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.

Thank you, Operator. Good morning, everyone, and welcome to LKQ's fourth quarter and full year 2023 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; Rick Galloway, Senior Vice President and Chief Financial Officer; and Justin Jude, Executive Vice President and Chief Operating 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. Now, let me quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the Risk Factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in 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. And with that, I'm happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe, and good morning to everybody on the call. 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…

Thank you, Nick, and welcome to everyone joining us today. Before I address the fourth quarter, I would like to reflect on what LKQ accomplished throughout 2023. We were optimistic about our prospects going into 2023 despite macroeconomic challenges, inflation, and declining commodity prices. With our operational excellence focus and strong balance sheet, we concentrated on the things we could control and in those areas we were very pleased with our performance. We encountered headwinds that set back the overall profitability, but we believe many of these are transitory and will be minimal in 2024. The non-discretionary nature of the majority of our business and the resiliency of our industry allows us to perform well in almost any market environment. Referring to the walk on Slide 4, I want to highlight the key year-over-year variances in our full year results. We reported diluted earnings per share of $3.51 and adjusted diluted earnings per share of $3.83, the latter of which was $0.02 decrease relative to 2022. Our operational performance was a strong positive, delivering $0.27 year-over-year improvement with exceptional growth in North America partially offset by softness in precious metal prices and difficult market conditions impacting our Specialty and Self Service segments. Europe also contributed to the improvement with solid revenue growth and productivity benefits helping to offset the effects of the German strikes and the value-added tax matter in Italy. We benefited by $0.10 due to the lower share count resulting from our share repurchases in 2022. We experienced year-over-year headwinds from market conditions, the most notable of which were $0.19 from the impact of metal prices as shown on Slide 28, and $0.13 in higher interest expense resulting from rate increases excluding Uni-Select costs. Acquisition and divestiture activities had a negative effect including $0.04 of dilution from the…

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: people, growth and operational excellence. People are the heart of LKQ. My first and foremost commitment is to each of my fellow team members across our global organization who are the backbone and essence of LKQ. LKQ's employee-focused culture, centered around communication, accountability, integrity and respect is not just a goal, it's a necessity for our collective success. Growing our business, delivering excellent service and products to our customers is a part of who we are. We will drive revenue organically by growing share of wallet with our customers and being opportunistic on tuck-in acquisitions. And lastly, operational excellence. We will continue to hone our culture of lean management throughout our operations. This will not only improve our financial metrics, but will also provide a consistent and repeatable operating rhythm where our customers will see continual improvements in our service levels. Alongside these principles, we will focus on four key priorities. First, integrate our businesses and simplify our operating model. Second, focus on profitable revenue growth and sustainable margin expansion. Third, drive high levels…

Thank you, Justin, for your thoughtful perspective and comments, and Rick for that detailed financial overview. Our organization has once again proven to be incredibly resilient in any operating environment. Our global teams have worked with agility and urgency to continuously achieve positive results with our operational excellence strategy in establishing One LKQ, a unified and globally focused team. This success is a direct result of a shared mission amongst our over 49,000 employees, which is simply being the leading global value-added and sustainable distributor of vehicle parts and accessories by offering our customers the most comprehensive, available, and cost effective selection of parts and service solutions while building strong partnerships with our employees and the communities in which we operate. I'm confident LKQ will live that mission in 2024 and excel through this leadership transition. LKQ's future is very bright with Justin at the helm. And with that operator, we are now ready to open the call to questions.

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

Yes. Hey, good morning, everybody. Congrats on the quarter.

Hey, good morning.

Good morning, Daniel.

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?

Yes, sure. Thanks, Daniel. Thanks for the question. The way to think about it, I talked a little bit about it in the prepared remarks, Specialty is going to be in the low-single-digits, so that's going to be on the downside of it, whereas North America and Europe will actually be on a little bit of a higher side. When you think about both of them, it's going to be primarily driven by volumes as far as where that's going to come out for our North American operations. And then I did talk a little bit about the EBITDA percentage with Uni-Select included 17% is the number that we're guiding towards for our North American operations.

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?

Yes. I appreciate the question. You're spot on the vendor financing program, supplier financing program; we're very pleased with what we saw. We ended the year at $411 million of -- in the vendor financing program. That includes $71 million related to Uni-Select with the acquisition that we did. That's compared to $244 million that we had at the end of 2022. Obviously, there's going to be some ups and downs. We finished a little bit on the high end from what we expected, but very good usage. We'll continue to see a little bit more going into that particularly for our European, but also for our Uni-Select operations, hoping to drive a little bit of more free cash flow. But it's not going to be at those same levels. It's not going to be a 20% increase going into 2024. So I caution you to not put too much in there as far as that goes. And then on the share repurchases, we're pleased with where we are turning out on free cash flow. We hit the billion dollars that we had talked about. That's inclusive of the $30 million that we purchased in Q4 on shares. And then again, we were active in Q1, and we think that this will be a regular piece of it. Obviously, there's significant commitment that we made on the leverage ratios getting down to 2x within the first 18 months. So that's technically January or Q1 of 2025. So there'll be a significant overweighting on the debt payments throughout the year. But we will be active as we see opportunities.

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

Good morning. And Nick, I know you got one more earnings call, but you do get to leave the business better than you found it, so well done.

Thank you, Michael.

So my question is back to the free cash. I think you're getting a lot of these today, probably, and there's two parts of it. When do we get back to a compounded growth rate in the cash? And then the European question, part of that is, what's the remaining gap between payables and inventory in Europe that is an opportunity to capture that would drive some of that compounding.

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.

Okay. And then my second question, Justin alluded to the possibility of portfolio optimization and I'll get very specific. I get that self-serve was the start of the company, but at this point, do you need to own the self-serve business to be the LKQ you are today going forward?

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.

Our next question comes from Craig Kennison of Baird. Craig, the line is yours.

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

Thanks, Craig.

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.

Yes, sure. Thanks for the question, guy. I have spent several weeks over in Europe meeting the teams over there, the leaders of our different businesses. I'm very optimistic about our future, spent quite a bit of time with Andy Hamilton, our new CEO. Andy did run our ECP operations in the UK, which was our highest profitable and one of our highest businesses that drive private label. Some of the things that him and I have talked about that he's laser-focused on is category management. And that includes driving more private label, which will bring us better margins, really leveraging our inventory and logistics without borders. Today, we're very optimized within the countries for which we operate, but we're still independent within those countries. So we're going to continue to accelerate the One LKQ Europe to leverage that inventory, freeing up free capital. In addition, it'll give us better fulfillment rates, which will drive organic revenue and also looking at labor productivity. And so these are things that Andy's been once again laser-focused on with his team, and him and I are aligned on that pretty well. So very optimistic about the opportunities in Europe.

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?

It's a lot of different product lines today, we're heavily collision focused in the U.S. and North America versus hard parts over there. We're grabbing some of, I would say, the best practices to track fulfillment rates. We have a lot of orders in our European operations that are not necessarily on the phone like they are in the U.S., so a lot of online, a lot of e-commerce with businesses. But one of the things when we look at category management and we rationalize some of the different excess product lines that we may carry, still carrying an application for what the customer is looking for, but maybe not so many different brands, that will actually allow us to drive our fulfillment rate set.

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

You talked about bumper to bumper doing some purchasing from European vendors. Could you talk about how much supply chain synergy there -- is there? How much bumper to bumper product could come from existing vendors?

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.

Yes. To your point, we have started leveraging our European supply chain, bringing in some private label that we already operated on or already carried at bumper to bumper in Canada. Our next phase is looking at new product lines that today bumper to bumper does not carry. So it's not only a cost of goods to get there, but also a revenue generation and margin improvement with new brands and new product lines offering within the private label, so.

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.

Okay. And then you talked about EV battery recycling, and I guess, what does that mean? Are you talking about extracting them or actually processing, like, a redwood materials? Is that North America or Europe? And is that a capital investment to get into that business?

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.

With that, we have no further questions on the line. So I'll hand back to Nick for any closing remarks.

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.

Ladies and gentlemen, thank you for joining today's call. You may now disconnect your lines.