The LKQ Corporation First Quarter 2024 Earnings Conference Call began with a welcome from the operator, Angela, and an introduction from Joe Boutross, Vice President of Investor Relations. Joe reminded listeners of the Safe Harbor statement and the possibility of forward-looking statements. He also mentioned the availability of the earnings release and accompanying slide presentation on the LKQ website. Nick Zarcone, CEO of LKQ, then gave some introductory remarks.

The speaker, who is turning 66 soon and will be retiring as CEO of LKQ on June 30th, will be giving their final quarterly earnings call. They are proud of the company's achievements and growth over the years, but the first quarter of 2024 was challenging due to mild winter weather in North America and soft demand for specialty products. The company has made cost adjustments and opened a new distribution facility in Germany to mitigate the impact of ongoing union negotiations. Despite these challenges, they remain optimistic about the rest of the year.

The third paragraph discusses the quarterly results for the company, including a 10.6% increase in revenue compared to the previous year and a decrease in parts and services organic revenue. Other revenue fell due to weaker precious metal prices. Diluted earnings per share also decreased compared to the previous year. The Board of Directors declared a quarterly cash dividend. The speaker, Justin, acknowledges the disappointing results but is confident in the team's ability to improve performance. He also mentions the company's back-end loaded guidance for the year and their focus on continuous improvement.

Despite a slow start, the company is confident in achieving their previously communicated EPS guidance for the year. In Wholesale North America, there was a decline in organic revenue due to a strong comp from the previous year, a decrease in repairable claims, and challenges with aftermarket inventory entering East Coast ports. However, the salvage business saw positive growth and the team was able to swiftly integrate FinishMaster branches, resulting in increased synergies.

The efforts to improve the Bumper to Bumper business in Canada caused some short-term strain on the team, but it will have long-term benefits. The company is leveraging their European procurement size and scale to make improvements. The CEO has visited the European operations multiple times to identify opportunities for improvement and the team is focused on integration and improving margins. New tools have been implemented to track pricing, productivity, and cost reduction initiatives. A new distribution center has been opened in Germany to alleviate strain on the primary center. The company has also made the strategic decision to divest their operations in Slovenia to a long-term partner.

The company recently closed a sale and entered into an agreement to divest their operations in Bosnia. They will continue to assess their business and European market mix to determine the best course of action. They are also implementing a SKU rationalization program to reduce complexity and improve efficiency. In terms of specialty, their organic revenue decreased 1.4% in the quarter, but certain product categories saw positive growth. RV-related products had the smallest decrease compared to previous quarters.

The company's specialty team has been successful in targeting margin actions and controlling costs. The self-serve division saw a decrease in revenue due to factors such as commodities and weather, but margin performance exceeded expectations. The company also made some acquisitions and investments. The financial results for the first quarter were lower than expected, but the company is still committed to meeting its full year earnings guidance and is taking actions to improve performance.

The first quarter consolidated results showed a decrease in adjusted diluted earnings per share of $0.22 compared to the previous year. This was mainly due to a $0.12 reduction in operating results, primarily in North America. Other factors that contributed to the decrease were movements in commodity prices and other items such as investment performance and taxes. North America's segment EBITDA margin decreased by 420 basis points to 16.3%, mainly due to the anticipated dilution effect from the Uni-Select integration. However, the company expects this impact to flip to accretion in 2024 as synergies are realized. In Europe, the segment EBITDA margin decreased by 100 basis points to 8.7% compared to the previous year.

The company's gross margin improved by 60 basis points, but higher overhead costs offset the improvement. The Specialty segment's EBITDA margin declined due to competitive pricing pressure, but the company is implementing changes to improve net pricing. The Self-Service segment's EBITDA margin decreased by $6 million, but the company is pleased to have reached double-digit margins again. The company has implemented a global restructuring program to enhance profitability, with a focus on exiting certain businesses or markets that do not align with their strategic objectives. This includes exiting businesses in Slovenia and Bosnia, and evaluations of other markets are ongoing.

In the first quarter, the company recorded $27 million in charges, including asset impairments and inventory write downs. They produced $187 million in free cash flow and have a total debt of $4.3 billion with a goal of reducing their leverage ratio. They completed a successful bond offering and have a diverse maturity profile. They repurchased shares and paid a dividend, showing a balanced capital allocation strategy. They will discuss their projected 2024 results.

The company's guidance for the year is based on current market conditions and recent trends, assuming no major changes in scrap and precious metal prices or the European economy. The global tax rate remains unchanged. The company expects a decrease in organic parts and service revenue due to softness in Q1, but is closely monitoring monthly claims data and is prepared to take cost actions if needed. Adjusted diluted EPS is expected to be in the previously stated range, but there is heightened risk due to revenue volatility. The company still expects to achieve its free cash flow target.

The speaker is thanking the current CEO, Nick, for his leadership and integrity during his time at LKQ. They mention the company's progress and recognition for their workplace culture and express gratitude for their employees. The speaker then opens the call for questions from Craig Kennison, who asks about insurance prices.

Justin Jude, CEO of a company, discusses the impact of higher insurance prices on their business. He mentions that the increase in insurance rates, coupled with deductibles, caused some customers to not repair their cars. However, they believe that the primary reason for the decrease in repairable claims is due to weather. Another factor contributing to the decline in gross margin in North America is the acquisition of Uni-Select, which has a different margin profile for the products they sell. Overall, they expect the gross margin to be around 17% for the year.

The company expects to have a 17% profit margin for the year, but it was below that for the first quarter due to a decline in volume and leverage. The team has been working on consolidating facilities to reduce costs. The gross margin also declined, mostly due to a squeeze in the salvage margin. This was expected and has been communicated to stakeholders.

Scott Stember asks about the performance of individual regions in Europe. Rick Galloway and Justin Jude mention that there was a significant impact on EBITDA margins due to wage inflation, which began in Q2. However, the team has been able to mitigate this impact through pricing and productivity initiatives. Justin specifically mentions mid teen increases in labor rates in some markets, but the team is actively working on passing on these costs to customers without losing market share. Nick Zarcone adds that all regions showed positive organic growth in revenue in the quarter.

The company saw good growth in Central and Eastern Europe, with strong performance from their private label product. Sales in other regions were consistent with a 4% increase. The bumper to bumper business in Canada, which is the only place where the company offers all of LKQ's services, has shown positive progress and integration with LKQ's operations. The mechanical repair side of the business in North America has also seen an increase.

The company saw an increase in vehicle miles traveled (VMT) in North America, which led to more maintenance and repairs on the mechanical side. This was primarily due to weather, although other factors such as insurance rates and used car prices may have also played a role. The company also saw an uptick in alternative parts penetration, driven by State Farm's entry into the space. The company expects to maintain a 17% market share in North America for the full year.

The speaker discusses the company's projected organic parts and services revenue growth for 2024, which has been lowered due to a revenue miss in Q1. The growth is expected to be driven mostly by volume, with minimal impact from pricing. The impact of unfavorable car parc dynamics, such as fewer 4- to 6-year old vehicles, is also mentioned.

The speakers, Justin Jude and Nick Zarcone, discuss the growth of the car part market in North America, particularly in the 3-10 year age bracket. They mention that the trend is positive and that the shift towards older cars is not a concern for their business. They also note that insurance carriers used to avoid aftermarket parts in the first 0-3 years, but this has changed in recent years.

The speaker discusses how the aftermarket world has changed in the last 10 years, with products being pulled up quickly and carriers using current model year for aftermarket or recycled to drive APU. They do not see this as an impact on their business. The European SKU rationalization, which aims to reduce overlap by 35%, is expected to result in margin improvement through the addition of more private label products and fewer suppliers. This project is seen as a catalyst for future growth and will be discussed further at the upcoming Investor Day on September 10th.

Justin Jude, a member of the LKQ management team, expresses his excitement about the future of the company. He highlights the growth in the car parc and aging vehicles, which will lead to increased utilization of alternative parts. Inflationary cost pressures on insurance carriers and increasing complexity of vehicles also create opportunities for LKQ's services business. The recent Uni-Select acquisition and the European market, which is still highly fragmented, present further consolidation opportunities. The team has a clear roadmap for accelerating margin enhancement, including SKU rationalization and leveraging procurement scale.

The speaker discusses the company's strong position in the specialty market, with a leading management team and positive trends in demand and sales. They also mention an upcoming investor day and thank participants for joining the call.

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