Formatted Report

23-Apr-2024

LKQ Corp. (LKQ) Q1 2024 Earnings Call

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report

23-Apr-2024

CORPORATE PARTICIPANTS

Justin L. Jude Chief Operating Officer & Executive Vice President Rick Galloway Chief Financial Officer & Senior Vice President

Joseph P. Boutross Vice President-Investor Relations

Dominick Paul Zarcone Rick Galloway President, Chief Executive Officer & Director Chief Financial Officer & Senior Vice President .....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Craig R. Kennison Robert W. Baird & Co., Inc. Gary Frank Prestopino Barrington Research Associates, Inc.

Bret Jordan Jefferies LLC Jash Patwa JPMorgan Securities LLC

Scott L. Stember ROTH MKM .....................................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTION

Joseph P. Boutross

Vice President-Investor Relations

GAAP AND NON-GAAP FINANCIAL MEASURES...........................................................................................................................

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

.....................................................................................................................................................................................................................................................................

Dominick Paul Zarcone

President, Chief Executive Officer & Director

BUSINESS HIGHLIGHTS ..............................................................................................................................................................................................

Opening Remarks

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 30
With that, this will be my 38th and final quarterly earnings call with all of you

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

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

Operational Excellence

I am incredibly proud of the organization, my team, and all we’ve achieved over the years
We are a 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
Q1 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 the overall operating leverage

Cost Structure

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 in that market, we have increased our temporary workforce to largely mitigate the revenue impact with the risk of ongoing strikes
And we’ve opened a second, albeit a much smaller distribution facility in Bielefeld, Germany, which is outside of Bavaria and not impacted by the union activity
Overall, we remain optimistic about the remainder of the year

Revenue and Diluted EPS

Now on to the quarterly results, revenue for Q1 2024 was $3.7B, an increase of 10.6% compared to the $3.3B for Q1 2023
For Q1 this year, parts and services organic revenue decreased 0.3% on a reported basis, but increased 0.5% on a per day basis
Foreign exchange rates increased revenue by 0.8%, and the net impact of acquisitions and divestitures increased revenue by 11.6% y-over-y, for a total parts and services revenue increase of 12.1%
Other revenue for Q1 2024 fell 14.6%, primarily due to weaker precious metal prices relative to the same period in 2023
Diluted EPS for Q1 2024 was $0.59, compared to $1.01 for the same period of 2023
Adjusted diluted EPS was $0.82 for Q1 2024, compared to $1.04 for the same period of 2023
Lastly, on April 22, the board of directors declared a quarterly cash dividend of $0.30 per share of common stock payable on May 30, 2024 to stockholders of record at the close of business on May 16, 2024

Justin L. Jude

Chief Operating Officer & Executive Vice President

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

OPERATING HIGHLIGHTS ......................................................................................................................................................................................

Performance

As Nick mentioned, we are not pleased with the results delivered in Q1
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, in 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 three 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

Wholesale

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 were 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 US experienced the fifth 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

Aftermarket Inventory

Finally, we experienced some challenges with aftermarket inventory entering the East Coast ports due to the ongoing Panama Canal disruption
We have yet to witness any disruption from the Baltimore tragedy, but we are closely monitoring the situation
Offsetting some of the aftermarket inventory delays, the salvage business posted positive growth in the quarter
As the North American team faced the soft demand, John Meyne and his team immediately shifted their focus to accelerating the integration of FinishMaster
This swift action resulted in the consolidation of 65 branches in Q1 bringing the total to 99, which represents two-thirds of the acquired locations

FinishMaster

We initially communicated the rationalization of the FinishMaster locations would take us three years to reach this synergy level, and I’m impressed the team was able to accomplish this within the first eight months following the acquisition closing

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Today, 100% of FinishMaster sales and operations have been fully integrated, and through this process, the team uncovered additional synergies, allowing us to increase the previously disclosed estimate amount from $55mm to $65mm
This effort caused some short-term strain on the team slightly impacting margins, but it was the right thing to do long term

Bumper Business

And we continue to make strides with our Bumper to Bumper business in Canada by leveraging the European procurement size and scale
I want to again emphasize that Uni-Select was a unique opportunity that will enable us to widen the moat around our North American business and capitalize on revenue synergies that exist with paint and hard parts
I am confident and committed to this transaction generating positive financial metrics for all stakeholders

Europe

In Europe, organic revenue increased 2.7% on a reported basis and 4.4% on a per day basis, the best across our operating segments
Rick will cover the EBITDA results in his remarks, but let me cover several actions taking place to drive improved performance
I had made four different trips to our European operations in Q1 to meet with the broader leadership team and look for improvement opportunities
I am pleased to see how focused the team is to drive integration and improve performance, all with a goal of enhancing our margins
Andy Hamilton and his team have deployed new detailed tracking tools that are actively being reviewed
These tools include pricing actions, productivity initiatives, a restructuring plan focused on taking costs out of the business, portfolio divestments, and implementing a new technology within our distribution centers to lower the total cost of delivery to our customers

Germany

In Germany, we expanded our distribution capacity by opening a second highly automated regional distribution center, which will reduce the strain on our primary distribution center in Bavaria, where the strikes had been occurring
Specific to divestitures and after careful and thorough analysis of our European business model, market trends, and the overall economic environment, we made the strategic decision to divest our operations in Slovenia to a long-term valued partner of LKQ.
That sale closed last week
Additionally, we entered into an agreement to divest our operations in Bosnia, and we expect to complete that sale in Q3, subject to the receipt of regulatory approval
We will continue to assess our business and our European market mix to determine if we are the best operator and whether we should fix or exit certain underperforming markets

European SKU Rationalization Program

Given the small size of these divestitures, we are not disclosing the terms of these two transactions

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

One of the biggest projects we plan to update on a quarterly basis is our European SKU rationalization program
Today, little product commonality exist across the entire European platform, which prevents us from maximizing the leverage of our pan-European footprint
This project will reduce the total number of SKUs, reduce our complexity, simplify the offerings to our customers, and drive several benefits, which include improved fulfillment rates, improved gross margins, reduced inventory levels, and a decrease of our cost to serve our customers

SKUs

When Andy kicked this project off in early Q1, we had over 900,000 SKUs across our European operations with less than a 7% overlap
Based on the first phase of this project, we believe we can achieve a 35% reduction in overall SKUs over the next 2 to 3 years
We look forward to Andy providing a deeper dive into this program on our September 10 Investor Day this year

Specialty

Now turning to Specialty, their organic revenue decreased 1.4% in the quarter, tracking closely to plan and showing improvements month-on-month within the quarter
Certain product categories witnessed positive y-over-y growth
Automotive products, which includes truck and off-road parts and accessories, increased 2.5%, despite pickup truck and Jeep sales being down 5.6% and 11.4%, respectively
Also, marine posted growth in the quarter
RV-related products decreased 8.5%, the smallest revenue decrease when compared to the 2023 quarterly growth rates
Our Specialty team has focused their efforts on targeting margin actions relating to price and cost controls, some of which we saw in the quarter with y-over-y improvements in SG&A

Self Serve

Turning to Self Serve (sic) [Self Service], they had an organic revenue decrease of 10.5% in the quarter primarily driven by commodities and inclement weather in key markets
But margin performance exceeded our expectations
On the corporate development front, during the quarter, we closed on two tuck-in acquisitions, including a heavy-duty truck parts supplier and an aftermarket parts distributor in Belgium
We also made an equity investment in a start-up recycler of lithium-ion EV batteries

Rick Galloway

Chief Financial Officer & Senior Vice President

FINANCIAL HIGHLIGHTS .........................................................................................................................................................................................

Performance

We released our full year guidance in February

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

We expected Q1 earnings to be challenged by the impact of weather conditions in January, very low catalytic converter prices, and y-over-y 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

Operational Excellence

Despite Q1 results, we remain committed to our full year earnings guidance
We have nine months to make up the shortfall, and the core strengths 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 five 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

Adjusted Diluted EPS

Turning now to Q1 consolidated results, adjusted diluted EPS of $0.82 were $0.22 lower than the prior year figure
Operating results were the largest individual factor with $0.12 reduction mostly related to North America o 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 $0.06 y-over-y decrease
Other items, including investment performance and taxes, drove $0.04 decrease

SEGMENT RESULTS.........................................................................................................................................................................................................

North America

Now for segment results, going to slide 9, North America posted segment EBITDA margin of 16.3%, a 420-basis point decrease relative to last year
During the last call, we projected the full year margin would be around 17% for the full year impact of the Uni-Select dilution
The reported margin was below the full year expectation due to leverage impact from the lower revenue in Q1
Relative to the prior year, in addition to the communicated anticipated Uni-Select dilution effect on gross margin, salvage margins were down reflecting unfavorable revenue and vehicle cost trends compared to the prior year period and lower catalytic convertor prices in Q1 2024

OVERHEAD EXPENSES

Overhead expenses partially offset the gross margin reduction with lower costs for freight, charitable contributions, and incentive compensation

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Q1 2023 also included a nonrecurring benefit from an eminent domain settlement that created a y-over-y negative variance
North America is executing action plans to recover the profitability missed in Q1, and we expect the full year EBITDA margin to be around 17%

Europe

Looking at slide 10, Europe reported a segment EBITDA margin of 8.7%, down 100BPS from last year
Gross margin, excluding restructuring costs, improved by 60BPS but was offset by higher overhead costs, including personnel costs tied to wage inflation in markets such as Germany, the UK, and the Benelux region
While we have grown gross margin, we have not covered the overhead cost increases, and we have work to do on pricing and productivity to mitigate the cost inflation
We still expect to achieve double digit margins in Europe for the full year

Specialty EBITDA Margin

Moving to slide 11, Specialty’s EBITDA margin of 6.4% declined 150BPS compared to the prior year, driven by a 170-basis point decrease in gross margin
Competitive pricing pressure remains a challenge for the business, and we are evaluating options and implementing changes to improve our net pricing
We believe the full year Specialty EBITDA margin will be flat to a slight increase as we work through the lingering gross margin pressures
As you can see on slide 12, Self Service generated an 11.7% EBITDA margin in Q1 2024 compared to 13.2% last year

Dollar Term

In dollar terms, segment EBITDA decreased by $6mm
The impact from commodities represented $16mm headwind
However, the efforts to manage vehicle costs helped mitigate a portion of the commodities impact, and overhead cost controls produced a y-over-y benefit
We have not seen double digit segment EBITDA margin in percentage or dollar terms since Q1 2023 o So, we are pleased to reach this level again this past quarter

Global Restructuring Program

We implemented a Global Restructuring program in Q1 focused on enhancing profitability
The largest portion of the activity will come from the European segment and, as Justin mentioned, will include exiting certain businesses or markets which do not align to our strategic objectives
Initially, this includes exiting businesses in Slovenia and Bosnia, which are relatively small with under $40mm in combined annual revenue, and evaluations of other markets are ongoing
We recorded $27mm in charges in the quarter, including $17mm in asset impairments and $8mm in inventory write-downs

Other Charge

Other charges are expected in future periods for severance, lease termination costs, and other shutdownrelated expenses

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Shifting to cash flows and the balance sheet, we produced $187mm of FCF during the quarter, and we remain on track for a full year estimate of approximately $1B
As of March 31, we had a total debt of $4.3B with a total leverage ratio of 2.3 times EBITDA

Leverage Ratio and Cash Flow

And we remain committed to reducing our total leverage ratio below 2.0 times
In March, we successfully completed a €750mm bond offering with a 7-year maturity and a fixed 4.125% interest rate
The offering was completed to pay off the existing €500mm bonds that were scheduled to mature on April 1, 2024
We upsized the offering by €250mm in response to very strong demand from fixed income investors reflecting LKQ’s strong credit profile and solid cash flows
The additional proceeds were utilized to pay down a portion of our euro revolver debt
The larger offering allows us to lock in capital at an attractive rate for an extended period and diversify our maturity profile

Debt Maturity

The bonds are publicly tradable and listed on NASDAQ
We do not have significant debt maturity until January 2026
Our effective borrowing rate was 6.0% for the quarter, an increase of 20BPS relative to Q4 2023
We have $1.7B in variable rate debt, of which $700mm has been fixed with interest rate swaps at 4.6% and 4.2% over the next 1 to 2 years, respectively
In Q1, we repurchased roughly 600,000 shares for $30mm and paid a quarterly dividend totaling $81mm, further validating that as we reduce our debt levels, we are migrating to a more balanced capital allocation strategy

Projected 2024 Results

I will conclude with our current thoughts on projected 2024 results
Our guidance is based on current market conditions and recent trends and assumes that scrap and precious metal prices hold near market prices, and the Ukraine/Russia conflict continues without further escalation or major additional impact on the European economy and miles driven

Global Tax Rate and Organic Growth

On foreign exchange, our guidance includes rates in line with Q1
The global tax rate remains unchanged at 26.8%
Our full year guidance metrics on slide 4 remain mostly unchanged from Q4 earnings call
We expect reported organic parts and service revenue in the range of 2.5% to 4.5%, which is a 100-basis point decrease in the range
The softness in Q1 organic growth drove the decision to lower the full year range
We believe that mild winter weather conditions were a major contributing factor to the revenue softness and will have some carryover effects into Q2, but otherwise will be a temporary headwind relative to repairable claims
However, if repairable claims in North America do not rebound to a more normalized level, we would expect to be closer to the low end of the full year range

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Adjusted Diluted EPS and FCF

We are closely monitoring monthly claims data, and the team is ready to take decisive cost actions if claims remain depressed
We still expect adjusted diluted EPS in the range of $3.90 to $4.20
With the revenue volatility, there’s heightened risk to the profitability estimate
But we are confident in the action plans being implemented in all segments to address controllable factors, such as our cost structure, to keep us inside the previously issued range
The FCF expectation of $1B and 50% to 60% annual EBITDA conversion remain in place
Improved profitability over the balance of the year and diligent balance sheet management should support achievement of the full year target

SUMMARY.....................................................................................................................................................................................................................................

Thanks for your time this morning
But before I turn the call back to Nick for his closing comments, on behalf of our LKQ team globally, I’d like to thank Nick for his leadership, vision, and integrity during his tenure as our CEO.
Nick, you left a tremendous mark on LKQ and have positioned us well for the next chapter of our evolution

o We wish you and the growing Zarcone family all the best

Dominick Paul Zarcone

President, Chief Executive Officer & Director

LKQ’s Mission

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 carried forward in Q1 when we were awarded Mental Health America’s Bell Seal for Workplace Mental Health at the Gold level
SUMMARY.....................................................................................................................................................................................................................................
And we were again selected as a 5 Star Employer by WorkBuzz for our US, 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 for my fellow employees is immeasurable, and I cannot thank them enough for creating an incredible journey for me

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

QUESTION AND ANSWER SECTION

Craig R. Kennison

Robert W. Baird & Co., Inc.

Q

And, Nick, all the best to you. It’s been a pleasure working with you. My question goes...

.....................................................................................................................................................................................................................................................................

A

Dominick Paul Zarcone

President, Chief Executive Officer & Director Thanks, Craig. .....................................................................................................................................................................................................................................................................

Craig R. Kennison

Robert W. Baird & Co., Inc.

...to your comments around – yeah. You bet, Nick. 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. .....................................................................................................................................................................................................................................................................

Justin L. Jude

Chief Operating Officer & Executive Vice President

– Yeah. Just talking to this is Justin, Craig, by the way. In talking to different folks in the industry when we saw the insurance increasing 20% to 22% y-over-y, 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 in huge increases in insurance rate. So, we still think the primary driver for the repairable claims being down is weather. But anything when we see huge swings like that with used car pricing or once again insurance rates, it has some effect on us.

Gary Frank Prestopino

Barrington Research Associates, Inc.

And, Nick, best of luck to you in your retirement. Enjoyed working with you.

Dominick Paul Zarcone

President, Chief Executive Officer & Director

Thanks, Gary. .....................................................................................................................................................................................................................................................................

Gary Frank Prestopino

Barrington Research Associates, Inc.

Could you maybe just unpack a little bit more on this decline in the gross margin in North America? I know, Rick, - you 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 so much to go down close to 500BPS or over 500BPS?

Rick Galloway

Chief Financial Officer & Senior Vice President

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Formatted Report 23-Apr-2024

Q1 2024 Earnings Call

LKQ Corp. ( LKQ)

Yeah, 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’s 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, a 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.

Gary Frank Prestopino

Barrington Research Associates, Inc.

Q

Yeah. But I was asking about the gross margin, Rick. Is that ...

Rick Galloway

Chief Financial Officer & Senior Vice President

Oh, I’m sorry. I thought you were talking about [indiscernible] (00:29:24) margin.

Gary Frank Prestopino

Barrington Research Associates, Inc.

– – I [indiscernible] (00:29:24), but what yeah, so no, I just the gross margin had a pretty big decline. So I just wanted to unpack that little bit more. .....................................................................................................................................................................................................................................................................

Rick Galloway

Chief Financial Officer & Senior Vice President

A

Yeah. Most of that is mix. 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 as 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 vs. the cost side because everything’s 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.

Scott L. Stember

ROTH MKM

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

Dominick Paul Zarcone

President, Chief Executive Officer & Director

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Thanks, Scott.

Scott L. Stember

ROTH MKM

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. .....................................................................................................................................................................................................................................................................

Rick Galloway

Chief Financial Officer & Senior Vice President

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 y-over-y, 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 200BPS down that you have on overall wage inflationary increases.

What the team has been able to do was improve on pricing and productivity initiatives to claw 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 y-over-y impact on the wage increases. And, Justin, I don’t know if you want to talk a bit more about the various different regions. .....................................................................................................................................................................................................................................................................

A

Justin L. Jude

Chief Operating Officer & Executive Vice President

Yeah. 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. ..................................................................................................................................................................................................................................................................... Dominick Paul Zarcone A

President, Chief Executive Officer & Director

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 in all the other regions we’re in and around that 4% on a same day basis, +/- a little bit. So, again, it was good, consistent performance across the platform.

Scott L. Stember

ROTH MKM

Yeah. 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 trends, just trying to get a sense of the market, how things are holding up, and at least internally, are sales growing? .....................................................................................................................................................................................................................................................................

Rick Galloway

Chief Financial Officer & Senior Vice President

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

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Scott L. Stember

ROTH MKM Yeah. Yes, correct. .....................................................................................................................................................................................................................................................................

Rick Galloway

Chief Financial Officer & Senior Vice President

Yeah. Yeah. So the progress on Bumper to Bumper has been very positive. There’s been a few tuck-in acquisitions that we worked on taking some three steps to two steps. We’re very pleased with what the team’s done on the integration side of that business as well. And we’re starting to see some of the opportunity to actually working together, right, between the hard parts side of the business and the collision 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’s 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.

Justin L. Jude

Chief Operating Officer & Executive Vice President

Yeah. 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 US 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.

Scott L. Stember

ROTH MKM

Got it. That’s all I have. Thank you.

Bret Jordan

Jefferies LLC

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 y-overy? And then if you could give us any color on alternative parts penetration, is there any negative shift there? .....................................................................................................................................................................................................................................................................

Justin L. Jude

Chief Operating Officer & Executive Vice President

Yeah, 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 APU driven by, I think, a lot primarily by State Farm. Anytime when the carriers are looking to save money, they’re going recycled parts or aftermarket parts. And so on a y-over-y basis, Q1 to Q1, we did see an uptick of roughly 200 – I can’t remember the exact number, but 260BPS improvement in APUs so market share gain on the APU side.

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Bret Jordan

Jefferies LLC

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

Rick Galloway

Chief Financial Officer & Senior Vice President

Yeah, Bret, we expect to be 17% for the year, not a run rate.

.....................................................................................................................................................................................................................................................................

Bret Jordan

Jefferies LLC Okay. .....................................................................................................................................................................................................................................................................

A

Rick Galloway

Chief Financial Officer & Senior Vice President

So we’ll catch up to that. We believe we’ll catch that up and be around that 17% that we talked about 60 days ago or so. .....................................................................................................................................................................................................................................................................

Jash Patwa

JPMorgan Securities LLC

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 vs. pricing? And any color on how these assumptions have changed vs. the prior guide earlier this year? Thanks, and I have a follow-up.

Rick Galloway

Chief Financial Officer & Senior Vice President

A

Yeah. 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.

Jash Patwa

JPMorgan Securities LLC

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 car parc dynamics over the next couple of years as fewer vehicles fall in the four- to six-year-old sweet spot as we anniversary the pandemic and [indiscernible] (00:39:09) induced new vehicle sales from?

Justin L. Jude

Chief Operating Officer & Executive Vice President

You said unfavorable – I didn’t catch the word after unfavorable midway through your question. .....................................................................................................................................................................................................................................................................

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Jash Patwa

JPMorgan Securities LLC

Just on the car parc dynamics, like we have fewer four- to six-year-old vehicles in that sweet spot for LKQ. So, just wondering how we should think about the impact from a volume perspective there. .....................................................................................................................................................................................................................................................................

Justin L. Jude

Chief Operating Officer & Executive Vice President

I mean, right now, we’re seeing the car parc growing in North America. We’re seeing 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 parc for North America.

JPMorgan Securities LLC

Understood. Thank you. .....................................................................................................................................................................................................................................................................

Justin L. Jude

Chief Operating Officer & Executive Vice President

A

And just to be clear, our sweet spot on the collision 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 total losses, that is shifting towards very old cars, cars north of 10 years old, which generally wouldn’t end up in the collision base anyways. So, we think the dynamics of the car parc are trending just fine for our collision base business.

Bret Jordan

Jefferies LLC

– Just a follow-up on that last topic. I guess, your internal math as the class of 2021 class of 2020 the pandemic new vehicle sales impact starts to swing into that 3- to 10-year old sweet spot. Have you done the math here on the next couple of years as far as what that is as a headwind to organic growth?

Rick Galloway

Chief Financial Officer & Senior Vice President

No, we don’t see that part of the 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.

Justin L. Jude

Chief Operating Officer & Executive Vice President

And, Bret, I would say being in an 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 tooled up in aftermarket world relatively quickly, six to nine 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 it as an impact to us. .....................................................................................................................................................................................................................................................................

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Bret Jordan

Jefferies LLC

Q

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

Justin L. Jude

Chief Operating Officer & Executive Vice President

A

Yeah. 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 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.

Dominick Paul Zarcone

President, Chief Executive Officer & Director

A

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 10 when we do our Investor Day. Andy will kind of lay it out in a little bit more detail on there.

Justin L. Jude

Chief Operating Officer & Executive Vice President

North America

Just before Nick closes us out, I want to give, I guess, a [indiscernible] (00:44:35) 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 the mechanical world

Pricing

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

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LKQ Corp. ( LKQ) Q1 2024 Earnings Call

Formatted Report 23-Apr-2024

Europe

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
But the team has a clear road map on accelerating margin enhancement with extending 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 the scale and size that we have with our European procurement teams

RV and SEMA Related Products

And 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 I think looking at Specialty for the month or for the quarter, even though we were still negative, we saw month-on-month, as I mentioned, improvements, and March was actually the first month where we saw a increase y-over-y in demand and an increase y-over-y in sales
And so just in closing, I just I guess 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.

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LKQ CORP — Call Transcript 2025

30750_rns_2025-01-21_8976e53a-11f7-4f8c-88e7-6707c0c24aa9.pdf

CORPORATE PARTICIPANTS

OTHER PARTICIPANTS

MANAGEMENT DISCUSSION SECTION

Joseph P. Boutross

Dominick Paul Zarcone

Operational Excellence

Cost Structure

Revenue and Diluted EPS

Justin L. Jude

Performance

Wholesale

Aftermarket Inventory

FinishMaster

Bumper Business

Europe

Germany

European SKU Rationalization Program

SKUs

Specialty

Self Serve

Rick Galloway

Performance

Operational Excellence

Adjusted Diluted EPS

North America

OVERHEAD EXPENSES

Europe

Specialty EBITDA Margin

Dollar Term

Global Restructuring Program

Other Charge

Leverage Ratio and Cash Flow

Debt Maturity

Projected 2024 Results

Global Tax Rate and Organic Growth

Adjusted Diluted EPS and FCF

Dominick Paul Zarcone

QUESTION AND ANSWER SECTION

Craig R. Kennison

Robert W. Baird & Co., Inc.

Q

A

Dominick Paul Zarcone

Craig R. Kennison

Robert W. Baird & Co., Inc.

Justin L. Jude

Chief Operating Officer & Executive Vice President

Gary Frank Prestopino

Dominick Paul Zarcone

Gary Frank Prestopino

Barrington Research Associates, Inc.

Rick Galloway

LKQ Corp. ( LKQ)

Gary Frank Prestopino

Q

Rick Galloway

Gary Frank Prestopino

Rick Galloway

A

Scott L. Stember

ROTH MKM

Dominick Paul Zarcone

Scott L. Stember

ROTH MKM

Rick Galloway

Chief Financial Officer & Senior Vice President

A

Justin L. Jude

Chief Operating Officer & Executive Vice President

Scott L. Stember

ROTH MKM

Rick Galloway

Chief Financial Officer & Senior Vice President

Scott L. Stember

Rick Galloway

Chief Financial Officer & Senior Vice President

Justin L. Jude

LKQ CORP Call Transcript 2025