Operator:

Good morning everyone. Welcome to LKQ Corporation Second Quarter 2024 Earnings Conference Call. My name is Kiki [ph] and I will be your conference operator today. [Operator Instructions] I will now hand you over to your host, Joe Boutross, to begin. Joe, please go ahead.

Justin Jude:

Thank you, Joe and good morning to everyone joining us on the call. I am deeply honored and excited to be able to speak with you today as the CEO of LKQ, a company where I've spent the last 20 years working with dedicated colleagues to build a strong and vital business. Before diving into the results for the quarter, I want to start by laying out my overarching priorities for our company and the plans we are executing to enhance performance and drive value for LKQ shareholders. LKQ is a strong company with market-leading businesses. We have been successful by leaning into our operational excellence strategy with a focus on profitable revenue growth, margin enhancement and cash flow generation. Under my leadership, we will prioritize these strategic pillars which are an integral part of LKQ's culture. However, this doesn't mean we'll follow the exact same playbook. I expect my team to challenge the status quo, to be innovative, to set goals and communicate them so we hold each other accountable and to learn from mistakes. Rick and I have years of experience operating successful businesses, of which 4, we're together running our North American wholesale segment. We will work together with our global team to run an efficient organization, one that is focused on growing market share while driving productivity and actively managing the cost structure. In terms of capital allocation, our guiding principle is to direct our resources to the most value-enhancing opportunities. From our vantage point today, share repurchases will be a priority and a means of driving shareholder value. As you can see from our repurchase activity in the second quarter, we believe our shares are trading below their intrinsic value and repurchases represent our best use of funds. We see attractive return metrics in our shares and through our capital allocation priorities, you should expect to see ongoing programmatic share repurchasing activity. We have paused any large-scale acquisitions and raised the hurdle rate for improving synergistic tuck-in transactions. In fact, we have walked away from deals in recent months because the returns on investment did not meet our new criteria. Rationalizing the asset base has been a key element of our strategic framework. We have routinely examined our assets from individual locations up to lines of business to determine if the assets align with our future plans. As part of this process, we identified certain lines of business that did not fit our strategic objectives and we took action, divesting 14 businesses in the last 5 years which represented over $600 million in low margin revenue. These transactions were done judiciously and following a disciplined process to achieve a favorable outcome and we will continue to carefully evaluate whether we are the right owners for any of our businesses while we focus on our core strengths. Finally, cash flow generation will remain central to our business. Delivering strong cash flow allows us to invest in our future through capital projects and to return value to shareholders through dividends and share repurchases while maintaining a manageable debt level and our investment-grade rating. I'll now provide some comments on our results and then Rick will discuss our financials and guidance. Our second quarter results did not meet expectations on the top line. In the first quarter, we faced revenue headwinds from a decrease in repairable claims in North America which was influenced by mild and dry winter weather conditions. In our Q1 commentary, we noted there would be a carryover effect in the second quarter as shops had lighter backlogs than normal going into April and we acknowledge a further risk to revenue if repairable claims didn't rebound as we were projecting. As you can see from our second quarter results, the revenue trends moved in an unfavorable direction in North America as well as our other 3 segments. On a per day basis, organic parts and revenue was down 2.9% overall and was negative in each segment. Drilling down and starting with North America, organic revenue decreased by 5.3%, with the largest drop coming from aftermarket collision parts. Similar to Q1, repairable claims were down in the second quarter by 7%, proving to be a headwind. Although not material, access to aftermarket inventory following the Panama Canal disruption and delays with inbound deliveries also had a negative effect. As we continue to see a reduction in repairable claims during Q2, we dug deeper into the market to further understand the drivers of this sequential decrease. While weather was a contributing factor to the reduction in Q1's repairable claims, as we mentioned on the last call, we further researched the impact of rising insurance costs and declining used car values on the consumer's decision to repair their vehicle. We found the combination of these economic factors, rising insurance premiums and repair costs relative to the declining used car prices have the largest aggregate effect. In parallel, we also engaged a leading global consulting firm to conduct an independent assessment of the market and their findings lined up with our deep dive analysis. Based on these findings, we believe that most of these factors are temporary as weather conditions will fluctuate from year to year and economic conditions should normalize over time, allowing for insurance cost to moderate and used car prices to stabilize. We believe that an improvement in economic conditions will contribute to more cars being repaired. The smaller impact of repairable claims is the ongoing effect of ADAS technology entering the car park and we estimate that headwind to approximately be a 1% decrease in repairable claims per year. This is further supported by research from the Insurance Institute for Highway Safety and the Highway Loss Data Institute, that states there is little evidence that partial automation systems are preventing collisions. However, the ADAS impact is not news to us and it doesn't change our near and long-term outlook on the collision market as we believe there will continue to be offset [indiscernible] volumes with revenue opportunities from an increase in parts per estimate, the cost of more complex replacement parts, expanding our services of calibration and diagnostics and continued growth in APU. Rick will discuss in more detail how we are factoring these temporary effects into our guidance. We have taken decisive cost actions to address the revenue shortfall. As we discussed on the last call, we accelerated the FinishMaster integration and announced a global restructuring program in the first quarter. With revenue remaining soft in Q2, we implemented a further cost reduction plan and I am pleased with the progress the North American team has made. Just as the team proved throughout the COVID pandemic, we know how to drive cost out of the business and we exited Q2 with $60 million in run rate savings on the cost reductions. By making these actions quick, North America was able to generate a segment EBITDA margin above 17%, in line with our previous guidance. Our actions have been careful and deliberate and we believe we are well positioned to scale back up again as demand increases. Switching to our Europe segment; organic parts and services revenue increased by 0.3% on a reported basis but declined 1.3% on a per day basis due to volume reductions. There were several factors behind the negative trend with economic conditions being the most significant component. Modest economic growth and high inflation across many of our markets, including the U.K. and Germany, have impacted demand contributing to a year-over-year decline in overall volume. Like North America, we expect the unfavorable economic conditions to be a temporary headwind but one that will likely persist through the second half of 2024. Other factors impacting revenue include the strike activity in Germany and heightened competition from small distributors. With the pressure coming from soft consumer demand, we are seeing some of our smaller competitors aggressively lowering prices. LKQ has been a price leader but we are also very disciplined. By resisting price decreases, we lost some volume in the quarter. However, we do not think the short-term pricing behavior of these competitors is sustainable or irrational strategy and we believe our compelling value proposition will continue to be a key competitive advantage. Europe has also taken actions to mitigate the revenue decline, including cost takeouts and productivity initiatives. Given local regulations, these efforts require more time to implement and thus, the benefits weren't fully realized in the second quarter. We expect to see greater cost savings as the year progresses and into 2025. Additionally, the European team continues to advance our SKU rationalization project. The team has reviewed product groups representing about 1/3 of our revenue and we believe there is an opportunity to reduce about 30% of the current SKUs in these groups. The SKUs would be delisted over a 3-year period starting in 2025, with the large majority coming in the first 2 years. As I noted in my introductory remarks, we continue to review our portfolio and look for opportunities to divest noncore businesses. In Q2, we reached an agreement to sell our operations [indiscernible] and the transaction is expected to close in the third quarter. Combined with the previously announced sales of our Bosnian and Slovenian businesses, the ELIT Polska divestiture reflects our ongoing efforts to streamline and simplify our operations while improving our margin profile. This sale represents a good strategic fit as both LKQ and Mekonomen operated in Poland but neither had the scale to compete effectively with the larger players in the market. The combined operation will be better positioned to compete and we will share any upside potential through our investment in Mekonomen. Shifting to specialty; organic revenue was down 2.1% for the quarter, roughly in line with the Q1 change. Softness in RV demand continues to be a headwind with uncertain economic conditions and high interest rates contributing to pressure on retail volume. We are seeing growth in some product lines, including marine. Consistent with the rest of the organization, specialty has taken cost actions to protect margins and is narrowing the gap in the year-over-year margin change. I want to mention some other noteworthy items for the past several months. In May, we received a favorable ruling from the Federal Circuit Court related to design patents. We believe the ruling is a win for the aftermarket industry and consumers who benefit from the value proposition offered by aftermarket products. In June, the Verdi Trade Union and Employers Association in Germany entered into a new collective bargaining agreement. The new contract which runs through April 2026, covers approximately 5,000 of our employees and puts an end to the strike activity we experienced over the last year. We remain dedicated to providing the industry's best service to our customers and this agreement will improve our ability to deliver on this commitment. We have already seen an improvement in branch availability following the agreement and we expect to get back to pre-strike levels in the second half of this year. In the quarter, we did a handful of tuck-in acquisitions, mostly by our BUMPER TO BUMPER business in Canada, where a tax law change provided an incentive to finish deals prior to June 30. As I noted earlier, we are deprioritizing M&A as we shift focus to share repurchase and other more accretive uses of capital. On that note, we returned over $200 million to our shareholders through both dividends and share repurchases in the quarter. This included the highest number of shares repurchased any quarter in the past 18 months and we are continuing to repurchase shares in Q3. Our Board of Directors approved a quarterly cash dividend of $0.30 per share to be paid in August. Finally, from a governance standpoint, we regularly review the composition of our Board and ensure that we have members with the relevant experience and skills to support our mission. As part of this process, last week, we added Andy Clarke as a new board member. Andy is a former public company CFO and financial expert and we are excited to add his expertise to the Board. I'll now turn the call over to Rick for a review of the financials and guidance.

Justin Jude:

Thanks, Rick, for the financial commentary. Before we move to your questions, as we've communicated on recent calls, we are hosting our Investor Day on September 10 at the headquarters in Nashville and also via webcast. I hope you can all join us to discuss how we are charging our future. Rick and I will cover the overall LKQ strategy and then we will focus on our 2 largest businesses

Scott Stember:

In North America, you talked about -- last quarter, you talked about weather and the emerging trend, I guess, of lower repairable claims because of the economy. It seems like that part of it has become a bigger piece. Just trying to get a sense of if you had to frame out how much of the weakness is due to weather and just more just underlying economic issues in the country. Just trying to get a sense of how cyclical this business is starting to become.

Scott Stember:

All right. And the $60 million that you talked about in cost cuts, I assume that was for North America, that's year-to-date. Did you put out a goal for the full year? And how much of that is going to stick? I imagine some of it is just related to pay and stock comp and things like that. But just trying to get a sense of how much will stay?

Scott Stember:

And as far as how much will stick?

Operator:

The next question is from Craig Kennison from Baird.

Justin Jude:

Yes. So our goal is kind of twofold. One, we want to simplify the business in our operations. We have a lot of SKUs that are duplication -- that are duplicated if you think of applications. So when a customer calls for a specific year making model, we have several brands of those. We have a large team within our Europe operations across all countries, working to analyze that, the whole SKU rationalization project. I mean as of today, we've really not non-stocked any part or removed any SKUs from the application or removed any SKUs from our DCs. It's very small. We're very cognizant that we want to make sure we have a better application coverage. So right now, there's definitely some holes where when a customer calls us for a part, we don't have it. So we want to improve the availability of the application level. When it comes down to brands, obviously, there are certain brands in certain countries across Europe that we need to have and we will have. And so we have, once again, a large team focused on this project to make sure we don't make the wrong decisions. The other thing that we're going to be pushing also towards, that the team is excited about is driving our private label throughout the rest of our Europe operations which as you guys can imagine, the private label brings the best gross margin for LKQ.

Justin Jude:

We have some countries that are in the 30%, other countries that are in the single digits. We'll hear from Andy Hamilton at the Investor Day and we'll talk a little bit about some of our strategy to drive that even higher at our Investor Day once again in Nashville on September 10.

Gary Prestopino:

A couple of quick questions. Number one, the free cash flow generation that we're expecting for this year. I would expect, given what you've said, Justin, about share repurchases, the priority is share repurchases and you're fairly happy with your debt levels at this point.

Gary Prestopino:

Okay. And then a second quick question. You gave us a number for repairable claims being down. But do you have any numbers on what frequencies were in the quarter?

Operator:

The next question is from Bret Jordan from Jefferies.

Justin Jude:

They kind of thought that there's some pent-up demand in this piece but then there's also some volume of frequency that occurred that just probably won't ever get repaired. It's hard to -- it's hard to speculate on how much will actually come through eventually into the mix. But just with the rising insurance costs, the deductible cost, the repair cost climbing and then that the consumer's vehicle value dropping, it will be -- we'll have to see what happens with the economic if it changes the consumers' behavior. But we do think there is some pent-up demand but nothing that shows us it's going to start coming in relatively quickly.

Justin Jude:

Yes. And I would say that's nothing new. It probably slowed down a bit during the pandemic and the supply chain issue where we had a lot of inventory and a lot of our smaller folks did it. As they started getting their inventory back in, they kind of went back to their old ways of offering price more than service. And so that's not necessarily anything new for us. So yes, we still see it.

Justin Jude:

I kind of don't know if I have that number handy on it.

Operator:

The next question is from Ryan Brinkman from JPMorgan.

Rick Galloway:

Yes, it's a good question. When we're looking at the overall $0.37, it's a significant amount of volume. North of $0.50 would be volume and then there's some other pricing impacts that would be in addition to that. And then we're looking at a pretty substantial productivity initiative in the back half which is what I was talking about a few minutes ago on the $60 million cost reductions that are working to offset that to bring us to the $0.37. But if you think about it, we're somewhere north of, call it, $0.60 with some negativity on volume and pricing and then clawing back a fair amount of that through productivity initiatives.

Justin Jude:

Yes. I caught on the CDK comments. So I will tell you, I think there was roughly, what, 15,000 dealerships, not all those are automotive. There is some volume that we gained from that CDK when some of the OE dealerships could not necessarily service the parts. Obviously though, when we saw a headwind of repairable claims coming down 7.1%, it wasn't enough to -- the volume from CDK wasn't enough to offset that. A lot of the dealers that -- I mean, we still see those dealers today that have body shops and service centers. A lot of those are kind of have gone through the repair. They've either fixed the issue or they're off to CDK. So we had a little bit of a volume tick up there but nothing meaningful.

Rick Galloway:

We had some shutdowns within a couple of our facilities as far as the cost side goes. We haven't seen any type of volume changes. We're still kind of going through that as far as the hurricane goes but nothing material that we've seen at this point.

Brian Butler:

Just starting out, I guess, when you look at the first quarter result, our first half results and kind of then pair that with the guidance revision that you gave, it feels like the repairable claim outlook is definitely still on a downward trajectory in the third quarter and maybe into fourth quarter. So what gives you the confidence that this is just temporary in nature? And maybe, is there any historical precedent that we can look at and give you some comfort, again, that this isn't a much longer-term secular trend?

Brian Butler:

I guess so if you think about that guidance and the way the market should view that, I mean, it feels like that's got to be, as you said, kind of you're starting to flatten out almost the bottom. Is that almost a worst-case scenario? I mean, obviously, there's, I'm sure, scenarios where it can get worse. But is this kind of one of the low case scenarios where you put this guidance with the expectation of kind of resetting expectations going forward from there?

Rick Galloway:

So Brian, part of the way that we look at this in the forecast is the economic factors that we looked at ourselves and then further validated with the study that we did started to indicate when the insurance companies have increased their pricing. And so you get essentially a onetime change within the behavior with significant increases in insurance premium costs moving from one deductible to another deductible. And that impact started sort of in late Q2, early Q3 of last year which we think will then lead through at least through the end of the year. And that's what we've put in, that year-over-year impact going through the end of the year. But then once you annualize that, the change from one deductible to another deductible, we don't expect that to continue. We expect moderating within the insurance premiums and the behavior from the consumer will be back to a more normalized behavior.

Rick Galloway:

No, we don't. Yes, that's correct. We don't think that there's some sort of big rebound. There's nothing that indicates to us that there will be a significant bump up one way or the other. But it will be the new starting point, if you will, in the back half of the year that will grow from there.

John Healy:

I know that it's been talked about a lot already but I just thought I maybe ask the question differently. Relating to the accident frequency dynamic, I mean what's does the BCG study kind of say about, if they said anything, just kind of accident frequency potentially over the long term? And did you guys kind of flesh out with the scenario where maybe the decline in claims is maybe some form of accident avoidance technology and vehicles starting to proliferate through the car part? Like did they address that? And if they did, how did they refuse that as maybe potentially a sign of what's starting to change here?

Rick Galloway:

And Justin, maybe I'll just add back on to one thing that Bret was asking a few minutes ago. The repairable claims, we did see the peak in Q1, 21.4%, start dropping, Bret, to 20.7% in Q2. So it's starting to make its way back down on total losses. I'm sorry, total losses.

Justin Jude:

Thanks, operator. First, I want to thank our team out in the field, both in North America and Europe and the other countries for which we operate. Just we all face challenges. We face headwinds in the overall market but very proud of the team and how they reacted, getting our business rightsized or how they're working still to rightsize that business. So very much appreciative of that team. And for everybody on the call and for all of our employees and investors, as we talked about some of these headwinds, it's not an LKQ problem, it's a market issue right now. We're making sure we have the cost put [ph] in place and we'll be ready to go when the volume starts to recover and we have quite a bit of initiative and we'll share some of those at our Investor Day on September 10, once again, in Nashville, about how we have opportunities to continue to grow market share and that will help us as the market continues to recover. So with that, thanks everybody for joining the call, we appreciate it. And with that, we'll end the call.

Operator:

Good morning everyone. My name is, Angela, and welcome to the LKQ Corporation First Quarter 2024 Earnings Conference Call. I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Joe Boutross, Vice President of Investor Relations for LKQ. Joe, please go ahead.

Nick Zarcone:

Thank you, Joe, and good morning to everybody listening to our earnings call for the first quarter of 2024. I will provide a few introductory remarks. Justin will then provide some highlights to our Q1 segment activities. Rick will provide a review of the financial details of the quarter and our guidance for the year before I have a few closing remarks. I'm turning 66 in a few days and as reported in late November, I will be retiring as CEO of LKQ on June 30th. With that, this will be my 38th and final quarterly earnings call with all of you. It has been an absolute honor and privilege to serve LKQ and to interface with the investment community since joining the company in early 2015. I am incredibly proud of the organization, my team and all we've achieved over the years. We are very different company today than the one I joined almost 10 years ago, one that is focused on operational excellence, balanced capital allocation, improved returns on capital and the development of our most important asset, our people. The first quarter of 2024 proved to be a difficult environment for our business and our results came in below expectations. While we did a reasonable job of managing the items under our control, we experienced soft overall market conditions largely due to incredibly mild winter weather in North America, which reduced demand for collision parts and the continued soft demand for our specialty products. These market factors created pressure on revenue and overall operating leverage. We have already made adjustments to our cost structure in light of the current levels of demand. Related to Europe and our business in Germany, there has been no material progress with our union negotiations in Germany. To help insulate our customers in that market, we have increased our temporary workforce to largely mitigate the revenue impact with the risk of ongoing strikes, and we've opened a second, albeit a much smaller distribution facility in Bielefeld, Germany, which is outside of Bavaria and not impacted by the union activity. Overall, we remain optimistic about the remainder of the year. Now on to the quarterly results. Revenue for the first quarter of 2024 was $3.7 billion an increase of 10.6% compared to the $3.3 billion for the first quarter of 2023. For the first quarter of this year, parts and services organic revenue decreased 0.3% on a reported basis, but increased 0.5% on a per day basis. Foreign exchange rates increased revenue by 0.8% and the net impact of acquisitions and divestitures increased revenue by 11.6% year-over-year for a total parts and services revenue increase of 12.1%. Other revenue for the first quarter of 2024 fell 14.6% primarily due to weaker precious metal prices relative to the same period in 2023. Diluted earnings per share for the first quarter of 2024 was $0.59 compared to $1.01 for the same period of 2023. Adjusted diluted earnings per share was $0.82 for the first quarter of 2024 compared to $1.04 for the same period of 2023. Lastly, on April 22nd, the Board of Directors declared a quarterly cash dividend of $0.30 a share of common stock payable on May 30, 2024 to stockholders of record at the close of business on May 16, 2024. And now let me turn the call over to Justin.

Rick Galloway :

Thank you, Justin, and welcome to everyone joining us today. We released our full year guidance in February. We expected Q1 earnings to be challenged by the impact of weather conditions in January, very low catalytic converter prices and year-over-year decrease in selling days due to the timing of Easter. The actual results reflect lower than forecasted revenue mostly due to a reduction in North America aftermarket product volumes, which were predominantly related to a significant decrease in the number of repairable claims. On a consolidated basis, gross margin fell short of target as pricing did not fully cover input cost increases. Overhead expense actions were taken and others are currently in process, but the benefits will be seen in the balance of the year rather than Q1. Despite the Q1 results, we remain committed to our full year earnings guidance. We have 9 months to make up the shortfall and the core strength of the business are still there. We are digging deep on the operational excellence principles that drove our growth and margin expansion over the last 5 years and are taking decisive actions. As Justin described, each of the segment teams have detailed action plans in place to deliver the full year numbers. Turning now to the first quarter consolidated results. Adjusted diluted earnings per share of $0.82 were $0.22 lower than the prior year figure. Operating results were the largest individual factor with a $0.12 reduction, mostly related to North America. This figure includes the anticipated Uni-Select headwind as the integration efforts were ongoing. We expect the Uni-Select impact to flip to accretion going forward in 2024 as the synergies Justin mentioned are realized. Movements in commodity prices, primarily precious metals contributed a $0.06 year-over-year decrease. Other items including investment performance and taxes drove a 4% decrease. Now for segment results. Going to Slide 9. North America posted segment EBITDA margin of 16.3%, a 420 basis point decrease relative to last year. During the last call, we projected the full year margin would be around 17% for the full year impact of the Uni-Select dilution. The reported margin was below the full year expectation due to leverage impact from the lower revenue in Q1. Relative to the prior year, in addition to the communicated anticipated Uni-Select dilution effect on gross margin, salvage margins were down reflecting unfavorable revenue and vehicle cost trends compared to the prior year period and lower catalytic converter prices in Q1 2024. Overhead expenses partially offset the gross margin reduction with lower costs for freight, charitable contributions and incentive compensation. Q1 2023 also included a nonrecurring benefit from an eminent domain settlement that created a year-over-year negative variance. North America is executing action plans to recover the profitability miss in Q1 and we expect the full year EBITDA margin to be around 17%. Looking at Slide 10, Europe reported a segment EBITDA margin of 8.7%, down 100 basis points from last year. Gross margin excluding restructuring costs improved by 60 basis points, but was offset by higher overhead costs including personnel costs tied to wage inflation in markets such as Germany, the UK and the Benelux region. While we have grown gross margin, we have not covered the overhead cost increases and we have work to do on pricing and productivity to mitigate the cost inflation. We still expect to achieve double-digit margins in Europe for the full year. Moving to Slide 11. Specialty's EBITDA margin of 6.4% declined 150 basis points compared to the prior year driven by a 170 basis point decrease in gross margin. Competitive pricing pressure remains a challenge for the business and we are evaluating options and implementing changes to improve our net pricing. We believe the full year Specialty EBITDA margin will be flat to a slight increase as we work through the lingering gross margin pressures. As you can see on Slide 12, self-service generated an 11.7% EBITDA margin in Q1 2024 compared to 13.2% last year. In dollar terms, segment EBITDA decreased by $6 million. The impact from commodities represented a $16 million headwind. However, the efforts to manage vehicle costs helped mitigate a portion of the commodities impact and overhead cost controls produced a year-over-year benefit. We have not seen double-digit segment EBITDA margin in percentage or dollar terms since Q1 2023. So we are pleased to reach this level again this past quarter. We implemented a global restructuring program in the first quarter focused on enhancing profitability. The largest portion of the activity will come from the European segment. And as Justin mentioned, will include exiting certain businesses or markets which do not align to our strategic objectives. Initially, this includes exiting businesses in Slovenia and Bosnia, which are relatively small with under $40 million in combined annual revenue and evaluations of other markets are ongoing. We recorded $27 million in charges in the quarter including $17 million in asset impairments and $8 million in inventory write downs. Other charges are expected in future periods for severance, lease termination costs and other shutdown related expenses. Shifting to cash flows and the balance sheet. We produced $187 million of free cash flow during the quarter and we remain on track for a full year estimate of approximately $1 billion. As of March 31, we had a total debt of $4.3 billion with a total leverage ratio of 2.3x EBITDA and we remain committed to reducing our total leverage ratio below 2.0x. In March, we successfully completed a EUR750 million bond offering with a 7-year maturity and a fixed 4.125% interest rate. The offering was completed to pay off the existing EUR500 million bonds that were scheduled to mature on April 1, 2024. We upsized the offering by EUR250 million in response to very strong demand from fixed income investors reflecting LKQ's strong credit profile and solid cash flows. The additional proceeds were utilized to pay down a portion of our euro revolver debt. The larger offering allows us to lock in capital at an attractive rate for an extended period and diversify our maturity profile. The bonds are publicly tradable and listed on NASDAQ. We do not have significant debt maturity until January 2026. Our effective borrowing rate was 6.0% for the quarter, an increase of 20 basis points relative to Q4 2023. We have $1.7 billion in variable rate debt of which $700 million has been fixed with interest rate swaps at 4.6% and 4.2% over the next 1 to 2 years respectively. In the first quarter, we repurchased roughly $6 million shares for $30 million and paid a quarterly dividend totaling $81 million further validating that as we reduce our debt levels, we are migrating to a more balanced capital allocation strategy. I will conclude with our current thoughts on projected 2024 results. Our guidance is based on current market conditions and recent trends and assumes that scrap and precious metal prices hold near March prices and the Ukraine/Russia conflict continues without further escalation or major additional impact on the European economy and miles driven. On foreign exchange, our guidance includes rates in line with the first quarter. The global tax rate remains unchanged at 26.8%. Our full year guidance metrics on Slide 4 remain mostly unchanged from the Q4 earnings call. We expect reported organic parts and service revenue in the range of 2.5% to 4.5% which is a 100 basis point decrease in the range. The softness in Q1 organic growth drove the decision to lower the full year range. We believe that mild winter weather conditions were a major contributing factor to the revenue softness and will have some carryover effects into Q2, but otherwise will be a temporary headwind relative to repairable claims. However, if repairable claims in North America do not rebound to a more normalized level, we would expect to be closer to the low-end of the full year range. We are closely monitoring monthly claims data and the team is ready to take decisive cost actions if claims remain depressed. We still expect adjusted diluted EPS in the range of $3.90 to $4.20 with the revenue volatility there is heightened risk to the profitability estimate. But we are confident in the action plans being implemented in all segments to address controllable factors such as our cost structure to keep us inside the previously issued range. The free cash flow expectation of $1 billion, 50% to 60% annual EBITDA conversion remain in place. Improved profitability over the balance of the year and diligent balance sheet management should support achievement of the full year target. Thanks for your time this morning. But before I turn the call back to Nick for his closing comments, on behalf of our LKQ team globally, I'd like to thank Nick for his leadership, vision and integrity during his tenure as our CEO. Nick, you left a tremendous mark on LKQ and have positioned us well for the next chapter of our evolution. We wish you and the growing Zarcone family all the best.

Operator:

[Operator Instructions] We have the first question from Craig Kennison with Baird.

Justin Jude:

Yes. And just talking to, this is Justin Craig by the way. And talking to different folks in the industry, when we saw the insurance increasing 20% to 22% year-over-year, we saw deductibles increasing and so in some cases it caused folks not to necessarily repair their car. We still think the majority of our issue that we saw in Q1 from repairable claims was weather, but there's a lot of other commentary that we heard from other folks such as used car pricing, which saw huge decreases and huge increases in insurance rates. So we still think the primary driver for the repairable claims being down is weather. But when anything when we see huge swings like that with used car pricing or once again insurance rates, it has some effect on us.

Gary Prestopino:

Could you maybe just unpack a little bit more on this decline in the gross margin in North America? I know Rick went through a couple of things there, couldn't write them down quickly enough, but some of this was Uni-Select, but what were some of the other factors there that impacted that margin to so much to go down close to 500 basis points or over 500 basis points?

Gary Prestopino:

Yes. But I was asking about the gross margin, Rick. Is that I understand you were talking about the same margin. So No, I just the gross margin had a pretty big decline. So I just want to unpack that a little bit more.

Operator:

The next question is from Scott Stember with Roth MKM.

Nick Zarcone:

Thanks, Scott.

Rick Galloway:

So let me just go high level and then I'll turn it over to you, Justin. I know you've been spending a lot of time out there. So, Scott, appreciate the question. If you think year-over-year, the biggest impact that we had on overall EBITDA margins is really the inflationary impact of wages. So that happened throughout the year, but primarily starting in Q2. So it'll sort of calendarize as we start getting into Q2. There's roughly 200 basis points down that you have on overall wage inflationary increase. What the team has been able to do was improve on pricing and productivity initiatives to call back roughly half of that. And so, we're on a trajectory that we're pretty pleased with. Of course, we'd always like to have a little bit more, but the overall margins that we had, the 8.7% in Q1, reflects that really low year-over-year impact on the wage increases. And Justin, I don't know if you want to talk a little bit more about the various different regions.

Nick Zarcone:

And on the revenue side, Scott, all of our regions showed good organic growth, positive organic growth in the quarter, which is terrific. Particular bright spots included actually Central and Eastern Europe, where we saw some good growth. Our private label product saw excellent growth during the quarter. And all the other regions were in and around that 4% on a same day basis plus or minus a little bit. So again, it was good consistent performance across the platform.

Nick Zarcone:

You're talking about the bumper to bumper business that we have up in Canada, Scott?

Nick Zarcone:

Yes. So the progress on bumper to bumper has been very positive. There's been a few tuck-in acquisitions that we've worked on taken from 3 steps to 2 steps. We're very pleased with what the team has done on the integration side of that business as well. And we're starting to see some of the opportunity that we're actually working together, right, between the hard part side of the business and how we can work a little bit better together. We've talked about it before that that business is Canada is really the only place that we do everything that LKQ has the power of doing and we're starting to see that power of LKQ up in Canada. So, it's been good progress. Justin, I don't know if you want to expound a little bit on bumper to bumper as well?

Operator:

[Operator Instructions] We have the next question from Bret Jordan with Jefferies.

Justin Jude:

Yes. Once again, overall, I mean, from the stats that we can see externally, we think it's mostly contributed to weather. I'm not sure I don't have the facts in front of me from 2017. Other things that we hear that caused some of the repairable claims being down, I mentioned such as skyrocketing insurance rates, plunges in used car pricing. We did see an uptick in ATU driven by length, I think a lot primarily by State Farm. Anytime when the carriers are looking to save money, they're going after recycled parts or aftermarket parts. And so on a year-over-year basis, Q1-to-Q1, we did see an uptick of roughly 200, I can't remember the exact number, but 260 bps improvement in APU. So market share gained on the APU side.

Rick Galloway:

Yes, Brett. We expect to be 17% for the year, not a run rate. So we'll catch up that we believe we'll catch that up and be around that 17% that we talked about 60 days ago or so.

Unidentified Analyst :

Hi, good morning. This is [indiscernible] on for Ryan Brinkman. Thanks for taking our question and best wishes for your retirement, Nick. Could you just give us a sense of the underlying drivers of the 2024 organic parts and services revenue growth guide in terms of contribution from volume versus pricing? And any color on how these assumptions have changed versus the prior guide earlier this year? Thanks and I have a follow-up.

Unidentified Analyst :

Understood. That's very helpful. And just as a follow-up to Bret's question, just wanted to get a sense of how you are thinking about the impact from unfavorable cop up dynamics over the next couple of years as fewer vehicles fall in the 40 year old 4- to 6-year old sweet spot as we anniversary the pandemic and ship started in new vehicle sales form?

Unidentified Analyst :

Just on the car parc dynamics, like, you know, we have fewer 4- to 6-year old vehicles in that sweet spot for LKQ. So just wondering how we should think about the impact from a volume perspective there?

Nick Zarcone:

And just to be clear, our sweet spot on the closing side, we've always indicated is kind of 3 to 10 years. After 10 years, people tend not to get their cars repaired just because the overall value of the car and sometimes people lop off their collision coverage. But the parc inside that 3- to 10-year age bracket is still very strong. What we are seeing is on total losses that is shifting towards very old cars, cars north of 10 years old, which generally would end up in the collision base anyways. So we think the dynamics of the car park are trending just fine for our collision base business.

Bret Jordan:

Just a follow-up on that last topic. I guess, as your internal math as the class of '21, class of 2020, the pandemic, new vehicle sales impact starts to swing into that 3- to 10-year old sweet spot. And have you done the math here over the next couple organic growth?

Justin Jude:

And Brett, I would say being in the industry for 25 years, 10 years ago insurance carriers would not typically ride aftermarket or alternative parts in the first 0 to 3 years. That has changed quite a bit in the last 10 years where we can get a product pulled up in aftermarket world relatively quickly, 6 to 9 months, and we see nearly all carriers riding current model year for aftermarket or recycled to try to drive that APU. So we don't see that as an impact to us.

Justin Jude:

Yes. We haven't quantified the overall margin improvement. We know it's there. We haven't publicized it, I should say. In that, I would say when that 35% reduction, that's in lieu of us actually adding more private label. So we're going to be adding more SKUs to the mix to get more private label as Nick talked about. That is growing. We're expanding that in other countries and we still plan on reducing the net number of SKUs and with private label that typically comes at the higher margins. But the other comment you made it would be less suppliers which would create some operational efficiencies from an SG&A standpoint in the warehouses and the distribution centers as well as some margin lift with fewer suppliers.

Operator:

Thank you. As a reminder, everyone, it appears that we have no further questions. So I will hand back over to the management team for closing.

Nick Zarcone:

Thanks, Justin, and thank you to everybody on the call for spending time with us here this morning to review our first quarter results. We will be back together, at least Justin, Rick and Joe will be back together with all of you on July 25th to discuss our second quarter results. And again, I'd like everyone to put Tuesday, September 10th on your calendars for the Investor Day that will be held down in Nashville. So thank you for your time, and have a great day.

Operator:

Hello, and welcome to today's LKQ Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Jordan and I will be coordinating your call today. [Operator Instructions]. I’m now going to hand over to Joe Boutross, Vice President of Investor Relations, LKQ Corporation. Joe, please go ahead.

Nick Zarcone:

Thank you, Joe, and good morning to everybody on the call. As many of you know, in late November, we announced my intention to retire as CEO effective June 30, 2024, and that the Board unanimously selected Justin as my successor following an intensive planning process that had been initiated well over a year ago. In the interim, Justin is serving as our Global Chief Operating Officer and I look forward to working with him and our segment teams to ensure the continuation of our operational excellence program that we started late in 2018. Nowhere has this program been more evident than in our Wholesale North America segment, which under Justin's direction has significantly expanded margins, improved cash flow, all while enhancing our leading market position. Time and again, Justin has proven himself as both a strong operating executive and an effective leader who definitively embodies LKQ's values. It is a pleasure having Justin on the call today in his well-deserved new role. I'm going to start by providing some high-level comments related to our performance in the quarter and the full year 2023, followed by Rick who will dive into the financial details and discuss our 2024 guidance. And then, Justin, will provide some initial thoughts and commentary on our businesses, the path forward, and an update on our Uni-Select integration. Let me start with what LKQ accomplished in the last year, a year where operational excellence remained at the forefront of our efforts as we look to drive organic revenue growth, productivity, and excellent free cash flow. I am proud to say that the LKQ team delivered. Here are some of the 2023 accomplishments worth noting. LKQ delivered strong full year organic revenue growth for parts and services of 4.7% on a reported basis and 5.1% on a per day basis. In February, we announced the highly synergistic Uni-Select acquisition and closed the transaction on August 1. We used our free cash flow to begin paying down debt as we strive to reduce our total leverage ratio to 2.0x. We're well on our way with net debt pay downs of over $375 million since the transaction closing, and the total leverage ratio at year-end was just 2.3x. We returned about $300 million of cash to our shareholders through dividends and increased a quarterly amount by 9% in October. We also continued our share repurchase program with a $38 million outlay during the year of which $30 million was completed in fourth quarter. And finally, we sustained a positive momentum in terms of cash flow generation, with free cash flow of approximately $1 billion in 2023. This represents the fourth consecutive year at or above $1 billion, and the 2023 results reflect a solid conversion ratio of 59% of adjusted EBITDA. Now on to the quarterly results. Revenue for the fourth quarter of 2023 was $3.5 billion, an increase of 16.6% as compared to $3 billion for the fourth quarter of 2022. Parts and services organic revenue increased 2.8% on a reported basis and 3.4% on a per day basis. Foreign exchange rates increased revenue by 2.7% and the net impact of acquisitions and divestitures increased revenue by 13.1% year-over-year, for a total parts and services revenue increase of 18.7%. Other revenue fell 16.4%, primarily due to weaker precious metal prices relative to the same period in 2022. Let's turn to some of the quarterly segment highlights. Organic revenue for parts and services for our North America segment increased 5.3% compared to the fourth quarter of 2022. We continue to perform well in North America, especially when you consider that according to CCC, collision and liability related auto claims were down 7.9% year-over-year. We believe the significant outperformance is due to several factors, including an industry-wide increase in alternative part usage, or APU, which was in part driven by the continued progress of the State Farm rollout, the remaining positive impact of the UAW strikes, and lastly, LKQ continuing to take market share. The upward trend in our aftermarket volumes and the ongoing improvement in our order fill rates continued with fill rates reaching close to 95% in the fourth quarter, the highest level in 2023. As the supply chain recovered and fill rates increased, APU trended in our favor, particularly when looking at vehicles in our sweet spot. While total APU was about 36% in 2023, when looking at vehicles four to six old, it was approximately 40% and for vehicles more than seven years old, it was 51.6%. Both results represent meaningful increases over the 2022 levels. The aging car park will increase demand for the types of parts we sell into the collision repair industry. The salvage business had solid organic growth largely driven by volume. Total loss rates increased a bit in 2023 to 20.8%, but as you can see, it had no impact on our organic growth. Importantly, the increase in total loss rates is largely being driven by vehicles 10 years and older, which is a population of vehicles at the very tail end of our sweet spot. For perspective, today, the average model year of a vehicle being repaired in a collision bay is a 2017 model, with the total loss rate for that cohort of vehicles being just 18.4% in 2023. That further supports our thesis that total loss rates will not materially impact our growth. Industry experts believe the total loss rate will edge down a bit in 2024. As we have always stated, fluctuations in total loss rates are largely net neutral events for LKQ. During the quarter, we realized a slight revenue uplift from the UAW strikes, which has now leveled off and no further benefit is expected. Moving to our European segment. Europe organic revenue for parts and services in the quarter increased 3.9% on a reported basis and 5.1% on a per day basis. All the regions produced solid organic growth in the quarter with a particularly strong performance in the Benelux and Eastern European markets, as well as with our private label and salvage product lines. During the fourth quarter, our operations in Germany were again impacted by employee strikes at our large distribution center in Bavaria, while the ongoing discussions and negotiations between the works council and employers association continued. Throughout this process, our European team has worked diligently to mitigate the day-to-day impact of the strikes and their efforts have begun to offset some of the challenges that have impacted our German operations. Although the strikes continue, we have been able to temporarily add some short-term capacity to operate our business and service our customers. Additionally, to foster a resolution, we recently initiated an incremental and unique approach and proposed terms of an LKQ-only offer to the works council. We have also commuted those terms to our employees and are cautiously optimistic that we are making positive progress towards a resolution. Rick will provide you with the financial impact shortly. Now, let's move on to our Specialty segment. During the fourth quarter, Specialty reported a decrease in organic revenue of 7%, which was under our expectations. Specialty again confronted headwinds specific to RV and towing products. Within the RV space, RV wholesale shipments of new units from the OEs to the dealers ended 2023 on a positive note with an increase of 8.1% in December. This was the second consecutive month of year-over-year growth. Full year shipments, however, were down 36.5%. The general sense in the industry is that the RV headwinds have bottomed out, but we are not yet out of the woods as the dealers are still reluctant to fully restock accessories until they see the demand for new units increase. Truck accessories were also under some pressure in the quarter due to the drop in new vehicle production specific to the pickup and jeep categories, while marine and off-road product lines generated positive growth. Now to our Self Service segment. Organic revenue for parts and services for our Self Service segment decreased 5.6% in the fourth quarter. Self Service was again challenged by soft commodity pricing as seen in the other revenue decline, which impacted our expectations. The soft precious metal prices have continued into 2024 and in the short-term, we expect little relief from commodities as we have modeled accordingly. Briefly on the Red Sea crisis, as far as we can predict, there will be minimal impact on parts availability in our key segments. In Europe, our procurement team is seeing some disruption with the shipping lines having to divert their vessels via the Cape of Good Hope around South Africa increasing lead times and freight costs. The freight cost is expected to soften once the Chinese New Year four weeks from mid-January ends. As one would expect, if the crisis persists, then we will potentially witness an increase in freight cost. Our supply chain team is taking precautionary measures by adding additional orders to address the extra lead times, especially with our private label product. Lastly, on October 25 of 2023, as I mentioned on the last earnings call, we completed the divestment of GSF Car Parts formerly owned by Uni-Select. Since the GSF Car Parts business was held separately and never integrated into our business, we classified the business as discontinued operations upon acquisition. Before I turn over to Rick, who will run through the details of the segment results and discuss our outlook for 2024, I am pleased to announce that on February 20, 2024, our Board of Directors approved a quarterly cash dividend of $0.30 per share of common stock that will be payable on March 28, 2024, to shareholders of record at the close of business on March 14, 2024.

Justin Jude:

Thank you, Rick, and good morning to everyone on the call. First, I am honored to be chosen to succeed Nick later this year as the next Chief Executive Officer of LKQ and I'm humbled to be able to lead our talented team into the future. I'd like to thank Nick for his mentorship and leadership. Our Board trusted me to lead LKQ through this next chapter, and most importantly, I'd like to thank my wife and kids for their love, patience and support because without them I wouldn't be where I am today. As I prepare to step into the CEO role in July, I am filled with enthusiasm and a deep sense of responsibility. My vision for LKQ is rooted in three fundamental principles

Operator:

Thank you. [Operator Instructions]. Our first question comes from Daniel Imbro of Stephens. Daniel, the line is yours.

Nick Zarcone:

Hey, good morning.

Daniel Imbro:

Justin, I want to start maybe on -- good morning, I want to start on the North American side. Rick, Justin, I know you guys aren't guiding to growth by segment, but obviously it's been holding in there nicely this year. Would the 3.5% and 5.5% kind of organic growth guide be a fair range for North America as well? And could you break out maybe your expectations of what you plan on seeing between pricing and then traffic growth as we head through the New Year here in North America side?

Daniel Imbro:

Great. And then, as a follow-up, want to touch on the balance sheet. Obviously free cash generation remains strong. I want to focus on vendor financing over in Europe. There's still room to drive that higher. Can you provide any quantification on maybe the progress you've made, Rick, over the last few years? And then, in terms of uses of cash, good to see the buyback restart here in 4Q, are you comfortable with that being a more readable part of capital allocation moving forward?

Operator:

Our next question comes from Michael Hoffman of Stifel. Michael, please go ahead.

Nick Zarcone:

Thank you, Michael.

Rick Galloway:

Yes. Thanks, Michael. As far as the free cash flow goes, if you think about the last couple of years, and I talked briefly about this in the prepared remarks, we were able to drive a significant portion of some of our lower hanging fruit on trade working capital. And then in addition to that, we did have a little bit of a benefit in the last couple of years, not 2023, but prior to that, if you're looking back a little bit on CapEx as well, where we did -- we had some supply chain financing, or not supply chain financing, but supply chain issues and getting some of those materials. And so CapEx was a little bit lower. If you think back to, like, 2020, when we had a high, we only delivered -- we only had about $172 million of CapEx, whereas we had $358 million this year. So there's pretty significant catch-up, if you will, on that portion. So what I would say is we're at a normalized level, and the compounding you're talking about with EBITDA and driving overall earnings and then driving free cash flow, that's what we should start expecting as we've just now normalized that amount. As far as the opportunity in Europe goes, we think that there's still opportunity. I wouldn't put necessarily a number to it, Michael. I think we had about a 20% improvement, a little over 20% improvement in our vendor financing program in 2023, which is great. It's not going to be 20% in 2024. It's going to be lower than that, but it's still going to be positive and still going to be cash generation coming out of our trade working capital going into 2024.

Justin Jude:

So first off, I would say our self-serve team manages very well through some challenging conditions in 2023. But I'll give you an answer on my overall thoughts on portfolio management, which really hasn't changed from the company standpoint, from Nick Standpoint. Our job is always to look at whether we're the right owners of the businesses, whether it's product lines, whether it's businesses that operate in different geographies. And if they fit in our long-term operating model, if they hit our financial metrics, it's something we'll look at keeping and optimizing, and if not, we'll optimize it and look to sell it. But I would say that's just my general idea on portfolio management. Historically, self-serve has been a decent business for us too.

Craig Kennison:

Hey, good morning, and Nick and Justin, congratulations to you both. Question --

Craig Kennison:

Justin, I think -- Europe and some levers that you and Andy might pull, maybe you could dig into that a little more, especially on the private label side. But any other levers that you can pull to drive margin expansion.

Craig Kennison:

As a follow-up, is there a way to frame your fulfillment rates in Europe and contrast them with what you can achieve in the U.S. or North America?

Operator:

[Operator Instructions]. Our next question comes from Bret Jordan of Jefferies. Bret, please go ahead.

Nick Zarcone:

Yes. We've got -- so, Bret, I'll start and then if you want to chime in, Justin. So we've identified within the $55 million some procurement synergies. It's less than a $10 million number, as far as the overall opportunities on that portion of it that we have been already active talking back and forth with our European operations in driving some of that. And it's been real small thus far as far as the opportunity goes, getting into the P&L, but it is progressing nicely. So, Justin, I don't know if you want to add anything.

Nick Zarcone:

Yes. You recall that when we announced the transaction back in February 2023, one of the opportunities we saw actually related to European makes and models, because today, up in Canada, that cohort of cars represents 10% of the car park. But bumper to bumper historically has distributed almost zero product for European makes, models. And we know somebody who knows a lot about the European marketplace, and that's where the focus will be to bring in product lines to service that 10% of the market up in Canada.

Nick Zarcone:

Yes. So our primary focus right now, Bret, is on the remanufacturing of the batteries, taking a battery that's not operating at normal levels, taking out the cells that are defective, putting in new cells and getting that battery back on the road, essentially extending the life of the powertrain. We have -- as we noted last year we're talking with some third parties about recycling not where we would be operating facilities, but where we could be a partner because nobody has access to the batteries. None of the big folks trying to do the recycling really have access to the supply chain. And with our salvage operations, we are the perfect entity to help partner. So we are taking a hard look at key partnerships that could help us move forward on the recycling side. But we would not be necessarily owning and operating large recycling facilities.

Nick Zarcone:

Well, we certainly thank you for your time and attention this morning and for a productive call, a good set of questions. Just a couple of key dates for everyone to keep in the back of their mind. First, our first quarter call is going to be on Tuesday -- Tuesday, April 23. Normally, we host our calls on Thursday, but this year, that week in April is an overlap with our Annual Leadership Conference in North America, which begins on Thursday, the 25th. So Q1 reporting will be on Tuesday, April 23. Second, we'd like everyone to mark their calendars for our 2024 Investor Day, and that's going to take place on September 10 and will be held at our North American headquarters down in Nashville, Tennessee, so April 23 and September 10. And with that, I'd like to thank everybody on the call for your time and attention. And as always, I extend and my sincere thanks to the 49,000 strong LKQers who make it happen every day. Take care, everyone.

Operator:

Thank you for joining the LKQ Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] I’d like to go ahead and introduce our speaker today, Joe Boutross, with LKQ Corporation. Please go ahead.

Nick Zarcone:

Thank you, Joe. Good morning to everyone on the call, and thank you for joining us. This morning, I will provide some high-level comments related to our performance in the quarter, and then Rick will dive into the financial details and provide an overview of our updated guidance, before I come back with a few closing remarks. The third quarter of 2023 represented some mixed results, which collectively fell short of our expectations. Wholesale North America continued to outperform, all while working on the integration of the Uni-Select acquisition. However, we experienced some unusual transitory events that, in aggregate, affected the short-term performance of our European operations. We also had continued pressure on commodities, which impacted Self Service, along with less-than-expected demand for our specialty products. The LKQ culture is one that takes accountability for results and is humble enough to understand that this quarter’s results fell short of both our expectations and the expectations that may view on the call. Make no mistake, the shift to our operational excellence strategy implemented in 2019 has not changed. Structurally, our business model and financial outlook are sound, and we continue to be very optimistic about the future of LKQ. One quarter does not define the resiliency of our business model, the uniqueness of our global enterprise or the long-term opportunities that lie ahead for LKQ. The perpetual challenging macroeconomic conditions are not unique to LKQ, and they will continue to persist, but the LKQ team will move forward. On the positive side, we continue to experience strong organic revenue growth in our North American and European businesses achieving same-day growth of 5.8% and 6.2%, respectively. North America achieved excellent EBITDA margins, which were ahead of expectations, and our free cash flow was excellent, particularly in North America and Europe. On the downside, during the quarter, we faced a few unusual and transitory headwinds. In late September, our Italian subsidiary, Rhiag, completed a negotiation with the Italian tax authorities on the remediation of a value-added tax violation that was committed by certain of our third-party suppliers dating back to 2017. These suppliers are no longer in business, and thus, Rhiag agreed to remit the disputed amounts to the Italian revenue agency to remedy any damage caused by the VAT violations of the former suppliers. Additionally, our German operation was hit with periodic strikes at our large distribution center, which reduced our ability to fully replenish the branch network with inventory on a daily basis. Negotiations with the works council are ongoing, but there have been additional strikes in October, which will affect our Q4 results. It’s important to note that resolving the matter is not fully in our control as the labor contract involved with some multiple employers in Southern Germany that must agree on terms through the employers association. These two items alone reduced our European organic growth by approximately 160 basis points and reduced segment EBITDA margins by 110 basis points. While we are disappointed with these two transitory items, our long-term view of the growth and margin potential of our European business has not changed. Related to commodities, pricing pressure continued in the third quarter, with scrap and precious metal down sequentially 14% and 23%, respectively, decreasing both margins and earnings per share. For context, in Q3, catalytic converter prices fell below $100 for the first time since early 2019, versus the third quarter of last year, when they averaged to $197. This difficult commodity environment, again, had a particularly negative impact on the profitability of our Self Service segment. Rick will provide a deeper dive into the EPS and segment margin details in the quarter when he discusses our updated guidance. The quarter included many other highlights worth noting. The company generated robust free cash flow, and we are on target to again reach $1 billion for 2023. On August 1, we announced the completion of the Uni-Select acquisition, a bespoke and highly synergistic opportunity that will add positive long-term shareholder value and further widen the competitive moat around our North American business. Yesterday, we completed the sale of GSF Car Parts to Epiris, a private equity firm based in the UK, the proceeds from the sale will be used for debt repayments. And finally, our Board has declared a 9% increase in our quarterly cash dividend from $0.275 to $0.30 per share of common stock. This increase reflects the Board’s ongoing confidence in our ability to continue to generate solid free cash flow and drive long-term value for our shareholders. Now, on to the third quarter 2023 results and year-over-year comparisons. Revenue for the third quarter of 2023 was $3.6 billion, an increase of 15%. Parts and services organic revenue increased 3% on a reported basis and 4.3% on a per day basis. Diluted earnings per share was $0.77 as compared to $0.95 for the same period last year, a decrease of 18.9%. While adjusted diluted earnings per share was $0.86 compared to $0.97 for the same period of 2022, a decrease of 11.3%. Let’s turn to some of the quarterly segment highlights. As you will note from Slide 8, organic revenue for parts and services for North America increased 4.1% on a reported basis and 5.8% on a per day basis. We continue to perform well in North America, especially when you consider that non-comprehensive related auto claims were down 4.3% year-over-year in the third quarter. Similar to the first half of the year, the growth in North America was a combination of price and volume improvements, with the organic growth in our aftermarket collision products predominantly being volume-related. These nice volume increases were driven by our disciplined procurement efforts that allowed us to achieve the proper levels of inventory and the ability to stabilize and maintain our industry-leading fulfillment rates of over 93%, which helped us grow the business. The strong volume was also attributable to State Farm, expanding their usage of aftermarket headlights, taillights and bumpers beginning earlier this year. Further on State Farm, during our last call, I mentioned that State Farm launched another pilot program in California and Arizona for the use of a full range of aftermarket collision parts, including sheet metal products like fenders, hoods and trunk lids and other items like side mirrors and grills. Today, I am pleased to share that on October 16, State Farm announced that they are rolling out the use of these parts nationally to collision repair shops, which are part of their DRP program. We expect the incremental lift from this expansion at a full run rate will reflect a $20 million to $30 million annual benefit in revenues once fully ramped up. With respect to the UAW strikes, we believe that a continuation of the strikes will create incremental demand for our aftermarket and to a lesser extent, our recycled collision parts. Because the strike started in late September, there was no impact on our third quarter results, but we are starting to see an incremental per day volume uptick across all product lines, with some lines that have historically been sourced primarily from the OEs expanding at a faster rate. Obviously, we don’t know how long this demand benefit will last, so we have not adjusted guidance for the UAW strike. North America EBITDA margins exceeded our expectations for the quarter, and we are on track to achieve the greater than 19% full year target we have previously discussed, excluding the anticipated dilution of Uni-Select. Let’s move to our European segment. Europe’s organic revenue for parts and services in the quarter increased 5.1% on a reported basis and 6.2% on a per day basis. While the market remains competitive, the business is performing well by increasing the organic growth rate in the quarter, mostly driven by volume. During the third quarter, we saw solid organic growth in all of our regions, despite the impact of the strikes in Germany, with regional same-day organic growth ranging from approximately 4.7% on the low end to 16.3% on the high end and a total same-day growth rate of 6.2%. Excluding the impact of the strike, the same-day growth rate was just shy of 8%, which is outstanding. The diversity of our European platform is also highlighted by the dispersion in EBITDA margins, with key lines of business and markets posting margins in the low teens, while certain smaller markets delivering mid-single-digit performance. While the labor situation will weigh on our margins in Q4, we remain confident in the long-term margin potential of our European operations. Now let’s move on to our Specialty segment, which continues to face a soft demand environment. During the third quarter, Specialty reported a decrease in organic revenue of 6.1% on a reported basis and 4.6% on a per day basis, which again was below our expectations. As in the past, there were major differences in the demand for various part types. With the RV OEM warranty products and truck and off-road products up 3% and 2%, respectively, during the quarter, while RV accessories and towing-related products were off double digits on a year-over-year basis. The RV portion of our Specialty business was impacted by the wholesale shipment and retail unit sales of RVs, which were down 45% and 17% year-to-date through August, respectively. Though still down, the Specialty revenue decline in the third quarter was less significant than in the first half of the year. Still, we don’t see a natural near-term catalyst for demand to bounce back, and we anticipate tough comparisons into the start of 2024. Now on to the Self Service segment. Organic revenue for parts and services for our Self Service segment increased 5.1% in the third quarter. Self Service was again confronted by the decrease in metals pricing, I mentioned earlier, particularly with respect to catalytic converters, which are linked to precious metal prices. Operationally, the Self Service team also had challenges with their ability to source vehicles at the appropriate cost. Simply put, car costs have not declined in lockstep with commodity prices, creating significant margin pressures and pushing Self Service into a loss position for the third quarter. We have already taken action with our buying practices and have installed an operational leader to drive standardization and process improvements across our Self Service buying group. The leadership team has also taken actions to reduce overhead costs, and the early returns have been positive. We expect this business to be marginally profitable in Q4. As reported, we closed on the Uni-Select acquisition on August 1. The integration activities and synergies are on target and in some cases, ahead of schedule. This past week, we completed the first wave of FinishMaster facility optimizations, with 10 locations being folded into an existing LKQ aftermarket warehouse location and two other FinishMaster locations being merged. From here, we will begin to see an acceleration of our footprint optimization. Our sales force and operations teams dedicated to the paint and related products market have been fully aligned, and we’ve built out a synergy tracking team with various tools and metrics to assure we hit the targets we established when we announced the transaction back in February. Now that we’ve owned the business for a few months, we see a slight shift in the FinishMaster business with MSOs representing a slightly larger share of activity. As you know, the MSOs are some of our largest customers on the parts side of the business. The bumper to bumper business in Canada is actively working with our European team to assess and take advantage of the procurement leverage that exists between their respective businesses. We have completed two tuck-in acquisitions in Canada that Uni-Select had in the hopper, and we have another small transaction that will close shortly. We are excited about the growth opportunities in Canada and believe we have a great team to execute the plan. Overall, I am confident in our North America team managing the Uni-Select integration, and that they will deliver the same strong results as they’ve had with their operational excellence efforts over the last three years. Let me now turn the discussion over to Rick, who will run you through the details of the segment results and discuss our updated outlook for 2023.

Nick Zarcone:

Thank you, Rick, for that financial overview. Before we open the call for questions, I want to reiterate what our global team has accomplished since starting the operational excellence journey back in 2019. In 2022, North America adjusted EBITDA margins reached their highest full year level in the company’s history at 18.7%. Excluding the impact of Uni-Select, we are on track to beat that record again this year. As a reminder, North America ended 2018, which segment EBITDA margins at 12.6%. The 1 LKQ Europe Program has generated tremendous results since introducing the plan in September 2019, and the segment is on track to consistently drive full year double-digit EBITDA margins. Importantly, there is further runway for leveraging our scale and unparalleled distribution network. This is demonstrated by the strong organic revenue growth in the quarter and the first nine months of the current fiscal year and a significant year-on-year increase in segment EBITDA of $40 million after taking into account the two unusual items that cost the segment $19 million in aggregate. We’ve generated free cash flow at or above $1 billion for three years in a row, and we are on target to make 2023 the fourth. We’ve divested 16 businesses, representing over $625 million of revenue that did not fit our strategic objectives. We’ve achieved investment-grade ratings from each of Standard & Poor’s, Moody’s and Fitch. We’ve repurchased $2.4 billion of stock since initiating our first repurchase plan in October of 2018. We’ve distributed $578 million in quarterly dividends to our shareholders. And we’ve achieved a AAA ESG rating from MSCI and built out a team to drive our global sustainability effort forward with targeted objectives. So yes, we are very LKQ proud. As we move forward towards the end of 2023, let me restate the key strategic pillars, which remain central to our culture and objectives. First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high levels of cash flow, which in turn, give us the flexibility to maintain a balanced capital allocation strategy. And lastly, we will continue to invest in our future. As always, I want to thank the over 49,000 people who work for LKQ for all they do to advance our business each day and for driving our mission and our LKQ Delivers Values forward regardless of the challenges. Without a doubt, our people are LKQ’s biggest asset. And with that, operator, we are now ready to open the call to questions.

Bret Jordan:

Hey, good morning guys.

Rick Galloway:

Good morning, Bret.

Nick Zarcone:

Sure, Bret. Great question as – anticipated. The definitive sale agreement includes a provision wherein we are not allowed to disclose any of the terms of the transaction. What I will tell you is that we ran a full and complete auction process that started out with dozens and dozens of potential buyers. We closed the transaction at the highest value that was – that came out of the option process. We had fully anticipated that the multiple that we would receive for GSF would be materially less than the multiple that we paid for the other businesses. And we built that into all the original analysis and that exactly proved to be the case. All things considered, we’re happy to get the transaction behind us. As Rick indicated, we’re going to use the proceeds to repay debt. And the other thing I would say is the multiple reflects the current M&A environment and the impact of higher interest rates. Particularly for leveraged transactions, we sold this to a PE shop over in the UK but again, it was generally in line with what our going expectations were. Maybe a little bit on the skinny side, but not materially different.

Rick Galloway:

Yes. Thanks, Bret, for the question. I’ll take that one. So one of the things that we’re pretty excited about is the ability that the CAG Group or Bumper to Bumper Group has with the vendor financing program. We got about $65 million in the vendor financing program as one of the components to drive performance. It was underutilized and something that we think we can grow fairly significantly. The overall trade working capital that we inherited from the transaction, roughly, call it, $200 million that we think we can continue to enhance and benefit within the payables, similar to what we’re doing over in Europe.

Operator:

Next question comes from Craig Kennison from Baird. Your line is now open.

Nick Zarcone:

Good morning, Craig.

Nick Zarcone:

Hey Craig, I’ll take that one. When we were analyzing and negotiating the transaction some nine to 10 months ago, we were working off of the Uni-Select annual budget for 2023, we had to make some estimates on our side as it relates to the quarterly phasing of how their business was going to unfold. We’re now sitting here in October and we recognize that our estimates, as it relates to the seasonality and the phasing of their business, were off a bit, with kind of more of their activity hitting earlier in the year than we anticipated and a little bit less late in the year. In response, we’re working hard to realize the synergies sooner rather than later, as Rick indicated. From our perspective, nothing really changes in a material manner related to the long-term economics of the transaction. And what I’d also highlight for you, as Rick mentioned, is between the benefits of the FX hedge on the original purchase, some of the higher-than-expected cash on the balance sheet at closing, the transaction value actually declined by about $100 million, which helps offset some of that earnings difference from a return perspective, not necessarily from a, from an EPS perspective.

Craig Kennison:

As a follow-up to that, Rick, I thought a lot of those synergies were tied to leases, which maybe three years before their expiration. So how are you able to accelerate what are essentially contractual agreements?

Craig Kennison:

Thank you.

Operator:

Our next question comes from Scott Stember from MKM Partners. Your line is now open.

Nick Zarcone:

Good morning, Scott.

Nick Zarcone:

Are you talking about the strike in Germany?

Nick Zarcone:

Yes. So look, employees or certain employees at our big distribution center in Sulzbach-Rosenberg, which fulfills all of our branches in Germany, a number of those folks belong to a union or a works council as they’re called over on the other side of the pond. We don’t have advanced warning as to when they decide to call a strike. It’s very episodic. The issue is we’re down in headcount. Not all the members go on strike, but probably we lose about 40% of our workforce when they are out in strike. And that creates significant issues in trying to move product into and out of the distribution center. But we need to replenish our branches on a daily basis. Because if the product is not out in the branch the next morning, it can’t be sold. And some of the key bottlenecks are actually on the inbound movement of goods, as you can imagine, with less people to bring all that product in. The vendor delivery trucks get stacked up out in the drive, et cetera, et cetera, right? We have a phenomenal team at Stahlgruber that’s doing everything possible to mitigate the issues. We are in flight in bringing in a second DC [ph online up in Bielefeld, which is in the northern part of Germany, but that’s not going to come online in time to help with the strikes. The branch and corporate personnel in Bavaria, we pulled some of those folks into the distribution center to help with staffing. We’re still down even after that from an overall headcount perspective, and obviously, those employees are not as productive because they’re doing new things. We’re trying to push more inventory out into the branches on non-strike days, but there are limits as to how much the branches can hold from a practical perspective. And we have to make educated guesses as to what product each particular branch may need in the future, which is not the same as fulfilling orders based on actual sales to [indiscernible]. As I indicated, the employees have been on strike for several days here in October, and we anticipate that’s going to continue. The biggest part of it is it’s not like in the U.S. where, say, Ford, GM and Chrysler are all negotiating separately with the UAW. Here, there’s a group of employers, including Stahlgruber, that are all part of the same works council. And we need to get to a settlement as a group, we cannot do a one-off settlement with the union. We’re hopeful we can bring this to a close yet this year. Like many unions around the globe, they’ve got really big expectations. And there’s a difference both in the amount of wage increases and the term of the contract. We obviously want to lock in the longer term, so we’re not here next year talking about the same kinds of things. So the impacts of the strike are continuing into the fourth quarter. And we anticipate that they will continue at least through November.

Scott Stember:

Okay. Got it. And then just a quick last question on the bumper to bumper business. I don’t know if you’ve mentioned this before. Can you just give us an indication of how the organic sales growth has been running just some of the industry dynamics up in Canada on the mechanical repair side?

Rick Galloway:

To throw a number at it, Scott, high single digits is the way you should kind of think about that business right now.

Rick Galloway:

Yes, organically. Yes.

Rick Galloway:

Thank you.

Gary Prestopino:

Hey, good morning everyone.

Gary Prestopino:

Rick, could you maybe go into some of the issues. I mean you mentioned pricing, but what exactly is going on for the 140 basis point decline in gross margin in Europe that you cited. You talked about something pricing in Eastern Europe was having some issues, could you maybe go in a little more detail on that?

Gary Prestopino:

Okay. Thank you. And then versus the EPS bridge that you put in Q2 to Q3, it looks like, operationally, you were looking for a $0.05 positive in Q2. It’s now slipped to $0.05 negative in – with the Q3 guidance. Is that all specialty that is making that shift?

Gary Prestopino:

Thank you.

Brian Butler:

Hey good morning. Thanks for taking my questions.

Rick Galloway:

Good morning, Brian.

Nick Zarcone:

Yes. It’s a little bit of both, Brian, to tell you the truth. As you know, our North American and European businesses largely sell nondiscretionary parts that are used to repair vehicles, while Specialty primarily sells parts to accessorize the vehicles. As had Specialty is going to be more directly impacted by the broader macroeconomic environment, things related to economic growth, interest rates, consumer balance sheets and the like. The sale of light trucks, jeeps and SUVs has been reasonably okay, while the sale of new RV units has been very depressed, as you know. So with that, it shouldn’t be a surprise that the sale of RV accessories and related products like hitches and other towing equipment have been much softer than the traditional SEMA product. We believe that retail sales of RV units is probably a better leading indicator for the potential demand for our RV accessories than wholesale shipments from the OEs to the dealers, because unsold units sitting on a dealer lot doesn’t do anything to generate demand for the types of parts that we sell. And so with interest rates going higher and the financial health of the consumers eroding, that’s why I said we don’t see a near-term catalyst for a quick rebound in the RV marketplace. Now as we get into next year, we obviously have an easier set of comps because 2023 has been very soft. And so we wouldn’t anticipate the same kind of negative growth in 2024 than – as compared to what we have here in 2023.

Rick Galloway:

Yes. No, it’s a great question. I mean you look at the free cash flow, you think year-over-year, when you combine three items – interest, CapEx and Uni-Select [ph] transaction costs, $250 million come down off of last year’s number, where we were at roughly $1 billion, making all of that up and delivering a fantastic result. It’s a little bit higher than $150 million if you think about the trade working capital. It’s more like $180 million as we go into Q3. It’s things like our vendor financing program that the European team does. The operational excellence initiatives span way beyond just the P&L side, they go to the balance sheet side as well. The team is doing a fantastic job driving the performance. They’re up 12% versus year-end, up about $35 million on the vendor financing program, up 10% in payables. And so driving that over and over again is something that we see as a continuous improvement. So I would tell you, the performance is good, really solid performance year-over-year, and that trade working capital really is the catalyst behind driving that performance.

Rick Galloway:

To repay?

Rick Galloway:

We should have roughly about $150-ish million. About $150 million debt pay down in the fourth quarter.

Operator:

Our next question comes from Bret Jordan from Jefferies. Your line is now open.

Nick Zarcone:

Yes, total losses, at least according to our best sources that we have here, Bret, was approximately 20.6% in Q3 of 2023, which was up a bit from both 2022 and 2021. So total losses were up a bit. That in part is why we think repairable claims was down 4.6%, right, because you had a few more total losses. As we’ve always said, we’re agnostic to the total loss rate. Because in reality, the more cars that roll through the auctions, creates more pine opportunities for our salvage operations at reasonable prices. The key, we believe, is what’s powering the overall demand for products. And while repairable claims may be down a little bit, APU is going north. And APU is going north in part because the average number of parts required to repair a vehicle is at an all-time high of 15.7 parts in the third quarter. Obviously, the industry is fully recovering from our aftermarket parts availability. As we said, our fulfillment rates were back to over 93%, which is pretty close to our target. And then you’ve got things like the benefit of the State Farm program, which will take a little bit of share away from the OEs as well. So our sense is that our same-day organic of 5.8% outstripped what we believe would be the net impact of all the other headwinds and tailwinds, giving us confidence that we’re continuing to take share.

Nick Zarcone:

There’s no doubt that the way that the accounting works and the way the contracts are – and that the margin on MSO business is less than the margins on a non-MSO. Because it’s basically a service quotient to service fee, if you will, even though we have to record the full value of the product that are sold. And as I mentioned in my comments, MSO volumes were a little bit higher as a percent of the total than they’ve been in the past. And that, quite frankly, that happens every time one of the MSOs buys an independent shop, right? It switches from – it switches the volumes. All in all, we’re happy with the – with where we stand with the paint business.

Operator:

Our next question comes from Daniel Imbro from Stephens. Your line is now open.

Daniel Imbro:

That’s helpful. And then maybe just a follow-up. Rick, so you mentioned in your scripts that buybacks are part of capital deployment. But it does feel like you guys have done more M&A, whether it’s a small one in Canada, you just bought Uni-Select. Can you maybe talk about like what just the strategic rationale is at buying at this point in the cycle? Could you – do you typically get better prices if we do enter a downturn? And just, I guess, how you plan on spending the $1 billion of free cash? You have $150 million of debt pay down of work to do, but what do you plan to do with the rest of it?

Daniel Imbro:

Great. Thanks so much.

Operator:

There are no further questions at this time. I’d like to turn back the call to Nick Zarcone. Thank you.

Operator:

This concludes today’s conference call. You may now disconnect.

Operator:

Good morning and thank you for joining LKQ Corporation’s Second Quarter 2023 Earnings Conference Call. I am your operator, Jiao. [Operator Instructions] I will now turn the conference over to Joe Boutross, VP of Investor Relations. Please go ahead.

Nick Zarcone:

Thank you, Joe and good morning to everybody on the call. I hope you are all having a safe and enjoyable summer. This morning, I will provide some high level comments related to our performance in the quarter and then Rick will dive into the financial details and provide an overview of our updated guidance before I come back with a few closing remarks. The second quarter of 2023 was a continuation of what we delivered in the first quarter, where again the resilience of our businesses shined through with an exceptional organic revenue growth and strong margins in our North American and European segments, which more than offset the impact of the headwinds experienced by our Specialty and Self-Service segments. The non-discretionary nature of the parts these core segments distribute, coupled with our ongoing operational excellence initiatives, highlights the strength of our business model and our ability to generate robust profitability during periods of challenging macroeconomic conditions, including flat declining economic growth in several of our markets, decreases in commodity pricing, the ongoing conflict in Ukraine and its impact on the broader European markets, and the continued increases in interest rates and its subsequent impact on consumers. The strength of our North American and European segments is evidenced by the fact that in the second quarter of 2023, North America and Europe collectively represented roughly 90% of our total segment EBITDA versus 79% for the second quarter of 2022 and just 74% in 2021. The variance in performance across our operating segments this quarter again validates our long-term diversification strategy, both with respect to geography and product and speaks to the true strength of our organization and our portfolio of businesses. Now on to the second quarter 2023 results and year-over-year comparisons. Revenue for the second quarter was $3.4 billion, an increase of 3.2%. Parts and services organic revenue increased 4.8% on a reported basis and 5.4% on a per day basis. The net impact of acquisitions and divestitures was flat year-over-year and foreign exchange rates increased revenue by 0.6% for total parts and services revenue increases of 5.4%. Other revenue fell 23.9% in the second quarter of 2023, primarily due to weaker precious metal prices relative to the same period in the prior year. Net income for the second quarter of 2023 was $281 million as compared to $420 million last year. Diluted earnings per share, was $1.05 in the second quarter of 2023 compared to $1.49, a decrease of 29.5%. The company completed the divestiture of PGW Auto Glass in the second quarter of last year, which generated a pre-tax gain of $155 million and an after-tax gain of $127 million or $0.45 a share in the second quarter of 2022. Adjusted net income of $291 million in Q2 of 2023 compared to $307 million last year, a decrease of 5.1%. Adjusted diluted earnings per share in the second quarter of 2023 was flat with last year at $1.09, coming in flat to the prior year is a testament to the strength of our operating performance as we faced headwinds from significantly lower commodity prices and higher interest expense. Rick will provide further financial details in his prepared remarks. Now, let’s turn to some of the quarterly segment highlights. As you will note from Slide 8, organic parts and services revenue for North America increased 8.3%. North America also reported the highest quarterly EBITDA margin on record as a standalone segment, excluding self-service. We continue to perform well in North America, especially when you consider that collision and liability-related auto claims were down 3.1% year-over-year in the second quarter. Similar to Q1, the growth in North America was a combination of price and volume improvements. The pricing impact primarily reflected the year-over-year benefit of increases implemented late in Q2 and Q3 of last year as opposed to further increases in 2023. The volume pickup was particularly evident in the aftermarket product line and was the result of two factors. First, having largely worked through the industry supply chain issues and returning to proper levels of inventory enabled us to get back to our historical level of fulfillment rates with year-to-date aftermarket fill rates at their highest level since June of 2020. Second, the impact of the State Farm program continues to unfold nicely and is building demand for aftermarket headlights, taillights and bumper covers. As previously disclosed, in December of last year, State Farm announced that it would allow the use of these aftermarket part types. Late last month, State Farm announced that they are running yet another pilot. This time in California and Arizona for the use of a full range of aftermarket collision parts, including sheet metal products like fenders, hoods and trunk lids and other items like side mirrors and grills. As part of this pilot, State Farm requires at these parts to be certified by CAPA, a Certified Automotive Parts Association. As many of you know, we are by far the largest distributor of CAPA-certified collision parts in the United States. Importantly, we believe the potential expansion by State Farm into the utilization of these additional aftermarket part types validates both the high-quality standards of our platinum plus private label aftermarket parts offerings and our ability to deliver best-in-class service to State Farm’s direct repair network across the country. We will be a beneficiary should State Farm ultimately decide to rollout the use of these additional aftermarket part types on a nationwide basis. This upward trend in our aftermarket sales volumes is consistent with a general rise in alternative part usage or APU, which again approached pre-pandemic levels in the second quarter. I am pleased to say that the increase in APU also included an uptick in the recycled parts category, increasing about 140 basis points year-over-year. Combined, aftermarket recycled parts have witnessed over a 400 basis point improvement in industry-wide APU year-over-year in the second quarter of 2023. Our outperformance is another indicator that we continue to take market share. Non-comprehensive total loss rates decreased sequentially in the second quarter to 20.4% from 20.9% in Q1. With the recent drop in used car prices, we expect total loss rates to slightly pick up for the balance of the year. And then as OEs work through their healthy inventory levels, industry experts believe we will likely see a mix shift to newer vehicles down the road and would expect to see any near-term increase in total losses to reverse cars given newer vehicles are less likely to be deemed a total loss. As stated in prior calls, we are generally agnostic as to the small up and down shifts in the total loss rate. Finally, last month, I had the opportunity to spend some quality time with the top performing general managers and salespeople at an event for our North American business. I must say their enthusiasm regarding the future of LKQ was simply energizing. Now, let’s move on to our European segment. Europe’s organic revenue growth for parts and services in the quarter increased 8.5% on a reported basis and 9.8% on a per day basis. It was a quarter of records for the European segment, which reported the highest quarterly revenue ever at $1.64 billion, the highest EBITDA at $188 million, and the highest second quarter EBITDA margin percentage ever at 11.5%. During the quarter, we saw high single-digit to low double-digit reported organic growth in some of our key operating geographies. In particular, our Benelux, German and Eastern European operations performed exceptionally well. The revenue growth reflected a combination of positive movements in both price and volume. We are confident we are continuing to take share in these large and highly fragmented markets as witnessed by ECP, our UK business, which generated its highest level of per day sales on record. In the second quarter, LKQ Europe entered into a strategic partnership with Mobivia, Europe’s largest independent provider of automotive maintenance and repair services, operating under 11 brands in 18 countries across Europe. The agreement between Mobivia and LKQ Europe is based on a dual mode of collaboration, which includes the procurement and delivery of automotive parts to Mobivia’s 530 ATU service branches across Germany. LKQ and Mobivia are both leaders in our respective sectors of the European automotive aftermarket. And thanks to this collaboration, we will leverage our strengths to provide a differentiated solution that is unparalleled in the marketplace. Our European team continues to face cost inflation across all operating markets. And to combat this, the team has taken decisive structural and multiple efficiency actions. These actions resulted in year-over-year improvements in SG&A for the second quarter despite this challenging macro environment. I spent last week in Europe meeting with all the senior leaders across the segment and also with the regional teams in the UK and the Benelux region. I am incredibly proud of the performance of the European team in what they are delivering. And I am very excited about all the initiatives they have underway to grow the business and enhance our leading competitive position. The team’s focus and drive are outstanding and they are creating a uniquely special and market leading business. Now, let’s move on to our Specialty segment. During the second quarter, Specialty reported a decrease in organic revenue of 12.9%, which was below our expectations. There were major differences in the demand for various part types with the truck, off-road and marine categories being down less than 2%, while RV and towing related products were off substantially more than the overall segment decline. The RV portion of our specialty business was impacted by the wholesale shipment and retail sales of RVs, which were down 50% and 20% year-to-date through May respectively. We expect to see further declines in the RV market as recent industry reports project that full year 2023 wholesale shipments will be down 40% year-over-year. With that, we believe the challenges for our Specialty segment will continue in the back half of the year. Now on to our Self-Service segment. Organic revenue for parts and services for our Self-Service segment increased 4.7% in the second quarter. Self-Service was again challenged by extremely soft commodity pricing, particularly as it related to precious metals. On the corporate development front, during the quarter and recently in July, we completed some smaller, highly synergistic tuck-in acquisitions, including a U.S. based remanufacturer and distributor of OE replacement engines, marine replacement engines and high-performance trade engines, a leading independent truck parts distributor in the UK, a Holland-based automotive aftermarket parts distributor, a Belgium-based business that distributes automotive parts, paint, tools and accessories and aftermarket accessories distributor with locations in Texas and Oklahoma. Additionally, during the quarter, we divested a small non-core business in our Specialty segment. The net annualized revenue impact of these six transactions collectively is approximately $240 million. As most of you know, on February 26, we entered into a definitive agreement to acquire all of Uni-Select’s issued and outstanding shares for CAD48 per share in cash, representing a total enterprise value of approximately $2.1 billion. The process is on schedule and we are pleased with our progress. During the second quarter, we received the required approvals from Uni-Select’s shareholders, the Superior Court of Quebec, the antitrust regulators in the United States and in Canada. On July 21, the Competition and Markets Authority in the United Kingdom issued its Phase 1 decision on the transaction. And in response, we immediately submitted our proposed undertakings related to the divestiture of Uni-Select’s GSF car parts business in the UK for evaluation by the CMA. In light of those developments, yesterday, we waived the closing conditions relating to regulatory approvals and I am happy to announce we plan to complete the acquisition of Uni-Select on or about August 1. The pending divestiture of GSF continues to progress in accordance with our desired timeline. After we complete the customary competitive bid sale process, this CMA will complete its suitability review of our proposed buyer. Upon receipt of approval of the buyer from the CMA, we will complete the sale of GSF likely in the third quarter. Now turning to ESG. During the order, we initiated or expanded various programs that centered around our people, LKQ’s most important asset. As part of our response to our employee engagement survey, we identified that ensuring the health, safety and well-being of our employees is essential to our success. With that engagement data, we took actions. We expanded our Inspire to Thrive wellness program globally, which focuses on the physical, mental and financial well-being of our employees. We expanded the installation of dash cams across our North America and specialty fleets, a program that enhances the safety of our drivers. And at ECP, our team implemented two exciting programs, 25 by 25 and PAVE, which stands for people adding value everywhere. Both these programs are centered around our diversity, equity and inclusion initiatives. Again, we implemented these programs as they are in the best interest of our employees. I could not be prouder of the continued progress on our ESG efforts, which was again validated in June by MSCI maintaining our AAA ESG rating a rating that very few companies can claim. Lastly, I am pleased to announce that on July 25, 2023, the Board of Directors declared a quarterly cash dividend of $0.275 per share of common stock payable on August 31, 2023, to stockholders of record at the close of business on August 17, 2023. I will now turn the discussion over to Rick who will run through the details of the segment results and discuss our outlook for 2023.

Nick Zarcone:

Thank you, Rick, for that financial overview. In closing, the second quarter was another solid performance for team LKQ. I am beyond proud of the results we delivered for the first half of the year, particularly how the teams are diligently planning and positioning their respective businesses for the balance of 2023 as we continue to be challenged by certain uncontrollable dynamics. As we move into the second half of the year, let me restate our key strategic pillars, which remain central to our culture and our objectives. First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high 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 always, I want to thank the over 46,000 people who work at LKQ for all they do to advance our business each day and for driving our missions and our delivers values forward regardless of the challenges. And with that, operator, we are now ready to open the call to questions.

Scott Stember:

Good morning, guys. Congrats on the quarter and thanks for taking my questions.

Scott Stember:

In North America, I just wanted to touch on State Farm. I think in previous calls, you had talked about, I guess, based on those three SKUs throughout the country, about $100 million in benefit, getting a lot of questions from investors about what the potential is with California and Arizona now going fully live with the whole program.

Scott Stember:

So that $125 million to $150 million, is that an all-in number? Or that’s an additional amount just for California and Arizona?

Rick Galloway:

The pilot, Scott, won’t mean much for us as a product to the pilot. So we’re – the numbers that Nick just quoted are assuming they go live at some point in time.

Nick Zarcone:

Yes.

Nick Zarcone:

I wouldn’t say countercyclical, Scott. I mean the reality is the economies in Europe are in much worse shape than the U.S. economy. If you just look at some of the published statistics, Germany is in a recession, they have had two quarters now of negative GDP growth. The UK is probably the worst off of any of the economies, the impact of the war, the impact of energy prices inflation. While inflation has come down a bit in the U.S., inflation is hanging pretty high over in Europe. And quite frankly, that’s having an impact on the consumer. The fact that we are continuing to grow our business, both from a volume perspective and a price perspective tells us that while may not be countercyclical, we are more than holding our own as it relates to the overall economic backdrop in Europe. Again, good growth, we are highly confident that what this means is, over time the car park is going to age. And if you talk to anybody in our business, an older car is our friend. So, we think that longer term, these soft economic conditions in Europe will actually bode to our favor.

Craig Kennison:

Hey, good morning. Thanks for taking my questions. Rick, I had a question for you. North American fulfillment rates, is there any way to quantify the year-over-year increase you saw this quarter? And then how long do you expect tailwinds from that improving fulfillment rate to impact North American organic growth?

Craig Kennison:

Thanks. And as you look at like Q3 and Q4 and then 2024, do you still expect tailwinds, or do you think that has abated from a year-over-year perspective?

Operator:

Thank you. Your next question comes from the line of Bret Jordan of Jefferies. Please go ahead.

Nick Zarcone:

Good morning Bret.

Nick Zarcone:

Yes. So, as we outlined back in late February when we announced the transaction, Bret, we are highly confident that there is $55 million of cost synergies that we will be able to get our hands on over the first kind of 3 years post-transaction. Most of that will come in the second year with only a few of those dollars needing a full 3 years to access. We are going to start the process just as soon as we can and trying to deliver the synergies very quickly. And again, there is facility savings. There are some procurement benefits and kind of all the corporate overhead and the like that we don’t need. And so nothing has changed from the presentation that we gave everybody back on February 27th, 28th, when we announced the transaction. Again, we are highly confident in our ability to do that. Obviously, much of the synergies are going to come in the U.S. That’s where the FinishMaster operations and our paint operations overlap. That’s where a lot of the synergies come from. We have no plans on eliminating, changing or shutting down facilities up in Canada because we don’t do what they do in Canada today, right. They are distributing small mechanical parts. That’s the business that we have over in Europe. We do think that there will be benefits, revenue benefits that we can glean by broadening out their product line, giving them some incremental inventory to cover all car types that are used up in Canada by giving them some capital to grow their business. But none of that is included in the $55 million of benefits that we outlined when we announced the transaction.

Nick Zarcone:

Leadtech, yes, so we love our services business. The reality is it’s growing about 25% a year, which is obviously significantly higher than any of our other businesses, and it has really strong margins. And so we are very, very happy about that. I mean if you look at some industry data, about 75% of all repairs at the MSOs are scanning the car for some of that technology. And about 18% of the repairs actually have some sort of calibration work being done on the vehicles. Now the 18% may sound low, but you got to remember that there is only a – today, there is only a small portion of the car park that has all the technology on it. Average price of a scan is running about $140. Average price of the calibration is running close to $400. And so it is a really attractive business. And the market is going to continue to grow because every year, there are simply more cars out on the roads with some of that more advanced technology on the car. That’s where we got into the business several years ago. We have created what we believe is a market-leading offering, providing a high level of service to our existing customers. By providing some of those services actually in their shops, and we are optimistic about the future.

Brian Butler:

Hi guys. Thanks for taking my question.

Brian Butler:

Just when you think about specialty, it doesn’t sound like there is a bounce from the bottom, but do you feel like we have kind of reached the bottom and how to think about where the margins ultimately settle out, maybe kind of back half of ‘23 and then thinking about ‘24?

Brian Butler:

Alright. That’s helpful. Thank you very much. And second question, how do you bridge the free cash flow outlook staying the same with the higher interest expense, what’s offsetting that?

Brian Butler:

Thank you.

Gary Prestopino:

Hey. Good morning everyone.

Rick Galloway:

Good morning Gary.

Rick Galloway:

The metals will be an impact. But you are right, on the interest side – on the taxes side, those will be avoided. But the metals impact, you should feather that in.

Rick Galloway:

Yes, exactly. And it’s roughly the same, Gary. I mean it’s minimal as far as the difference go on the EBITDA side.

Nick Zarcone:

As Rick indicated, a lot of the focus came on SG&A. We – of the 70 basis point improvement, I think we split 20 basis points in gross margin and 50 basis points in SG&A. So, taking a really hard look across all of our platforms to make sure that we are doing the best job possible to control our overhead expenses. Now, when you have 9.8% per day organic revenue growth, that helps. But make no mistake, Gary, the inflationary environment, as I indicated over in Europe, is much more intense than it is here in the U.S. And so they have needed productivity gains to offset a lot of that increase and allow us to actually get to a lower SG&A percent as it relates compared to revenues. Rick did indicate that we have got some wage inflation coming at us in Europe in the second half of the year. We know that already. Certain other countries, particularly the Netherlands has another wage increase coming at them. We experienced already a couple of days strike in Germany as the unions over there and the work consoles have their members to use short-term strikes to try and position for better wages. And so those are all things we are going to have to deal with in the second half of the year.

Operator:

Thank you. Your next question comes from the line of Daniel Imbro of Stephens. Please go ahead.

Nick Zarcone:

Good morning Daniel.

Daniel Imbro:

Rick, I want to start on North American EBITDA margins. Obviously, I think you had guided earlier this year that was set down as smaller competitors got inventory and may be used price to get share back, but they have held in much stronger. So, I guess what’s playing out differently than you thought? Are smaller peers being more rational, or is there something else driving North American wholesale margin up to offset some of that price competition?

Daniel Imbro:

Thank you for that color. And then maybe a related follow-up on North America, I think Nick, you mentioned 400 basis points of APU improvement. That should have been on a guess just a nice tailwind to volume, but could you break out the 8.5% comp? How much was ticket versus like more ticket growth versus more traffic growth? And then are you seeing any change in OEM pricing? I think that’s an investor concern out there as OEM production picks up. So, how is that side of the pricing backdrop been related to the traffic first ticket discussion?

Operator:

Thank you. There are no further questions at this time. I would now like to turn the call back over to Nick Zarcone for closing remarks. Please go ahead, sir.

Operator:

And that concludes today’s conference call, you may now disconnect.

Operator:

Good morning. My name is Rob and I'll be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Joe Boutross, Vice President of Investor Relations, you may begin your conference.

Nick Zarcone:

Thank you, Joe and good morning to everybody on the call. This morning I will provide some high-level comments related to our performance in the quarter and then Rick will dive into the financial details before I come back with a few closing remarks. On February 28th, the company kicked off a year-long celebration of our 25th anniversary by ringing the opening bell at NASDAQ. The celebration is focused on our 25-year history, our customers, our employees, the communities that we serve, and further energizing our global team about our future. Following this initial celebration, we hosted leadership conferences in both North America and Europe for key leaders across each of our operating segments, where we all had a chance to celebrate educate and collaborate on our past successes and share the excitement of what the future holds for LKQ. While we've had a great run since 1998, I am highly confident that the next 25 years will be even better. As an organization we have always held a core set of values that has helped us achieve our success and created the LKQ we are today. Like all aspects of life, change is inevitable and as an organization it's critical that we advance our values forward to lay the foundation for the next 25 years. Keeping us moving forward, during the quarter, I had the pleasure to announce our updated values for the future. Values that unite our global enterprise as a cohesive and focused One LKQ and that will serve as a single guide to ensure we deliver on the promises we hold true for all constituents. The values are development, excellence, leadership, integrity and trust, value-added, embracing change, resourceful, and sustainability. Simply put, it spells DELIVERS. Expanding on the word DELIVERS the One LKQ team across the globe delivered a solid first quarter performance and an outstanding start to 2023. During the quarter, our two largest segments North America and Europe exceeded our expectations as our teams embraced our operational excellence initiatives. The first quarter of 2023 started the year where 2022 left off as the resilience of our business shine through a myriad of uncontrollable headwinds ranging from economic softness, inflation, supply chain disruptions, labor shortages, energy cost spikes, and a war in Europe. The continuation of exceptional organic revenue growth and strong margins in our North American and European segments more than offset the impact of the headwinds experienced by our specialty and self-service segments. The variance in performance across our operating segments this quarter validates our long-term diversification strategy both with respect to geography and product and speaks to the true strength of our organization and our portfolio of businesses. Now on to the first quarter 2023 results and year-over-year comparisons. Revenue was $3.3 billion in the first quarter for both 2023 and 2022. Parts and services organic revenue increased 7.9% on a reported basis and 7.1% on a per day basis. The net impact of acquisitions and divestitures decreased revenue by 3.3% and foreign exchange rates decreased revenue by a further 3% for total parts and services revenue increase of 1.5%. Other revenue fell 19.2% in the first quarter of 2023 primarily due to weaker precious metal prices relative to the same period in 2022. Net income was $270 million in Q1 of this year as compared to $269 million last year as better operating results more than offset the negative impacts related to soft foreign currency exchange rates, higher interest expense and a higher effective tax rate. Adjusted net income was $279 million in Q1 of 2023 as compared to $287 million last year a decrease of 2.8%. Diluted earnings per share was $1.01 in Q1 of this year compared to $0.94 last year an increase of 7.4%. Adjusted diluted earnings per share in Q1 was $1.04 this year as compared to $1 even last year an increase of 4%. The increases in earnings per share relative to the changes in net income illustrate the positive impact of our historical share repurchase activity. Let's turn to some of the quarterly segment highlights. As you will note from slide 7 organic revenue for parts and services in North America increased 14.4% on a reported basis, a record first quarter performance. North America also reported its highest quarterly segment EBITDA margin on record. Rick will cover the segment level margin details shortly. We continue to perform well in North America especially when you consider that according to CCC collision liability-related auto claims were down 4.4% year-over-year in the first quarter. Our growth was balanced between price and volume improvements the latter of which was particularly evident in the aftermarket product line which was the result of two factors

Nick Zarcone:

Thanks, Rick for that financial overview. In closing, the first quarter was a great start to 2023 that again validated the strength of our strategy, our business model and most importantly our people. As we continue to progress through 2023, let me restate our key strategic pillars, which continue to be central to our culture and our objectives. First, we will continue to integrate our businesses and simplify our operating model. We will continue to focus on profitable revenue growth and sustainable margin expansion. And we will continue to drive high levels of cash flow, which in turn gives us the flexibility to maintain a balanced capital allocation strategy. And fourth, we will continue to invest in our future. As always, I want to thank the over 45,000 people who work at LKQ for all they do to advance our business each day and for driving our mission and our delivers values forward regardless of the challenges. And with that operator, we are now ready to open the call for questions.

Daniel Imbro:

Yes. Hey, Good morning, guys. Thanks taking my questions.

Daniel Imbro:

Yes. Nick, I want to turn to the North American organic growth side. Obviously really strong on a headline basis. I'm curious were there any noticeable industry changes that drove that whether it was a step-up in alternative part usage from State Farm faster than expected? Was there pent-up demand that got filled by the improved auction availability you talked about in the slides. Just trying to reconcile the big step-up on both a two year and a three year tax basis for the organic growth in the quarter?

Daniel Imbro:

I appreciate all that color Nick. And maybe I'll stay on North America with the little margin. Just clarifier, I think the North American margin over 20% was good to see. You got a 80 bps of a tailwind from freight in the quarter. I would assume you guys have locked in some of those. So would that kind of tailwind continue? And then similarly to follow-up on what you just talked about with growth staying so strong. Would maybe your expectations for North American margins to be higher this year than we talked about a few months ago just given growth is coming in faster than expected?

Daniel Imbro:

Great. Well, congrats to Justin and everyone on the team and a good luck going forward.

Operator:

Your next question comes from the line of Bret Jordan from Jefferies. Your line is open.

Nick Zarcone:

Good morning Bret.

Nick Zarcone:

Sure. We are thrilled with the performance of our European business again on a per day basis over 8%, 9% on a reported basis. As I mentioned in my prepared comments, every geography was either in high single-digits or low double-digits. And we haven't seen a scenario like that for quite some time. Again we called out a couple of the higher performers being Benelux, Germany, and Central and Eastern Europe. But that doesn't mean that the rest of the team underperformed. Indeed they were in that high single-digit area. And it was a mix of price and volume. Again when inflation hit hard we did the best we could to get ahead of the curve because if you don't, inflation will eat your life from the inside out. I'm so proud of the efforts by our teams over the last couple of years to make sure that we were able to get ahead of that. But there was some good volumes comparisons. And look the first quarter of 2022 was a good quarter, but wasn't off the charts and so we had a pretty good comparison to go after. And we're optimistic that Europe will continue to produce good solid results. Again we're not anticipating 9% growth for the entire year for the European team. So, it may come in a little bit as we move through the next few quarters as the organization really picked up some momentum towards the back half of last year. The cadence through the quarter I mean there was we don't give monthly results, but it was solid and the second quarter is off to a decent start albeit we're 20 some days into the quarter and we still got a long way to go. What we're particularly pleased with our European business Bret is the margins. Margins are up 90 basis points from where they were in Q1 of last year. And the revenue growth is great. We want to bring that down to the bottom-line because [Indiscernible] revenue doesn't do anything for an organization. And the reality is we've got the best margins in the European theater. When you look at it on an apples-to-apples US GAAP to US GAAP basis nobody has our level of EBITDA margins and we're very proud of that.

Nick Zarcone:

Yes, I mean it started off the year soft and ended the first quarter soft and that's why we've been very upfront with the same. We're not expecting any great turnarounds for the back of the year and it's going to come in below our original expectations and what was in our original guidance that we set back in the February call. We don't see any particular catalyst. And again all part types are not equal. As we mentioned the softer product lines include RV what's no pun intended, but what's attached to the RV volumes is towing product think about hitches and the like because every time somebody goes to get a brand new RV if it's a towable they need a hitch on their truck or their car, right? And so when new unit sales go down demand for towing product goes down. And so those are two product categories that are softest. The traditional SEMA product and the performance products again are down a little bit year-over-year. We think that's just the fact that they were so high in 2021 and 2022, but not down nearly as much as our RV product set. And then as Rick indicated, Marine is actually up a bit which is terrific. Important is that the specialty team is not taking it all sitting down. They've got a lot of programs particularly focused on productivity. They're adjusting the footprint their footprint of what they do. They -- we've already consolidated our fab tech California operation into our Fab 4 South Carolina operation. So, we're going to save some money there. We have dramatically reduced inventory in that business, to really align the working capital along with the current and anticipated revenue trends. We sold a very small underperforming business, to the former owner. But at the same time, this market in Specialty is going to provide us some opportunity to probably make a couple of small tuck-in acquisitions, that will go a long way to helping create and broaden our competitive moat in certain geographic or product markets. And we're going to take advantage of that.

Operator:

Your next question comes from the line of Brian Butler from Stifel. Your line is open.

Nick Zarcone:

Good morning, Brian.

Nick Zarcone:

No. I mean miles driven is kind of just basically, moderating along. There's no material growth -- no material declines. As we've said in the past, we have better statistics on that in the US than we do in Europe. But overall mobility, has not changed dramatically on a year-over-year basis, in the first quarter. And the reality is that's fine. We really got pinched obviously, back in 2020 when the pandemic hit, is when the literally mobility around the globe came to a grinding halt. And as long as vehicles are on the road and people are using their vehicles to get to and from work, fuel prices have come down generally on a global basis. They're not all the way down to where they were pre pandemic, particularly in Europe. But they've moderated a bit, and we think that's always good. Lower fuel prices tend to lead to perhaps, a little bit more miles driven and that creates demand for our parts. Again, we're assuming that the rest of the year that we're going to be kind of a flattish environment from an overall mobility perspective.

Rick Galloway:

Yes, I'll take that one. Thanks for the question. So, we're real pleased with the activity that we've had over in Europe in particular, with the vendor financing program, but also in the overall payables, right? We started making sure we transition away from just talking about vendor finance and talk about overall payables. And what we were able to see year-over-year is, that really a 10% improvement in our European operations on the days payable, as we extend that. And there's still room to go. We would expect similar-type improvement this year, and probably for the next couple of years. You got to think of it as not a race. We're not in a 100-meter dash here. We're in a marathon. It's going to be continuous improvement over and over again, every year as we deal with our vendors and really train them in the extension of the terms. And so, the team has done a great job. We got to see it. We got to see it in the free cash flow. We will see it again this year and continually improve even from Q4 to Q1 another improvement from what we've seen on there, as well. And it's both pieces, right? So, it's exactly where we're wanting to be and we expect that to continue for the next couple of years.

Scott Stember:

Good morning, guys. Congrats on the very strong results

Scott Stember:

Going over to State Farm obviously things are cranking up nicely as expected, and it's just on two or three SKUs. Are there any signs that that SKU count will increase, whether it's radiators or fenders or door panels?

Scott Stember:

Got it. And then last question just going back over to specialty. You talked about the RV repair side. I know that you guys are pretty well entrenched with the OEMs to handle their warranty business. Are you seeing increased demand for just wear and tariff types of items? And how would you expect that to offset the general softness in the segment?

Scott Stember:

Got it. And then, just one last question back over to North America. You were talking about loss rates and as these higher-priced used units I guess work their way through the auction process. Can you talk about where you expect loss rates to be? Are we hitting a bottom here? Are we hitting a point where we could see an inflection in actual repairable claims going up?

Scott Stember:

All right guys. Thanks a lot. That's all I have.

Operator:

Your next question comes from the line of Craig Kennison from Baird. Your line is open.

Rick Galloway:

Yeah, Craig, I appreciate the question. As we look at the fulfillment rates last year we were in the upper-80s. We finished the year in the upper 80s. We started off really around 84, for the first quarter last year. And then as we progress through the year it gradually kept getting better and better and better. We're still up versus Q4's number as well. So we finished in the low-90s, but a slight improvement. And our expectation is that that will continue to etch up just a little bit throughout the year. So we're really pleased with the inventory availability. If you think about last year particularly in Q1 inventory was not very available for us. And we think we missed out on some share with OEs and the drop in APU. And then that's come back in Q1. And so the team is doing well and the inventory position we're very happy with in our North American operations.

Rick Galloway:

Yeah. It's in the 90s. I mean, that one didn't drop like we saw over here in North America. So still in the 90s and really pleased with our delivery performance out there.

Rick Galloway:

Yeah. Thanks Craig.

Nick Zarcone:

Well as always we greatly appreciate your time and attention in spending the hour with LKQ. We're very proud of the first quarter. We're optimistic about the future, not just here in 2023 but for the next 25 years, as we continue to celebrate the first 25. And we look forward to chatting with everyone in about 90 days to announce second quarter results. So, thank you.

Operator:

Good morning. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the LKQ Corporation's Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Joe Boutross, Vice President of Investor Relations, you may begin your conference.

Nick Zarcone:

Thank you, Joe, and good morning to everybody on the call. This morning, I will provide some high-level comments related to our performance in the quarter and full year 2022, and then Rick will dive into the financial details and discuss our 2023 outlook before I come back with a few closing remarks. This month, we are celebrating the 25th anniversary of our company's founding in February 1998. What started with a few salvage facilities in the U.S. has grown to a Fortune 300 business with operations in 28 countries and over 45,000 employees, providing a wide array of aftermarket and recycled parts used to repair, maintain and accessorize vehicles. Our operations are leaders in their respective markets and are well positioned to continue their success in the future. Getting to this point has been the result of the dedication of our past and present teams. And I want to express my sincere appreciation for all of these efforts. I am excited to see what this team can deliver in the future, as the LKQ team is never satisfied, never rests on its laurels and has always pushing to be the best. When LKQ was founded, ESG was not the hot topic that it is today. But ESG has always been a vital part of our strategy. Through our recycling operations, we are enabling the circular economy in doing our part to reduce waste. I am proud of our contributions to date and I can assure you that our emphasis on sustainability will continue to be an integral part of our mission. Our success in ESG is being recognized by external parties. On December 05, 2022, MSCI upgraded LKQ to their highest ESG rating of AAA, placing LKQ in the top 5% of all companies that they rate globally. And on January 31 of this year, LKQ was included in Sustainalytics' 2023 Top-Rated ESG Companies list. The fourth quarter of 2022 closed a year where the resilience of our businesses shine through a myriad of uncontrollable headwinds, ranging from economic softness, inflation, supply chain disruptions, labor shortages, energy cost spikes and a war in Europe. From an operating perspective, the fourth quarter was a very strong set of results, and I could not be more proud of our team. The continuation of exceptional organic revenue growth and strong margins in our North American wholesale segment, when combined with solid organic revenue growth and the highest fourth quarter EBITDA margins in the history of our European segment, offset the impact of the continued headwinds experienced in our Specialty and Self Service segments. The January revenue trends are similar to the levels generated in the fourth quarter. While the operations were collectively right on target with the guidance that we provided back in October, the annual tax provision was higher than anticipated, which drove a full year catch up in the fourth quarter and resulted in quarterly EPS at the low end of the guidance range. Rick will provide more detail on the tax provision in a few minutes. Now on to the strong quarterly results. Revenue for the fourth quarter of 2022 was $3 billion, a decrease of 5.8% as compared to $3.2 billion in the fourth quarter of 2021, driven by FX translation and the divestiture of PGW. Parts and services organic revenue increased 4.5% on a reported basis and 5.9% on a per day basis. The net impact of acquisitions and divestitures decreased revenue by 3.1% and foreign exchange rates decreased revenue by 6.1%, for a total parts and services revenue decrease of 4.8%. Other revenue fell 20.1%, primarily due to weaker commodity prices relative to the same period in 2021. Net income in the fourth quarter was $193 million as compared to $235 million for the same period in 2021. Diluted earnings per share for the fourth quarter was $0.72 as compared to $0.81 for the same period last year, a decrease of 11%. During the quarter, we had an unfavorable $0.15 year-over-year impact related to the higher-than-anticipated tax rates. The tax rate was also higher than anticipated during our third quarter call, which generated an unfavorable $0.05 effect on adjusted diluted EPS relative to our guidance. On an adjusted basis, net income in the fourth quarter was $209 million as compared to $254 million for the same period of 2021, a decrease of 17.5%. Adjusted diluted earnings per share in the fourth quarter was $0.78 as compared to $0.87 for the same period of last year, a decrease of 10.3%. Net income for the full year of 2022 was $1.14 billion as compared to $1.09 billion for the same period last year. Diluted earnings per share for the full year of 2022 was $4.11 as compared to $3.66 for the same period of 2021, an increase of 12.3%. Please note that 2022 results include the gain on sale of PGW. On an adjusted basis, net income for the full year of 2022 was $1.1 billion. That's compared to $1.2 billion for the same period of 2021, a decrease of 9.4%. Adjusted diluted earnings per share for the full year was $3.85 as compared to $3.96 for the same period of last year, a decrease of 2.8%. Adjusted earnings exclude the gain of the PGW sale but include the impact of the higher tax rate. Now let's turn to some of the quarterly segment highlights. As you will note from Slide 12, organic revenue for parts and services in the fourth quarter for our North American segment increased 10.3% on a reported basis and 12% on a per day basis compared to the fourth quarter of 2021. We continue to perform well in North America especially when you consider that according to CCC, collision liability related auto claims were down [0.9%] (ph) year-over-year in the fourth quarter. Looking back at our performance through the financial crisis, from 2008 to 2010, our North American business grew organically at an average of 7.5%, which drove the alternative part usage rate, or APU rate, above its historical annual growth rates. As we enter 2023 and face the reality of a global recession, our alternative parts offerings clearly become more attractive during these challenging economic periods. We are also encouraged by the trend in parts per repair, which reached an all-time high in 2022. Important to note is that our sweet spot has expanded and today stands at model years four to 15 years of age. All these items combined positions North America well for continued organic growth in 2023. The upward trend in our aftermarket sales volumes and the ongoing improvement in our fill rates continued in the fourth quarter with fill rates reaching their highest percentage levels in 2022, and today stands at close to the pre-pandemic level of 93%. Importantly, as the supply chain recovered and fill rates increased, the entire industry realized a 220-basis point improvement in the aftermarket percentage of APU, taking share back from the OEs as we progress throughout the year. The supply chain has stabilized and our inventory is generally where we want it to be. The main issue we are confronting today are continued delays at some of the railheads due to congestion. As many of you know, on December 7 of last year, State Farm announced that they are rolling out expanded non-OEM collision repair parts to use in most of the United States. We are excited the State Farm is embracing the aftermarket value proposition that the industry offers, which will ultimately benefit the end consumer. We continue to actually analyze this opportunity and we are well positioned to compete for our fair share of this opportunity and have built our inventory appropriately to do so. Our salvage inventory is also healthy and we saw some relief on our cost per vehicle during the quarter. The salvage business had solid organic growth, largely driven by price, but as we entered December, we witnessed an upward trend in our salvage volumes. Total loss rates increased a bit in the fourth quarter, which were largely seasonal. And as you can see, it had no impact on our organic growth. These slightly higher loss rates played a role in our ability to source the right level of inventory at auction at attractive prices. As we have stated before, fluctuations in loss rates are largely net neutral events for LKQ. Moving on to our European segment. Europe organic revenue growth of parts and services in the quarter increased 4.6% on a reported basis and 5.8% on a per day basis, which represents the best fourth quarter per day organic revenue growth since 2016. I'd also like to highlight that Europe's segment EBITDA margin was the highest fourth quarter level since entering the European market in 2011. On a full year basis, Europe's performance is another year of double-digit segment EBITDA margins, which is consistent with our 1 LKQ Europe initiative and strategy. Rick will cover more margin details in his prepared remarks. Throughout the quarter, our European team was laser-focused on the cost structure, including rationalizing headcount to create a more nimble and agile team and focusing our team on a narrow and actionable list of key projects. These projects represent the highest return opportunities that the team can execute in the near term, further cementing the long-term resiliency and market leadership of our European segment. On February 1, LKQ Europe announced that it expanded its European salvage network with the acquisition of Dutch-based Rhenoy Group. Founded in 1991, Rhenoy is a leading supplier of remanufactured engines and recycled OEM car parts. Rhenoy operates a salvage dismantling facility in the Netherlands and remanufacturing plants in both the Netherlands and Poland. As you know, the roots of our company lie in the dismantling of salvage vehicles to recycle OEM parts. As part of our European strategic plan, we intend to capitalize on that history and knowledge, coupled with our remanufacturing capabilities, to grow our salvage network across our European footprint. And with this tuck-in acquisition, we take one small incremental step towards that objective. I want to congratulate our STAHLGRUBER team on their 100th anniversary and commend them for building a resilient and market-leading business that continues to demonstrate an ability to adapt to the ever-changing independent aftermarket. A century since founding brothers Otto and Willy Gruber started the business. Today, the STAHLGRUBER business continues its history of embracing change, which positions them well to capture further opportunity as the car park shifts towards EVs and other forms of mobility. We can't wait to see the next -- what the next 100 years brings for STAHLGRUBER. Now let's move on to our Specialty segment. During the fourth quarter, Specialty reported a decrease in organic revenue of 10.6%. Throughout 2022, Specialty was up against tough 2021 comparisons in the midst of decreased demand for certain key RV parts and a slower-than-expected recovery in U.S. light vehicle sales. Looking at the Specialty segment on a multi-year basis, since 2019, Specialty has generated approximately a 4% compound annual growth rate for organic revenue, outperforming the industry growth of SEMA and RV-related products. A few Specialty operational highlights would include that Specialty continued to realize the full benefits of the SeaWide synergies, which exceeded our expectations in dollars and operational execution. And Specialty won O'Reilly's 2022 [Top] (ph) Supply Line award for the third year in a row. Now onto our Self Service segment. Organic revenue for parts and services for our Self Service segment increased 4.8% in the fourth quarter. Self Service was again challenged by commodity pricing as seen in the material decline of other revenue which impacted our expectations for the quarter. On the corporate development front, the fourth quarter was fairly quiet. While we did not complete any material transactions during the quarter, our corporate development team is actively assessing various opportunities that exist across our operating segments. As the global economies continue to soften, that may lead to multiple compression and we are well positioned to execute on synergistic acquisitions that fit our strategic objectives. Outside of Q4 corporate development efforts, I am pleased to announce that this past January, we entered into a memorandum of understanding with Korea Zinc Company Limited, a world-class general non-ferrous metal smelting company. Under the memorandum of understanding, we will work towards a potential large scale joint venture related to the recycling of lithium-ion EV batteries in the United States. This is again evidence that we will continue to strategically position the company to adapt to and seize the longer-term opportunities that exist in the ever-changing car park. Turning to ESG. During the fourth quarter, we continued to build out our ESG program by focusing on our people efforts and various social initiatives. Here are a few worth noting. Every colleague employed by LKQ ELIT Ukraine for at least six months received a one-time hardship payment to support pain for energy and the general increase in the cost of living owing to the Russian invasion. Our U.K. and German operations also implemented one-time hardship payments to support our employees in those markets given the state of the overall European economy. We initiated a voluntary daily pay benefit in the United States that allows our employees to access a portion of their earned pay on demand. The company implemented this benefit with the financial wellness of our people in mind. And we launched our first employee inclusion group, the LKQ Veterans Network, a program that embraces our proud community of employee veterans and veteran allies who support and encourage each other to share experiences, veteran recruitment, career development, outward engagement, professional growth and retention. In 2022, our North American salvage operations continued our leadership as the largest recycler of vehicles by processing over 753,000 vehicles, resulting in, among other things, the recycling of approximately 3.6 million gallons of fuel, 2.2 million gallons of waste oil, 2 million tires, 700,000 batteries and approximately 955,000 tons of scrap metal. The end result of these efforts resulted in nearly 13 million recycled and repurposed parts being sold into the collision and mechanical repair shop industry that otherwise would have ended up in landfills. Let's turn to the inflationary environment, again a key item of interest for most listeners on this call. As I discussed this time last year, we expected inflation to be a headwind throughout 2022 and that expectation became a harsh reality all year across each of our segments. Fortunately, we are beginning to see some moderation with inflation in the U.S., and recently we witnessed the rate of inflation drop for the last three months in a row across the Eurozone. Eurozone inflation stood at approximately 8.5% in January, down from October, where it was almost 11%. Despite this drop, many of our key operating markets continue to face high inflation rates with certain countries running in the high-single to low-double digits. In the U.S., the labor markets continue to be strained and unpredictable in the midst of higher interest rates and mounting fears of a recession. Daily we read about high profile layoffs, yet new claims for unemployment benefits remain at a historic low. As of late, wage inflation is beginning to slow and certain areas of our business are seeing reductions in turnover. But these reductions are not material and we are far from out of the woods, but it is validation that our retention and employee engagement programs are gaining traction. Our engagement efforts aren't simply an HR mandate. They are programs that stretch across all levels of the organization and are a key component of our culture. Our global engagement score of 74 is significantly above the average for companies of our size. Studies have shown that employees who are engaged are 14% more productive and that companies with engaged employees are 23% more profitable than those with disengaged employees. So, from a business perspective, positive employee engagement is critical, but importantly, it's the right thing to do for our most important asset, our people. Lastly, before I turn the discussion over to Rick, who will run through the details of the segment results and discuss our outlook for 2023, I am pleased to announce that on February 21, our Board of Directors approved a quarterly cash dividend of $0.275 per share of common stock payable on March 30, 2023 to stockholders of record at the close of business on March 16, 2023.

Nick Zarcone:

Thank you, Rick, for that financial overview. In closing, 2022 was another banner year for our company and again validated the strength of our strategy, our business model and, most importantly, our people. Let me restate our key strategic pillars, which continue to be central to our culture and objectives as we've entered the new year. First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high levels of cash flow, which in turn gives us the flexibility to maintain a balanced capital allocation strategy. And fourth, we will continue to invest in our future. With these pillars in place, coupled with our industry-leading teams, we are well positioned to both face the challenges the new year presents and to continue to deliver positive year-over-year operating results for our shareholders. As always, I want to thank the over 45,000 people who work at LKQ for all they do to advance our business each day and for driving our mission forward regardless of the challenges. Time and time again, our teams have shown that these challenges are opportunities for growth, both for themselves and for the overall organization. And with that operator, we are now ready to open the call for questions.

Craig Kennison:

Okay, thanks, and good morning. I wanted to ask about your recycling business in Europe after you've acquired Rhenoy. I mean, I know it's not large in the scheme of things, but perhaps you could just update us the recycling footprint you have today in Europe and whether the time is right to maybe make a bigger push, build something like your North American auto recycling business now in Europe?

Craig Kennison:

Thank you.

Scott Stember:

Good morning, guys, and thanks for taking my questions as well.

Scott Stember:

Can you talk about State Farm? What you're seeing? Early experiences? How fast it's ramping up? And then, also are you hearing anything about State Farm potentially expanding past the two or three SKUs that they're currently using right now?

Scott Stember:

Got it. And then, just a follow-up...

Scott Stember:

Got it. Well, clearly in a better spot than we were 10 years ago. So...

Scott Stember:

And just if I could just slip one last question in Europe. I don't know if you gave granularly detailed by market. But what are you seeing -- the countercyclical benefits of the aftermarket -- or the mechanical parts aftermarket starting to kick in? Maybe just give us a little color there.

Scott Stember:

Got it. Thanks, guys.

Bret Jordan:

Hey, good morning, guys.

Nick Zarcone:

Good morning.

Nick Zarcone:

Well, we believe that in the fourth quarter, the biggest part of that tailwind is that the aftermarket, including ourselves, by far the largest player, we actually had inventory to sell. As you recall, we had supply chain challenges coming out of 2021 into 2022 and our fulfillment rates, because of that, were down. I mean, historically, we've been in this the mid-90% range. And as we indicated in prior quarters, we're down into the low to mid-80%-s, right? The fact that we actually have the inventory need to be responsive to customer demand is the primary reason the whole aftermarket industry was able to grab over 2 percentage points of share back from the OEs. And we think that -- and we're very proud of that. Obviously, we're the largest player in the aftermarket parts space. We're charging hard to take share, not just from the OEs, but from our smaller competitors as well.

Nick Zarcone:

Yes, this is not a play for 2023 or even 2025, perhaps this is a 10-to-15-year play, right? And what, ultimately, we believe is it's pretty well documented that there's not enough lithium being mined to produce all these batteries that are going to go on the EVs that folks are anticipating going to be on the road. And so, recycling the key elements out of existing EV batteries can become critical. We don't have the technology to do that. We recycle parts, but we don't know how to recycle chemical elements, right? But that's where Korea Zinc comes in. I mean, they are truly a world-class organization when it comes to reclaiming and recycling all sorts of various non-ferrous metals. And we believe that's a combination of their ability and process technology on the one hand was our ability to source cores and batteries on the other hand is a -- it could be a great partnership. Now, it's a memorandum of understanding, right? It's not a joint venture yet. The goals over the next couple of years to figure out and work together to develop a plan that could be profitable for both companies. But it's moving us into the next generation of mobility and we're very excited about it. And we think Korea Zinc will be a terrific partner for us.

Operator:

[Operator Instructions] Your next question comes from the line of Brian Butler from Stifel. Your line is open.

Nick Zarcone:

Good morning, Brian.

Rick Galloway:

Yes. So, we -- the way we're looking at it -- thanks for the question. The way we're looking at it is 55% is the minimum of where we're sort of guiding on the conversion piece of it. So, as we're driving into this thing, the mix between what happened year-over-year in the earnings with the interest payments, the tax payments coming down and the capital expenditures, I would -- I think we've got a gap, call it, 50 plus or minus, we kind of gear right in that range. That's where I would kind of look on the free cash flow piece. And then, backing into that, we've guided 55% to 60%. We think that's a pretty reasonable approach, where we hit the 60% in the prior year 2022, bringing that down a little bit with the CapEx expenditures in 2023 is how we end up getting to that $975 million.

Rick Galloway:

Yes, that's a fair way. Yes.

Rick Galloway:

That's exactly...

Rick Galloway:

Yes, that's exactly [indiscernible].

Rick Galloway:

Yes. So we look at 2% of revenue, 2% to 2.25% of revenue is usually the kind of guide that we've given. We have 1.75%, I think it was 1.77%, something like that in 2022 as things pushed out, primarily trucks, equipment pushed out with the supply chain issues. And then when you think year-over-year, we're right in that 2% range that we've been kind of guiding to. So, there may be ebbs and flows back and forth between different years, but that 2% to 2.25% is the right way to look at it.

Rick Galloway:

No, I don't think so. So, we have a traditional build throughout the year, and we ended up decreasing that a little bit and then driving that down toward the end of the year to end up virtually flat year-over-year on overall inventories, and it's something that we're watching very closely with the demand. And so, nothing to be concerned about in that area.

Operator:

Your next question comes from the line of Daniel Imbro from Stephens. Your line is open.

Nick Zarcone:

Good morning, Daniel.

Nick Zarcone:

The answer, Daniel, not to be snide, but the answer is yes, right? We've got a number of different projects over in Europe. Rick mentioned restructuring, the 2022 restructuring plan, that hits all of these segments, including the European segment. It's part -- folks should think about restructuring at LKQ as part of our continuous improvement plan that every year, we're looking to find ways to optimize our business and to get excess cost or better throughput and efficiency from each of our operations. And so, yes, there are some restructuring plans over in Europe, just like North America and Specialty. We're looking at programs to continue to drive organic revenue growth, particularly volume growth. And Varun and the team are focused on some key programs there. They pulled in headcount a little bit, particularly at the kind of at the head office level, not just in Zug, but across the operating platforms as well, just to make sure that our administrative costs are aligned with the realities of 2023 and the economic climate. So, it's a number of different initiatives, Daniel, none of which we're going to put a pinpoint as to what it means from a euro or dollar perspective, but it's all with the goal of continuing to drive organic revenue growth and better margins. And as I think Rick indicated in his prepared comments, we're anticipating that the margins in Europe will...

Nick Zarcone:

Will go up by 20 basis points to 30 basis points in 2023. And that's been included in the guidance that Rick set out.

Nick Zarcone:

Yes. So, Daniel, you need to separate the collision business from the mechanical repair business. And the EV batteries, what we're doing right now with Bumblebee and Green Bean, the two companies that we bought over the last year or so that remanufacture batteries, that has nothing to do with the collision business. That just has to do with the failure of the batteries and the life batteries to extend the life of the vehicle, okay? The memorandum of understanding on recycling with Korea Zinc, again, has nothing to do with remanufacturing. That is truly a recycling to get to the core elements that are inside that EV. And so, you need to keep -- there's a big difference between remanufacturing and recycling. Recycling, there's not a battery left to go back into another vehicle, right? Remanufacturing is where we truly look at the battery, we replace certain cells. That is not an insurance-driven profit. If you have a nine-year-old EV and your battery is failing, you're not going to get reimbursed a nickel from your insurance company to go replace that battery. That's going to be an out-of-pocket expense.

Nick Zarcone:

Yes.

Nick Zarcone:

Yes.

Nick Zarcone:

Well, as always, we greatly appreciate everyone's time and attention on this call. We know it's a busy reporting period, and we appreciate you spending the hour with LKQ. Again, I couldn't be more proud of our team and the results that we posted up not only in the fourth quarter of 2022, but the full year as a whole. We're looking forward to being back on line with you in about, I don't know, 60 days or so, in late April, when we announce our first quarter results. So, thank you for your time, and we'll be talking to you soon.

Operator:

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now by the turn my conference over to Joe Boutross, Vice President of Investor Relations for LKQ Corporation. Please go ahead.

Dominick Zarcone:

Thank you, Joe. Good morning to everybody. And thank you for joining us on the call to discuss our third quarter results. Last month we announced a couple of important leadership changes, including Varun Laroyia moving from the CFO chair to become the CEO of our European operations; and Rick Galloway succeeding Varun. Since that move happened with just a few weeks left in the quarter, after I provide some high level comments, Varun and Rick will tag team on the financial details and the updated guidance for 2022. I will then provide some closing comments before opening the call to your questions. Once again, LKQ recorded strong operating results notwithstanding a very difficult macro environment. The pandemic is still creating challenges. The labor market remains tight and the supply chain is less than optimal though finally, starting to show some signs of improvement. The war continues in Europe and economies around the globe are showing signs of softness as many governments tried to curb their runaway inflation created by the monetary stimulus utilized to support economies during the early days of the pandemic. But the biggest current headwind is in the foreign exchange market. With the U.S. dollar reaching levels we haven't seen in over 20 years. While we can hedge much of our transactional exposure with about 46% of our revenue being sourced from our European segment, we cannot hedge the translation exposure. To put things into perspective, the euro and pound sterling fell approximately 7% relative to the dollar during Q3 and have fallen about 15% since the start of 2022. The volatility in exchange rates on a year-over-year basis had a material impact on our reported results during the quarter, reducing revenue by $228 million and adjusted EPS by about $0.07 a share during the third quarter. I believe when you focus on our local currency results, you will agree that our company is performing extremely well and we are quite pleased to achieve our EPS goals in light of the ongoing and challenging environment. The leadership changes announced in mid-September are moving forward in a seamless manner and clearly demonstrate the depth and breadth of our talent. As discussed in each of the past three investor day events, talent management has been a key priority for LKQ and the benefits of that focus shine through at times like this. Overall, it was a strong quarterly result and we continue to be optimistic about the future. Our decision to increase the dividend reflects the confidence that we have in our business. Now onto the quarter. Revenue for the third quarter of 2022 was $3.1 billion, a decrease of about 5.9% as compared to $3.3 billion in the third quarter of 2021. On a constant currency basis third quarter revenue grew up by about 1% to a little over $3.3 billion. Parts and services organic revenue increased 4.8%, while the net impact of acquisitions and divestitures decreased revenue by 2.3% and the foreign exchange rates decreased revenue by 7.4% for a total parts and services revenue decrease of 5%. Other revenue fell 17.4% due to changes in commodity prices relative to the same period in 2021. And that's a reminder, PGW was included in our third quarter 2021 results. Net income for the quarter was $261 million as compared to $284 million for the same period in 2021. Diluted earnings per share for the quarter was $0.95 compared to $0.96 for the same period of 2021, a decrease of 1%. On an adjusted basis, net income for the quarter was $266 million as compared to $300 million for the same period of 2021, a decrease of 11.4%. Adjusted diluted earnings per share for the quarter was $0.97 as compared to $1.02 for the same period of 2021, a decrease of 4.9%. Importantly, please note that FX volatility and lower metals prices collectively created a $0.16 per share headwind in the third quarter of 2022 when compared to the 2021 results. Now let's turn to the quarterly segment highlights. In North America, organic revenue for parts and services of our North American segment increased 10.9% in the quarter on a year-over-year basis, which exceeded our expectations. The impact of divestitures primarily PTW reduced revenue by 10.6% in the quarter. This organic growth performance is outstanding when you consider that the industry data suggests that collision liability related to auto claims were up only 2%. Also, North America delivered these results in the midst of decreasing miles driven, which is largely due to the increase in fuel prices. According to the U.S. Department of Transportation, miles driven decreased 3.3% in July and was up only seven tenths to 1% in August. That said, the long term trends for North America continue to be very favorable. Continued technician shortages will benefit our diagnostics business as shops look to outsource their diagnostic repairs. Total loss rates trending down into the high teens, parts per claim, reaching over 12 parts per vehicle, a 20% increase from the third quarter of 2018 and office occupancy filling nearly a three-year high, which ultimately lead to more congestion in claims frequency. During the quarter, we were encouraged by the upward trend in our aftermarket volumes. During the quarter, we experienced some relief in the aftermarket supply chain relative to Q2, which translated into an increase in our fill rates. The biggest challenge exists on the domestic side of the supply chain, including the rail carriers and truckers, all of which are out of our control. In talking with several third-party experts, they generally expect these domestic challenges will continue into the first half of 2023. The spot market pricing for containers used in ocean freight has softened measurably, and our team is laser-focused on active rate reductions from our contracted carriers. Now onto our Self Service segment. Organic revenue for parts and services for our Self Service segment increased 7.2% for a third quarter. The softness in commodity prices resulted in a decline in other revenue of 24.8%. The soft metal prices also had a significant impact on segment EBITDA margins on a year-over-year basis. This was anticipated given the lag effect that Varun touched on during our second quarter call. Moving on to our European segment, organic revenue for parts and services in the third quarter increased 4.8% on a reported basis and 5.8% on a per day basis. Acquisitions added one half of 1% growth in the quarter, while the exchange rates resulted in a 14.7% decline on a year-over-year basis. I am quite pleased with the organic growth, albeit mostly driven by price in an environment facing high inflation, continued supply chain hurdles and an energy crisis in Europe. All of our European regional platforms recorded strong local currency organic revenue gains with some being in the low double digits. The only decline on a year-over-year basis related to the sale of product to Russian based jobbers, which as previously mentioned, we completely stopped back in February when the war commenced. Now let's move on to our Specialty segment. Organic parts and services revenue for Specialty declined 9.1% in the quarter, a sequential improvement from Q2, but still down and below our expectations. You may recall this segment reported 14% organic growth in Q3 of last year, so on a two-year stack, the annual revenue growth is still positive. The impact of acquisitions had a 6.6% positive impact on revenue growth in Specialty, while as a predominantly U.S. business, the exchange rates had a negligible impact. During the quarter, certain product groups such as towing that have some exposure to new unit volume, again underperformed in the quarter as the new RV unit sales have decreased year-to-date by over 23% through August. As a reminder, the majority of our RV parts are replacement parts that are not tied to new unit volume but are largely related to the size of the RV part, which is still running at record levels. Also, some of the softness that the SEMA-related products based in the quarter was due to a year-over-year decrease in light truck and SUV vehicle sales in the United States, an important vehicle category for our specialty offerings. Total U.S. light vehicle sales were flat year-over-year. Importantly, I would like to congratulate our Specialty team for receiving the RV Industry Association Award as the 2022 Distributor of the Year. This is the second year in a row for this recognition, further validation that our people are truly our greatest asset. Let's move on to initial Q4 revenue trends. Revenue for our North America wholesale operations has gone off to a solid start, largely driven by the improvement in aftermarket fill rates. Though we don't anticipate, we will continue to run at these very high levels, particularly as we lap the pricing movements initiated last year. Our European segment is also witnessing a good start with growth rates continuing at Q3 levels. Specialty revenue is also trending similar to the Q3 performance and it will have easier comps in the fourth quarter compared to the rest of this year. From my corporate development perspective, in the [indiscernible] quarter we divested our Florida shredder. As part of this transaction, we entered into a supply agreement to which our Florida self-service yards will sell or offer to sell its crust vehicles to the new acquirer. We also divested our equity interest in a small subsidiary of Stahlgruber. Neither of these divestitures are material. Our employees sit at the center of our ESG efforts. And we are in the process of working through our second employee engagement survey. We just completed surveying all of our North American employees and our in process in Europe. We have a lot of data to analyze, but the North American team had a 93% participation rate. Our independent advisor has mentioned this is extremely high for these types of activities and is generally indicative of a high level of engagement across the workforce. I look forward to showing more on this topic once the process is complete. And I will now turn the discussion over to Varun and Rick.

Varun Laroyia:

Thank you, Rick. Appreciate that introduction and the overview of the North America wholesale and self-service segments performance. Let's move to Slide 11 of the earning deck. Europe delivered an 11.3% EBITDA margin for the quarter, down 20 basis points from the prior year period. Gross margin improved by 10 basis points as we worked to offset inflation with procurement initiatives and pricing. Overhead and other expenses increased by 30 basis points with inflation weighing primarily on personnel, freight and fuel costs. The segments solid third quarter performance reinforces our expectation that we will deliver a double-digit margin for the fuller despite the macroeconomic headwinds around general inflation, energy costs and the Russia/Ukraine conflict. While I have been in my new role as CEO of the European segment for a little over a month, I have gotten an opportunity to get an on the ground view of our operations and the management team. And I am even more impressed by the strength of our frontline businesses and despite the darkening macroeconomic clouds with judicious and decisive prioritization, I am confident that we can achieve our long-term operational and financial target. Moving on to Slide 12 specialties EBITDA margin of 10.8% declined 30 basis points compared to the prior year coming from a decrease in overhead expense leverage driven by an organic revenue decline of 9.1% as they anniversary a tough comp from the prior year when the business delivered a nearly 14% organic revenue growth rate in the third quarter. Inflationary pressures also pushed overhead expenses as a percentage of revenue higher including personnel, freight and fuel expenses. The overhead expense increases were partially offset by a 70 basis point benefit from lower incentive compensation and 80 basis points of benefits from operating expense synergies largely generated from the SeaWide acquisition of a year ago. Shifting to cash flows and the balance sheet. We produced a healthy $224 million in free cash flow during the quarter, bringing the year-to-date total to $862 million. We have made good progress in rebuilding our inventory levels in wholesale North America and in Europe. As shown on Slide 32, we increased our inventory values in these segments, do please note that the dollar increase doesn't directly equate to a quantity change given the higher input costs. Using North America aftermarket as an example with higher per unit costs by inventory balance in dollar terms is close to Q4 of 2019, while the total available quantity on hand is down approximately 20%. We still have some work to do to optimize inventory at hand, especially going into the busier winter season, so we expect further fine tuning of inventory levels over the balance of the year. Through September the cash conversion ratio is 64% conversion of EBITDA to free cash flow just above our target range of 55% to 60%. There continues to be timing elements that will reverse over the course of the year. For example, the third quarter inventory build will result in higher outflows for payables in the fourth quarter, and we are confident in our ability to generate sustainable free cash flow in line with our expectations. As of September 30th, we had net debt of $2.2 billion with a net leverage ratio of 1.3 times EBITDA which is comfortably inside our target range of being below 2 times. Our effective borrowing rate rose to 3% for the quarter and with the effective rate heights in the U.S. and Europe we are $1.6 billion in variable rate debt, so a 100 basis point rise in interest rates would increase annual interest expense by approximately $16 million. As you can imagine, we are evaluating our fixed versus floating rate mix as part of a larger review of our capital structure and credit facility, which matures in approximately 15 months and we expect to complete this assessment shortly. Most of our transactions are conducted in the home entities functional currency, for example, buying inventory for our U.S. locations in U.S. dollars or European entities borrowing funds in local currency to create in natural operating hedge. As a result, our currency exposure is weighted to translation of foreign currency denominated results into U.S. dollars rather than transaction gains and losses where we have transaction exposures, we hedge through forward contracts. We are comfortable with our current approach to managing foreign exchange risk, though we are monitoring market conditions to determine if a change in strategy is required. With a strong free cash flow and the proceeds from the PGW Glass sale earlier this year, we have been able to return a significant amount of capital to our shareholders in 2022. We repurchased over 17 million shares for $891 million through September, including almost 7 million shares for $343 million in the third quarter. Additionally, we paid quarterly dividends totaling $210 million year-to-date. We had approximately $260 million available on the previous board share repurchase authorization as of September 30th, and we have remained active in the market in October with a further $119 million purchase through last Friday. Earlier this week, our board authorized a $1 billion increase to our share repurchase program for a total authorization of 3.5 billion and extended the term through October of 2025. We are pleased to have this program expansion to be able to continue to use share repurchases as part of our balanced capital allocation strategy. As our earnings release of this morning indicated the board also approved a quarterly cash dividend of $0.275 per share, which will be paged on December 1st to stockholders of record as of November 17th. This reflects a 10% increase in the quarterly dividend. Before I turn the call back to Rick, I would like to take a moment to thank LKQ's leadership team, our global finance organization, and all our dedicated employees across the organization. It has truly been a great privilege to serve as your CFO over these last five years. Over that time, the company has achieved tremendous things with significant growth and profitability and free cash flow, building a rock solid fortress like balance sheet and generating robust shareholder returns. I truly appreciate everyone's efforts to reach this point and I feel honored to have been a part of the team during this pivotal period. Now we need to leverage our strengths to become even more successful. I leave the finance organization in Rick's capable hands and I look forward to working with him in my new role. With that, Rick, back to you.

Dominick Zarcone:

Thank you Rick and Varun for that financial overview. Let me restate our key initiatives which are central to our culture and our objectives. First, to integrate our businesses and simplify our operating model. Second, to focus on profitable revenue growth and sustainable margin expansion. Third, to drive high levels of cash flow, which in turn give us the flexibility to maintain our balanced capital allocation strategy; and forth, as always to continue to invest in our future. As you can see from our results, we are committed to driving these metrics forward regardless of the operating environment. Our teams across all of our segments are executing on their operational targets and they have done a tremendous job during these unpredictable and unique times. With respect to the items we can't control, such as FX rates, the supply chain and labor market constraints we don't have a crystal ball, but it appears we will be confronting these uncontrollable items as we enter 2023. That said, I am confident our operational excellence efforts can navigate and effectively manage most any challenge. Why? Simply stated, we have the best teams in each of our segments and industry and their track record over the last three years speaks for itself and for that, I offer a tremendous thank you to our team members across the globe that make it happen each and every day. They define what it means to be LKQ proud. And with that operator we are now ready to open the call for questions.

Daniel Imbro:

Yes. Hey, good morning guys. Thanks for taking our questions and congrats on the quarter.

Daniel Imbro:

Rick, I wanted to start on something you said around kind of North American margins. I think the comment you made was you expected them to moderate going forward maybe 4Q into next year. Can you just provide more detail on what the drivers of that outlook is? Is it a change in underlying core margin to due to maybe wage or other cost pressure or kind of what, what was driving that comment around moderation going forward?

Dominick Zarcone:

I don't know if you want to add anything on that.

Operator:

Your next question is from the line of Michael Hoffman with Stifel. Please go ahead.

Dominick Zarcone:

Okay. Michael, this is Nick. Thanks for your question. As you know, and as everyone knows, the entire aftermarket collision parts industry moved to Taiwan decades ago. There are no material production capacity outside of Taiwan. It just doesn't exist. There are no plants sitting in Mexico or Vietnam or India sitting idle waiting for the Taiwanese machine to get shutdown, right? It doesn't exist. Now we pay very close attention, obviously to geopolitical events and we're not overly concerned about the scenario that that you laid out where China would effectively shut down the Taiwanese economy because they wouldn't pick out auto parts specifically and the reality is, if they were to shut down the economy and shut down kind of shipments out of Taiwan, auto parts is the least of everyone's concern. 65% of all semiconductor production and 90% of all advanced chip production comes out of Taiwan. So if China were to embargo export shipments, you would not be able to buy iPhones or new cars or metal equipment or anything that has a chip in it. And we think that the Chinese leadership is they're very smart, they certainly don't want to cook the golden goose that Taiwan represents in form of a really strong economy. Our sense and in talking with outside advisors is it'd be more likely that China would move kind of to a Hong Kong model first where they would seek to have significant influence over the territory, but not just shut – totally just shut down their economy.

Dominick Zarcone:

Yes. So on the 2023 outlook you are absolutely correct. We're in the middle of our budget process and we have yet to see any submissions from the field. We don't have a consolidated view at this time. What I can tell you however, is that nothing has changed maturely from what we presented back at the Analyst Day and the Investor Day this past June 1st in Nashville. So on the revenue front, we will likely shake out at a consolidated per day growth rate similar to 2023 or similar to 2022. But we'd probably get there with a slightly different mix as indicated in my prepared comments we do not anticipate that the recent double-digit organic growth in North America wholesale business will be sustainable. It's just, it's too high. Europe should post up similar organic growth next year as what we're doing this year, which is in the mid-single digits. We do anticipate that specialty will return to positive revenue growth, likely in the low- to mid-single digits and self-service assuming scrap prices stay where they are can sustain low- to mid-single digit growth as well for their parts and services business. All that obviously is based on what we talked about in Nashville and that is market growth being in the low-single digits, a bit of share gain, which we always are trying to achieve each and every year in each of our businesses and some boost from inflation. As Rick indicated 2023 will have one pure selling day than 2022 which clips you for a few basis points of growth, 40 basis points to be exact. And so hopefully that gives you a sense of local currency revenue trends, but the strong dollars that we've had this year that's going to carry over assuming rates stay about where they are next year. And so Michael, when you and everyone else on the call are building your models you should probably bake in kind of the exchange rates over the last few weeks, which is about $0.97 for the Euro and $1.11 for the sterling because at those levels, just to put it in perspective, that's like a $450 million headwind from a U.S. dollar perspective after taking into account the translation impact to the currencies. Now, in terms of margins, as we just indicated in answering Daniel's questions long-term, we believe that our North American wholesale business can sustain margins in that low- to mid-17% range. We don't expect to go from where we are today down to 17% next year. We think it's going to be a more gradual decline. In Europe we are absolutely committed to achieving consistent double-digit EBITDA margins. The one LKQ year program is still underway. We would expect to see some minor margin improvements with specialty, particularly if we can get some modest revenue growth and the self-service margins assuming no significant changes in scrap prices should get back to kind of mid-teens. On free cash flow, again, 55% to 60% of EBITDA we believe is the right target. Interest costs will be higher due to the impact of the higher rates on our floating rate line of credit balances as Varun indicated that was about $1.6 billion as of September 30th. At current interest rates, that would be about a $28 million headwind, which is about $0.07 a share. Now obviously earnings per share will benefit from the 17 million shares that we repurchased thus far in 2022. So we've got a lot of work ahead of us on the budgeting front. But hopefully that gives you enough to get into the right zip code when building your models for next year.

Ali Faghri:

Good morning and thanks for taking my question and Varun and Rick congrats again on the new roles.

Ali Faghri:

So my question is on used car pricing, obviously we're seeing used car prices come down real time right now. Maybe you can remind us what the impact is of lower used car prices on your business?

Ali Faghri:

Great, thank you.

Craig Kennison:

Hey, good morning. Thank you for taking my questions as well and congratulations to the whole team. Varun, I wanted to start with you and ask about your priorities for Europe and maybe frame them in the context of the LKQ 1 strategy. Where do you see an opportunity to double down on some of these initiatives and where might you dial back your priorities in order to focus on what you see as the highest priority?

Craig Kennison:

Thank you.

Scott Stember:

Good morning, and I echo my compliments as well to everybody in management. Thanks for taking my question.

Scott Stember:

You guys talked about Europe seeing some areas that are growing in low doubles. Could you just maybe parse out which areas in Europe did better? And with regards to, I guess, what you're seeing right now, are you seeing any signs that the countercyclical benefits of the mechanical aftermarket are starting to kick in?

Scott Stember:

All right. And just one follow-up. Any update on State Farm?

Scott Stember:

Got it. Thanks.

Bret Jordan:

Hey, good morning guys.

Varun Laroyia:

Good, good morning, Bret.

Varun Laroyia:

Yes, listen, I think, in terms of, just to kind of remind everyone from a broader perspective, you are essentially talking about one of the key underpinnings of the 1 LKQ Europe program was to essentially integrate certain backend processes of the business. So, maintaining the frontend, entrepreneurial, local nature of our business and making sure we have best-in-class customer intimacy, and also the last mile of delivery, no change to any of that. But in terms of one of the key enablers in unlocking the overall cost to serve is from a back office perspective. Nick and I have talked about this ad nauseam with regards to where we get our payables done from, where payroll runs from, that, frankly, 1 rate [ph] doesn't care about as much as long as it is done efficiently and effectively. But really it's the case of having the ERP system out there, which unlocks all of these pieces. Nothing has changed on that front. And if you go back to thinking about how we built up the European business, largely bought through private equity companies. And that has, I think, as all of us know, typically have a very limited time horizon with regards to certain investments. So in terms of making the investment on the ERP, no change at all. In fact, that's an area that I'm working with my management team to double down and get it done even quicker because the pools of opportunity that it opens up are still very, very attractive. So no change on that front and really making sure that the entire organization has got its shoulder behind it rather than it being a technology project. So some due difference out there in the first few weeks, but overall, no change on that front in terms of where we are going.

Dominick Zarcone:

I'll take that one Bret. What we have seen is our revenue on the RV side is not tied necessarily to RV SAR, new unit sales, as much as it's tied to campground utilization. And so unlike – there are a couple product lines that I indicated things like towing, there is a direct correlation to new unit sales because the first time RV buyers usually need to get hitches and related towing gear installed on their vehicle. But again, most of the RV revenue comes from kind of consumables and things that need to be replaced. And that's directly related to the overall size of the RV park, as well as the campground utilization, which is currently running at record levels. And so there is going to be a little bit of a ying and a yang if a recession really does hit. What we also know is that during recessionary times folks kind of reallocate their vacation dollars and would tend to shy away from getting on applying and applying to Disney World and look for more cost effective ways to vacation with their families and camping cost effective way of doing that. On the SEMA side of the business there are a number of products tied to new vehicle sales, particularly pickup trucks, jeeps and other SUVs. The enthusiast marketplace tends to hold pretty steady through the recessionary environments. And so at the end of the day, Bret, it depends on how deep and how long the recession goes. And we can't predict that. We feel good about our market position as being the leader in that market, and we will continue to work hard to drive profitable revenue growth wherever we can.

Gary Prestopino:

Hey good morning all. Quick question on the recycled side. I mean, we could be looking at an unprecedented decline in used car prices for the next year or two. How does that impact what you're buying at auction? And then I guess the other question I would have there is do you see – do the prices of the parts as the cars come down on the recycled side, do they come down concurrently with the decline in car prices?

Rick Galloway:

No, I think it was spot on.

Rick Galloway:

Yes, no, I'm the one who mentioned that Gary. Essentially at the end of September, we had about $1.6 billion of variable rate debt on the revolver. So every 100 basis points will essentially be $16 million of higher interest expense. That was a simple math. So total debt was about $2.4 billion. We had cash and handed for about $270 million and net debt of $2.2 million, which as you know, we've got two euro bonds for half a billion and two and fifty million. So, the only change on that really would be on the variable rate debt.

Operator:

Your next questions from the line of Michael Hoffman with Stifel. Please go ahead.

Rick Galloway :

Yes, so I appreciate the question. So, we've been seeing obviously this the spike that we saw earlier in the year, late last year, earlier this year. And so you would start seeing the relative decline over Q4 going into Q1 as it sort of normalizes with a lot of offsetting items. Right? So, there is the other inflationary increases that we're keeping a keen eye on along with product cost increases that are somewhat flowing through that inventory level as well. So, the other thing to keep in mind is that as the spot market was rapidly going up due to our size and scale, we were able to get a lot of contracted rates. And so some of the increase that we saw would have been mitigated against competition.

Operator:

And this does conclude the Q&A portion of today's call. I will now turn the call back over to Nick for any closing remarks.

Operator:

This does conclude LKQ Corporation’s third quarter 2022 earnings conference call. We thank you for your participation. You may now disconnect.

Operator:

Good morning. My name is Rex, and I'll be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. Thank you. Mr. Boutross, you may begin your conference.

Dominick Zarcone:

Thank you, Joe, and good morning to everyone on the call. This morning, I will provide some high-level comments relative to our performance in the quarter and then Varun will dive into the financial details and provide an update on our guidance before I come back with a few closing remarks. The second quarter of 2022 was one of the most unusual and complicated operating environments we've encountered maybe ever, but clearly, since the financial crisis. During the quarter, we were confronted with ongoing COVID risk and the issues associated with an uptick in positive cases in our workforce. Major labor constraints, ongoing supply chain disruptions, a challenging inflationary environment globally as evidenced by June being the highest level of inflation the United States have seen in some 40 years. Soaring energy prices, commodity price volatility, the unfortunate conflict in Ukraine and political unrest across the globe. And all this has resulted in major volatility in the foreign exchange markets with the euro weakening materially in the quarter and reaching parity with the dollar in July. I think I speak for all CEOs across all industries when I say the sheer number of cross currents and headwinds have created some very challenging business dynamics. Yet, the LKQ team delivered another quarter of solid performance, driven by excellent focus and execution, exceeding many expectations, both internally and externally. I am very proud of the hard work and dedication demonstrated by our 45,000 employees that enabled our company to deliver on behalf of our stockholders and our customers during the quarter. I am equally proud of the team's commitment to effectively immense the dynamics of our business, which they can control, while not losing focus on growing the business, developing our people and continuously looking for opportunities to generate leverage and synergies across our operating segments. This effective management will serve the company well as we progress through the balance of 2022 and continue to confront many of the same headwinds. Our confidence in our team's ability to manage through this environment is validated by the reaffirming of our 2022 guidance, which Varun will discuss shortly. Now on to the quarter. Revenue for the second quarter of 2022 was $3.3 billion, a decrease of 2.7% as compared to $3.4 billion in the second quarter of 2021. Parts and services organic revenue increased 3.8% on a reported basis and 4.2% on a per day basis. The net impact of acquisitions and divestitures decreased revenue by 1%, and foreign exchange rates decreased revenue by 5.6% for total parts and services revenue decrease of 2.7% on a reported basis or 2.4% on a per day basis. Other revenue fell 2.9%, driven by a decline in precious metal prices. Net income for the quarter was $420 million as compared to $305 million for the same period of last year. Diluted earnings per share for the quarter was $1.49 as compared to $1.01 for the same period of 2021, an increase of 47.5%. These amounts reflects a $127 million gain on sale of the PGW Glass business in April or $0.45 a share. On an adjusted basis, net income in the quarter was $307 million as compared to $340 million for the same period of 2021. Adjusted diluted earnings per share for the quarter was $1.09 as compared to $1.13 for the same period last year, a 3.5% decrease. The adjusted results exclude the impact of the PGW sale. Now let's turn to some of the quarterly segment highlights. In North America, organic revenue for parts and services for our North American segment increased 10.7% in the quarter on a year-over-year basis, which exceeded our expectations. This performance confirms the resiliency of our business model and our team's ability to effectively implement pricing initiatives to offset inflationary pressures. As it relates to volume, during the quarter, we saw some weakness, which was consistent with a 2.6% decrease in second quarter fuel consumption as measured by the U.S. Department of Energy. Additionally, vehicle miles traveled saw a little year-over-year growth, and Q2 growth was down relative to Q1. The largest pressure point in North America continues to be the aftermarket collision parts product line, which experienced reduced year-over-year volumes due to lower performance rates associated with the supply chain disruptions. During the quarter, we benefited from some minor relief in the aftermarket supply chain relative to Q1, which translated into a very modest increase in our fill rates, with June aftermarket fill rates reaching the highest levels of 2022. While we are still well below historical levels, we are encouraged by this modest positive trend in the supply chain, which is also evidenced by the decrease of spot container costs the market witnessed during the quarter, albeit the shipping costs are still multiples above pre-pandemic levels. During the quarter, we were successful in getting a higher level of aftermarket collision parts shipped from Taiwan, but most all of that inventory is still on the water and won't be received in our warehouses until late summer or early fall. Our salvage collision part volumes were up a bit compared to last year as we were able to shift some of the aftermarket demand over to recycled parts. Recycled and remanufactured mechanical part volumes were generally flat on a year-over-year basis. The value proposition of alternative parts could not be more attractive that insurance carriers base loss pressures from increased parts cost, rising labor cost and technician shortages at the repair shops, broader supply chain issues and decreased availability and increased cost of rental cars. During the quarter, collision repair costs increased 11.6% year-over-year with cycle time still being over double their historical averages. Recently, the value proposition of CAPA Certified Aftermarket Parts is being recognized by the largest auto insurer in the United States, that being State Farm through a small pilot program. On June 20, State Farm began an 8-week program where it introduced aftermarket bumper covers, headlights and taillights when preparing repair estimates and settling auto claims in the Oklahoma and Texas markets. As you all know, State Farms historically has not utilized the aftermarket collision parts. We cannot predict the outcome of the pilot or estimate how this will impact State Farm's parts strategy going forward and neither should you. That said, as with many things, the first test is the widest and the tallest and we're cautiously optimistic that aftermarket parts could potentially become a larger portion of State Farm's parts spend over the long term, as they work through the outcomes of this pilot program. Moving on to our European segment. Organic revenue for parts and services in the second quarter increased 4.2% on a reported basis and 4.9% on a per day basis. Our regional operations continued to experience varying revenue performance in the quarter, but every geographic market was positive year-over-year with our Benelux, U.K., Central and Eastern European and salvage businesses being the top performers. Importantly, Italy realized year-over-year growth, which reflected the second consecutive quarter of positive revenue performance in that region. As mentioned last quarter, we halted all sales of parts into Russia when the war commenced. This decision reduced same-day organic growth for the European segment during the second quarter by approximately 1.5% to 1%. Excluding the impact of the lost Russian revenue, same-day organic growth in Europe was 5.4%. When taken as a whole, the European volumes were down a bit during the quarter, but pricing was strong. We continue to make great progress with our 1 LKQ Europe Program. Alongside solid organic growth during the quarter, our European segment achieved double-digit segment EBITDA margins which represented incremental improvements, both sequentially and year-over-year. Our European teams focus on pricing actions, private label branding and procurement initiatives generated positive results in the quarter. As I've said before, the execution element of the 1 LKQ Europe program will be with us forever, and it will be the driving factor behind the productivity improvements in years to come. Given all the current operating challenges in Europe, including the foreign exchange and geopolitical dynamics, I am very pleased with Europe's performance in the quarter. Now let's move on to our specialty segment. Organic revenue for parts and services for specialty declined 11.5% in the quarter, largely due to a tough year-over-year comp. As you may recall, this segment reported 30% organic growth in the second quarter of last year. So on a 2-year stack, the annual revenue growth is still well into double digits. Indeed, specialty revenue in the second quarter would have been a record for the team, if not for the buoyant performance in 2021. Our RV parts category performed better than the segment level growth as a whole during the quarter, as demand for the majority of our RV parts offerings is driven more by the size of the RV part and not new RV unit volume. That said, certain product groups such as towing that have some exposure to new unit volume, underperformed in the quarter. Also, some of the softness that the SEMA-related products based in the quarter was due to a year-over-year decrease in light vehicle sales in the U.S. In particular, pickup truck sales were down nearly 12% in the quarter, an important vehicle category for our specialty offerings. Now on to self service. Organic revenue for parts and services for our Self Service segment increased 13.2%. There were some softness towards the end of the quarter in precious metals prices, which also impacted segment EBITDA margins year-over-year. Self service also had increased vehicle procurement costs as we were challenged to source inventory. The recent volatility in commodities further validates the rationale for breaking out this nondistribution Self Service business as a separate segment, given it represents the vast majority of the other revenue category. Let's move on to the initial Q3 revenue trends. Revenue for North America wholesale operation have gotten off to a solid start, though we don't anticipate it will continue at the double-digit growth rates experienced in the first half of the year. Our European segment is also witnessing a good start, with growth rates continuing at second quarter levels. Lastly, specialty revenue is slowly trending back towards prior year levels now that it has lapsed the incredibly strong growth rates experienced in the first half of 2021. We are experiencing some level of supply chain shortages and disruptions across all of our segments. These disruptions are creating product scarcity and freight delays that are resulting in meaningful availability pressures. While supply chain challenges are also driving cost inflation across all our segments, we have been very effective in passing along these higher costs, as witnessed by our margin performance. Alongside supply chain inflationary pressures, like many businesses across the globe, we are facing wage inflation and increased competition for labor. We are constantly looking at our wage structure and turnover rates across all of our segments to ensure that we stay ahead of any competitive pressures and help backfill the open positions with the best candidates we can attract. Our focus on the total rewards received by LKQ employees, not just compensation, is helping us navigate the difficult labor markets. From a corporate development perspective, in the second quarter, we acquired 4 businesses. In the United States, we acquired Bumblebee Batteries, another EV battery remanufacturing operation. In Europe, we acquired a workshop concept in The Netherlands, 2 very small former Hess Automotive branch locations in Germany and the equity interest of our former JV partner in a small aftermarket parts business in Germany. In addition to closing on the sale of our PGW business during the quarter, we also divested our equity interest in 2 small joint ventures. Lastly, on the ESG front, on May 23, we released our 2021 Sustainability Report and unveiled our new brand identity, reflecting the company's transformation from a salvage dismantler and recycler to a leading global value-added and sustainable distributor of vehicle parts accessories and services. LKQ is widely known and respected for our environmental stewardship. But within our 2021 CSR, we provided a deeper understanding of our social impact initiatives and strong governance structure, both of which underpin the long-term strength and success of our business. This year's report is another step in evolving our holistic ESG focus across our global organization with new and robust disclosures and accomplishments. Also during the quarter, 50/50 Women On Boards, a leading education and efficacy campaign driving the movement towards gender balance and diversity on corporate Boards recognized LKQ as a 3-plus company. This award acknowledges our efforts in understanding the importance and advantages of having a diverse Board that ultimately benefit stockholders, customers, employees and communities. And I will now turn the discussion over to Varun, who will run you through the details of the strong second quarter financial performance.

Dominick Zarcone:

Thank you, Varun, for that financial overview. Let me restate our key initiatives, which are central to our culture and our objectives. First, integrate our businesses and simplify our operating model. Second, focus on profitable revenue growth and sustainable margin expansion. Third, drive high levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy. And fourth, to continue to invest in our future. As you can see from our results, we are committed to driving these metrics forward regardless of the operating environment. We are doing our very best to effectively manage the items which are under our control so as to offset the headwinds which are largely outside of our control. And for that, I offer a tremendous thank you to our team members across the globe that make it happen each and every day. They define what it means to be LKQ proud. And with that, operator, we are now ready to open the call to questions.

Scott Stember:

Congrats on the very strong results despite the nonstop headwinds that you're facing.

Scott Stember:

First question, I'm just going to jump right to State Farm. Obviously, they left the market more than 20 years ago and they've come back in dipping their toe in. Can you maybe just size this up versus prior attempts of them going back in the market? How real this feels and how tangible and how big this could be, if it really does come to fruition?

Scott Stember:

All right. And just going back to North America, you talked about in June, you saw some encouraging results from a fulfillment standpoint. Could you just give a little bit more detail on that?

Scott Stember:

All right. And just lastly, your 4.5% to 6.5% parts and service organic growth rate has not changed, but has the composition by segment changed?

Operator:

Your next question comes from the line of Craig Kennison.

Dominick Zarcone:

Thanks, Craig. It's almost impossible to put a single number on inflation because it's coming at us from so many different corners at different rates. Fuel expenses are up dramatically. I mean gas used to be $3.50 a gallon. During the quarter, as high as over $5 a gallon. Now it's easing back a little bit. But that's not the 9% inflation that the rest of the -- that's being published about the United States inflationary factors, right? Labor rates are up significantly. The good news was in June, for example, we didn't have to go to the spot market for container shipment at all. It was all under contract. And so while it's still above where it was pre-pandemic, it wasn't quite as bad as we had feared. So it really varies almost by category of expense and by location. The experience in North America is different than in Europe. But overall, all of our costs are up. The cost of goods is up. All the SG&A expenses are up. Nothing is -- almost nothing is down other than what we can do to have productivity measures to reduce the consumption of SG&A type items. But it's a big headwind. There's no doubt about it.

Brian Butler:

Well, just the first one. Can we talk about the trade working capital opportunity? And how should we think about our model kind of some of the trade working benefits plays out in the second half of 2022?

Brian Butler:

Okay. That's very helpful. My second question was on kind of looking at -- can you talk a little bit about price and volume mix when you look at the U.S. and the EU for the parts and service business for the second quarter?

Operator:

Your next question comes from the line of Daniel Imbro.

Dominick Zarcone:

Yes, Daniel, this is Nick. The OEs, they don't just increase all the prices on all their parts every month. That's not how they operate. They're very selective in how they're pricing their parts. Some prices go up significantly, some prices don't go up at all. And obviously, all the OEMs kind of have their own strategy. In general, their prices have gone up a little bit less than or generally less than overall inflation. And so we -- whenever they take their prices up, that provides us an opportunity, not just us as a whole, alternative parts industry as a whole, the ability to take pricing up a little bit as well. I can't predict what they're going to do in the future. Ultimately, they're dealing with the same types of inflationary pressures as all the other businesses as it relates to input costs, whether that be materials, commodities, labor, all the rest, right? All I can say is we will try -- we keep a very close eye as to how the OEs are pricing their product. We need to maintain a competitive stance. We think we're doing a good job of doing that in this current environment.

Varun Laroyia:

Yes. Listen, great question, Daniel, and thank you for giving us the opportunity to respond to that. Listen, I think, as you know, Q1 with the Ukraine-Russia conflict, there were some challenges associated with that. But the underlying business operates in a very resilient market. Folks have kind of talked about the fact that energy prices have been moving up with what's happening further out there. But we really haven't seen a significant drop off on a VMT basis, number one. And that really is the key driver for our European business. So from that perspective, really happy with the way our European business continues to perform. Nick obviously gave some color on the broader platforms in terms of how they've been performing also. I think the key piece out here has been making sure that we have the inventory to satisfy the demand, which we do. But overall, very happy with the way the margin trajectory of the European business continues, and we feel comfortable and confident about the double digits on a full year basis. With regards to 2023, we haven't given any guidance as of now. But needless to say, if you kind of go back to our commitment to the markets way back in September of 2019 when we launched the 1 LKQ Europe Program, at that point of time, we said exiting 2021, we would be a sustainable double-digit margin business. We certainly delivered that in '21. We're delivering that '22. There's no reason for us to start to backslide at this point of time. So while we haven't given any guidance, we do expect there to be further goodness from a margin and profitable growth perspective across our European segment.

Bret Jordan:

On that last question, Varun, you said that VMT has remained pretty stable in Europe. Could you talk about the consumer demand trend, I guess, sort of the cadence in the quarter as obviously compounding volatility over there? Has it had any impact as we've progressed?

Bret Jordan:

Great. And then within specialty, could you sort of carve out the performance differences between RV, which I think you called out as being pretty stable versus the SEMA-related product is sort of within that total specialty decline. Could you give us a feeling on the pieces?

Operator:

Your final question comes from the line of Gary Prestopino.

Dominick Zarcone:

Yes. So repairable claims in the second quarter were up about 6% compared to 2021, but still down 6% compared to 2019. So the industry is still down relative to the pre-pandemic levels.

Varun Laroyia:

We haven't called that piece out, but I will tell you from a North America perspective, clearly, there's little to none. But if you think about it, really where does the FX exposure come through, it's from our European business. And so if you think about where the European business, total SG&A was around $420-odd million. And if you then kind of go -- you can back into that number, Gary, and this is the way you should think about it. Within the slide deck, we obviously have on Slide #27, we obviously have the FX rates out there also. But essentially, the euro has been the big kind of decline. So roughly call it about a 10% decline on there. So kind of run that piece of the $420 million, but that basically is what the -- it's kind of strange to see a benefit, but the translation benefit, if that's what you're referring to from a lower conversion rate, that's really where it would come through.

Operator:

There are no further questions at this time. Mr. Zarcone, I turn the call back over...

Operator:

This concludes today's conference call. You may now disconnect.

Operator:

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation’s First Quarter 2022 Earnings Conference Call. [Operator Instructions] Thank you. Joe Boutross, Vice President of Investor Relations for LKQ Corporation, you may begin your conference.

Nick Zarcone:

Thank you, Joe and good morning to everyone. I will provide some high level comments on what was a robust quarter for LKQ from many different perspectives before Varun walks you through some of the financial details and our increased financial guidance. I will then close with a few observations before opening the call to your questions. As we entered 2022, who would have thought the world would experience events more traumatic than the pandemic we all have been living through? Just when everyone thought we had turned the corner and we’re headed towards the new normal, in late February, Russian tanks rolled into Ukraine, and everything changed overnight. In retrospect, issues related to tight labor markets, supply chain challenges and inflationary pressures pale in comparison to the needless loss of human lives. Yet out of the ashes, we are all able to watch the evening news and see true leadership and courage in action and incredible solidarity in a time of crisis. Yes, I’m talking about the Ukrainian people. But the same is true for the 950 people in Ukraine who are LKQ associates. These employees are truly remarkable. So too are their colleagues in Poland, Hungary, Slovakia and Romania who welcomed hundreds of family members of our Ukrainian employees at the border to provide food, housing, medical assistance and schooling to those fleeing the country. They are all defining what it means to be LKQ proud. As to the business, we exceeded our expectations for Q1 in terms of both revenue and profitability. And this gives us confidence to increase our financial guidance for the year. The key word in the economy in the past several quarters has been inflation. During periods like this, companies have a choice, wait and see the impact and play defense or anticipate the impact and play offense. LKQ chose to play offense, and the benefits of doing so can be found in our results. This is particularly true with respect to the exceptional organic revenue growth achieved in our North American wholesale and European segments. Both of which benefited from strong demand for automotive products as mobility and claims volumes increased, while pushing prices in an attempt to offset most of the inflationary pressures. Managing through this environment is hard. And I am extremely thankful for the efforts of the global LKQ leadership team, which is doing a terrific job of balancing the best interest of our customers, suppliers, employees and shareholders. Now on to the quarter. Revenue for the first quarter of 2022 was $3.3 billion, an increase of 5.6% as compared to $3.2 billion in the first quarter of 2021. Total parts and services revenue increased 5.9% in Q1, comprised of organic revenue increases of 6.9%, plus the net impact of acquisitions and divestitures of 1.7%, offset by foreign exchange rates, which decreased revenue by 2.7%. Net income for the first quarter of 2022 was $269 million as compared to $266 million for the same period of 2021, an increase of 1.1%. Diluted earnings per share for the quarter, was $0.94 as compared to $0.88 for the same period last year, an increase of 6.8%. On an adjusted basis, net income in the first quarter of 2022 was $287 million compared to $286 million in the same period of 2021. Adjusted diluted earnings per share for the first quarter, was $1 as compared to $0.94 for the same period of 2021, a 6.4% increase, driven by a reduction in the average share count. Let’s turn to some of the quarterly segment highlights. And please note, this is the first quarter of separating the self-service business from the core North American wholesale business. Turning to North America, from Slide 6, you will note that organic revenue for parts and services in our North American wholesale segment increased 13.6% in the quarter on a reported basis and 11.8% on a per day basis. During the first quarter, industry-wide overall claim counts increased 12.2% versus Q1 of 2021. According to the U.S. Department of Energy, during the first quarter of 2022, U.S. weekly supplied motor gasoline volume was approximately 4.9% above last year, but still 4.7% below the first quarter of 2019 pre-pandemic. And according to the Department of Transportation, highway miles driven during Q1 increased 4.9% above last year, but lagged 2019 levels by approximately 2.2%. From a product line perspective, recycled and remanufactured parts demonstrated higher growth, including gains in both volumes and price relative to last year. On the aftermarket front, we have been successful in passing through inflationary cost increases despite the supply chain challenges, which are causing volumes to be down relative both to last year and 2019. April has started off on a positive note, following the pattern established in Q1. We don’t anticipate achieving double-digit revenue growth in our North America wholesale operation for the rest of the year, but we expect it to be in the mid- to high single-digits. In part due to headwinds from parts availability and more so due to labor constraints, during Q1, the national average scheduling backlog at collision repair shops reached 4.5 weeks, 2.5x the length of the typical first quarter backlog. Additionally, since 2016, average vehicle repair costs have risen steadily every year, with the largest increases occurring in the past 2 years, reaching an all-time high in 2021. Our parts provide a strong solution for shops and insurance carriers to manage costs. As we inevitably begin to witness some relief in the supply chain and a steadier flow of aftermarket product, the value proposition of our parts becomes even more attractive as shops continue to face headwinds related to labor costs and overall inflation. As we indicated in our last call, this quarter, we began reporting self-service as a separate segment. This new segment provides investors with greater transparency into the commodities dynamic of our business. Given the majority of our other revenue category, which primarily consists of scrap and precious metals, comes from our self-service operations. Varun will cover more details on the margins of this segment shortly. During the first quarter, total revenue for self-service was flat compared to last year, reflecting the relative softness in metals pricing. Organic revenue for parts and services for this segment increased 14.6%, largely driven by price. Also, the average revenue per admission, a key productivity metric, rose during the first quarter of 2022 relative to 2021. Moving to our European segment, organic revenue for parts and services in the first quarter increased 6.9% on a reported basis and 6% on a per day basis. As the largest pure-play distributor of automotive aftermarket parts in Europe, this is a tremendous start to 2022, even in the face of an extremely challenging geopolitical environment on the continent. So we are quite pleased with the organic growth in Europe. While different by market, overall consolidated organic growth was split evenly between volume and price. According to the Apple Mobility Index, the trends in driving trips in our European markets was down earlier in the year due to normal seasonal patterns. As we progress through Q1, the index rebounded. Encouragingly, despite all the fear of a dramatic drop-off in demand due to global macro headlines, at this point, we have not seen any notable shift in European mobility as we have entered the second quarter. Our regional operations experienced varying revenue performance in the quarter, but all posted positive growth, with very solid year-over-year performance. The UK and Benelux operations were particularly strong with high single-digit organic growth, while Germany and Central Europe, excluding Ukraine, posted mid-single-digit organic growth. Italy also demonstrated progress, posting positive organic growth for the first time in several quarters. The Russian invasion of Ukraine had a direct impact on our revenue in late February and all of March due to having to close certain branches that we operate in Ukraine. And those that have remained open, as you would assume, saw a significant drop in demand. Also, immediately following the invasion, we ceased all sales to Russian-based parts distributors. We estimate the impact of the war on European organic revenue growth during the quarter was approximately 60 basis points. And as these conditions continue, we anticipate the impact on our full year European growth to be about 120 basis points. We continue to pay our Ukrainian employees regardless of whether they are working. And we are supporting their families who have fled to neighboring countries. As I’ve always said, our people are our most important assets. And in Ukraine, the well-being of our people is our primary focus today. Varun will provide some additional financial related details to this unfortunate situation shortly. Now let’s move on to our Specialty segment. Organic revenue for parts and services for our Specialty segment declined 8.3% in the quarter on a reported basis and 9.8% on a per day basis, largely due to a very tough year-over-year comp. You may recall, this segment reported 33% organic growth in Q1 of last year. So on a 2-year stack, the annual revenue growth is still well into double-digits. We anticipate another tough comparison in Q2 against the 30% growth reported in the second quarter of last year, with a positive recovery and a return to year-over-year organic growth in the back half of this year. A few other key highlights for Specialty during the quarter. In the first quarter, Specialty hosted our annual Big Show, a customer event, which is focused on SMA-related parts, and also hosted our annual RV Expo for our RV-focused customers. Both events booked solid year-over-year increases in attendance and sales, suggesting good demand in the future. Also, in March, our Specialty team opened a 210,000 square foot distribution center in Orlando, Florida. While it will create a very slight drag on near-term margins while it ramps up, this new distribution facility will help create higher revenue as it will service Florida and Georgia. Both of which are very attractive markets for our RV and marine-related product lines. The supply chain continues to provide challenges. And we’re doing our best to get the inventory needed to service customer demand. During the quarter, key port cities in China were shut down for a while. This shifted container capacity to other countries like Taiwan, giving our North American team an opportunity to get some incremental inventory on the water. March was the second best container volume that we’ve witnessed in 24 months. We expect some of this benefit to continue into April and likely May. And this inventory should be at our warehouses by mid to late summer. Once the China lockdowns reopen, we will likely see a regression back to the lane bottlenecks that we’ve endured over the past 12 months as the pent-up demand from China comes through. In Europe, product availability remained challenging through Q1, with back orders still running high, but we are witnessing some signs of improvement as we enter Q2. Turning to ESG. During the first quarter, we continued our environmental stewardship efforts by processing 193,000 vehicles, resulting in, among other things, the recycling of approximately 970,000 gallons of fuel, 562,000 gallons of waste oil, 501,000 tires and 178,000 batteries. During Q1, we also processed approximately 260,000 tons of scrap steel. On the social front, during the quarter, we focused on some key initiatives around the financial and mental health well-being of our employees. As an example, in North America, we implemented a profit-sharing plan, where we made a special contribution of $1,000 to the 401(k) accounts of all eligible team members. Alongside this contribution, we provided services to educate our team on how to think about and plan for retirement. From this initiative alone, we witnessed over 4,000 new 401(k) account openings. We want all employees to benefit from our success. And this plan allows us to reward and thank them for their relentless focus on results, which made a huge impact on our 2021 performance. In Europe, we launched a program called Inspire to Thrive that lets our team know that their mental well-being matters. The goal of this program is multifaceted, including creating a supportive culture, addressing factors that may negatively affect mental well-being, addressing negative perceptions of mental well-being issues, providing support to colleagues suffering from mental health issues and developing management skills to address issues when they arise. Operationally, we believe this program will have many benefits, such as higher retention, reductions in sick leave and enhanced productivity. More importantly, however, it’s simply the right thing to do for our team and helping them maximize their overall well-being. Lastly, from a corporate development perspective, during the quarter, we entered into a transaction to sell our PGW glass business. While a fundamentally solid operation, we had come to the conclusion that LKQ was not the best owner of this business and the margins were always going to be dilutive to the overall North American segment margins. This transaction closed last week, and we are extremely pleased with the outcome. As we enter Q2, we are witnessing a healthy pipeline of potential tuck-in acquisitions. And since April 1, we have closed on two small European transactions. And I will now turn the discussion over to Varun, who will run you through the details of the strong first quarter financial performance and our increased guidance.

Nick Zarcone:

Thank you, Varun, for that financial overview. We believe our unique competitive position across all of our operating segments continues to translate into strong results for our company during difficult conditions. I am extremely proud of how our team of 46,000 employees tackle the headwinds we faced over the past 2 years, which subsequently positioned us well as we entered 2022. Our strong first quarter performance and raising our guidance for 2022 is a true validation of our confidence and commitment to creating long-term value for our stockholders. And again, I would like to acknowledge the bravery and courage of our Ukrainian team as they operate in an unthinkable environment. Our thoughts and hearts are with you all. And with that, operator, we are now ready to open the call for questions.

Bret Jordan:

Hi, good morning, guys.

Varun Laroyia:

Good morning, Bret.

Varun Laroyia:

Yes. Absolutely. And Bret, thank you for raising that piece and acknowledging LKQ is now an investment-grade company. It’s taken a lot of time. And the overall pivot to operational excellence has certainly been looking at every aspect of our business, income statement, functions and also the overall balance sheet. Yes, we do anticipate several hundred million upside related to getting the investment grade. However, it will not happen overnight. If you think about our European vendor financing program, which is coming along incredibly well, we still have a gap. And really, what we do is we benchmark ourselves given the product assortment with, say, what the folks in the U.S. are doing, right? And so in terms of even being able to get to a one to one with regards to AP, offset by inventory or inventory offset by AP, we have a gap, a significant gap. And that runs into a fair bit. So again, it won’t happen overnight. We obviously do have these contractual negotiations with our vendors. On an annual basis, the team is moving in the right direction. And so, we really don’t see it in the short-term, i.e., within 2022. But I think from 2023 onwards, we certainly will see that piece continue to climb further.

Nick Zarcone:

Bret, this is Nick. Thanks for the question. Our fill rates are not where we would like them to be. We tend to run well into the 90s. We are not in the 90s today. We’re probably in the mid to high 80s. So there is progress to be made. It all relates to the supply chain challenges. Again, it has nothing to do with our suppliers being able to produce the product. It all has to do with transporting the product from Taiwan into the U.S. and Canada. Again, we’ve got some incremental containers on the water in March. We’re hoping for a few incremental containers in April, May as well. But it takes – with the port congestion and transportation issues here in the U.S., we won’t see any of that inventory until mid to late summer. When that hits, it should help a little bit. From a fulfillment perspective, we do not believe it’s going to take us back to our historical levels, but it will help. What we do feel very confident about is our fulfillment levels are the best in the industry even with the challenges that we are facing. The reality is our smaller competitors are struggling to get product. And from an overall perspective, from a competitive perspective, we think we’re still leading the pack.

Michael Hoffman:

Hi, thank you very much. And great opening round here, thanks. I appreciate it. On the wholesale side, just to dig a little deeper, total volumes were down, just the mix inside whether it was a new aftermarket versus a recycled remanufactured. Is that correct?

Michael Hoffman:

Okay. But the good news is you’re able to shift around even if fulfillment came down. That’s part of your competitive advantage, is you’re able to shift around to support volume.

Michael Hoffman:

Got it. And then, Varun, on the guidance, so everything goes up except the free cash flow. I’m assuming, versus February, you’re planning on spending more on inventory, and that’s the difference? And what is that delta?

Operator:

Your next question comes from the line of Daniel Imbro from Stephens. Your line is open.

Nick Zarcone:

Thanks, Daniel.

Nick Zarcone:

Yes. So, at this point in time, based on the backlog that I mentioned in the repair shops, the insurance companies just want to get parts on the car. And whether it’s an aftermarket part or recycled part, or quite frankly, an OEM part, because every day that, that car is in the shop, they are generally paying a rental car fee and which clearly increases their prices. So, it’s not that they are trying to aggressively move to a higher APU given the inflationary environment because it’s whatever part is available. We do believe, as I mentioned in my formal comments, that once the supply chain kind of works its way through and some of the challenges we have from a fulfillment perspective begin to normalize that our product set provides a great opportunity for shops and for insurance carriers to lower their overall cost. And they can use the price benefit that we have relative to OEM pricing has helped offset some of the other inflationary costs.

Nick Zarcone:

Our sense is that at some point in time, and we can’t put a timeframe on it, Daniel. At some point in time, the supply chain will balance itself out. And that will obviously help us and it will help the smaller folks as well. Nobody is trying to buy volume these days because it’s a shortage of product. And so pricing is strong. So, we don’t anticipate anybody, not us, not our – even our smaller competitors are trying to buy volume through price. Because when there is not enough inventory to go around to begin with, that would not be a smart move, right. They will continue to compete. We will continue to compete. We think we have got significant advantages from a product growth perspective, from a product perspective and from our service capability. And that’s how we are going to continue to compete and grow our market share in the months and quarters to come.

Nick Zarcone:

Good morning Stephanie.

Nick Zarcone:

Thank you.

Varun Laroyia:

Stephanie, let me start off with the European margin piece of it and then Nick will pick up on where we are with the 1 LKQ Europe program. Yes. Listen, in terms of where European margins came in, slightly softer. But I think it’s fair to know the fact that the Ukraine-Russia conflict was not anticipated. So, that certainly has clipped the margin trajectory of the business in Q1. And there was the odd customer bankruptcy also. But really, on a full year basis for balance of year, the team, all of us, we are very confident of being able to hit what we have put out there from a public commitment perspective of hitting our sustainable double-digit margins. And so while Q1 kind of clipped it for about just over $0.01 in – with the Ukraine-Russia conflict, on a full year basis, we think it will kind of clip us about six. So, there is another five yet to go. And that’s really what you see in the earnings deck where we have given a walk from the prior original guidance to what we are now suggesting. But in terms of how the business is progressing, the organic growth is coming through strongly. And we expect the operational side of things with the higher organic revenue growth that Europe has put up and really what it continues to forecast, which again is not all price, it’s actually a good mix of volume and price and – which is actually incredibly heartening. And the same thing, as Nick mentioned, about North America. They are the ones that do have good product availability. We would like to have some more. But in terms of our investments that we have been making those are certainly beginning to bear fruit and really shows the resiliency of the business that we have built up on both sides of the pond. But again, Nick, if anything else you would like to add from a 1 LKQ Europe perspective?

Stephanie Moore:

Great. Thank you. That’s very helpful. And then maybe lastly for me, if you wanted to just touch on kind of a longer term view as the vehicle dynamic changes across the globe, changing from ICE to EVs, and how you think you are positioned with some just recent investments that you have made?

Operator:

Your next question comes from the line of Craig Kennison from Baird. Your line is open.

Nick Zarcone:

Sure. So, the first thing we did, Craig, on our private label front is we had to rationalize and consolidate all the various brands. Because when you take a look at all the companies we had acquired in Europe, essentially, we had 90 different private label brands that we have bought along the way. And there is no need for us to have 90 different brands. So, we have rationalized that out significantly. We have put all of our private label product activity and the growth of that business under the leadership of a single person on a pan-European basis. We refer to it as our components business. And we have an individual who came out of the Stahlgruber organization that is focused on growing that business across the European platform. Some countries are ahead. Like the UK, we have the highest penetration of owned brand or private label products. In other countries, like in Germany, it’s significantly lower. Our goal is to raise the total so to have a higher penetration in each of the countries in which we operate. And it’s not going to happen overnight. Part of it is making sure that the private label product that we put out there is extremely high quality, because the – ultimately, the customers will not react well with low-quality products. So, we are working with all of our vendors to make sure we have great quality product. And then the goal is in each of the countries where we operate, to get the percentage of private label revenue up. When we do that, okay, private label is less expensive and very price competitive for the customer. And so that will have a little bit of an impact on revenue, but the margins are significantly better. And that’s all part of the thought process.

Nick Zarcone:

We will probably have multiple brands, but we are consolidating it down significantly from what we started with. And we do have a brand called the E-Motive that we have in the very, very early stages. Maybe not even – maybe kind of batting practice warm-ups where we are starting to roll that brand out across the European platform. We have not disclosed our private label penetration in Europe. Again, we are the highest in the UK and probably the lowest in Germany and all the other countries are somewhere in between. In total, today it’s probably around 10%.

Nick Zarcone:

Good morning Gary.

Varun Laroyia:

Great question, Gary and good morning. No, I don’t think anything really changes on a day-to-day basis. If you think as to we have been operating with the investment-grade credit metrics now for probably six quarters, right. And so from that perspective, debt is well kind of arguably under-leveraged at this point of time, but kind of following our balanced allocation product, capital allocation policy. We have been kind of talking about the fact that we are not prioritizing debt pay-downs at this point in time. With the investment grade rating that comes through, I think there was a previous question on the call also. Over time, it doesn’t happen overnight, but as we go, renegotiate client-vendor partner contracts, that higher level of trade payable days certainly lifts. And that certainly will release a few hundred million dollars of incremental free cash flow over the next few years. With debt levels arguably below where they need to be, we are happy with what the overall debt leverage is. So, nothing really changes because we have been operating at those metrics for quite some time. The key piece really is that we continue to look for opportunities to grow our business. Organic is obviously that much better. Seeing the level of organic revenue growth coming through our businesses is incredibly heartening. So, that really is the key focus, making sure that we provide all the capital required to continue to stretch out our lead from an organic perspective. And as and when opportunities come up to do some corp dev activities, we will certainly do that. But again, we are not going out that whale fishing or elephant hunting. It’s basically high synergy tuck-ins, building up incremental adjacencies, critical capabilities. And then whatever is the excess free cash, yes, having a share repurchase program is incredibly helpful.

Nick Zarcone:

Yes, absolutely. I mean every time we have a customer on the phone, if we do not have the aftermarket part in stock, but we do have a recycled part in stock, we try and cross-sell. Again, we are the only company that can do that because. We are the only company that offers both recycled and aftermarket parts. And our salespeople have the inventory screens for both product sets right in front of them when they are talking to their customers. So, we try and cross-sell every opportunity we have.

Operator:

And your final question comes from the line of Ryan Brinkman from JPMorgan. Your line is open.

Nick Zarcone:

Good morning Ryan.

Nick Zarcone:

Yes. So, a lot of questions there, Ryan. The reality is, again, we did – I wouldn’t say that we took prices up in anticipation of higher costs later. Not that we were ahead of it, but we didn’t wait to see our costs go up and then do prices. So, I would say we – I think we timed it pretty well. Again, it’s a very competitive market out there. And at the end of the day, your ability to push price ultimately is dependent upon overall market pricing. Like I said, supply is short. That’s true with all different types of parts. And so nobody out there is leading with price as a way to buy volume, right. Everyone, I think is trying to hold their prices tight. Again, we knew inflation was coming. It was no surprise. And so we weren’t shy. The reality is no customer likes prices to go up, just like nobody listening to this call likes to pay more for anything, right. But the reality is governments around the world have $32 trillion of capital into the marketplace as a result of the pandemic. And when you have more units of currency chasing a fixed – faster goods and services, prices go up. And there is not probably a country in the world that hasn’t seen the negative impact of inflation. And if you don’t stay on top of it, you fall behind, and you never catch up. And we made a conscious decision not to come out of the box behind the curve. Yes. So, I am not – I don’t want to imply that we are leading the curve, but we are staying constant. I think we are doing the good job of matching the ability to push prices along with the higher cost. And look, everyone knows that shipping containers from the Far East into North America is up five-fold to six-fold from where it was a couple of years ago. That’s not 6% or 7% inflation, right. That’s significantly more. Labor is up more along the lines of normal inflationary statistics that you have read. And so we have moved prices up. And we have had customers who haven’t been happy, but they understand that, right. Because they know what’s going on in their own businesses as well. And there is no free lunch. And we are a humble distributor. And we have no intention of getting caught holding the inflation bag, if you will. It’s not our job to fund the parts and services industry in the automotive repair marketplace. And so we are going to do what we can to protect ourselves from inflationary pressures. There haven’t been huge differences between kind of the type of parts that we have been able to move price along. Again, we have done our best to move along on all types of parts. Again, every market is a little bit different. Every country is a little bit different depending on overall competitive dynamics and the like. The inflationary pressures in the U.S. are higher than in Europe. That doesn’t mean that Europe doesn’t have inflationary pressures. They absolutely do. But we see it a little bit more intense here in the U.S. than overseas.

Nick Zarcone:

Well, I want to thank everyone for your time and attention this morning. And we certainly look forward to continuing the discussion with you. I think as everyone knows, we are hosting our Investor Day on June 1st. And we would hope to be able to see most of you there in Nashville. We are hosting at our national – at our North American headquarters. It will be a live event. We understand that some of you may not be able to find your way to Nashville. And for those, the event will also be virtual in nature. It will be telecast, and you will have the ability to come in via the Internet. Again, that’s June 1st in Nashville. And then again, obviously, we will be speaking with everyone in late July when we report second quarter results. So, with that, I would like to bring this call to a close. Again, we thank you for your time and attention. And we hope you have a great day.

Disclaimer*:

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Joe Boutross:

00:54 Thank you, operator. Good morning, everyone, and welcome to LKQ's fourth quarter and full year 2021 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning, as well as the accompanying slide presentation for this call. 01:21 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. 01:53 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. Hopefully everyone has had a chance to look at our 8-K which we filed with the SEC earlier today. And as normal, we are planning to file our 10-K in the coming days. 02:15 And with that, I am happy to turn the call over to our CEO, Nick Zarcone.

Varun Laroyia:

19:36 Thank you, Nick, and good morning to everyone joining us today. Before I go into details on the fourth quarter, I'd like to spend a moment to reflect on the last two years operating in the pandemic. Since the world was turned upside down in March of 2020, we leveraged LKQ's core strengths, namely our best-in-class inventory availability and service reliability, extensive distribution network, rock solid balance sheet, and most importantly, our people to be successful in adverse conditions. We accelerated our operational excellence program to make the business more resilient and have delivered record annual results yet again, while creating a strong position for the company to participate in the demand recovery. 20:26 The performance over the past 3 years since the pivot to operational excellence and in 2021 in particular, highlights the benefits of our operating initiatives. By many measures, 2021 was an outstanding year. In terms of profitability, we generated record full year adjusted diluted earnings per share of $3.96, an increase of 55% compared to 2020, our previous high watermark. During the September 2020 Investor Day I set the expectation that LKQ aims to be a double-digit EPS compounder with about half coming from organic growth and productivity and the rest from judicious capital allocation. With our 2021 results, we surpassed this expectation and picked up about 3 years of EPS growth in a single year. 21:22 We have sustained the momentum built in recent years around cash flow generation, with free cash flow of $1.1 billion in 2021 and successfully reset the business model to operate at this higher level going forward. At the conversion ratio of 60% of EBITDA, we are delivering free cash flow in line with our long-term expectation, generating significant and sustainable free cash flow has accelerated various capital allocation options, including our share repurchase program, maintaining investment grade credit metrics, and initiating a regular quarterly dividend. 22:02 With the focus on operational excellence, including integrating our acquisitions and converting profits to cash, we have made significant progress in improving our return on invested capital. By our internal measure of ROIC, which essentially ignores the amortization of intangibles, we exceeded 15% in 2021 after running at approximately 10% just a few years ago. All of this reflects our commitment to delivering long-term value to our various stakeholders. 22:34 I'd also like to take this opportunity to extend my sincere thanks to the entire LKQ team for their dedication and hard work. It takes all 45,000 of us rowing in the same direction to deliver such outcomes. We have raised the bar on what LKQ can be and we have more to come. 22:55 Now shifting to the fourth quarter, our fourth quarter results reflect a solid finish to the year, with improving revenue, net income, and earnings per share year-over-year, despite, as expected, the negative impact of metals, challenges to inflation, the global supply chain and the Omicron variant. Gross margin remained a year-over-year benefit with improvement in Europe, offsetting metals-driven softness in North American margins. Unlike the first 3 quarters of 2021, commodity prices had a negative effect on margins in the fourth quarter. 23:34 We estimate that scrap steel and precious metal prices produced year-over-year decreases of approximately $16 million in segment EBITDA and $0.04 in adjusted EPS in the fourth quarter. In 2020, we benefited from significant sequential increases in scrap steel, and precious metal prices during the fourth quarter, while 2021 showed roughly flat to declining sequential changes. 24:03 Overhead expenses as a percentage of revenue increased 130 basis points year-over-year with over half driven by personnel costs. The tight labor market has pushed wages higher in many of our markets. Additionally, strong performance across all 3 segments contributed to increased levels of incentive compensation in 2021, which of course resets with new targets for 2022. 24:28 I'll now turn to segment operating results. Starting on slide number 10, North America produced an EBITDA margin of 15.1% for the quarter. Our adjusted gross margin was unfavorable by 50 basis points, primarily related to the metals effect, which had a negative 210 basis point effect on gross margin in the fourth quarter. The benefits from ongoing margin initiatives in the wholesale business and improved pricing partially offset the metals impact. 25:01 Segment overhead expenses increased by 230 basis points, with the largest change owing to personnel expenses. Roughly half of the 140 basis point increase in personnel expenses is attributable to higher incentive compensation, with the remainder related to wages, temporary labor, and medical costs. Higher freight and fuel cost drove a further 80 basis point increase in overhead expenses. 25:30 With some of the overhead leverage benefit from higher revenue dollars offsetting a portion of the gross margin impact, metals had a negative 170 basis points effect on the reported 15.1% segment EBITDA margin. This result is consistent with our expectations for a mid to high 16% baseline without the metals impact. For the full year, the reported North America segment EBITDA margin of 18.3% benefited by roughly 100 basis points from metals prices, mostly in the first half of the year. 26:10 Moving to Europe, Europe continued its strong performance with an 8.9% EBITDA margin, the highest fourth quarter figure since 2015 and finished the full year with 10.2%. As you can see on Slide 11, gross margin was the primary driver of the fourth quarter improvement with better net pricing. We are pleased with Europe's progress in delivering a double digit full year segment EBITDA margin and we are confident that there is further opportunity ahead. 26:41 Moving to Slide 12, specialty held gross margin roughly flat despite inflationary pressures in the segment's 1 operations and a negative mix effect from the SeaWide acquisition with offsetting benefits in net pricing. Operating expenses increased by 80 basis points, driven mostly by personnel expenses, higher wages, medical costs, and incentive compensation, which of course, some of it will be reset to reflect 2022 targets. The specialty team made great progress on the SeaWide integration plan during the fourth quarter by moving all inventory into existing facilities in December and subsequently has exited 3 of the 4 acquired facilities in January, which of course will create cost savings going forward. 27:31 Income taxes in the fourth quarter of 2021 included discrete benefits of $0.07, primarily related to the reversal of certain valuation allowances and true-ups related to prior-year tax return filings. There was a benefit of $0.25 reflecting the change in estimate of our effective tax rate as we closed out our 2021 financials. While the discrete benefits in the 2021 rate are non-recurring, we expect to benefit from a lower effective tax rate going forward and have included 25.1% in our 2022 guidance assumptions. 28:12 Shifting to liquidity and capital allocation, we have been foreshadowing a cash outflow for inventory all year as we've looked to rebuild our inventory levels in anticipation of demand recovering. The outflow has been delayed by supply chain issues, though we began to see some real progress in the fourth quarter. As you can see on Slide 31, we were able to grow our inventory balances in all 3 segments in the fourth quarter, an opportunity which drove a higher than expected cash outflow of $182 million. While there are still some challenges getting aftermarket products to our locations, given the challenges with ocean freight and ongoing congestion at the ports here in North America, we saw robust activity at the auctions and grew our salvage inventory to support the strong growth in this category. 29:05 We were also successful in increasing the inventory for our specialty segment ahead of the key selling season, with a number of shows that take place in the first quarter. We are confident that our inventory positions will enable each segment to continue to offer best-in-class availability and service relative to our competitors, despite the ongoing supply chain challenges. 29:30 Our capital spending for the quarter was higher than what we've seen in recent years. With a backdrop of inflation continuing for the foreseeable future, the increase was driven by strategic capital deployment during the quarter as we identified a series of opportunities, mostly related to our salvage business in North America to invest in real estate. These investments, which include site expansions and the purchase of a new facility for our Denver operation will provide room for growth in our salvage business. 30:02 Additionally, we identified other high return investments related to vehicles, equipment, and systems to undertake in the fourth quarter, given the long lead times with the ongoing supply chain disruptions. In total, the real estate and other strategic purchases totaled about $90 million for the quarter, which accounts for much of the growth in capital spending. 30:26 Full year free cash flow, as I mentioned previously, was $1.1 billion, our second year in a row being above the $1 billion mark. At a 60% conversion ratio for free cash flow to EBITDA for the year, this was roughly $275 million above our original guidance floor of $800 million when we gave guidance for 2021 last February. Following our balanced capital allocation philosophy, we repurchased 5.3 million shares in the quarter for $297 million and issued our first quarterly dividend with a $73 million payment in December. 31:09 We also acquired businesses in the fourth quarter. SeaWide in our specialty segment and a tuck-in business in the Benelux market for a total consideration of $57 million. Our net leverage ratio came in at 1.4 times EBITDA and interest coverage now exceeds 28 times compared to the credit facility requirements of 4 times and 3 times, respectively. We are well positioned with our credit metrics, which are consistent with an investment grade profile and we remain committed to achieving an investment-grade rating. As our earnings release of this morning indicated, the Board has approved a quarterly cash dividend of $0.25 per share, which will be paid to stockholders on record as of March 3. 31:59 I will wrap up my prepared comments with our thoughts on 2022. Over the past two years of living with the once in 100 year health crisis, what has become clear is the resiliency of our end markets and our team's ability to deliver solid results utilizing the operational excellence toolkit. This in effect gives us the confidence to reinstate full year guidance, including organic revenue growth for the coming year. Our guidance assumes that; one, there are no significant negative developments related to the COVID-19 in our major markets; two, foreign exchange rates hold near recent level for the remainder of the year; three, scrap and precious metal prices trend lower than what we're currently seeing in the month of February and an effective tax rate of 25.1%. So with that, we expect organic parts and services revenue growth of between 3% and 5%, with higher growth rates in the second half of the year than the first half. 33:04 With ongoing inflationary pressures exacerbated by the supply chain challenges, we remain confident in our ability to positively work through pricing changes as needed. Second, we are projecting full year adjusted diluted EPS in the range of $3.72 to $4.02, with a midpoint of $3.87. This is a decrease of $0.09 or 2% at the midpoint, relative to the 2021 actual figure. 33:38 Looking at slide number 19, you can see how we get from the 2021 actual EPS to our 2022 expectation. We've been transparent about the commodities benefit on our 2021 results. And with lower prices anticipated for 2022, we will face a headwind of roughly $0.27 related to scrap steel and precious metal prices, predominantly in the self-service operating unit. The favorable discrete tax adjustments in 2021 will not reoccur, which will lower EPS by a further $0.06. Additionally, lower average foreign exchange rates will have a $0.04 negative effect year-over-year and we had a $0.03 pickup of fair value adjustments related to certain equity investments that we are not projecting to reoccur in 2022. 34:36 Taking these factors into account, we are looking at a baseline EPS figure of $3.56. On a 2 year stack, we remain well above our long-term growth expectations in 2022 and we expect annual growth rates to normalize in 2023. The operational excellence initiatives have created a significantly stronger and more resilient business, which we believe will support our ability to improve operating results, despite the current inflationary environment and supply chain challenges. 35:10 And finally, our balance sheet is solid. We continue to generate outstanding free cash flow through strong profitability and judicious use of trade working capital. We are projecting to generate free cash flow of at least $1 billion in 2022 as we sustain a healthy conversion of EBITDA to free cash flow. 35:33 Before I turn it back to Nick, I want to inform everyone that we are contemplating breaking out the self-service operating unit as a separate reportable segment in 2022. While we are not planning any changes in how self-service is operated or how it interacts with the wholesale business, we'd like to provide investors even greater transparency into the North America business, especially as it relates to the metals impact. We will provide further information on the decision ahead of our first quarter earnings call in late April. 36:12 Thanks for your time this morning. And with that, I'll turn the call back to Nick for his closing comments.

Operator:

37:50 Thank you, sir. [Operator Instructions] Your first question comes from the line of Stephanie Moore of Truist.

Dominick Zarcone:

38:07 Good morning, Stephanie.

Varun Laroyia:

38:21 Good morning, Stephanie. It's Varun. No, it does not. Really, what you see on Slide 19 of the earnings deck reflects the annualized benefit of all the share repurchases that we did in 2021. And obviously, that flows through into 2022. So, no, the guidance does not include anything incremental that we may do in 2022.

Dominick Zarcone:

39:20 Thank you, Stephanie. Let me answer that one. So I think your question is specifically regarding North American margins in the fourth quarter. And again, if you kind of go back to the earnings deck on slide number 10, where we actually break that piece out, First of all, I think just to be cognizant of it that we have a seasonal trend within our business. And so, Q4 typically is lighter in many case, but as you rightly point out, yes, some of the inflationary pressures have certainly been picking up. 39:49 In my prepared comments, I did call out where the single biggest piece was, which was within the personnel cost. I think everyone understands that there is a tremendous amount of labor shortage here in North America, and arguably the other one is that how much of that is our higher incentive compensation also. Clearly from an incentive compensation perspective that does get reset with new targets in 2022, so that entire number that you see, that really is not the true exit run rate. So that's kind of an important piece to think through, but with regards to medical costs for that matter what we are paying from a talent perspective, that is real. And we do expect our ability to get positive price associated with that. 40:37 I think the other piece really which maybe is kind of more fundamental is, at the gross margin level, while it seems that gross margins were down by about 40 basis points to 50 basis points year-on-year, really they were down by 210 basis points owing to the metal space. So the metal is the single biggest piece in our North American margins. And if you go back to the October earnings call, we were aware that metals would impact our North America segment margins. So that really is where it shows up. 41:09 The work that the team has done on positive pricing has been able to offset some of that. And then the final point really I'd like to highlight is the 15.1% that North America reported for Q4 is impacted by about 170 basis points associated with metals. You add those 2 pieces together and it is right where our expectations are, which is the mid to high 16% without the metals impact. 41:35 So I hope that helps answer. We are happy with the way the Europe -- the North American business is performing. We are aware of the supply chain challenges and also the inflationary pressures, but the team is doing an outstanding job and really hitting its marks excluding the metals volatility.

Operator:

42:00 Your next question comes from the line of Daniel Imbro of Stephens.

Dominick Zarcone:

42:07 Good morning, Daniel.

Varun Laroyia:

42:44 Yeah. Thank you, Daniel. So let me just try and summarize your question. And that really is in terms of where we see margin expansion and then really further productivity gains. So let me start with the margin side first. 42:59 As you saw in our quarterly earnings, in the earnings deck, Europe has been doing an outstanding job on the pricing side. And you certainly see that gross margin expanding for our European business. That accounts for close to half of our business. And as part of the One LKQ program that we had called out in September of 2019, that business has hit every single mark that it had suggested. 43:25 As Nick has previously also called out, we are not done with the One LKQ Europe program. We're making tremendous progress, but there is a lot further opportunity yet to come. So when you see the full year 10.2% segment EBITDA margin, we expect 2022 to continue to improve from there on. So that's kind of one piece I certainly wanted to highlight. 43:47 The second one is, I think from a North America margin perspective, I think folks get a little bit confused about the metals piece and really with that, as I mentioned in the fourth quarter, gross margin owing to metals was impacted by 210 basis points in the quarter, which we had largely anticipated and excluding the metals benefit -- rather the metals impact in the fourth quarter, that would have been a mid to high 16s. The metals impact was 170 basis points. 44:17 So that may seem to kind of color some of the views, but that business is hitting its marks and whether it'd be the permanent cost savings that had been called out at the September 2020 Investor Day, that business is exceeding those at this point in time. And as we've talked about whether it'd be route optimization, overall network setup that we have across our North America business, each of those pieces continues to deliver. Those are multi-year goals and the business continues to find further opportunity. 44:52 So without belaboring the point further, we are excited about where our North America and our European business is and the same for our specialty business, [indiscernible] forget it at times, but that business has just been outstanding from its execution perspective. They are not immune like other businesses in other industries with regards to inflationary pressures, but really that specific segment, while our smallest segment has did an outstanding job, really picking up the strong demand that continues to come through and then executing flawlessly on that front. 45:28 The final point I should kind of highlight is that, when you talked about multi-year views, we are contemplating our biannual Investor Day setup and that is currently expected to be late spring, early summer, but certainly after the first quarter earnings. So we are thinking of a May timeframe at this point in time.

Dominick Zarcone:

46:25 Yes, Daniel. Great question. As we announced last quarter, we've made an acquisition probably 4 or 5 months ago of a company called Green Bean that got us into the entire battery remanufacturing, not recycling, but remanufacturing business. We are looking to make further investments in battery technology just so we can make sure that we are able to address the opportunities that are going to come along with the very slow shift of the car park to EVs. Within there, there'll be plenty of opportunities for LKQ. Just like the engine is the most expensive and most valuable part of our car today, the battery is the most valuable part on an EV and that provides a number of different opportunities for a company like LKQ. 47:21 As the EV population grows in the United States, we fully anticipate that the cars that we buy at auction coming out of the whole total loss process that there will be a higher percentage of electric vehicles in that population of cars that we buy and that will provide a number of opportunities for us on the remanufacturing and potentially recycling side of the EV battery business. So we view it as a big opportunity. It's going to take some time to develop because the impact of EVs on the car park is going to be very slow and very evolutionary, but we are thinking ahead and trying to get ahead of the curve.

Operator:

48:08 Your next question comes from the line of Brian Butler of Stifel.

Dominick Zarcone:

48:16 Good morning, Brian.

Dominick Zarcone:

48:33 Yeah. So we generally don't provide segment by segment margins, but as we've talked about in this call already, right? Long-term sustainable margins for the North American business will be in the mid to high 16% range. And that's where we were in Q4 in North America, if you exclude the impact of the metals. So we're very comfortable in the mid to high 16s in North America. Again we posted up 10.2% in Europe for the year in 2021. We do anticipate another 30 basis point to 50 basis point improvement in Europe during the next year. And specialty has been a very strong and we don't expect a tremendous amount of upside in specialty margins, but they're going to more than hold their own. 49:29 So when you put it all together on a corporate level, you're going to be shaking out probably somewhere in that 13% range from a EBITDA margin perspective. Again, that all assumes no significant movements in metals pricing and the like.

Varun Laroyia:

50:15 Brian, it's Varun. So, let me take those 2 questions. So, firstly, with regards to capital spending, we are back to our normal cadence, which is between 2% and 2.25% of revenue, right? So between 2% and 2.25% on a revenue perspective, and this really is a bounce back from what took place in 2020. Our ability to quickly act and pull down that CapEx number is what we delivered during the height of the pandemic a couple of years ago. You saw 2021 coming at the 2.2% and we expect a similar number in 2022 also. So roughly, call it, between the $285 million to $300 million is what we are expecting from a capital expenditure and that then fits into our top line revenue guidance also. So that's kind of point number one. 51:09 With regards to the overall free cash flow number, we are essentially targeting a 55% to 60% EBITDA conversion. This is what we've been talking about for the past couple of years and really through 2020 where you saw a significantly higher conversion rate as the business was essentially finding as to where the demand was, we certainly flexed the balance sheet and really on a go-forward basis we are stabilizing the free cash flow at that higher level. So the 55% to 60% EBITDA conversion piece and really, if anyone is looking for the math associated with that as to why, that is a strong conversion factor for a distribution business. 51:50 Let me start from an EBITDA perspective. There are cash taxes to be paid. So in our case, call it, roughly about $350 million of cash taxes. Capital expenditure, as I just mentioned, roughly 2.2%, so the $285 million to $300 million. Interest expense, which was about $72 million in 2021, call it, marginally down in 2022. And then finally restructuring and restructuring will be at a similar number to what we did in 2021, so roughly about $20 million. That really is your conversion from a cash basis, EBITDA down to what we see coming through from a free cash flow perspective. 52:30 I hope that gives you the math. I certainly hope that -- it makes sense. And it's been very consistent to what we've been talking about now for the past couple of years.

Varun Laroyia:

53:10 Yeah. So if you think about where we – where the metals benefit came through in 2021, that's the starting point, right? And from that perspective, if you think about where catalytic converters and that really is where the precious metals group really sits, that was at an all-time high. I think it touched an all-time high of close to about $285, $290 per cat converter on an average quarterly basis. So that number has come down significantly. 53:39 And really, if you think about -- we called this piece out in September, because we've seen it at the end of August and September of last year, and then again, we saw that these -- from a volatility perspective in December and also in early January. So we're looking at numbers which are significantly lower than the full year average of about $255 on a cat converter, call it, about 20% lower than that. 54:04 And then really, I think over the past couple of weeks, really with the geopolitical tensions there has been a slight uptick associated with that. But really, when we are purchasing salvage vehicles and as to how we're processing them, there's always a lag associated with it. So that really is how you should think about it more than anything else. And that's the underlying assumption of what we have in our overall full year guidance on. So I hope that gives you a sense in terms of how we're thinking about the volatility associated with metals.

Bret Jordan:

54:42 Hey, good morning, guys.

Bret Jordan:

54:46 On the 2022 outlook for growth, could you sort of carve out what is price versus units in that, particularly in the parts and service, the 3% to 5%?

Bret Jordan:

56:31 Okay, great. And then one question on [indiscernible]. I think you called out that supply chain is still an issue. Could you talk about both Europe and North America, sort of where your fill rates are versus where you'd hope they'd be? And maybe the cadence of the supply chain, are you seeing improvement in those fill rates?

Bret Jordan:

59:15 Okay, great. Thank you.

Scott Stember:

59:24 Good morning, guys. Most of my questions have been answered. But maybe, Nick, you could talk about on the specialty side, again, maybe give a little more granularity on this pass that the drivers get, the level of benefit you can see in 2022 and also why is this just limited to the specialty delivery side?

Scott Stember:

59:54 Yes.

Scott Stember:

61:15 Got it. That's all I have. Thanks.

Dominick Zarcone:

61:25 Well, we certainly like to thank everybody for their time and attention here this morning. We know that this earnings season is always -- like always is a busy one. We appreciate your focus on LKQ. Again, we are incredibly proud of what we delivered in 2021. We are incredibly excited about what lays in front of us in 2022. We believe we're going to be able to deliver and execute on our plan and create value for all of our shareholders and all the other constituents. So we look forward to chatting with you again in late April after Q1. And then as Varun indicated, we'll get everyone together for our longer-term strategic view of the business in the late spring, early summer at our Investor Day. And we'll be coming out with an exact date in the near term here. So thank you and have a great day.

Operator:

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to LKQ Corporation's Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the call over to Joe Boutross, Vice President of Investor Relations for LKQ Corporation.

Dominick Zarcone:

Thank you, Joe, and good morning to everybody on the call. This morning, I will provide some high-level comments related to our performance in the quarter, and then Varun will dive into the financial details as well as our outlook for the balance of 2021, before I come back with a few closing remarks. This was another quarter of significant operating progress at LKQ, driven by excellent execution in delivering solid financial performance, all while navigating the challenges with the supply chain and the current cost environment. We were able to produce yet another record quarter, and this represents the fifth consecutive quarter with the highest EPS reported in their respective quarters. The third quarter also reflects the second time we've been able to achieve more than $1 of earnings per share on an adjusted basis and reflects the highest third quarter segment EBITDA margin in the history of the company. We are particularly pleased that our European business delivered its highest segment EBITDA level in over 9 years, exceeding the 11% level. Varun will dig into the margin details shortly. While I recognize the listeners are primarily focused on the financial results, I know our performance is a reflection of the dedication and effort of our 45,000 team members around the globe who are working hard to serve our customers. I hope you can appreciate that I am more excited about the performance of my team than the quarterly results as they are the key to continued excellence. With respect to capital allocation, as you hopefully read from our press release issued this morning, I am very pleased to announce that our Board of Directors has declared the company's first-ever quarterly cash dividend. This dividend declaration and our existing stock repurchase program are key components of our strategic plan to drive total long-term returns for our stockholders. Our solid balance sheet and sustainable cash flow generation, coupled with our leading market positions across our operating segments, provide us with the opportunity to execute on that plan. The quarterly dividend of $0.25 per share will be paid on December 2, 2021, to stockholders of record at the close of business on November 11. Now on to the quarter. Revenue for the third quarter of 2021 was $3.3 billion, an increase of 8.2% as compared to the $3.0 billion in the third quarter of 2020. During the third quarter, total parts and services revenue increased 6%, comprising organic growth of 4%, the net impact of acquisitions and divestitures increasing revenue by 0.5% and foreign exchange rates increasing revenue by 1.5%. Net income for the third quarter of 2021 was $284 million as compared to $194 million for the same period last year, an increase of 46.4%. Diluted earnings per share for the third quarter was $0.96 a share as compared to $0.64 a share for the same period of 2020, an increase of 50%. On an adjusted basis, net income in the third quarter was $300 million compared to $228 million in the same period of 2020, a 31.6% increase. Adjusted diluted earnings per share for the third quarter was $1.02 as compared to $0.75 for the same period of 2020, a 36% increase. Now let's turn to some of the quarterly segment highlights. Slide 5 sets forth the revenue trends for the quarter, and you can see growth rates improved year-over-year for all segments. The vaccination rates in our key geographic markets continued to improve; but as we progressed throughout the quarter, we started to face headwinds related to the rise in the Delta variant and also challenges with the aftermarket supply chain, both of which impacted organic growth across each of the segments. Turning to North America. According to the U.S. Department of Energy, fuel consumption for the third quarter was 8.6% above the prior year and 1.3% below the third quarter of 2019. From Slide 6, you will note that organic revenue for parts and services for our North American segment increased 5.9% in the quarter on a year-over-year basis. When looking at our performance relative to collision and liability repairable claims this quarter, given the aberrations associated with the significant swings in 2020, we believe the most relevant comparison is to the third quarter of 2019. During Q3, organic revenue for parts and services for our North American segment declined about 7% on a per day basis relative to 2019 levels, while repairable claims declined 10.6%, so it was another period of outperformance for our North American operations. During the third quarter, our salvage business and the growth of our major mechanical product groups had solid performance. Although fill rates have been challenged, we are witnessing a positive offset from our quote conversion rates on salvage parts. Importantly, as we progressed through the third quarter and entered Q4, we've witnessed an increase in availability of the auctions, and prices are moderating versus what we experienced earlier in the year. Also, Elitek, our diagnostic and calibration services business, continued to exceed our expectations, with September being the highest monthly level of diagnostic scans since building out this business, a clear sign that shops and carriers are embracing this unique service offering. For those on the call that will be attending the SEMA event next week, Elitek will have a presence at the show. So please come visit, and you can see why we are excited about this growth opportunity. Moving on to our European segment. Organic revenue for parts and services in the third quarter increased 0.1% on a reported basis and 0.3% on a per day basis. When compared to the third quarter of 2019, our European revenue was down just 1% on a per day basis. So we have made progress on getting back to pre-pandemic levels and are optimistic we will move ahead of the 2019 levels in the next quarter or 2. From an overall mobility perspective, virtually every European market experienced flat growth in the quarter, which we believe is a sign that the spike we witnessed in the second quarter due to the reopening of the economy subsided sequentially in Q3. Our regional operations continued to experience varying revenue performance in the quarter. Our Eastern European business had the strongest recovery despite a very competitive pricing environment. Germany and the Benelux markets also delivered well above total segment growth. The drag in growth was primarily driven by negative growth in Italy, a market that continues to face very difficult conditions. Other items to note in Europe would include the fact that on September 6, we celebrated the grand opening of our new Innovation and Service Center in Katowice, Poland that began operations earlier in the quarter. Also, on October 1, just after the close of the third quarter, we acquired a company named Hamu, which operates 9 locations in the Central Netherlands region. With over 100 employees, Hamu is one of the largest independent automotive parts wholesalers in the Netherlands. Now let's move on to our Specialty segment, which again delivered solid performance during the third quarter by reporting organic revenue growth on a same-day basis of 13.7%. As witnessed in the first half of the year, the drivers of this ongoing performance continued to be strong demand for parts related to RVs and light trucks as well as our drop-ship business. On October 1, we finalized the acquisition of SeaWide Marine Distribution, a nationwide electronics wholesale distributor that supplies electrical and electronic products for the marine, outdoor and personal navigation markets. This acquisition is consistent with the strategy of entering adjacent markets that Bill Rogers highlighted during our 2020 Investor Day. Marine products overlapped nicely with our RV and towing product portfolio. Importantly, SeaWide now has the benefit of leveraging our network of 8 specialty distribution centers in over 40 cross-docks that are strategically located to provide next-day service throughout North America. According to the National Marine Manufacturers Association, the total addressable market for the wholesale product SeaWide offers is over $3 billion. Lastly, I want to acknowledge and congratulate the Specialty team for being recognized as the RV Industry Association Distributor of the Year at the recent 2021 RV Aftermarket Conference in Atlanta, a tremendous accomplishment. In addition to the Hamu and Seawide Marine acquisitions, other corporate development transactions included divesting all of our equity interest in a very small joint venture in the U.K. And acquiring a business in the United States that remanufactures torque converters, a product used in the remanufacturing of automatic transmissions. The global supply chain continues to be under duress. It is widely known that, today, a record number of ships are anchored off the coast of California waiting for port lanes to unload containers, some of which hold our aftermarket inventory and are eventually headed to LKQ facilities. High demand for overseas products, congestions within the ports and at the rail hubs and a severe shortage of truck drivers, has led to delays and increased cost for ocean and land freight, both in North America and in Europe. The recent initiatives across the globe to begin tackling components of these route issues, such as the measures implemented by the Port of Los Angeles on October 12, are encouraging. But we expect overarching supply chain issues to persist in the near to midterm. We are doing our best to effectively navigate the difficult environment, and we are hopeful that we won't be talking about the supply chain challenges and reading draconian headlines on a daily basis at this time next year. Alongside supply chain inflationary pressures, like many businesses across the globe, we are facing wage inflation and increased competition for labor. We are constantly looking at our wage structure and turnover rates across all of our segments to ensure we stay ahead of any competitive pressures and to help backfill the open positions with the best candidates we can attract. Now a brief update on some of our ongoing ESG efforts. During the quarter, we established the LKQ Cares ESG Advisory Committee, which is comprised of key leaders across our company. The purpose of the committee is to support and provide advice regarding LKQ Corporation's ongoing commitment to environmental matters, social responsibility, corporate governance and many other public policies relevant to our company. Additionally, with inclusion being a core value at LKQ, I am excited to announce that LKQ has joined the Second Chance Business Coalition, a nationwide effort to create economic opportunity for approximately 78 million Americans trying to get back on their feet and contribute to society. We are proud to be alongside 35 other large public and private companies that also believe that supporting those seeking a second chance in life not only provides opportunities for the individual but also for their families and for their communities. It's simply the right thing to do. Lastly, as you may have read, we are both humbled and honored that LKQ North America has been recognized by WorkBuzz, an independent global employee engagement firm as a 5-Star Employer after receiving positive feedback from our first-ever employee engagement survey. Part of our mission statement is to build strong partnerships with our employees and the communities in which we operate. And this award validates that our inclusive and engaged teams are proudly carrying this mission forward. And I will now turn the discussion over to Varun, who will run through the details of the strong third quarter financial performance.

Dominick Zarcone:

Thank you, Varun. Let me restate our key initiatives, which continue to be central to our culture and our objectives. First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy. And fourth, as always, we will continue to invest in our future. As Henry Ford once said, obstacles are those frightful things you see when you take your eyes off of your goal. 2021 continues to be a year where our global teams have never lost sight of our shared goal of driving long-term value for our stockholders. And for that, I offer a heartfelt thank you to each of our 45,000-plus team members that make it happen each and every day. And with that, operator, we are now ready to open the call for questions.

Bret Jordan:

When you think about the Elitek or Elitek business and I guess the incremental margin that you own the hardware. I guess scans would have a fairly high incremental margin. How do you see that business sort of shaping out from a longer-term contribution? I guess what sort of size and maybe what the margin profile might be if you think out a year or 2 or 3?

Bret Jordan:

Okay. And a quick question. One of your peers in Europe was commenting about share shifts and maybe share gains, particularly around the U.K. market. Do you see anything changing over there from a competitive landscape? Are smaller players giving up share at a higher rate? Or maybe give us some color there.

Operator:

Your next question comes from the line of Stephanie Moore with Truist.