Good morning. My name is Rob and I'll be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Joe Boutross, Vice President of Investor Relations, you may begin your conference.

Thank you operator. Good morning everyone and welcome to LKQ's first quarter 2023 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Rick Galloway, Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning as well as the accompanying slide presentation for this call. Now, let me quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC this morning. As normal, we are planning to file our 10-Qs in the coming days. And with that I am happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe and good morning to everybody on the call. This morning I will provide some high-level comments related to our performance in the quarter and then Rick will dive into the financial details before I come back with a few closing remarks. On February 28th, the company kicked off a year-long celebration of our 25th anniversary by ringing the opening bell at NASDAQ. The celebration is focused on our 25-year history, our customers, our employees, the communities that we serve, and further energizing our global team about our future. Following this initial celebration, we hosted leadership conferences in both North America and Europe for key leaders across each of our operating segments, where we all had a chance to celebrate educate and collaborate on our past successes and share the excitement of what the future holds for LKQ. While we've had a great run since 1998, I am highly confident that the next 25 years will be even better. As an organization we have always held a core set of values that has helped us achieve our success and created the LKQ we are today. Like all aspects of life, change is inevitable and as an organization it's critical that we advance our values forward to lay the foundation for the next 25 years. Keeping us moving forward, during the quarter, I had the pleasure to announce our updated values for the future. Values that unite our global enterprise as a cohesive and focused One LKQ and that will serve as a single guide to ensure we deliver on the promises we hold true for all constituents. The values are development, excellence, leadership, integrity and trust, value-added, embracing change, resourceful, and sustainability. Simply put, it spells DELIVERS. Expanding on the word DELIVERS the One LKQ team across the…

Thank you, Nick and good morning to everyone joining us today. We're very pleased with the start to the year as our first quarter results highlight strong revenue growth and profitability. Our two largest segments North America and Europe generated above-expectation revenue growth and margins as our operational excellence initiatives continued to yield benefits. The Specialty and Self-service segments underperformed in the quarter as market conditions continue to produce headwinds for both businesses. Overall, we are pleased with the good start to the year and are on track to deliver on our full year guidance. As discussed on our February call in Q1, we replaced our prior credit facility which included a $3.15 billion revolver with a new unsecured facility, including a $500 million term loan and $2.0 billion revolver. We feel good about the new facility and our ability to fund our operating needs over the next five years at a competitive rate structure. Free cash flow generation remains solid noting that the quarterly phasing will be weighted more to the balance of the year than we've seen in the past couple of years when phasing was impacted by the pandemic and supply chain disruptions. The pending Uni-Select acquisition was a source of significant activity during the quarter with due diligence, deal negotiations and post-announcement financing activities. Nick provided an update on the transaction status, and I'll highlight the Uni-Select impacts on our first quarter financials. Turning now to first quarter results starting with segment performance. Going to slide 9. North America continued its strong performance posting a record first quarter segment EBITDA margin of 20.5%, a 240 basis point improvement over last year. We saw gross margin improvement of 190 basis points driven by lower freight costs, a favorable mix effect, with the sale of the lower-margin PGW…

Thanks, Rick for that financial overview. In closing, the first quarter was a great start to 2023 that again validated the strength of our strategy, our business model and most importantly our people. As we continue to progress through 2023, let me restate our key strategic pillars, which continue to be central to our culture and our objectives. First, we will continue to integrate our businesses and simplify our operating model. We will continue to focus on profitable revenue growth and sustainable margin expansion. And we will continue to drive high levels of cash flow, which in turn gives us the flexibility to maintain a balanced capital allocation strategy. And fourth, we will continue to invest in our future. As always, I want to thank the over 45,000 people who work at LKQ for all they do to advance our business each day and for driving our mission and our delivers values forward regardless of the challenges. And with that operator, we are now ready to open the call for questions.

[Operator Instructions] Your question comes from the line of Daniel Imbro from Stephens. Your line is open.

Yes. Hey, Good morning, guys. Thanks taking my questions.

Good morning, Daniel.

Yes. Nick, I want to turn to the North American organic growth side. Obviously really strong on a headline basis. I'm curious were there any noticeable industry changes that drove that whether it was a step-up in alternative part usage from State Farm faster than expected? Was there pent-up demand that got filled by the improved auction availability you talked about in the slides. Just trying to reconcile the big step-up on both a two year and a three year tax basis for the organic growth in the quarter?

Great question. Obviously, the demand in North America is ultimately driven by the need for parts to repair collision-damaged vehicles. We do that with both aftermarket parts and recycled parts. As disclosed, we are benefiting a bit from the price actions that we took last year. And so average selling prices are up a little bit, 2023 over 2022, but volumes are up as well. And that as I indicated in my prepared remarks it's really driven by a couple of items. One is we finally have our inventories where we need them to be. And so fulfillment rates are back in north of 90% on the aftermarket product which is terrific. And the State Farm program is starting to kick in. We talked about in the Q4 – Q4 call that we thought that would be somewhere in the $80 million to $100 million benefit for 2023 for LKQ. We're right on track to hit that. That's what we built into our expectations for the year. And State Farm, we knew was not going to be like turning the lights switch on. It was going to take time for that to build and it's building. I mean the reality is APU for the industry in the first quarter was about where it was back in 2018 and 2019. which is terrific. It obviously dipped quite a bit during the height of the pandemic and the shortage of aftermarket supply but we're back to good levels of APU, which is terrific. We believe we're continuing to take share. And there are longer term there are other metrics that bode in our favor. The cars are being built in a more complex manner. The average number of parts needed to repair a vehicle has increased by about 2.5 parts over the…

I appreciate all that color Nick. And maybe I'll stay on North America with the little margin. Just clarifier, I think the North American margin over 20% was good to see. You got a 80 bps of a tailwind from freight in the quarter. I would assume you guys have locked in some of those. So would that kind of tailwind continue? And then similarly to follow-up on what you just talked about with growth staying so strong. Would maybe your expectations for North American margins to be higher this year than we talked about a few months ago just given growth is coming in faster than expected?

Yeah. I appreciate the question Daniel. So good question. You're spot on. So during part of the prepared remarks, I talked about our expectations for the year will be elevated for our North American operations with the 20.5% EBITDA that they delivered just fantastic results from the team. Some of that will come back through pricing as we talked about, but we're comfortable saying we'll be within the 18s now. And we were guiding a little bit lower than that if you recall a couple of months ago as we were going to finish out the year, we don't think we'll finish out the year near as low as that. And it's really -- as you start thinking about that freight that freight -- when we looked at that year-over-year there was a pretty significant increase in freight in Q1 and that went away starting in Q2 last year. And so year-over-year there's a pretty nice benefit. That benefit almost goes away when we look at Q2 as we had already locked in some rates and there wasn't this excess freight is what we call it here there was excess freight on the ocean deliveries that really mitigated when we got into Q2. So still good results. I expect those to continue, but we will see a little bit of a tightening but not near as much Daniel.

Great. Well, congrats to Justin and everyone on the team and a good luck going forward.

Thank you.

Your next question comes from the line of Bret Jordan from Jefferies. Your line is open.

Hey, good morning guys.

Good morning Bret.

Switch over to Europe now. Could you talk about the 8.2% growth per day, breaking it out on price and units? And then as a follow-up to that you called out Benelux, Germany and Eastern Europe as very strong. Could you give us some performance spread to the UK and Italian business? And maybe talk about the cadence that you saw in the quarter as it progressed?

Sure. We are thrilled with the performance of our European business again on a per day basis over 8%, 9% on a reported basis. As I mentioned in my prepared comments, every geography was either in high single-digits or low double-digits. And we haven't seen a scenario like that for quite some time. Again we called out a couple of the higher performers being Benelux, Germany, and Central and Eastern Europe. But that doesn't mean that the rest of the team underperformed. Indeed they were in that high single-digit area. And it was a mix of price and volume. Again when inflation hit hard we did the best we could to get ahead of the curve because if you don't, inflation will eat your life from the inside out. I'm so proud of the efforts by our teams over the last couple of years to make sure that we were able to get ahead of that. But there was some good volumes comparisons. And look the first quarter of 2022 was a good quarter, but wasn't off the charts and so we had a pretty good comparison to go after. And we're optimistic that Europe will continue to produce good solid results. Again we're not anticipating 9% growth for the entire year for the European team. So, it may come in a little bit as we move through the next few quarters as the organization really picked up some momentum towards the back half of last year. The cadence through the quarter I mean there was we don't give monthly results, but it was solid and the second quarter is off to a decent start albeit we're 20 some days into the quarter and we still got a long way to go. What we're particularly pleased with our European business Bret is the margins. Margins are up 90 basis points from where they were in Q1 of last year. And the revenue growth is great. We want to bring that down to the bottom-line because [Indiscernible] revenue doesn't do anything for an organization. And the reality is we've got the best margins in the European theater. When you look at it on an apples-to-apples US GAAP to US GAAP basis nobody has our level of EBITDA margins and we're very proud of that.

Great. Yes it's looking good. And then one last question on the specialty business. Obviously sort of similar cadence question but starting to see some maybe softening in the U.S. consumer. Could you talk about the trajectory of that business through the quarter?

Yes, I mean it started off the year soft and ended the first quarter soft and that's why we've been very upfront with the same. We're not expecting any great turnarounds for the back of the year and it's going to come in below our original expectations and what was in our original guidance that we set back in the February call. We don't see any particular catalyst. And again all part types are not equal. As we mentioned the softer product lines include RV what's no pun intended, but what's attached to the RV volumes is towing product think about hitches and the like because every time somebody goes to get a brand new RV if it's a towable they need a hitch on their truck or their car, right? And so when new unit sales go down demand for towing product goes down. And so those are two product categories that are softest. The traditional SEMA product and the performance products again are down a little bit year-over-year. We think that's just the fact that they were so high in 2021 and 2022, but not down nearly as much as our RV product set. And then as Rick indicated, Marine is actually up a bit which is terrific. Important is that the specialty team is not taking it all sitting down. They've got a lot of programs particularly focused on productivity. They're adjusting the footprint their footprint of what they do. They -- we've already consolidated our fab tech California operation into our Fab 4 South Carolina operation. So, we're going to save some money there. We have dramatically reduced inventory in that business, to really align the working capital along with the current and anticipated revenue trends. We sold a very small underperforming business, to the former owner. But at the same time, this market in Specialty is going to provide us some opportunity to probably make a couple of small tuck-in acquisitions, that will go a long way to helping create and broaden our competitive moat in certain geographic or product markets. And we're going to take advantage of that.

Great. Thank you.

Your next question comes from the line of Brian Butler from Stifel. Your line is open.

Hi, good morning. Thank you for taking my questions.

Good morning, Brian.

Just kind of going back to North America, and maybe Europe too, just kind of on the larger trends of driving activity. Maybe some color there. Just how that's playing through on the results on the volumes, as well as was there any benefit kind of from the winter weather, or was that even a maybe a headwind meaning it was so mild?

No. I mean miles driven is kind of just basically, moderating along. There's no material growth -- no material declines. As we've said in the past, we have better statistics on that in the US than we do in Europe. But overall mobility, has not changed dramatically on a year-over-year basis, in the first quarter. And the reality is that's fine. We really got pinched obviously, back in 2020 when the pandemic hit, is when the literally mobility around the globe came to a grinding halt. And as long as vehicles are on the road and people are using their vehicles to get to and from work, fuel prices have come down generally on a global basis. They're not all the way down to where they were pre pandemic, particularly in Europe. But they've moderated a bit, and we think that's always good. Lower fuel prices tend to lead to perhaps, a little bit more miles driven and that creates demand for our parts. Again, we're assuming that the rest of the year that we're going to be kind of a flattish environment from an overall mobility perspective.

Okay. That's helpful. And then my follow-up, can you provide maybe a little bit more color just in Europe, on the payables and inventory and kind of what trends you're seeing there and how that matches with the expectations?

Yes, I'll take that one. Thanks for the question. So, we're real pleased with the activity that we've had over in Europe in particular, with the vendor financing program, but also in the overall payables, right? We started making sure we transition away from just talking about vendor finance and talk about overall payables. And what we were able to see year-over-year is, that really a 10% improvement in our European operations on the days payable, as we extend that. And there's still room to go. We would expect similar-type improvement this year, and probably for the next couple of years. You got to think of it as not a race. We're not in a 100-meter dash here. We're in a marathon. It's going to be continuous improvement over and over again, every year as we deal with our vendors and really train them in the extension of the terms. And so, the team has done a great job. We got to see it. We got to see it in the free cash flow. We will see it again this year and continually improve even from Q4 to Q1 another improvement from what we've seen on there, as well. And it's both pieces, right? So, it's exactly where we're wanting to be and we expect that to continue for the next couple of years.

And your next question comes from the line of Scott Stember from ROTH MKM Partners. Your line is open.

Good morning, guys. Congrats on the very strong results

Thanks, Scott.

Going over to State Farm obviously things are cranking up nicely as expected, and it's just on two or three SKUs. Are there any signs that that SKU count will increase, whether it's radiators or fenders or door panels?

Yes. So, we knew that the decision by State Farm to begin to turn on aftermarket products like I indicated was not going to be flipping a switch over on the wall to turn on the lights, right? It was going to be evolutionary, not revolutionary. And the volumes are ramping up to our expectations. There have been no discussions about adding additional parts. State Farm has not done anything put out any statements made any comments publicly about expanding the program. To be sure, every time we talk with our folks at State Farm, we are continuing to encourage them to both accelerate the rollout of the existing parts and to add new parts to the program. But the direct answer to your question is there has been no, material movement coming out of Bloomington Illinois with respect to broadening the part types.

Got it. And then last question just going back over to specialty. You talked about the RV repair side. I know that you guys are pretty well entrenched with the OEMs to handle their warranty business. Are you seeing increased demand for just wear and tariff types of items? And how would you expect that to offset the general softness in the segment?

Yeah. You're correct. We do -- most of the distribution of warranty parts for not every OE but most of the OEs which is terrific. As you can appreciate the first quarter of the year is not a high utilization point with respect to RVs, because not a lot of people are using their campers north of the Mason-Dixon, line in January and February. It's a little chilly outside. We do expect that that activity will begin to ramp, as to whether gets warmer and people really get out to the camp grounds to utilize their units. And we think we're incredibly well positioned. We're making sure that we've got the right inventory to service those types of requests for warranty parts. And we're going to be standing ready to support all of our OE customers in that regard.

Got it. And then, just one last question back over to North America. You were talking about loss rates and as these higher-priced used units I guess work their way through the auction process. Can you talk about where you expect loss rates to be? Are we hitting a bottom here? Are we hitting a point where we could see an inflection in actual repairable claims going up?

Yeah. In our discussions with the industry groups and the folks who have all the data on the collision industry and total loss rates and the like, their expectation and our expectation is total loss rates for 2023 will settle out somewhere in the 18% to 19% range. They were 19% in Q1 as car prices -- used car prices moderate a little bit that's going to fluctuate around. But their expectation our expectation is somewhere in the 18s for 2023. And we'll pilot that. And again, the 19% in Q1 was up a little bit from last year and it had no impact on our growth. As we've said over and over we've lived through almost every cycle as it relates to total loss rates. And we just no pun intended we drive right through that.

All right guys. Thanks a lot. That's all I have.

Thanks Scott.

Your next question comes from the line of Craig Kennison from Baird. Your line is open.

Thanks for taking my questions. Rick I wanted to follow up on your fulfillment commentary. I think you said fulfillment rates were back above 90%. Can you give us a feel for that rate in Q1 of last year? And do you expect each quarter in 2023 to benefit from a similar lift in fulfillment, or does the benefit fade as the year unfolds?

Yeah, Craig, I appreciate the question. As we look at the fulfillment rates last year we were in the upper-80s. We finished the year in the upper 80s. We started off really around 84, for the first quarter last year. And then as we progress through the year it gradually kept getting better and better and better. We're still up versus Q4's number as well. So we finished in the low-90s, but a slight improvement. And our expectation is that that will continue to etch up just a little bit throughout the year. So we're really pleased with the inventory availability. If you think about last year particularly in Q1 inventory was not very available for us. And we think we missed out on some share with OEs and the drop in APU. And then that's come back in Q1. And so the team is doing well and the inventory position we're very happy with in our North American operations.

And then, could you comment on European fulfillment rates? Are there similar trends there given that in some cases you share, same dynamic?

Yeah. It's in the 90s. I mean, that one didn't drop like we saw over here in North America. So still in the 90s and really pleased with our delivery performance out there.

Perfect. Thank you.

Yeah. Thanks Craig.

And this concludes our question-and-answer period. Mr. Nick Zarcone, I turn the call back over to you for some final closing remarks.

Well as always we greatly appreciate your time and attention in spending the hour with LKQ. We're very proud of the first quarter. We're optimistic about the future, not just here in 2023 but for the next 25 years, as we continue to celebrate the first 25. And we look forward to chatting with everyone in about 90 days to announce second quarter results. So, thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.