00:06 Good day, and thank you for standing by. Welcome to the LKQ Corporation's Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference call is being recorded. [Operator Instructions]. 00:40 I would now like to hand the conference over to your speaker today, Joe Boutross, Vice President of Investor Relations for LKQ Corporation. Please go ahead.

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.

02:20 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 2021 and then, Varun will dive into the financial details and discuss our 2022 outlook, before I come back with a few closing remarks. 02:40 Before I begin, on behalf of everyone at LKQ, I again want to express our sincere thanks to all those on the front lines who are working hard to keep our communities and our citizens safe and healthy. I also extend condolences to all those who have suffered a personal loss during this unfortunate pandemic. It seems like everyone know someone who has been seriously impacted by COVID. While we've made great strides across the globe combating the pandemic, it is still a harsh reality that we all have to confront in our daily lives. 03:20 As most of you know, LKQ spent two decades consolidating fragmented markets into centralized businesses. And in the process, we created the largest and best-in-class operators in each of our major markets. Then, in 2019 we pivoted our strategy to focus on operational excellence. Some folks may have been skeptical about this pivot, but they may not have had a true understanding of our culture, a culture that is centered on outcomes not obstacles, a culture that is agile and nimble and a culture that is LKQ proud. It is with great pride that I can say our teams across all of our segments embraced and delivered on our operational excellence initiatives throughout all of 2021. 04:12 Before I move on to the fourth quarter results, let me highlight just a few of the milestones we achieved in 2021. We had record corporate-wide revenue and profitability. North America…

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…

36:19 Thank you, Varun. In closing, 2021 was a banner year for LKQ and I could not be prouder of the collective efforts of my global teams. Let me restate our key strategic pillars, which continue to be central to our culture and objectives as we've entered 2022. 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 last but not least, we will continue to invest in our future. 37:13 With these pillars in place, coupled with our industry-leading teams, we are well positioned to face the challenges in the first half of the year and we'll 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 and every day. They are truly our greatest asset. 37:44 And with that, operator, we are now ready to open the call for questions.

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

38:03 Hi, good morning and congrats on a great year.

38:07 Good morning, Stephanie.

38:10 My first question is really a clarification question. As you look to your 2022 EPS guidance, does that -- does the guide EPS range include incremental share repurchases?

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.

38:44 Great. No, that's helpful. Switching to the North America business, obviously there has been across all segments a tremendous work over the last 2 years to just improve operating performance, reduce costs, whether it'd be around labor, et cetera. So maybe if you wanted to kind of bridge what you expect would be incremental expenses in North America. I think you noted and we're all aware of labor, wage pressure, towing and then also kind of what will be done to offset that from this overall efficiency gain? Thank you. As well as pricing? Thanks.

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.

41:56 Absolutely. Thank you so much for the color.

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

42:05 Yeah. Hey, good morning, guys. Congrats on the quarter.

42:07 Good morning, Daniel.

42:09 I wanted to follow up on the thoughts around long term efficiencies. Varun, you kind of mentioned I think the word productivity improvement could offset some of these inflationary headwinds this year to drive that improvement. Could you add some more color around what specifically you see an opportunity to improve? I think you mentioned freight and supply chain. Can you kind of quantify any of those savings buckets? 42:30 And then taking a step back, as we look out 2023, 2024 and beyond, I know you're not giving long-term targets now, but how should we think about the pace or the cadence of margin expansion in out years given what you see on the productivity opportunity.

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.

45:51 Varun, thanks for that color. Nick, I wanted to follow up with a bit of a longer-term question. You mentioned some of the ESG initiatives and clearly that's a focus for the company with the recycling. But as EVs grow across the country and just over the next decade, how is the infrastructure in your opinion on EV battery recycling? Is that something you could be a larger player in since there is a demand for it and you're already ingrained in the auto recycling ecosystem? Just kind of curious how LKQ can capitalize on that opportunity given where you sit today.

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.

48:07 Thanks, guys.

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

48:13 Good morning, guys. Thank you for taking my question.

48:16 Good morning, Brian.

48:19 Just the first one, can you kind of maybe summarize the segment margins that are kind of built into the 2022 outlook? And also kind of how that might flow seasonally through the year?

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.

49:47 Okay, great. That's helpful. And then a follow-up question on the cash flow side. Can you talk a little bit about maybe capital spending in 2022 and how that should trend? What's keeping that at a higher level? As well as how should we think about working capital in the year? How much of that $1.3 billion of cash from operations is benefiting or being impacted by the working capital side?

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.

52:41 Okay, great. And if I could slip in maybe one last one. Just on the metal side when you talk about metals coming down, are we really talking about kind of what's built into the 2022 guidance is metal prices getting back to the 2020 levels. I mean, when you take out the full $0.27 impact, I'm just trying to understand the magnitude of how much pricing has -- how much metal prices have to come down to show that impact?

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.

54:36 Your next question comes from the line of Jordan -- from the line of Bret Jordan of Jefferies.

54:42 Hey, good morning, guys.

54:44 Good morning, Bret.

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%?

54:57 Yeah. Bret, great question. It's -- the answer is, it depends. It's really different business by business and product line by product line. But I assure you that all of our segments are expecting an increase in demand, increase in volume, if you will. A portion of the 3% to 5% is anticipation that we're going to be able to move prices up, but certainly not all of it. It's a good balance between volume and price. The reality is, we look at prices on our products literally daily across the globe. And we are always adjusting something up or down. It's a balance. 55:43 On the one hand, we want to make sure we're driving the price to make sure we're doing whatever we can do to protect our gross margins to cover the cost, the incremental cost associated with labor and freight and all the rest. On the other hand, you don't want to take your prices up so much that you start impacting our ability to sell product and impact volumes. So it's a balance. We think we have a -- strike a good balance. Again, we're working with our suppliers, we're working with our customers and embedded in that 3% to 5% is a volume growth for all 3 of the segments and some pricing improvements as well.

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?

56:48 Yeah. So the real challenge that we have is the aftermarket collision parts in North America, because that's where we pull the better part of 16,000 containers a year over from the Far East, Taiwan, specifically. And that's been the most impacted by the supply chain disruption. And again, we were able to build inventories in each of the segments. We're feeling reasonably good with our current positions in Europe, though, it's not perfect. It's better than it was, the same with specialty. It's not perfect, but it's better than it was. Again, we've gotten great conversion on the salvage side. And so the sticky wicket, if you will, is in the North American aftermarket business where normally we would be in fulfillment rates well north of 90% and we're below the 90% level right now. Our goal is to get back to our historical levels and that's all tied to having product on the shelf in order to sell. It's not necessarily a demand issue. It's truly a supply issue. 58:01 We saw a little bit of relief towards the end of the year in getting product over. Now, everyone needs to understand that while on the balance sheet the value of the inventory even in North America was up, it's basically our inventory. It's on our books when it hits the ports in Taiwan. And with the extended shipping time, it doesn't mean that our salable inventory sitting in our warehouses was up by the full amount of the increase in North American inventory. It's still a challenge. 58:37 I mean, what used to take 4 to 6 weeks to get product into our warehouses is taking months. And we did everything we could to pull product in before the Chinese New Year, which has an impact on the shipping times and we are able to get a bit of product in and now it's slowing back down a little bit. Overall, we think the supply chain challenges are going to be with us basically through most of the year. We're working hard to do what we can to make sure we've got the product that we need where we need it, so we can sell it and deliver it to our customers.

59:15 Okay, great. Thank you.

59:18 Your next question comes from the line of Scott Stember of CL King.

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?

59:48 Yeah. So the -- you're talking about the Department of Transportation --

59:54 Yes.

59:55 So every year every organization has to submit information to the DOT and the like. Our specialty business, which executes incredibly well has an incredible focus on safety as their number 1 priority and goal. And it's coming through because their results were quite good. We don't anticipate it to have a huge impact on specialties margins, our ability to -- certainly, it has nothing to do with sales. But on the fringe, on the margin, it means that a little bit less waiting time for the drivers, which makes them a little bit more productive, the ability to save some time and money on labor. 60:49 Again, you probably won't be able to see it because it's not a big item, but we wanted to highlight it just to demonstrate the focus that we have on the health and safety of our employees and the other constituents that are important to us. And it's a little bit of a blue ribbon issued by the government saying that we're doing a good job.

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

61:19 This concludes today's Q&A session. I will now turn the call back over to Nick 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.

62:19 Thank you. This concludes today’s conference call. You may now disconnect.