus to operational excellence with an emphasis on pursuing profitable revenue growth and generating high quality sustainable free cash flow.
Our 2020 results and especially the third quarter are an indication of the success of these multiyear assets I want to acknowledge the work of all our teams across the business in producing a record quarter of earnings per share and over $1 billion in.
Free cash flow through nine months.
While navigating a pandemic that is truly outstanding performance.
In my remarks, I will cover the progress we've made with margin expansion and cash flow generation and a brief recap of the segment results and our core EPS above the fourth quarter.
I'll start with slide seven which shows the consolidated margins achieved over the last three years you can see how prioritizing profitable revenue growth has played out in gross margin in the last couple of years.
Each quarter in 2019, and 2020 as showing year over year improvement.
Except perhaps the third quarter of 2019, which was adversely impacted by 60 basis points from restructuring charges.
Taking away that impact it would have been seven consecutive quarters of year over year improvement listen.
Listen I can guarantee to the street will continue uninterrupted as we know there are positive and negative shocks that can pop up such as the effect from fluctuations in precious metal prices. However, I fundamentally believe that we are in a stronger and more resilient position today.
Dennis few years ago willing to Rightsizing and productivity actions and margin initiatives implemented across each of our segments that recognize the world class fill rate.
Service and value that we provide to our customers to help them achieve their goals.
Additionally, with the portfolio deep dive that we initiated in line with the operational excellence program and integral part of our ongoing efforts to rationalize that acid base, the divestiture of lower margin and non core businesses is increasing our margin profile and improving returns on invested capital.
All of which is a sustainable development.
Shifting to segment EBITDA, we recognize that the benefits of our gross margin improvement initiatives were being partially of fully offset by changes in overhead expense leverage.
As you will recall, we implemented a global restructuring program in 2019 to drive operating efficiencies along with the ongoing one LG to Europe program.
When the global pandemic struck in early 2020, we took tough and decisive actions to accelerate the cost savings initiatives.
We acted immediately to align overhead expenses with revenue changes through actions, such as fellows salary reductions and bypass discretionary and other non mission critical spending.
Further and more importantly, we made permanent reductions through another restructuring program that targeted inefficient operations that had built up over years of relentless revenue growth.
These cost actions have been critical to the margin success, we've seen in the last two quarters during the pandemic, including the 210 basis points year over year improvement in the third quarter.
Looking at slide eight you can see the effects of our cost structure actions with the largest cuts coming in Q2, followed by some increase or into operational activity in Q3 has revenue recovered.
Importantly, we bled back expenses at a lower rate than the revenue increase.
Sequential revenue in the third quarter increased by 16% while overhead expenses grew only by 10.
Thus, creating positive operating leverage we are encouraged by these results and the level of permanent cost savings being achieved across the business.
On Slide 10, you will see a summary of the consolidated results for the quarter highlighted by impressive profitability increases on the segment EBITDA and EPS lines.
Moving to segment performance, we are very pleased with the North America results as shown on slide 11.
The segment EBITDA margin of 17.6% is the highest we've seen in the history of the company and merits additional praise for coming in the third quarter, which traditionally runs at a lower margin than the first two.
The gross margin remained strong due to pricing and Rightsizing actions and was further enhanced by favorable impacts from scrap steel and precious metal prices, it's difficult to forecast how long the precious metals benefit will last the current prices support a continuing benefit into the fourth quarter.
Although at a diminished level as car costs adjust for the increase.
We expect some downward pressure on gross margin in the fourth quarter from higher outage costs and the team is working to mitigate those effects.
North America has done an exemplary job of leveraging operating expenses as evidenced by a 5% sequential increase in Opex in Q3, two delivered 15% revenue increase.
Personnel costs are the biggest driver of improvement, reflecting reduced headcount lower medical claims improved safety performance lower overtime and limited travel expenses.
With gross margin expansion and operating expense leverage north.
North America delivered an incredible result.
As you heard at our virtual Investor Day last month and see in these results the North American management team has embraced the operational excellence mindset and is delivering outstanding performance.
Europe also produced a strong segment EBITDA margin in the third quarter coming in at 9.2%, which is its highest figures since the second quarter of 2017.
As shown on slide 12, the gross margin remains solid at 37.1% and generated most of the year over year improvement in segment EBITDA largely due to margin enhancement initiatives implemented to pursue our profitable revenue growth objective.
Overhead expenses are down in local currency versus last year as a result of permanent and temporary headcount reductions limited travel expenses and aid from government programs in Europe.
We know that there is more work to do in Europe to realize the full benefits of the one elderly to Europe program, which we now have the right team in place and we are confident that their position to meet or exceed the segment EBITDA margin targets for the second half of 2020 that was presented during Investor day.
Turning to slide 13 specialty continues to perform well through the pandemic producing a 60 basis point improvement in segment EBITDA. There is some year over year mix shift impacting gross margin and freight expenses in offsetting directions.
Leaving personnel expenses as the primary driver of the improvement.
Specialty made significant reductions in 2019, but was able to identify additional opportunities to drive efficiency and productivity.
Seamless benefits come through in the operating expense leverage.
So in summary Q.
Two three was an excellent quarter for all three of our segments each faced challenging conditions and yet produced year over year improvements.
Reflecting upon the journey, we've taken over the last few years.
Vividly recall Q1 2018, when has a newbie to allocate to the business generated $5 million of incremental segment EBITDA on a revenue increase of $378 million.
And contrast that against this quarter with a $52 million increase year over year in segment EBITDA. Despite a $100 million decrease in revenue there's.
Theres a lot of hard work and difficult decisions that got us to this position a.
Massive 10-Q, two all of my allocate new colleagues, who have helped make this happen.
Now onto cash flow and liquidity Q.
Q3 was another successful quarter for cash flow generation, we added $222 million in operating cash flows as we continued to benefit from reductions in trade working capital, especially inventory.
As expected and stated on the second quarter earnings call. Some of the tax payment deferral that boosted cash flow in the first half reversed this quarter as we caught up on income tax and beauty payments, which partially offset the trade working capital benefit.
The vendor financing program in Europe continues to ramp up with an increase in supply participation, we still expect to yield benefits in 2020 one.
During the fourth quarter, we give back some of the year to date trade working capital related benefits as we plan to increase our inventory levels to support the service and fill rate requirements of our businesses based on the revenue trends and expectations for Twentytwenty, one including normal seasonality as we approach the winter.
Yes.
As previously mentioned, while we expect to be able to operate effectively at a lower inventory balance than we exited 2019. This september figure isn't sustainable in the long run for us to continue our best in class fill rates.
As shown on slide 14 operating cash flows were 1.1 billion through September and Capex cash outlays were $110 million, the resulting free cash flow was used to pay down global $1 billion in debt. We are very pleased with the trend in EBITDA to free cash flow conversion as presented.
On slide 15, do we know that the 2020 ratio of 108% just isn't sustainable.
However, the strong conversion this year demonstrates the ability of the business to generate significant cash during periods of extreme volatility.
On Slide 16, you can see the progress we've made this year to strengthen our liquidity position.
I want to highlight the net leverage ratio, which has decreased to two times from 2.6 times at the end of 2019.
Weve targeted to maintain our net leverage around the two times level as I stated at the Investor Day last month, and reaching this level creates flexibility in our capital allocation decisions, while continuing to pursue investment grade metrics.
We will still opportunistically pay down debt when appropriate.
And the target net leverage ratio combined with a solid total liquidity position gives us confidence to restart the share repurchase program.
As you recall, we voluntarily halted the program in March to preserve cash as we work to understand the pandemics effect on our business node.
No different than before we will repurchase shares when we feel market conditions are favorable under our remaining authorization.
Finally, I will close with a couple of calls for the fourth quarter.
As cobot uncertainties remain we are not providing full financial guidance for 2020. However, our experience is obtained from operating in the pandemic over the last seven months gives us comfort in making the following statements.
Which build view extreme ability restrictions I repeat which assumes that extreme ability restriction on lot re implemented in our major markets.
One we.
We believe that the full organic parts and services revenue recovery will come through sometime in 2021 don't near term our fourth quarter revenue will be lower than the reported 2019 figure.
Two.
With the ongoing benefits of our focus on cost and.
On each one of these initiatives in the quarter.
No one at our cake, who takes for granted how hard we work to create our market leading positions in all levels of the organization are laser focused on maintaining and growing these positions each and every day.
The strength of our three reporting segments is based on our geographic customer and product diversity.
Unmatched inventory levels and the high levels of fulfillment rates across all of our segments.
Which is all supported by a proud culture of putting the customer at the center of everything we do.
With these key initiatives in place and the best operating teams in the industry. We are confident that we will continue to drive long term value for our shareholders.
Operator, we're now ready to open the call to questions.
Thank you.
I would like to ask a question. During this time simply press Star then the number one on your telephone keypad. Please limit questions to one question and then re queue for follow up.
Our first question is from Daniel and grow of Stephens.
And congrats on the quarter.
Hey, Thanks Diana.
Improved wanted to ask one on Opex and specifically on the personnel taken. This slide you mentioned personnel was down 12% that included some portion of permanent costs, but also some portion of a lack of merit based expenses.
Our based increases which should come back eventually I would think.
Over what kind of timeframe do you expect that to normalize. It can you help us think about what that 12% looks like by segment is it more concentrated in North America or Europe, any kind of color there would be helpful.
Is from Scott Stember of C.L. King.
Good morning, Scott Good morning, Scott.
Well again, thanks for taking my questions and congrats on a great quarter.
I agree with that.
You talked about.
Obviously, some certain caution and reluctance regarding the.
Increased infection rate throughout the world. So just trying to get a sense of what we've seen so far in October.
Have you seen any material difference from the trajectory of recovery in Europe, particularly in the UK and Netherlands and Germany.
So obviously we had a.
Well, we think was a pretty good third quarter.
Across the enterprise.
Given where we are with miles driven and the like.
Importantly in Europe.
While we were down seven tenths of a percent organic for the quarter.
Some of the key markets were up.
Kind of single digits, particularly the UK, Germany and the Netherlands.
In September was the best month generally of the quarter, so that was encouraging.
You know the.
We haven't seen a significant move in the first couple of weeks of October either up or down quite frankly.
But the.
The spikes in the cases of just.
They've just started in the governments are just beginning to think about what theyre action plans are going to be.
Actually since we've been on this call I saw a note.
That France is gone into pretty much of a superior lockdown now we don't have much business in France, so that won't have an impact on us.
The key Scott is how are the governments around the globe going to react to the current spike in in positive cases and.
We just don't have.
Any clarity as to how that's going to be but.
Thus far for okay.
Our next question is from.
Battler Stifel.
Good morning, Brian.
Now.
I just want to maybe going a little bit more on the working capital and if you could provide a little bit more color. I know you said that it was going to you're going to give back some of that but maybe a little bit color on on fourth quarter, where that comment is that.
A couple of hundred million dollars in inventory or anything that could help us get that fourth quarter number right yes.
Yes, absolutely I think it's a great question and answer can I called out in the second quarter and then also at Investor Day last month, and then earlier this morning.
The working capital conversion as of now is running significantly higher essentially proving that the business model at El Kikuyu operates.
The ability to generate significant amounts of free cash as we've proven yet again with regards to the fourth quarter given has to how revenue trends are coming through we do see some.
While investing in inventories specifically.
And again, it's broad based but largely within our specialty segment, which essentially has been constrained after a certain 0.2 with regards to inventory availability. It is flowing at this point of time, but that clearly is the one key priority that we are pushing pretty hard on and so we're really going to be the infant.
Quarterly bills for a few reasons Brian.
One we are significantly lower than where the revenue is currently trending we do expect the balance sheets to also flex based on revenue, but as you know revenues are running a little bit better than where the inventory levels are up we do not have any fill rate issues. We do not have any stockouts, but we certainly want to maintain.
Our best in class and class leading.
Bill rates and service levels. So that is something that did not willing to.
Compromise on so really from that perspective as I called out. This morning also we will be delivering at least a minimum of $900 million of free cash flow for the full year a year ago. It was roughly about 800 million. So that certainly makes sense with regards to a double digit EPS or conversion and then the.
The final piece really is as you think about our key selling season, it's the first in the second quarter.
And so now is the time when we need to rebuild the inventory levels for the seasonal uptick as we head into the winter. So yes, we will see some trade working capital give back and really it will be within the inventories side.
Our next question is from Craig Kennison.
W. Baird.
Hey, good morning, Thanks for taking my question Good morning, Greg wanted it Hey, Nick good morning.
Wanted to ask about just the the pandemic here I mean, it's been particularly hard on small businesses I'm curious what you see as your competitive change in position here I'm sure you've got some small competitors that are struggling but then also you've got some customers here who are also small businesses, who also may be struggling.
And just wondering how that dynamic plays out maybe in 2021 is things hopefully normalize.
Yeah, I wish I had a crystal ball Craig. The reality is is all going to depend on what the governments around the globe do not only as it relates to.
Kind of controlling the pandemic beasley restrictions on mobility, which obviously as we saw in the second third quarter have a negative impact on the overall demand in our industry and that hits not only.
Distributors like ourselves, but it also hits our customers.
And also what they do from an economic stimulus perspective.
Reality is we saw some of our competitors early in the pandemic.
Shut their doors for a couple of weeks and almost as soon as the.
The payroll protection plan Money's got distributed they open back up.
But that tells you kind of how much on the line some of those smaller businesses are you being able to keep the doors open.
If there are significant restrictions on mobility, such as demand for repair services and related parts is down and there is no government support or that's going to that's going to really put the smaller businesses.
At risk.
You know if the government's come along with another big funding. If you will to help businesses stay afloat that will obviously.
Mitigate what we've what we've seen across the globe is not a rational people going out of business.
But we know for a fact like in the UK Mark.
Market demand in the third quarter was down.
Our.
Organic revenue in the UK was up so we're taking share and we believe that the larger well capitalized businesses are are doing okay. In this environment and the smaller undercapitalized businesses are going to continue to struggle.
So the answer to your question Craig It all depends on how deep.
The.
The restrictions are and mobility and what kind of programs are in place.
Typically for smaller businesses by the government to keep them keep them going.
Our next question is from Bret Jordan of Jefferies.
Hey, good morning, guys. Good morning, Brad Good morning.
With another quarter of accounts payable experienced Dundee your belt Maroone I guess could you give us a feeling where you think you might be able to get your payables ratio in Europe, and obviously I guess your aggregate 80 is like 37%, but what.
What do you think your your total payables ratio could be companywide as you sort of run this program forward, yes listen great question and.
Are you happy with the way the payables program is coming along in Europe.
Both of the formal vendor financing program, but also the ongoing discussions with our supplier community.
We keep ramping that piece out we've seen some benefit in the current fiscal year, but really where we expect to see a lot of those negotiations that come to fruition we'll.
We'll be in Twentytwenty one.
And again, it's not everything going to the formal vendor financing program in a number of cases Brett.
We actually have our supplier that basically giving us what you're looking for from an extended payment term perspective in any case overall things are moving in the right direction. All I'll say is there is still a tremendous opportunity within our European segment. Our teams are working hard on that front.
We have prioritized the top 40 suppliers and those discussions have come through really strongly there is still a large portion of the remainder of calls in Europe to actually come through in terms of giving you an absolute number this and this is a multi year program and despite the fact I know folks should be clamoring to try.
And to get a target number that we are chasing listen it's one step at a time in many ways is this the first time, it's been done across the European continent in our industry and I'm glad with.
We now have a partner.
That's also pushing hard on that front running the two largest protagonists across the European continent should we know we not alone on that front.
Great progress being made and we keep.
Resetting the bar with regards to where we expect this program to end up.
Our next question is from Stephanie Benjamin that's true.
Hi, you guys noted for say analysts say that again today that he reached shuffle. Some of your margin improvement initiatives in Europe delayed some like ERP, but.
Calibrated there is.
David strategy kind of less reliant on.
Top line improvement I'm, just trying to get a sense that the pay in a worst case scenario you guys see meaningful locked down.
How these initiatives Ken can still be realized even a tougher topline environment. Thanks.
Good morning, Stephanie and good question.
The reality is it's a combination of both right I mean, some of the things that we're doing.
Clearly we are going to be moving towards a shared service center, that's really not dependent on revenue flow in any given quarter.
That's all about just trying to.
Really get rid of some duplicative costs that are being incurred or across the platform currently and pull them all together.
In a single spot and again Thats one of those items that we mentioned back in September 10 that were pulling forward.
In the overall plan.
Other items like procurement benefits there is a.
A director relatively dry dock.
Connection to revenue because.
As revenue goes up our procurement and our inventories need to go up to support the higher level of revenue, which means our supplier rebates in the life go up.
Revenue goes down you know, we're buying a little bit less from the.
From the suppliers and our rebates go down and so that's.
So some of it is not impacted by revenue in the things that are totally under our control.
We're trying to move forward.
Other things.
Have a connection to revenue so it's it's a little bit of a mixed bag.
As of now like I indicated we are.
Comfortable with both the the magnitude and the cadence of the margin.
The development and and forecast.
That we provided during the analyst day about 50 days ago.
Once again, if you would like to ask a question. Please press Star then one.
And our next question is from Daniel Enbrel Steven.
In the power says.
Rick I wanted to touch on that on the cost side of the equation.
You mentioned in your segment discussion, but freight costs are also increasing I think in this slide you did you increase your third party freight expert or can you talk about what potential offsets you have they mitigate that risk and maybe can you compare where you're at today versus where we were and the widespread cycle in 2017, when it was a pretty big headwinds.
Margin you guys maybe.
Maybe just compare the situation. Thanks, yes, absolutely and yes, we are seeing an increase in FFO.
Freight freighters actually impacting both our cost if you think about a north America.
Aftermarket supplies coming in from Taiwan, Daniel we.
We have seen a spike in the spot rates for ocean freight.
So that has spiked we still able to get our product service and no issues from an inventory availability, we're actually getting a true, but yes, we have seen a spike in spot rates on that front.
The other piece that probably.
I'd point, you to wedges in to see how the big.
Great Forwarders, and the carriers can the United States, but also the same folks in Europe. The EPS instead as seasonal as well will be essentially are also doing incredibly well and they have taken there.
DAC charges up the final one really is you know we are seeing an uptick in E commerce and online purchases from that perspective, there is some tightness in in demand out there the ongoing challenge of finding delivery drivers, it's no different to others within our industry.
Or for that matter to anyone else wouldn't the distribution space per se and so from that perspective, what we have done from call. It the first quarter 2018, where we saw this piece initially.
We obviously did become more efficient with regards to the amount of product that was being shuffled around.
And where it was being transported on a cross country basis for example to kind of keep our fill rates up as the example, I gave was unit from Q1 18, where revenue was up like just under $400 million and all it really kind of got US was about $5 million of incremental segment EBITDA. We've obviously put those learnings into play.
Yes, and yes, there are certain charges that we do apply as and when those are necessitated server.
We certainly mitigating latisys through the learnings of the past couple of years, but clearly there is an uptick on that front and our teams with regards to route optimization, our roadnet proliferation across the network or for that matter. The number of deliveries that end up taking place all of that piece is being worked into the equation.
And so we're really happy.
With the way our segment teams in fact, all pre segmentations are dealing with this spike in in freight and delivery costs.
Once again, if you would like to ask a question. Please press Star then one on your telephone keypad.
And we have no further questions I would like to turn the call back to Nick's Sarcone for any closing remarks.
Well. Thank you everyone for joining us on this call again, we believe we reported just terrific results. During the third quarter of 2020, we are working hard to make sure that we can do everything under our control.
To deal with the the impact of the pandemic, both obviously whats occurred thus far and what may ever a lie ahead for the the globe going forward.
You can trust that we are going to be extremely focused on our cost structure and continuing to generate cash.
And that I want to give a huge thank you to everybody on the allocate Q team because it is absolutely been a huge team effort to get us where we are today.
And lastly.
We started off right before this call was a piece of birthday take none other than Joe Boutross, whose birthday is today, so Joe happy birthday to you I know most of the folks on the call.
No you well and I'm sure they extend their best wishes. So we will talk again.
After fourth quarter results and.
We appreciate your attention take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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