The LKQ Corporation held their third quarter 2023 earnings call, with Joe Boutross introducing the speakers, Nick Zarcone and Rick Galloway. The Safe Harbor statement was discussed, along with the presentation of both GAAP and non-GAAP financial measures. The CEO, Nick Zarcone, provided high-level comments on the company's performance, followed by Rick Galloway who shared financial details and updated guidance. The call concluded with closing remarks from Nick Zarcone.

The third quarter of 2023 saw mixed results for LKQ, with their North American operations outperforming but facing challenges in their European operations. The company also experienced pressure on commodities and lower demand for specialty products. However, LKQ remains optimistic about their future and continues to focus on their operational excellence strategy. They achieved strong organic revenue growth in North America and Europe, with excellent EBITDA margins and free cash flow. On the downside, they faced some unusual headwinds, including a tax violation by third-party suppliers in Italy.

Rhiag had to remit disputed amounts to the Italian revenue agency due to VAT violations by former suppliers. Strikes at their German distribution center also impacted their ability to replenish inventory and negotiations with the works council are ongoing. These two factors reduced organic growth and segment EBITDA margins. Commodity pricing pressure also affected margins and earnings per share, particularly in the Self Service segment. Despite these challenges, the company generated strong free cash flow and is on track to reach $1 billion in 2023.

In this paragraph, the company discusses recent acquisitions and divestments, as well as their third quarter 2023 results. Revenue increased by 15%, with organic revenue for parts and services in North America increasing by 3% on a reported basis and 4.3% on a per day basis. Diluted earnings per share decreased by 18.9%, while adjusted diluted earnings per share decreased by 11.3%. The company highlights their strong performance in North America, despite a decrease in non-comprehensive related auto claims. The growth in the region was driven by a combination of price and volume improvements, particularly in the aftermarket collision products.

The company experienced significant volume increases due to their disciplined procurement efforts and the expansion of State Farm's usage of aftermarket collision parts. The company also expects an additional $20-30 million in annual revenue from State Farm's national rollout of aftermarket parts. The ongoing UAW strikes may also create more demand for aftermarket and recycled parts, with a potential impact on the company's North America EBITDA margins. The company remains on track to achieve their full year target, excluding the dilution from Uni-Select, and will now focus on their European segment.

In the third quarter, Europe's organic revenue for parts and services increased by 5.1% on a reported basis and 6.2% on a per day basis. Despite the impact of strikes in Germany, all regions saw solid organic growth, with a total same-day growth rate of 6.2%. Excluding the strike, the growth rate was almost 8%. The diversity of the European platform is shown by varying EBITDA margins. The Specialty segment saw a decrease in organic revenue of 6.1% on a reported basis and 4.6% on a per day basis, mainly due to a soft demand environment. RV OEM warranty and truck and off-road products saw an increase, while RV accessories and towing-related products saw a decline. The decline in RV revenue was less significant in the third quarter compared to the first half of the year.

In the third quarter, the Self Service segment saw a 5.1% increase in organic revenue, but faced challenges with decreased metals pricing and higher car costs. The company has taken steps to address these issues and expects the segment to be marginally profitable in the fourth quarter. The Uni-Select acquisition was completed in August and integration and synergy activities are on track. The company has already completed the first wave of facility optimizations and expects to see further progress in optimizing their footprint. The sales and operations teams for paint and related products have been aligned, and a synergy tracking team has been established to ensure targets are met.

The paragraph discusses the recent changes and developments in the FinishMaster business, including a shift towards MSOs as larger customers and the completion of two acquisitions in Canada. The North America team is confident in managing the Uni-Select integration and delivering strong results. However, the third quarter results were below expectations due to a combination of factors, but the company remains confident in the overall business and its strengths.

The company has a total debt of $4.0 billion, with a leverage ratio of 2.3 times EBITDA. They recently acquired Uni-Select and were able to save $50 million through hedging. They plan to pay down debt and reduce their leverage ratio within 18 months. They have already paid down $200 million in debt and expect a further reduction by year-end. The company generated $344 million in free cash flow in the third quarter and is on track to reach $1 billion for the full year. Despite some costs related to acquisitions and restructuring, they are pleased with their free cash flow performance.

During the quarter, the company invested $65 million on acquisitions and paid a dividend of $74 million. The dividend was increased to $0.30 per share, reflecting confidence in generating strong cash flow. The effective borrowing rate increased to 5.5% due to global market rate increases, but a significant portion of variable rate debt has been fixed with interest rate swaps. The North America segment reported a margin of 17.0%, including results from the recently acquired Uni-Select. Without Uni-Select, the North America segment continued to perform well with a margin of 18.8%. The integration of Uni-Select has led to a better understanding of the timing and projections, with an updated estimate of dilution in 2023. The company is focused on integration and accelerating synergies to maximize benefits in 2024.

The company remains confident in their investment in Uni-Select and expects the transaction to be beneficial in 2024. The European segment's EBITDA margin decreased due to unusual items and gross margin compression. The company is addressing this issue with specific actions. The Specialty segment's EBITDA margin also declined, mainly due to increased price competition and unfavorable product mix. However, SG&A expenses were favorable due to restructuring efforts. The company expects the trend of narrowing year-over-year decreases in organic revenue and EBITDA margin to continue in the fourth quarter.

Self Service profitability declined in the third quarter of 2023, with a loss of 0.6% compared to a 4.1% profit in the second quarter. This was due to lower precious metal prices and a decrease in other revenue. Adjusted diluted earnings per share also decreased by $0.11, primarily due to the impacts of metals prices and a VAT charge in Italy. Operational performance was slightly negative, but there were some gains in North America. The tax rate remained consistent with previous guidance. The projected 2023 results are based on current market conditions and assume stable scrap and precious metal prices.

The company is providing guidance for the rest of the year, including projected foreign exchange rates and expected revenue and earnings. They have adjusted their previous guidance due to various factors, including lost earnings from a German strike and the Uni-Select acquisition. They have also increased their free cash flow guidance and anticipate a decrease in Q4 due to seasonal factors and higher interest payments.

Nick Zarcone, CEO of LKQ, is pleased with the company's financial performance and progress in their operational excellence journey since 2019. They have achieved record EBITDA margins in North America and are on track to beat that record this year. The LKQ Europe Program has also been successful in driving double-digit EBITDA margins. The company has generated strong organic revenue growth and significant free cash flow, divested non-strategic businesses, achieved investment-grade ratings, repurchased stock, and distributed dividends. They have also received a AAA ESG rating and have a team dedicated to sustainability efforts. The company remains focused on their key strategic pillars as they move towards the end of 2023.

LKQ has outlined its four main priorities moving forward, which include integrating their businesses, focusing on profitable revenue growth and sustainable margin expansion, driving high levels of cash flow, and continuing to invest in their future. The company also thanks its employees for their contributions and states that they are their biggest asset. The sale of their UK assets was completed at the highest value possible, but the specific terms of the transaction cannot be disclosed. The proceeds from the sale will be used to pay off debt.

The speaker discusses the impact of multiple factors on their recent M&A transaction, including higher interest rates and the sale to a PE shop in the UK. They also mention the potential for growth in their Canadian business through a vendor financing program and improvements in trade working capital. The guidance walk includes a projected $0.05 headwind from the Uni-Select acquisition, which is slightly higher than the previous quarter's projection of $0.04. The speaker does not mention any specific reasons for this change.

The company's estimates for the seasonality and phasing of the Uni-Select business were off, resulting in a decline in transaction value by $100 million. However, they are working to realize synergies sooner and have already achieved 20% of their overall synergies. Some of the synergies were tied to leases, but not all.

The speaker discusses a strike in Germany that affected their distribution center and caused issues with product replenishment. They mention that they are working to mitigate the problems caused by the strike.

The company is facing challenges due to a strike at one of their distribution centers in Germany. They are trying to mitigate the impact by bringing in employees from other branches and increasing inventory levels. However, the strike is expected to continue for a few more months, and the company is hoping to reach a settlement with the union soon. The strike has already had a negative impact on the company's earnings in the second quarter and is expected to have a larger impact in the fourth quarter.

The company is optimistic about closing out in 2023 without impacting 2024. They have a total of $0.06 in guidance for Q3 and Q4. The bumper to bumper business is on track and has seen high single digit organic sales growth. In Europe, there has been a 140 basis point decline in gross margin due to price sensitivity in the recessionary environment. The company offers good, better, and best product options.

The company is seeing customers move from higher-priced products to lower-priced ones due to price sensitivity in a recessionary environment. This is impacting profit margins, but the company is taking steps to drive profitability, such as expanding private labeling offerings. The team is performing well in terms of volume and delivery, but there is some impact on margins. Changes are being made in the self-serve and specialty areas to improve profitability.

Nick and his team have implemented new leadership to improve procurement and margins. While there was initially negative performance, September showed a profit and Q4 is expected to be on par with last year. The decline in Specialty sales is due to a combination of macroeconomic factors and tough comparisons to a strong 2022. The sale of light trucks, jeeps, and SUVs has been steady, but new RV units have been significantly impacted by the current economic climate.

The sale of RV accessories and related products has been softer due to lower demand for RV units. Retail sales of RV units are a better indicator of demand for RV accessories than wholesale shipments. With higher interest rates and weaker consumer finances, there is no immediate catalyst for a rebound in the RV marketplace. However, in 2024, there may be a more positive outlook due to easier comparisons with 2023. The increase in free cash flow for the year is primarily due to a $180 million benefit from trade working capital, as well as other factors such as the vendor financing program and operational excellence initiatives.

The team is performing well and driving a 12% increase in performance, with a $35 million increase in the vendor financing program and a 10% increase in payables. This is attributed to continuous improvement in trade working capital. The company expects to pay down $150 million in debt in the fourth quarter. The total loss rate for Q3 was 20.6%, which was slightly higher than the previous years. However, the company is not concerned about this as it presents more opportunities for their salvage operations. The key factor driving the company's demand for products is the increasing average number of parts required to repair a vehicle, which has reached an all-time high of 15.7 parts. The industry is also recovering from aftermarket parts availability issues.

The company's fulfillment rates are back to over 93%, close to their target. The State Farm program may take some share away from the original equipment manufacturers (OEs). The company's same-day organic growth of 5.8% outperformed the impact of other headwinds and tailwinds, giving them confidence that they are continuing to take share. The MSO mix at FinishMaster is slightly higher and has lower margins than the traditional paint business. The company is happy with where they stand in the paint business. They believe North America will have similar growth in the fourth quarter.

The speaker discusses how the comps have become harder due to increased fulfillment rates in the fourth quarter of last year, but the company has also benefited from State Farm and the UAW strike. They are confident in their long-term growth expectations and plan to use their free cash for dividend payments, debt paydown, and tuck-in acquisitions.

LKQ Corporation's remaining $500 million in capital will be used for share repurchases, debt paydown, or other opportunities. They are committed to reducing their debt to below two times within 18 months, and will continue to evaluate their options for capital allocation. The company will announce their fourth quarter and full year 2023 results and set guidance for next year in late February 2024.

This summary was generated with AI and may contain some inaccuracies.