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.

Thank you, operator. Good morning, everyone, and welcome to LKQ's first quarter 2024 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-Q 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 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…

Thank you, Nick, and welcome, everyone, to the call. As Nick mentioned, we are not pleased with the results delivered in the first quarter. However, I do think the team is focused and on the right track to confront some of the anomalies we faced, and I'll detail some of those action plans on this call. During our February call, Rick discussed our guidance for the year and indicated that we expected a softness in Q1 and our full year guidance was back end loaded. Rick's comment was correct as we did experience a soft Q1, but it was beyond what we and the overall markets in which we operate anticipated. That said, we are a continuous improvement company and we know how to drive improved operational and financial performance across our entire global footprint. While we got off to a slower than expected start for the year, our team has 3 more quarters to recover the shortfall, and we are confident we have actions in place to achieve the previously communicated EPS guidance. Rick will cover more of these in his prepared remarks. Now for a few high-level segment comments. In Wholesale North America, organic revenue decreased 3.3% due to a few key factors. First, we are coming off a strong comp of 14.4% growth in Q1 of last year. Second, there was an 8% decline in repairable claims. While this decline was largely driven by the extremely mild winter weather that Nick had mentioned, as the U.S. experienced the 5th warmest quarter on record, there were several other dynamics such as abnormal changes in auto insurance rates and used car pricing that we believe also had a negative impact. Finally, we experienced some challenges with aftermarket inventory entering the East Coast ports due to the ongoing Panama Canal…

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%…

Thanks, Rick, for those very kind comments. When I took the seat as CEO in 2017, I believed it was my responsibility to be the primary advocate for our greatest asset, our people, and to place them at the center of LKQ's mission. I am incredibly thankful to all my past and current colleagues who served each other in pursuit of being an employee focused organization. Collectively, we made great progress over the years, which carry forward in the first quarter, when we were awarded Mental Health America's Bell Seal for workplace mental health at the gold level. And we were again selected as a 5-star employer by Workbuzz for our U.S., Indian, Mexican and Canadian businesses. It is with tremendous pride and humility that I depart knowing that the entrepreneurial culture that was established in 1998 when the company was founded lives on today and that every day our 49,000 global employees never lose sight of the passion needed to serve our customers and our communities. They are committed to not only grow the company, but themselves as individuals. The gratitude I have from my fellow employees is immeasurable and I cannot thank them enough for creating an incredible journey for me. And with that operator, we are now ready to open the call to questions.

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

Nick, all the best to you. It's been a pleasure working with you. My questions go to the comments around insurance prices. I'm just curious if you could walk through how higher and really significantly higher insurance prices impact your business overall?

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.

The next question is from Gary Prestopino with Barrington Research.

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?

Yes, Gary, fair question. So when we talked about it in the closing of Q4 for the guidance for this year, we said we'd be around 17% for the year with the dilution on Uni-Select. The product offering that we have for the various products that we sell for Uni-Select, the paint products and the hard part side of the business makes a different margin profile including the base business that we had before makes a similar margin as far as that paint side of the business goes. So with the increase in revenues that's one component. We thought we'd be down around 17% for the year. We still think we'll be at around 17% for the year. The major contributing factor for being below 17% for Q1 is primarily related to leverage. With the volume decline that we saw, significant volume on the repairable claims, we said about 8% on repairable claims and our overall volume is down a little over 3%. That's mostly a leverage component. And as we said, the team has really put some strong efforts in to work on the integration consolidation of various Uni-Select integrations, 65 different facilities that we consolidated. So some of that extra cost, little duplicate cost that will go away as we go into the rest of the year. And that's where we have that confidence of bouncing back and getting back to that 17% number that we've been talking about.

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.

Yes, most of that is mix. The other component that we have that we've been talking about for about 12 months, maybe 18 months is the salvage margin. So, what we talked about was there would be this squeeze in the salvage margin. So, as we thought about where we were at last year, which is about 20.5% of EBITDA, most of that gross margin piece that we see on the decline is that salvage margin squeeze. And so, what we don't do is we don't talk about it being revenue versus the cost side because everything is so unique in that industry. So we've been seeing that squeeze. It started happening in Q3 of last year and it continued in Q4 and then again in Q1 as expected. Those items are as expected what we've been kind of communicating externally to everyone.

The next question is from Scott Stember with Roth MKM.

Nick, I echo what was said before. It was great working with you and wish you nothing but the best of luck.

Thanks, Scott.

Can we talk about Europe for a second? How did the individual regions perform? Just trying to get a sense if there was any regional weakness or if anything stood out on the positive side.

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.

Yes. And Scott, like some of the markets such as the Benelux area or even in Germany, we're seeing mid teen increases in labor rates and it's a market issue. That happens immediately. The team has been actively working on pushing price out, but we're very also conscious to make sure we don't impact the market and start to lose market share. And so we'll continue to push pricing through Q2 to cover that up. We do typically pass it on. We are a humble distributor as you may have heard Nick say before, but we just saw immediate increases in labor rates and it's just taken us some time to pass those prices through to cover that.

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.

Yes. And just one final follow-up. I know you guys are not going to be breaking out, Uni-Select going forward within wholesale. But just trying to get a sense of how the mechanical repair side of the business trend, just trying to get a sense of the market, how things hold them up and at least internally are sales growing?

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

Yes. Yes, correct.

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?

Yes. No, I mean obviously we've done some tuck in acquisitions. We've gotten those integrated pretty well. The team is doing well on getting into the LKQ family. I would say overall in North America, the mechanical is up. So we're only in aftermarket hard parts in Canada with bumper to bumper, but if you look at the major mechanical that we had through our used and our remanufactured in the U.S. and in Canada. We saw an increase in VMT and VMT typically relates to more maintenance and repairs on the mechanical side. So we saw an increase in our engines, transmissions both on the used and the reman side. So overall, the business on the major mechanical and overall mechanical is doing well in North America.

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

On the North American business, I guess to take a little deeper dive, I think you call out weather, but I guess historically, I think 2017 was a warmer winter and I don't recall as much impact. So could you maybe bucket the negative from the Panama Canal issue, maybe the positive from State Farm having gotten into the space year-over-year? And then if you could give us any color on alternative parts penetration, is there any negative shift there?

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.

Okay. And then your comment about a 2017 around 17% full year for North America. Is that run rate of 2017 or getting the full year to 2017 and sort of catching up from the miss in Q1 and being above that at some point in the year?

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.

The next question is from Ryan Brinkman with JPMorgan.

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.

Yes. So I'll take a stab at that. So overall, we did lower the organic guidance due to the revenue miss that we had in Q1 related to the repairable claims. We're pleased with where the growth was in our European operations. On an organic per day basis, we're over 4% on growth. So, we're very pleased with where we're at on that. Most of the growth that we have between the 2.5% to 4.5% is the new kind of line that we put in the sand from this guide. We expect most of that to be a volume piece. There'll be minimal pricing impact, but there'll be some pricing impact, but it'll probably be overweighted on the volume piece.

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?

You said unfavorable I didn't catch the word after unfavorable mid midway through your question.

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?

I mean, right now, we're seeing the car part growing in North America. We're seeing that it growing in an aging, all leading to great improvements and the need for alternative parts utilization whether that's mechanical or collision, whether that's used or remanufactured. So we see great trends in the car park for North America.

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.

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

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?

No, we don't see that part as a headwind for organic growth. I mean the complexity of the vehicles, the value of the parts and the number of parts work to offset some of that, Bret. So we don't see that as a negative trend for us at all going further out.

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.

Okay. And I guess since I got back in line, I get my 2 questions. On European SKU rationalization, I think you're talking about taking 35% or reducing your overlap by 35%. What's what do you see that impact being to margin in that? I guess, more products from fewer suppliers. How do you see maybe the bucket, how many basis points you think you can get out of that initiative?

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.

And Bret, I mean this is kind of the catalyst, one of the bigger projects that we've got over in Europe. This is one of the things that will help us significantly when we think about logistics without borders. So as far as the opportunity here, we think the opportunity one of the reasons we're highlighting it is we think the opportunity going forward over the next couple of years, this is a really major contributing factor for us that we'll talk about a little bit more in September 10th when we do our Investor Day. Andy will kind of lay it out in a little bit more detail on there.

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.

Yes. Operator, this is Justin. Just before Nick closes us out, I want to give, I guess, the investors and really all of our employees that I feel super excited about the future of LKQ. I mean, if you look at the segments for which we operate in such as North America, as I mentioned earlier, the car parc is growing, it's aging, all great things that lead to alternative parts utilization, whether that's in the collision world or in a mechanical world. We've seen inflationary cost pressure on the insurance carriers. Carriers are all trying to drive more alternative parts utilization to combat some of the losses. We see the number of parts per estimate increasing and will continue to increase. We see part pricing increasing and continue to increase. The complexity of vehicles really leads to our services business, which allows us to do things like technical repairs or calibration. We're also very excited about the Uni-Select acquisition that's going to bring us tremendous synergies. And if you jump over to Europe, it's a core segment for LKQ. We have a great management team over there, we're the market leader today with the best margins, that market is still highly fragmented which leads to an opportunity for further consolidation. The team has a clear roadmap on accelerating margin enhancement with extending the, and accelerating the integration a lot of what Rick talked about with the SKU rationalization will lead towards that. And then we're getting the Bumper to Bumper benefits on the procurement side because of scale and size that we have with our European procurement teams. And then you know then jumping down to specialty, I mean we've got the strongest leading position in that space, we're the number one leader in the distribution of RV and SEMA-related products. We've got a great management team that can manage really through all cycles and we've seen that. And so and I think looking at specialty for the month for the quarter even though we were still negative, we saw month to month as I mentioned improvements and March was actually the first month where we saw an increase year over year in demand and an increase year over year in sales. And so just in closing, I just want to reiterate that we have the market leading positions in nearly everything we do. We have long-term great trends that operate in our favor, so truly excited about the future. And with that, Nick, I'll turn it back over to you.

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.

Thank you, Nick. This concludes today's call. Thank you for joining. You may now disconnect your lines.