Q2 2019 Earnings Call
Please refer to the L. kick your website at Okay, Q Corp. dot com for our earnings release issued this morning as well as the accompanying slide presentation for this call now let me quickly cover the safe Harbor some of the statements 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 assume no obligation to update any forward looking statements.
For more information please refer to the risk factors discussed in our Form 10-K , and subsequent reports filed with the SEC.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in todays earnings press release and slide presentation. Hopefully everyone has had a chance to look at our 8-K, which we filed with the FCC earlier today.
As normal we are planning to file our 10-Q in the next few days and with that I am happy to turn the call over to our CEO Nick Zarcone.
Thank you Joe and good morning to everybody on the call. We certainly appreciate your time and attention at this early hour.
This morning, I will provide some high level comments related to our performance in the second quarter and then the rune will dive into the segments and related financial details before I come back with a few closing remarks.
When taken as a whole the second quarter of 2019 played out largely as we anticipated when we announced our first quarter results 90 days ago.
There were both some clear positive movements and some disappointments, but we are encouraged by the overall result.
On the plus side, our North American segment experienced a significant uptick in both gross margin and EBITDA margin, which gives us confidence that our disciplined approach to the market and keen focus on controlling our costs are creating positive outcome.
Also our global focus on trade working capital management led to significant cash generation, which was well ahead of our 2019 expectations. While there were some positive items related to timing and we will give a bit back as we move through the remainder of the year. We are ahead of our initial plan from a free cash flow perspective for the first six months and we believe we will remain so for the balance of the year.
On the flip side, we knew we had a very difficult year over year revenue growth comparisons with respect to both our north American and European segments, but the organic revenue growth came in below our tempered expectations.
Additionally, there was one less working day in Europe in the second quarter of this year compared to last so it's important to focus on the same day results.
There was no doubt.
That's a soft macroeconomic conditions across Europe are weighing on our industry and our revenue comparisons.
We are performing better than many of our peers, but organic revenue in Europe was down and that softness bled through the operating margins.
And finally by quarter and scrap prices fell further 20% from the March thirtyth levels, which impacted Q2 results and will continue to weigh on our results for the balance of the year.
Now onto the quarter.
As noted on slide five revenue for the second quarter of 2019 was $3.25 billion, a 7% increase over 3.0 billion recorded in the comparable period of 2018.
Parts and services organic revenue growth for the second quarter of 2019 declined 2.1% on a reported basis.
When adjusting for the one less selling day in Europe , the decline in organic revenue for parts and services was 1.3%.
Net income was $150 million compared to the $157 million for the same period of 2018.
Diluted earnings per share for the second quarter of 2019 was 48 cents as compared to 50 cents for the same period last year.
However, the second quarter of 2019 result included a noncash impairment charge of $25 million net of tax.
Regarding this impairment charge as we reported last quarter, we intend to divest a few of our non core business units over the next year and thus have recorded the related assets and liabilities as held for sale.
Each period, we evaluate the recoverability of the carrying value of these assets.
In the second quarter, we concluded that the expected recovery would be less than the carrying value and as a result, we recorded an impairment charge of about eight cents a share which is excluded from our calculation of adjusted diluted EPS.
On an adjusted basis net income was $204 million, an increase of 6% compared to the $192 million reported for the same period of 2018.
Adjusted diluted earnings per share for the second quarter of 2019 was 65 cents compared to 61 cents for the same period last year, a 7% increase.
With respect to capital allocation during the quarter, we repurchased approximately 4.4 million shares of our common stock returning approximately $120 million of capital to our stockholders.
Since initiating our plan in late October 2018, the company has repurchased 9.3 million shares for a total of $251 million.
Let's turn to the quarterly segment highlights.
As you will note from slide seven organic revenue growth for parts and services for our North American segment declined four tenths of 1% in the second quarter of 2019.
As anticipated the PGW glass business and the airplane recycling operation exhibited a decline in same day growth, while the largest part of our North American segment that being the automotive salvage and aftermarket parts operations exhibited positive same day growth of approximately seven tenths of 1%.
While our focus on driving profitable revenue growth as the result of shaving off some low margin revenue. It has a material positive benefit on our margins.
We continue to perform well in North America, especially when you consider that according to CCC collision and liability related auto claims were again down 2.6% year over year in the second quarter.
This softness was nationwide with 40 of the 50 stage recording a decline in repairable claims.
Additionally miles driven has slowed with the lower growth coming from increased vehicles in operation versus miles driven per vehicle.
An increase in the number of people working from home and the shift towards online shopping.
Despite some macro industry challenges on the top line and facing a another tough comparison against the second quarter of 2018, our north Americas teams focus on profitable growth drove excellent year over year margin improvements.
Segment gross margins were 44.1% and EBITDA margins were 14.4%, reflecting improvements of 100 basis points and 130 basis points, respectively, when compared to the second quarter of last year and representing some of the highest levels in the history of the company.
Furthermore, when removing the self service business.
The business unit that experienced the greatest downward impact on margins from the decline in scrap prices gross margins and EBITDA margins for the rest of our North American segment were up 160 basis points and 190 basis points respectively.
Rune will address this in more detail, but I wanted to highlight the positive results from our margin enhancement efforts.
We also continue to grow our parts offerings with the aftermarket collision S.K. you offerings and the total number of certified parts available growing 5.4% and 11.5% respectively year over year in Q2.
Related to certified parts.
Some of you may be aware in late June LK Q received notification from an ESOP international that it will discontinue its automotive parts certification business and affiliated automotive certification and registration programs effective September thirtyth of this year.
Many parts, which are certified by NSF are also covered by cap off the largest certification body and we are confident going forward that this continuation will not have a material impact on our certified parts availability.
Moving to the other side of the Atlantic Our European segment achieved total parts and services revenue growth of 18%.
Primarily driven by the acquisition of Stahl Gruber.
Organic revenue growth for parts and services in the second quarter of 2019 declined 4.3% on a reported basis and was down 2.8% on a same day basis, which was below our expectations.
As noted by other public companies with European exposure. The softness is an overall industry headwind not I'll now take you specific issue. Indeed, our performance on a relative basis appears to be fairly strong, which gives us confidence that we are not losing share.
Additionally, the diversification of our geographic footprint in Europe .
Generally reduces the volatility in our segment performance, because we're not overly exposed than reliant on any one specific country.
While we don't disclose country by country detail I will note that Italy was the softest in terms of organic revenue growth and the eastern block was the strongest, albeit still below its historically high levels.
Europe is seeing many of its economy slowing as evidenced by negative or flat GDP growth and lower new vehicle sales.
Discussions with our suppliers and other industry participants have confirmed the downward pressure that poor economic growth across the continent is having on the European parts marketplace.
The consensus view is the soft economic conditions have led to an initial deferral of repairs and maintenance.
Well, a near term headwind, we believe that core automotive maintenance can only be deferred for so long and the demand will eventually rebound that said, we anticipate these soft industry conditions will continue through the balance of 2019.
We believe our team has done a reasonably good job of reacting to the new revenue paradigm, but the revenue declines have resulted in a deleveraging of our operating expenses and lower margins when compared to the prior year.
Lastly on Europe during our Investor day back in May 2018, we outlined some of the key categories of focus designed to drive the future performance of our European Enterprise.
There were both some near term and longer term activities identified and we are making good progress on each of these initiatives.
Since then we have also spent considerable time strategizing about how to best optimize the strength of our various businesses in Europe and to that end, we have engaged with a third party consulting firm to assist in this ongoing review.
Once complete we will likely settle on an even broader and deeper array of initiatives than those highlighted a year ago.
To be clear the primary focus of this optimization project is to create an even stronger enterprise and to enhance our already leading competitive position in the markets in which we operate by providing a best in class customer experience.
To do that across our European platform, we intend to transform and more fully integrate the European businesses to operate more as a single entity.
The transformation will be designed to allow allocate to Europe to take advantage of its scale and be a more efficient entity.
We anticipate most of this analysis will be completed in the next two months and we are currently targeting a call with the investment community in the second week of September . So we can share some of the key highlights of the project, including the anticipated long term benefits of the optimization initiatives as well as the related costs required to complete the transition.
Now, let's move on to our specialty segment.
During the second quarter specialty reported flat total revenue growth with organic revenue growth for parts and services of 110th of 1% being offset by a negative impact from currencies.
Specialty witness particular softness in Canada, which accounts for about 10% of the segments revenue largely related to Canada as weak economy.
Additionally, RV parts sales were off slightly due to lower dealer retail sales across all regions.
Our specialty team is laser focused on spending controls, which will continue to help offset the impact of lower revenue.
Despite the softness light truck industry Saar rates are still running at healthy levels and the number of our views on the road are at an all time high.
Favorable dynamics for RV business.
And our RV replacement part offerings.
Moving on to corporate development.
It was a relatively quiet quarter from a corporate development perspective closing on just three smaller transactions, including two companies in the United States and one regional distributor in Belgium.
For a total net consideration of $38 million, our pipeline of opportunities remains quite healthy and we will continue to acquire businesses that can add value from a customer offering or geographic perspective.
Additionally, our development team continues to make solid progress with our assets held for sale efforts and during the quarter, we entered into a definitive agreement to divest a small operation in Europe , which we expect to close in the third quarter.
Finally during Q2, we opened up three branches in Western Europe , and one in eastern Europe , while closing five underperforming locations, including one in Western Europe and four in Eastern Europe .
And with that I will now turn the discussion over to Rune will run through the details of the segment results and discuss our updated 2019 guidance.
Thanks, Nick and good morning to everyone joining us on the call overall, we feel that the second quarter was a qualified success, providing some positive developments in our North America segment and also free cash flow generation, while also offering a few areas for improvement.
Before diving into the results, let's start with the key financial highlights.
Operating cash flows in the second quarter were $461 million, the highest quarterly amount in the company's history by a factor of more than two times.
Free cash flow from the quarter totaled $413 million or $282 million higher than the same period in 2018.
We've talked in the past few calls about our emphasis on cash flow generation and a one two tank our teams across all three segments for their efforts to deliver substantial year over year growth. We are raising our full year guidance for free cash flow more details a little later.
The strong cash flows enabled us to buy 4.4 million units of L. Kikuyu stock for approximately $120 million in the quarter.
Additionally, we also paid down debt by $220 million in the quarter and in the six months through June 30th have paid down 281 million.
Returning cash to our shareholders, while reducing our net leverage ratio speaks to the strength of our business to generate strong consistent cash flows.
Our North America segment was able to withstand some revenue softness to post its highest segment EBITDA margin percentage since the second quarter of 2017.
I want to commend the North American management team for taking a proactive approach to protecting margins to offset inflationary pressures and proactively working to optimize its cost structure.
Our Europe and specialty segments also face off revenue and we are taking actions in both segments to advance our stated strategic objectives and address current market conditions.
Last quarter, we disclosed our plans to divest certain low margin businesses that fall outside of our core operations in geographies.
This quarter, we are announcing a restructuring program that we expect to enhance our competitiveness in the current macroeconomic environment.
The restructuring program covers all three of our reportable segments and advances our efforts to eliminate underperforming assets and cost inefficiencies.
With underperforming assets, we intend to close branches and warehouse locations that are not supporting a sufficient return on investments.
Our current plan includes approximately 40 locations across the business both in North America, and Europe , we intend to migrate as much of the revenue as possible from these locations to other facilities in the L. Kikuyu network, but there will likely be some low margin revenue lost as a result of the closures.
The restructuring charges will include facility closure costs, such as lease termination fees and moving expenses to relocate inventory and equipment.
Additionally to this process, we have identified selective personnel reductions that will benefit future periods, which will require upfront severance that will be charged to restructuring.
We estimate that the restructuring program will cost approximately $25 million to $30 million over the next year to implement and will generate savings of a similar amount on a run rate basis.
While this program represents a significant move forward in our plans to improve our competitiveness, we will continue to evaluate our businesses and cost structure to identify further opportunities for simplification and cost efficiency.
Regarding Europe , the restructuring program will aid our efforts to deliver sustainable double digit segment EBITDA margin.
These efforts are part off but do not reflect the entirety of the optimization project that Nick referenced earlier.
In conjunction with European margins I want to highlight that we expect various integration costs such as ERP implementation to have a negative impact on that segment EBITDA margin over the implementation timeline.
We have been cut some of these costs in the past, including in the second quarter, but expect some acceleration as the integration projects ramp up we think it will be important for investors to understand the nature and amount of these enablement costs and therefore, we will provide disclosure of the expenses incurred as part of our quarterly reporting cadence.
Now I'll cover our consolidated and segment results to save myself, some whereas when I referred to net income and diluted EPS. Please note that I will be referring to the amounts from continuing operations attributes a boon to L. Kikuyu stockholders.
In addition, Nick covered the details on net income and earnings per share so I will not repeat.
Please turn to slides 12, and 13 of the presentation for a few points on the consolidated second quarter results.
The consolidated gross margin percentage increased 10 basis points quarter over quarter to 38.4% driven by a 100 basis point improvement in North America.
While Europe was flat compared to 2018 as we've discussed previously there is a negative mix impact at the consolidated level has a lower gross margin European segment makes up a larger percentage of the overall results and hence has the diluted effect on the consolidated margin.
The mix impact will be less impactful going forward now that weve annualized the style Gruber acquisition.
Our operating expenses increased by 40 basis points quarter over quarter with the rise in our European segment.
Restructuring and acquisition related costs was 8 million as a result of ongoing expenses related to acquisition integration activities previously discussed those as well as some initial charges of approximately $5 million from the restructuring initiatives.
Interest expense was favorable by $2 million or 6%.
Compared to the second quarter of 2018 going to both lower interest rates and lower average debt balances.
Moving to income taxes, our effective tax rate was 27.1%, which is roughly in line with our full year estimate.
Please turn to slide 16 for highlights on segment performance, starting with North America.
Gross margin was 44.1% or 100% basis points higher than last year as I previously mentioned.
For the most part the margin expansion reflects the continued benefits of pricing initiatives in both our off to market and salvage operations as well as FX in not lost business to get recognized for the quality of service and the breadth and depth of inventory that we provide and renegotiate underperforming contracts.
We had an additional nonrecurring benefit of 25 basis points related to an insurance settlement that was realized in the quarter.
The self service operation was a drag on segment gross margin with a quarter over quarter decrease due to scrap pricing.
Sequential changes in stock prices had an unfavorable impact of $2 million for the quarter compared to a positive impact of $4 million in the second quarter of 2018, creating is $6 million a year over year negative swing.
Operating expenses were unchanged at 30.1% relative to the prior year given the pressure on both parts and services and other revenue and the resulting net leverage effect holding the percentage flat and actually reducing the absolute dollars by 4 million is a very respectable outcome.
This quarter is the first quarter without a quarter over quarter increase in expense as a percentage of revenue since the third quarter of 2017.
Wage inflation and higher medical costs continue to negatively impact our operating leverage there will be a north America team has effectively managed expenses to counteract a portion of the impact.
We generated further savings through improved safety performance has seemed to a reduction in workers' compensation claims and a favorable variance in bad debt expense from ongoing collection efforts.
In total segment EBITDA for North America was $190 million up 15 million compared to last year and as a percentage of revenue was up 130 basis points from the prior year quarter.
We've been talking about North America's margin enhancement efforts over the last year and the numbers show the progress that's been made a year ago. We disclosed a 130 point decrease in segment EBITDA margin in the period with 7.4% organic parts and services revenue growth.
This year North America recovered the full 130 basis points in margin, despite a 40 basis points organic parts and services revenue decline.
We're also encouraged by the fact of the North America team still feels that there are additional cost efficiency opportunities available and is working on plans to achieve these savings.
Moving on to the European segment on Slide 19 gross margin in Europe was 36% flat to the comparable period of 2018.
Centralized procurement yielded a 50 basis point improvement from supplier rebate programs as we continue to benefit from this trial group of synergies.
With respect to operating expenses, we experienced a 100 basis point increase on a consolidated European basis versus the comparable quarter from a year ago the quarter over quarter sales decline, partially attributable to one fewer selling day in the quarter had a negative impact on operating leverage.
Given the segments relatively high cost base, primarily with personnel costs.
Additionally, there was a 30 basis point headwind associated with the ongoing transformation efforts, primarily the ERP program and the broader project that Nick referenced.
Partially offsetting we had a 30 basis point decrease leading to reduced bad debt expenses as the teams focus on collection efforts.
European segment, EBITDA totaled $116 million, a 5% increase over last year.
As shown on slide 21 relative to the second quarter of 2018.
Both the Sterling and the euro each weakened by approximately 6% against the us dollar.
Causing in negative effect from translation.
This was offset by favorability in transaction gains and losses, netting to an immaterial impact on adjusted EPS for the quarter.
Segment EBITDA as a percentage of revenue was 7.7% for the quarter down 90 basis points compared to the same period a year ago. As noted earlier, we have taken action through restructuring programs throughout our European operations and we continue to believe that we have the best assets in Europe and are positioned to achieve significant integration synergies.
As Nick mentioned earlier, we will provide an update to the investment community in September on the European transformation project.
Turning to the specialty segment on slide 22, gross margin declined 130 basis points in the second quarter relative to the comparable period a year ago.
Of this amount 60 basis points related to higher net product cost has a supplier discounts were lower.
Then do is realized in the prior year.
The balance related primarily to unfavorable product mix.
Operating expenses improved 40 basis points with reductions in personnel and freight costs more than offsetting higher facility expenses related to warehouse expansion projects that went live after the second quarter of 2018.
Segment EBITDA for specialty was $52 million, approximately 4 million down from the second quarter of 18, and as a percentage of revenue down 90 basis points to 12.7%.
The specialty team is taking cost actions to protect its margins aimed at producing benefits in the second half of 2019.
Let's move on to liquidity and the balance sheet.
As presented on Slide 24, as previously mentioned you will note that our operating cash flow for the second quarter was $461 million or 152% higher than the second quarter of 2018.
On previous calls we've talked about driving working capital improvements and the team did a phenomenal job this quarter.
It was a total team effort as all three of our segments contributed with North America, and Europe posting significant gains.
Our key working capital accounts that has created receivables inventory and payables.
We generated a cash inflow of $189 million this quarter compared to an outflow of $49 million in the second quarter of 2018, I want to give special mention to the North America team for working with our vendor partners to ensure L. Kikuyu received market convention to payment terms no different than other large customers and to the European team for its disciplined patching approach in light of soft trading conditions.
As you would expect I do want to offer a few words of caution on the strong year to date cash flows.
There will be ups and downs in working capital and cash flows as we move throughout the year based on seasonality and the timing of certain transactions. We will also actively use our liquidity to pursue opportunities that support our business objectives. For example in funding the restructuring costs and those of our key vendor partners.
By making selective inventory purchases.
Capex for the quarter was $48 million, resulting in free cash flow for the quarter $413 million and $537 million on a year to date basis, and finally moving to slide 25 as of perpetual of June we had $376 million of cash, resulting in net debt of about $3.7 billion or 2.8 times last 12 months EBITDA.
Now I would like to spend a few minutes and provide an update on our annual guidance. Please note that the guidance assumes that scrap prices and foreign exchange rates hold at current levels. Additionally, the guidance continues to assume no material disruptions associated with the United Kingdom's potential exit from the European Union currently scheduled to occur on the pesky faster for October .
As Nick noted earlier, the second quarter came in line with our expectations North America performed well and we expect specialty to bounce back in the second half of the year.
We see challenges with European economic conditions, holding for the remainder of the year and despite the underlying business is being resilient the management team, who will adapt to the softer market conditions by accelerating the integration and cost efficiency programs. In addition to simplify by carefully evaluating various programs that may not deliver benefits in the near term.
As mentioned earlier scrap metal prices have continued to trend down.
And the British pound is trending lower based on the ambiguity that continues to reign in the United Kingdom with the new Prime Minister and his very definitive views on Brexit.
Given these scenarios, we are trimming our 2019 full year guidance by 2.5% or six cents at the midpoint for adjusted EPS, while increasing expected free cash flow for the year by $50 million.
Let me run through the updated guidance figures.
Organic parts and services revenue growth revised to 50 basis points to 2% for the full year.
Diluted EPS on a GAAP basis is updated to a range of $1.73 to $1.81 accounting for the first half activity primarily related to the noncash impairment charge I referenced earlier.
Adjusted diluted EPS in a range of $2 to $32 to 38.
You will note that at the midpoint of the range, we're down six cents per share from our prior guidance of this three and a half cents relates to lower scrap prices and FX rates relative to our prior guidance.
And the remaining two and a half cents largely reflects the net anticipated ongoing softness in Europe in the second half.
Cash flows from operations has been increased to a range of 800 million to 875 million and capital spending is reduced to a range of $225 million to $275 million, resulting in a net increase at the midpoint to to free cash flow for the full year by $50 million. Despite the trim in earnings.
In summary, the second quarter had several highlights showing where our actions are bearing fruit such as North America margins and generating strong free cash flow thats funded the ongoing share repurchase program and debt Paydown.
However, the softer macro conditions in Europe , and the volatility in scrap and FX give us pause for port and hence we've triggered a cost reduction and efficiency program to adjust to the market conditions overall, we remain optimistic about our prospects for the future.
Now I'll turn the call back to Nick for closing remarks.
Thank you grown for that excellent financial overview.
In closing I would like to review a few of the key initiatives discussed on previous calls that will continue to be points of focus during the balance of 2019.
First we will integrate and simplify our operating model.
Second.
We will continue to focus on profitable revenue growth to create sustainable margin expansion.
Third we will drive better levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy and fourth we will continue to invest in our future.
As you can see from the second quarter results. These programs and targets are gaining momentum throughout the organization.
And the teams are actively working towards achieving their respective goals.
I am proud of the momentum we have created with our second quarter performance and how our team of over 51000 employees performed a mid various market challenges in both North America and Europe .
Importantly, I want to recognize how our leaders across each of our segments have embraced our productivity initiatives and the performance and compensation metrics, we have implemented as we progress through 2019 and beyond.
I am confident these factors will create long term value for our stockholders.
I look forward to having you join our European discussion in September and we will announce final details as we get closer to that call.
And with that operator, we're now ready to open the call for questions.
Certainly at this time, if you'd like to ask a question. Please press star one.
To withdraw your question press the pound key.
Please limit questions to one question and re queue for follow up.
Daniel Enbrel with Stephens, Inc. Your line is open.
Yes, hey, thanks, Good morning, guys. Thanks for taking our question good morning, good morning.
Wanted to think about the European margin and actually over and start on the gross margin line. I think you said gross margins were flat year over year. Despite a 50 bip tailwind from procurement and we lap some of those issues from T. Two last year. So could you just kind of walk through some of the puts and takes of what's going on on that line and then as comparisons get more difficult in the back half. How you guys are expecting that gross margin line to trend in Europe . Thanks.
Yes, absolutely Daniel and good morning, and thank you for calling in this as the hour yes. As if you think about European gross margin. It was flat in deep Sea you actually read Thats correct, we really think about it in terms of file we did get the centralized procurement benefits.
With the organic decline coming through there is pressure on.
Margins right and so as you think about other competitors also but the one area where they go through to be able to kind of sustain the revenue side is on the margin piece of it so margin did come under some pressure as a result of that nothing more nothing less we've always had those competitors out there, but clearly with.
A falling market as such.
That's really where folks end up.
In trying to give value to their customers. So there was some pressure from that perspective, I think if you step back and think advantage.
While the headline number would suggest that the European segment EBITDA margins declined by call. It 90 basis points year over year, but this entire piece into context as you think about the fact that a year ago.
Europe delivered 8.3% organic growth number this year the reported numbers negative 4.3, Thats, a 12 and a half percentage points swing.
And as you think about the fixed cost structure largely more so in the European.
Space, that's the kind of de leverage that ends up coming through and even if we were to be able to hold flat for example, rather than a negative four three if it were flat and you were to run the math.
The SG any all the Opex expenses would actually decline by 100 basis points with all other things being similar so think about the.
The de leverage that takes place in a market that is shrinking and it doesn't just show up in the gross margin line actually shows up in multiple lines in terms of not being able to get the operating leverage.
Okay.
Craig Kennison with Baird. Your line is open.
Hey, I'm sure there'll be more questions on Europe , but I wanted to shift to North America, and the collision business. How do you explain that soft collision trend and to what extent.
Is the total loss raid, which appears to be climbing, resulting in fewer repairs and really just fewer opportunities for our Q.
We have a very deepen ongoing relationship with CCC, we get a lot of data from them.
On a on a quarterly basis and when we sat with them a couple weeks ago.
We asked them point blank their perspective as to the decline in repairable claims in particular, because that's really what drives our business.
In general they indicated that the winter of 2019 was a bit milder than 18 and that has an impact of reducing collision volume if you will.
And there is no doubt that on April 1st the beginning of the second quarter right.
The collision repair shops have less backlog if you will in 2019 than they did on April onest of 2018.
You are absolutely right total loss rates have continued to nudge their way upward just a bit.
And on the margin that takes a few cars out of the repair shops and into and puts them into the salvage auctions, which is not a bad thing for us because we have more cars too.
Turning to purchase a total loss rates.
For the June 2018 to May 2019 time period was 19.3%.
That compares to 18.7% for the June 17 to May 18 time period. So so up just about a half a percentage point or so.
Miles driven.
Yes, it has really started to flatten out.
From May 18, the April 19 up only six tenths of 1%.
Compared to the the May 17, Dave Roy 18 time period, and most of those models.
The increase is in fleets as opposed to personal Myles.
The what I would call the accident prone portion of the population I think about our teenagers out there and maybe some of the very elderly.
They are not in the fleet segment and so.
That they believe and we believe is having perhaps a slight impact.
As well.
So the good news on a longer term basis is that the number of cars in the sweet spot.
It is up and Aipu continues to shift upward very slowly, but it does a shift up a bit and we believe quite frankly that accounts for the positive spread between our organic growth and actually the negative.
Repairable claims growth.
And lastly, obviously, we were measuring against a 7% comp in Q2 of last year and those comps will get a little bit easier in Q3, and then much easier in the in Q4.
Michael Hoffman with Stifel. Your line is open.
Hi, I'm going to change gears completely and talk about cash.
Looking at the revised guidance my thinking about the second half correctly, if I take the midpoint of.
The net income and the free cash flow. It would suggest that you do about 300 million and net income offs helped by about a $180 million of DNA, and then offset setting that some all the other things and the cash flow statement stays unchanged other than working capital. That's the comment you made barone as there is about $140 million to $150 million walk back of working capital in the second half and that puts you at the mid point of.
Your cash flow from ops, yes, Michael So yes, good morning, It has vernaccia and.
Yes, I think that the mechanics that youre utilizing a new model from a free cash store and most yes perspective are appropriate.
And I think if you also kind of look back into the same it just takes 17 and 18 to prior years. We typically do have an outflow on the trade working capital in the second half versus the first half so in terms of different ways to look at it.
Clearly with the slight frame of 20 to 25 million on the met at the midpoint for adjusted net income.
Until such forget that you know with the restructuring program that we've called that also takes us back so I would not say that.
Usage on a working capital perspective was about 140 Onefifty I think just take into account the lower earnings plus also.
The restructuring that we've called out that will be utilizing cash.
And then just in terms of the first half second half.
Use of trade working capital. So overall, the mechanics that you're thinking up thinking off are appropriate and hence both Nick and I referenced that there will be set and timing associated with payments.
But we do expect that to be set and opportunities for us.
And to be able to invest more on the inventory side, just given the stage of the market on a broader basis.
It's not us that's seeing some softer revenues, it's happening to competitors and we certainly seeing it from some of the suppliers specifically over in Europe in terms of what they've been calling out but thank you for the question. We are very pleased with the weak cash has been coming through the business and really happy with.
The momentum that we picked up from the second half of last year and Thats carried into 2019.
We believe there is more to come.
Stephanie Benjamin with Suntrust. Your line is open.
Hi, good morning, good morning, Stephanie.
I was hoping you could talk a little bit about just the headwinds we're seeing from the aviation aviation in glass businesses.
And when you do so.
Lets start lapping those.
Tristan I was just kind of calm because they are small businesses where.
Small base, but you can see some nice swings quarter to quarter. So just first just when we should expect some of that going forward.
And then.
Additionally, if you just walk through.
In a little bit more detail just what's driving the kind of significant margin improvement in North America, whether it's pricing just cost control discipline.
A little bit more color and how we can think about that going forward would be helpful. Thank so much okay, great well I'll start.
Clearly we indicated in past calls as it relates to our.
Our glass business.
That when we bought the business, we inherited some less than profitable.
Contracts and so we have.
Moved away from some of that revenue.
Intentionally that's all part of the the idea of focusing on really profitable revenue growth.
That comes with a.
A decline in in revenue on an organic basis, if you will.
And sometimes you need to be willing to walk away from business and Thats, what weve done there if you will.
That project and.
And some of those contracts really.
Started at the beginning of this year. So by time, we get into late Q4, and first quarter next year, we have we'll have fully anniversaried.
That that project the aviation business again, you need to keep in mind, which was also by the way.
A negative drag on organic growth in both the first and second quarter now that's a business that's very very lumpy. The average ticket sale. There is not necessarily a few hundred dollars for our part, but we're talking tens of thousands if not hundreds of thousand dollars for parts, so timing on a quarter to quarter basis Ken.
Have big impacts.
Again, our expectation would be its going to.
The tough sledding there for the rest of the year.
And then secondly, just to kind of ex those up I think when your second part of the question about North America margin improvement. It actually is very very tightly linked with what Nick started off by saying our focus on profitable revenue.
Listen we've talked about this in the past also there are a number of businesses. There is a lot of revenue that is potentially available and in the past. The company has taken advantage of fit but as we've kind of looked into the margin pressures and really in terms of what's the contribution margins for that additional dollar of revenue whether it be certain customers whether it be certain product lines, we have consciously walked away from some of that.
How should we see lower margin or EBITDA free.
Nick mentioned this in his overall.
Comments, if we look at our core automotive parts and services business, which essentially is full said the salvage and also our after market business.
That business still grew about 70 basis points year over year, despite some tough comps from a year ago.
Yes.
So from that perspective, we have a happy in terms of where the focus by the team has being so think about that that specific piece is just being conscious about the revenue that be go chase because there is cost associated with.
Speaking of the parts in the warehouses delivering them in certain cases, having to pay for the returns and so just being very conscious in terms of the revenue that we choose.
Bret Jordan with Jefferies. Your line is open.
Hey, good morning, guys. Good morning, Brad wondering.
I would go back to Europe .
Chrysler battery distribution business as profitless sales.
So as it relates to to Europe as a whole. Your question I think really relates to what are we seeing here early in the third quarter and we've got.
Basically three weeks worth of data, which is not enough.
To to form a trend.
Some of our operations are seeing a slight uptick on the revenue side.
But again it's.
It's three weeks and we're headed into the big holiday season.
That being the vacation season over in Europe .
And so we are not going to.
We're not working under the assumption that theres going to be significant upticks.
In in revenue growth in the back half of the year, we think it's tough sledding.
The reality is we talk to our competitors, we talk to our.
Our customers the grudges and obviously our suppliers and.
And everyone is I think.
Working under the assumption that these industry conditions are going to be with us for a while if they turn we think we will be a huge beneficiary of that.
But we think it prudent to.
Work on the operating assumption that it's going to be.
These business conditions are going to be with us for the for the balance of the year.
On the.
Your question as to the battery business again.
We started that in 2018.
We are continuing to distribute batteries on behalf of the FC a organization that being the mopar batteries to their dealers across the United States.
That is a.
That is a good relationship in a.
And a good.
Good contract for us.
Chris Bottiglieri with Wolfe Research your line is open.
Hi, Thanks for taking the question.
Really.
Hey, good morning.
Relies on me a call in September , but and patient as our most investors so want to cut up like lay out what you've already told us in trying to think through kind of what we do know already today. So as I understand it there will be non-GAAP restructuring costs, which you've laid out.
And then Theres currently already a 30 basis point headwind.
From integration and systems.
You would expect that 30 basis points to accelerate moving forward as you get further along those projects.
And then on top of that as you go through the planning process there will be more.
Well there is additional cost be non-GAAP ed are those be just a headwind to earnings and how should we begin to think about 2020 I would think this would cause a decrease to European margins and free cash flow, but want to just.
Anything you do know today would be helpful.
Yes, Chris it's a it's about an entre. So yes, you are right and just for the broader attendees on the call also Nick did mention that in the second week of September we will provide an update on the various European initiatives that we talked about at the Investor Day last may.
So there will be a full a deep dive associated with the various initiatives and really as to how we see.
The overall three plus year program that we talked about a little over a year.
Started that activity so it's not as if you're starting it now.
It actually impacts each of our three reportable segments not only Europe . The other piece I would like to call out is with regards to the broader European optimization and integration program.
Did the restructuring that we've currently talked about is not the entirety of that piece. So yes, if you're going to play the tape forward there will be costs associated with integration and really the point is to kind of give the market. Some foreshadowing language with regards to.
Our transformation costs right, there will be a cost associated with being able to integrate those businesses and we will provide an update on that also in the September timeframe.
And again I think it just is helpful for the investment community to understand in a business as usual versus.
Costs associated with taking the business to the next level and essentially digging the mode that much deeper around what we.
Expect to be best in class businesses in any case, so there will be some cost associated with being able to make those investments, but also to get some of the cost structure. That's currently embedded out there, but again more on that when we get to the September review.
Ryan Merkel with William Blair. Your line is open.
Hey, thanks for fitting there.
Good morning, Ryan Good morning, Ryan Laurie.
So I have two questions on Europe . So first what percent of Europe segment sales like you define as more discretionary in nature.
And the reason I ask Im just trying to get better understanding of the cyclicality that we might see at Europe macro stay soft.
And then secondly on Europe optimization plan, what is the main scope of work for the consultants that you hired.
And the reason I asked that is because you're already restructuring and I presume you've already looked at divesting assets. So maybe just a little more clarity there would be helpful.
Yes, so I'll start with the second half of that question Ryan.
It's important to keep in mind that the restructuring activities and what I'll call. The optimization project, they're linked but theyre separate.
The restructuring initiatives are all about kind of rightsizing, our business for the current marketing conditions and that involved a consolidation of facilities and the elimination of lower margin activities at a local level as rune described.
The optimization project in Europe is really a longer term.
Focus.
In really.
The intent is to gain efficiencies by morphine the European organization and operating structure from what today is a fairly independent country based model.
To a slightly more integrated model that leverages, a higher level of.
Centralized resources.
To be clear you know in Europe , we sell in the local markets and our focus on customer service needs to remain to be a very local activity. So nothing is going to change there.
But there are many activities, where we can create a better customer experience across the European platform and become more efficient by utilizing a more centralized structure, particularly when you think about things like procurement category management logistics I T and the like.
Getting from here to there is no easy task, Okay, and it's not going to happen overnight, it's going to be it's going to happen over several years.
But we believe and some of the initial work with our outside consultants have.
They are clearly documented doctors could be some very significant benefits of doing this and that's why we're headed down the path.
There are cost to get there.
Things like a new RFP, the new ERP program whats going to get ticked up which was kicked off back in October it's going to roll out over the next four to five years.
We need to create a central European office as opposed to the virtual structure that we have today.
We need to establish some offshore or niche nearshore back office infrastructure activities and the like and we are.
In the middle of the process were mid flight, if you will in identifying and quantifying both the opportunities and and the expenses to get us there and thats.
Really what we're going to chat about come September so the focus of the program largely is hotter shift the kind of the org structure, both from a truly a structural perspective, an operating perspective.
From being a a last integrated kind of independent country model to a more integrated central model.
And that that is going to require a lot of heavy lifting to do that but the benefits are we believe are quite significant and at the end of the day. It will create a better customer experience, which will help drive revenues and the like.
As it relates to discretionary versus Nondiscretionary the reality is.
Most of the parts that we sell.
In Europe , our parts for kind of day to day service on your car.
And in some cases.
Take if your battery doesnt.
Is out and you cant crank your car over right. That's a non discretionary item you need to go get a new battery. So you car will work.
But what we find on the margin it when the economy's got soft European consumers are no different than American consumers. The first thing you do when things start to get tight is you take a hard focus on your household cash flow and you tend to.
By down and so we're still selling a battery to the shop, but maybe instead of the.
BARDA battery with a seven year warranty that goes out at a pretty high price point.
The consumer gets a a more value line battery.
That's cheaper for them, we still sell a battery, but its a lower revenue battery and it's a lower margin dollar about or even and so it it's hard to put a number Ryan as to what is.
Absolutely discretionary versus Nondiscretionary.
Now when your oil that comes on to say, it's time to change oil you don't have to go do that tomorrow, and if you're trying to save some money you may differ that for a few months.
Earlier in the spring I was that Clopper conference copper is a big trade organization for their parts manufacturers in Europe and had an opportunity to meet with the heads of almost all of our major suppliers a lot of our other peers in the distribution side of the industry and the like and our suppliers indicated that they saw their aftermarket.
Activity start to trend down late in 2018.
And so we're not even a year into it. So I think we've got and that's why we're a little bit cautious in.
In the expectations for the back half of the year I think it's going to be another six months before we begin to lap the impact of the of the soft environment.
This ends the time allotted for the Q and a session I would now like to turn the call back over to Nick.
For final remarks.
Well, we certainly appreciate your time and attention this morning.
We are as I indicated earlier, we are encouraged about.
That we've made in many regards particularly the margin structure in North America, the cash flow numbers, which were terrific. We have a lot of work to do in Europe , I understand that and we look forward to sharing with you in in mid September kind of the update on those activities.
So again I appreciate your time and attention and we'll talk to you in September . Thank you.
Thank you for attending today's.
Conference.
You may now disconnect have a good day.