The operator welcomes participants to the LKQ Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call and introduces Joe Boutross, Vice President of Investor Relations. Joe then introduces the other speakers, Nick Zarcone, Rick Galloway, and Justin Jude, and directs participants to the LKQ website for the earnings release and slide presentation. He also mentions the Safe Harbor statement and the use of both GAAP and non-GAAP financial measures. Nick Zarcone then takes over and begins his presentation.

In late November, the CEO announced his intention to retire and the Board unanimously selected Justin as his successor. Justin has proven himself as a strong operating executive and effective leader. The company has seen significant improvements in margins, cash flow, and market position under Justin's direction. The focus on operational excellence has resulted in strong organic revenue growth, the Uni-Select acquisition, and a reduction in debt through the use of free cash flow.

The company has made significant progress in reducing its net debt and returning cash to shareholders. They have also seen positive momentum in cash flow generation. In the fourth quarter of 2023, revenue increased by 16.6%, with parts and services organic revenue increasing by 2.8%. The North America segment saw a 5.3% increase in organic revenue, outperforming the industry despite a decrease in auto claims. This is attributed to various factors, including an increase in alternative part usage and the company's market share growth.

In the fourth quarter, the aftermarket volumes and order fill rates continued to improve for the company, with fill rates reaching close to 95%. This was largely due to the recovery of the supply chain and increasing demand for their products in the aging car park. The salvage business also saw organic growth, driven by volume. Though total loss rates increased slightly, it did not impact their organic growth as it was mainly driven by older vehicles. The average model year of vehicles being repaired is 2017, further supporting their belief that total loss rates will not significantly affect their growth. In Europe, all regions showed strong organic growth, particularly in the Benelux and Eastern European markets, as well as with their private label and salvage product lines.

In the fourth quarter, strikes at our distribution center in Germany affected our operations, but our team has been working to mitigate the impact. We have proposed terms to the works council in hopes of reaching a resolution. Our Specialty segment saw a decrease in organic revenue due to challenges in the RV and towing industries, but there is optimism that these headwinds have bottomed out. The Self Service segment will be discussed next.

The organic revenue for parts and services in the Self Service segment decreased in the fourth quarter due to soft commodity pricing. The Red Sea crisis is not expected to have a significant impact on parts availability, but there may be some disruption in Europe due to shipping diversions. The divestment of GSF Car Parts was completed in October 2023, and the company has announced a quarterly cash dividend. The rest of the paragraph is an introduction to Rick Galloway, who will discuss the details of the segment results and the company's accomplishments in 2023.

Despite facing challenges such as inflation and declining commodity prices, we remained optimistic about our prospects for 2023 due to our operational excellence focus and strong balance sheet. Our non-discretionary business and industry resilience allowed us to perform well in any market environment. Our full year results showed a $0.02 decrease in adjusted diluted earnings per share compared to the previous year, with strong operational performance in North America and Europe offset by market conditions and acquisition/divestiture activities.

In 2023, foreign exchange rates and tax provisions had a positive impact on the company's earnings per share. The fourth quarter saw similar drivers, with income taxes being the largest variance from the previous year. The Wholesale North America segment had a strong performance, but the recent acquisition of Uni-Select had a dilutive effect on the segment's margin. Without Uni-Select, the margins would have been comparable to the previous year and set a record for the full year. The integration of Uni-Select is progressing ahead of schedule, but it will no longer be reported separately in the segment results. The North American full year EBITDA margin, including Uni-Select, is expected to be around 17% in 2024. In Europe, the segment's EBITDA margin decreased due to several unusual items.

In the fourth quarter, the company faced several challenges such as strikes at their primary distribution center, non-recurring compensation charge, and a reserve for a value-added tax matter, which impacted the segment's EBITDA margin by 110 basis points. In addition, inflationary cost effects in SG&A expenses also contributed to the margin variance. Looking ahead to 2024, the company expects to return to a double-digit margin as they move past the strikes and other transitory effects. In the Specialty segment, the EBITDA margin decreased by 50 basis points due to increased price competition and unfavorable product mix, but was partially offset by favorable SG&A expenses. The company is optimistic about improving EBITDA margins in 2024 through productivity despite facing challenging conditions and low-single-digit organic revenue growth.

In the fourth quarter, Self Service profitability improved with an increase in EBITDA margins and a reduction in operating leverage. This was due to lower precious metal prices and a decrease in average car cost. The company produced $87 million in free cash flow during the quarter and exceeded their prior guidance for capital expenditures. The cash conversion ratio for the year was 59%, in line with their targeted range. However, due to future expenses, the company is widening their cash conversion target range.

The company has been successful in reducing working capital levels and generating strong free cash flow. They plan to continue this trend by efficiently managing working capital and expanding their supply chain finance program. They aim to reduce their total leverage ratio and are currently working on refinancing options. Their projected 2024 results are based on current market conditions and recent trends, including scrap and precious metal prices and foreign exchange rates.

In 2024, the company expects organic parts and services revenue growth of 3.5% to 5.5%, with one to two extra selling days and a decrease in Europe due to Easter. They anticipate a full year adjusted diluted EPS of $3.90 to $4.20, with a mid-point of $4.05, which is a 6% increase from 2023. This growth is expected to come from all four segments, with Europe and North America generating more growth than Specialty and Self Service. The impact of Uni-Select and transitory items in Europe is expected to be less in 2024. Commodity prices and interest expense are projected to have a nominal impact. The company anticipates an effective tax rate of 26.8% and approximately $1 billion in free cash flow for the year.

The paragraph discusses the financial outlook for LKQ, including higher cash payments for interest and investments in key areas. The company expects to generate $1 billion in free cash flow and plans to use it for various purposes. The first quarter of the year has been affected by weather conditions and low prices, but the rest of the year is expected to see growth. The new CEO, Justin Jude, expresses gratitude and excitement for his new role.

The incoming CEO of LKQ is committed to three principles: people, growth, and operational excellence. They will prioritize integrating their businesses, driving profitable revenue growth, generating high levels of free cash flow, and investing in the company's future. In the short-term, the focus is on integrating the Uni-Select acquisition and taking advantage of synergies.

The company's corporate synergies are on track to exceed expectations, with plans to deliver above targets ahead of schedule. The buffer to buffer business in Canada completed two acquisitions and is working with procurement teams to maximize revenue and cost synergies. The recent acquisition of Uni-Select will widen the company's moat and create new revenue synergies. The company's North American teams are skilled and experienced in integration and operational excellence. In the long-term, the company will continue to invest in recycled and remanufactured EV batteries. In Europe, the company's new CEO is focused on accelerating the integration of one LTQ Europe to fully leverage the network of inventory.

The company's plans to link distribution networks across Europe will lead to increased productivity, customer service, and profitability. They also have opportunities for growth in various areas, such as private label and EV aftermarket parts. The company also aims to optimize its facilities and logistics network for efficiency. They will continue to assess their businesses and make necessary changes during the integration process. The CEO expresses excitement for the future and credits the company's resilience and One LKQ strategy for their success.

The success of the company is attributed to its shared mission among its employees to be the leading global distributor of vehicle parts and accessories. The company's future looks promising under the leadership of Justin, and they are not providing specific growth guidance for each segment. However, it is expected that North America and Europe will see higher growth due to increased volumes, while Specialty may see a decline.

The speaker discusses the EBITDA percentage for North American operations, which is expected to be 17% with Uni-Select included. They also mention progress made in the vendor financing program in Europe, with $411 million at the end of the year. The speaker cautions that the program will not see the same level of increase in the future. They also mention the resumption of share buybacks and their commitment to reducing leverage ratios within the next 18 months.

The speaker, Michael Hoffman, is asking about the free cash flow and when it will return to a compounded growth rate. He also asks about the remaining gap between payables and inventory in Europe that could potentially drive this growth. The speaker, Rick Galloway, explains that in the last couple of years, the company was able to drive a significant portion of lower hanging fruit in trade working capital and had some benefits in CapEx due to supply chain issues. They are now at a normalized level and should expect compounding growth in EBITDA and free cash flow.

In response to a question about the opportunities in Europe, Nick Zarcone discusses the company's 20% improvement in vendor financing and their positive cash generation. Justin Jude then addresses the possibility of portfolio optimization and the company's approach to evaluating and potentially selling businesses that do not fit their long-term operating model. Craig Kennison then asks about levers that could be pulled to drive margin expansion, specifically in Europe and the private label side.

Justin Jude, the Vice President of LKQ Europe, discusses his recent trip to Europe where he met with the leaders of the company's different businesses. He is optimistic about the future and has spent time with the new CEO, Andy Hamilton, who has a strong focus on category management and driving private label sales for better margins. They also plan to leverage inventory and logistics across borders to improve fulfillment rates and drive organic revenue. Jude is confident in the opportunities in Europe and is aligned with Hamilton's goals. In terms of fulfillment rates, LKQ Europe is heavily focused on collision products in the US and North America, but is adopting best practices to track rates for their online and e-commerce orders in Europe.

The company is looking at category management and rationalizing excess product lines to improve fulfillment rates. They have identified $55 million in procurement synergies and have already started leveraging their European supply chain to bring in private label products. This will not only reduce costs, but also generate revenue and improve margins. Additionally, they see potential in European makes and models, which currently make up 10% of the Canadian car park.

The company is focusing on distributing European products in Canada and is considering partnerships for EV battery recycling. The first quarter call will be on April 23.

LKQ will be hosting their Q1 reporting on Tuesday, April 23 due to an overlap with their Annual Leadership Conference. They also announced their 2024 Investor Day on September 10 at their North American headquarters in Nashville, Tennessee. The speaker thanks everyone for their time and acknowledges the hard work of their employees. The operator then ends the call.

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