Q4 2020 LKQ Corp Earnings Call
We are comfortable providing the following statements all of which are based on the assumption that one extreme mobility restrictions beyond what are currently in place on.
And not re implemented and a major markets and to scrap and precious metal prices and foreign exchange rates continue near their recent levels.
So a few points to highlight first we believe that parts and services revenue will be higher on a full year basis, and 2021 drew down and the first quarter relative to 2020.
We anticipate that the revenue recovery will accelerate and vaccines had distributed more broadly and mobility restrictions fall off due we do not expect to return to our 2019 annual revenue figure until sometime in 2022.
Please note that we have two fewer selling days in North America and 2021.
One fewer and Q1 and the second and Q4, while Europe is flat with one fewer day in Q1, though that catches up and the second quarter.
The second point I would like to highlight is with revenue growth and the ongoing benefit of our margin and operating expense programs. We expect our 2021 adjusted diluted earnings per share will be above the comparable figure for 2020.
With that in mind, we are projecting and adjusted diluted EPS range of $2 65 to $2 85, with a midpoint of $2 75.
On a GAAP EPS basis, this would be $2 40 to $2 60.
Given the momentum of our European business and the second half of 2020 exceeding the upper end of the range provided last September we are reaffirming the outlook for the European 2021 segment EBITDA margin range of nine 2% to 10, 3%.
Four we projected free cash flow for the full year 2021 will be a minimum of $800 million.
While the absolute number is lower than the 2020 figure we've been very clear throughout this past year that 2020 was a strange year for cash generation as a result of the pandemic.
As we align inventory levels to forecast of demand our stock levels declined by well over 400 million, which and tons produced a significant cash inflow.
However, we are going to give some of the inflow back in 2021, as we replenish our inventory levels to support the anticipated revenue growth.
Some of the investments and inventory will be offset by improvements in days payables, resulting from vendor financing program, which we expect to yield more significant benefits in 2021 and in line with the target. We had set out in September of 2019, when we launched the one <unk>.
<unk> program.
And finally on capital expenditure, we planned to get back to our normal levels of 2% to two and a quarter percentage of revenue.
All of these factors will produce a lower free cash per month, and 2020, but importantly will still put us within our target conversion range of 55% to 60% for free cash flow to EBITDA widely considered to be best in class, but industrial distribution companies. Thank.
Thank you once again for your time this morning, and with that I'll turn the call back to Nick for his closing comments.
Thank you Arun for that financial overview.
In closing.
You asked me in late March 2020, after the onset of the pandemic to predict the financial results that we would achieve and 2020 and how do we end up the year.
I would likely have not even come close to gasoline at such a remarkable outcome.
But the one thing I never question are the capabilities of my team.
These results are a clear testament of the pride dedication resiliency and capabilities of the LKQ team members across the globe.
One payments college football coach says ability is what you're capable of doing.
Motivation determines what you do.
But it's the attitude that determines how well you do it.
Despite the challenges and unknowns, we faced it is the positive nothing will stop on the attitude that our 44th and dedicated team members bring to work each day and that carried us through the headwinds of 2020.
But simultaneously generated favorable outcomes that allowed us to reach certain key milestones.
We right size, the North American segment and generated record margins and we.
Made solid progress on our one LKQ Europe program and generated higher second half margin than projected at our September 2020 Investor day.
The uniqueness of our diversified portfolio businesses allowed us to benefit from the rise in demand for our RV replacement parts.
We effectively managed our working capital and generated almost $1 3 billion and free cash flow and an annual record for the company.
And the excellent free cash flow allowed us to pay down a record $1 $4 billion of debt, reducing our leverage ratio below two times.
We continued our talented acquisition initiatives by adding individuals to key roles across our broad and diversified portfolio of businesses.
We've made good progress on our global sustainability programs and we continue to provide the best in class customer service and in spite of the pandemic and importantly, all while focusing on the health and safety of our team.
And as I've said, both internally and externally we will come out of this pandemic period, a stronger better organization.
Further solidifying our market leading positions and with that operator, we are now ready to open the call for questions.
Thank you at this time and I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad again as a courtesy to others, we ask that each participant on this themselves.
And <unk> to one question and if necessary one follow up question before returning to the queue.
Your first question comes from Craig Kennison affair.
And as often.
Hey, good morning, and thanks for taking my question congratulations on navigating a tough year. My question is on inflation here.
Curious how your business is set up to absorb inflation and where you see your more important sensitivities, whether it's gas prices metals or other factors.
Good morning, and more <unk>.
And that's here absolutely I think it's a great question and I would say over the past couple of months, we've certainly seen inflation move up whether it be ocean freight, which we know is running at record highs at the moment, we know wages.
And in the U S. It's difficult to find delivery drivers. So I think you kind of get the message in terms of the inflationary pressures that are building up and also with oil prices now moving up and the Hyatt <unk> and are close to 60 Bucks.
Apparel in any case.
We have navigated as you know not just this past quarter, but I'd say starting 2018, when we put in place on margin programs and.
And obviously kind of accelerated opex programs in conjunction with the cash programs. Our teams have navigated those inflationary pressures pretty darn well.
And what they do and.
We believe we have the ability to continue to drive a number of dependent and cost reductions debt on North America business has taken the lead on but I do know that our European team is also following up with so long story short, yes, other inflationary pressures absolutely well.
<unk> setup to.
Undertake those inflationary pressures, yes up to a certain point.
It really depends in terms of what's going to come through over the next several weeks as such but.
We do expect a number of these inflationary pressures to begin to ease up for example, and ocean freight as the MTS is getting back to the approved create positions back out in Asia and things along those lines.
And if anything to add from your end.
No I think that was great earn.
Thanks, guys.
And Greg and if there's any follow up questions happy to kind of take it now or if you'd like to get back into cubic and certainly take a barrel expense.
Our next question comes from Scott <unk> CL King Your line is open.
Good morning, guys and Echo Greg's comments on the great job of navigating a very tough for Europe.
Thank you.
Let me talk about the North American business I know much of this is based on miles driven and people getting out and mobility, but we look out the window of the weather has been quite off over the last six weeks I'm trying to figure out whether you guys have seen any change in demand there.
And if you think that maybe there could be a tail of potential tail to that as we go from the first thing and into the second quarter.
Great question, Scott and again.
The weather and nasty.
Particularly in the last couple of weeks.
Im actually sitting in Austin, and because I got it.
Going back to the Sunday.
The reality is our business is very much driven by total miles driven.
And as you saw in the debt.
Chart, we included and the earning stock Kennedy revenue trends not just from fourth quarter, but also for January and you could see that January kind of per.
Awkward number left off on picked upward December left off price. So until there is a really meaningful movement mobility, we think we're going to be on a in this level of activity.
On.
Ultimately and we've.
And a number of questions and the past about.
What's going to drive and increase in mobility, and clearly getting through the pandemic and people getting out of their homes and returning per DAU daily lives that will be the biggest impact. We don't believe that everyone is going to work from home forever. We don't think everybody on this call that are permanently be working.
From home and.
And while we've all become fairly efficient and.
Productive and.
On the working from home there is clearly a lack of a community that is hard on organizations.
And we may not get back to a 100% of folks being back on the office, but we do think a number of folks will get back into the office. We think kids are going to get back from the school and when all that happens we think.
On the use of public transportation will remain depressed for a longer period of time, just because of the safety issues related to the virus a lot. So as some of those workers begin to head into the office.
Back into their workplaces.
Those who took public transportation.
And may opt to take private transportation, which means instead of operating on a train and robust they're going to hop on the car.
So we're.
We're cautiously optimistic that miles driven will move back north.
And that will help our business.
Clearly.
The ice storms and the like the pit and the last couple of weeks throughout the United States.
That should ultimately create demand for our business I will tell you here in Texas and plant based on.
The new stories of the higher ups, and Dallas, and Austin and Houston.
And that's probably going to create a bigger opportunity from a salvage volume perspective from a parts perspective, because a lot of those from a disposal and.
And all.
Ice going 40 miles an hour, but again, we're cautiously optimistic that.
And that we will get back to.
And on a more normal levels of miles driven which will lead to more.
On a normal level of demand, it's going to take some time, we don't think it's going to just pop back from the second or third quarter.
But hopefully by 2022, we'll be back.
And at historical levels of miles driven.
Got it and then last question on the specialty side you talked about are these really leading the way I guess thats more retail driven but you also last year expanded your warranty program could you talk about how that contributed and.
And how that probably will contribute even more as we move through the next year or two more rvs on the road.
Many of which will potentially hastily built.
And just more opportunities on that side.
Absolutely I mean, there was a and has been I think again, we note a massive shift and discretionary spending away from things like restaurants, and lodging and air travel.
Theater sporting events all of those group events right.
And outdoor recreation and campaign has absolutely been a huge beneficiary of that shift and discretionary spending.
On.
Per RV business, historically has not been tied to the RV Saar and any particular year.
And has been very highly correlated to campgrounds spending.
In 2020.
The Oems produced about 425000.
<unk> units, which.
And the expectation for 2021 is over half a million units will be all time record high debt.
Key there is that the size of the park a number of Rvs and the park is expanding and that's great for the specialty business as all of those incremental units that will be on the road per years and years to come we will create demand for the for the parts.
That was down.
So even if costar ultimately settles down over the next two or three years.
The units are still going to be on the road and larger base is going to provide.
A great opportunity for us to sell profitably parts for many years to come so the growth may ultimately slowed down we don't think we're going to continue to grow at 16% year over year like we did and the fourth quarter, but we don't anticipate substantial declines and the overall revenue base.
Got it that's all I had thanks guys.
Thank you Scott.
Your next question comes from Bret Jordan of Jefferies. Your line is open.
Hey, good morning, guys and good morning, Brian.
And sort of a big picture question here around the parts demand for Evs, and obviously Europe Scott jump on US you, there's a lot of business and Norway, but could you talk a little bit about how you see the different parts that.
Versus internal combustion and what this does to demand down the road long term.
Sure and it's a great question, obviously, one that's been.
Kind of on floating around the industry now for.
For the better part of the year.
And the reality is.
We believe that.
The supply chain.
And really the manufacturers of the EV parts.
<unk> will ultimately look alike look pretty much the same as the supply chain for internal combustion engine.
Now, there's going to be a lot of overlap and suppliers and.
And we fully anticipate that some of the bigger vendors like Bosch or continental on shuffler will apps.
Absolutely develop parts for electric vehicles.
And while they're going to start with the Oems as a focus and what they know today.
Is that their current aftermarket business makes better profit margins than their OE parts business.
And so it won't be long before they take that OE manufacturing capacity and start making parts from the aftermarket.
We have very strong relationships with all of those vendors.
We've got the leading distribution capabilities.
As it relates to Europe, and it's a natural fit for us and do business together.
Secondly, a lot of the conversion over the next 10 years or so Brett.
And on electrification is going to come through hybrids and.
And our hybrid as you know the combination of and internal combustion engine and.
Electric motor and the opportunity per LKQ there is twofold.
<unk> there is all sorts of new part types and willing to be able to sell.
Things like.
And then.
And and cooling fans electric air.
Conditioning compressors electric driven motor inverter coolers, I mean, just a whole new set of products that we can.
Ultimately distribute.
And then what we also know is that a hybrid parts related to the internal combustion engine side of the powertrain on.
More expensive.
And then similar parts on a non hybrid.
Car sales.
And AC compressor for our hybrid vehicles and we've talked about this during our Investor day back in November can be three times as expensive as and AC compressor for a normal and just internal combustion engine car.
Hulu and pump can be five or six times more concept. So we think there's a good opportunity for us to distribute those parts as well and they are higher value products and then lastly, we think the big opportunity ultimately as it relates to <unk> is the battery.
The engine is the most valuable part of the car that has an internal combustion engine. The battery is the most valuable part on EV and batteries have a defined and likely not going to go on forever, the car's going to be.
Around a lot longer than that initial battery and so there'll be opportunities, we believe for us to remanufacture.
Batteries, because generally it's not the whole battery that goes better bumps, but it's just a couple of valves and <unk>.
It's going to be too expensive and place the whole battery. So we think that's just a bundle of good opportunities for us and the future as it relates to the electrification of the car Park.
Thanks, Thanks for that and a question on the technology as well sort of your scanning and diagnostics program that you just talked about could you sort of talk about the revenue expectations and maybe the margin structure of more service based business like AMETEK.
Yes. So this.
This industry is nascent.
It's pretty small.
On the typical competitor.
Is somewhere between six and 12 technicians that have banded together to provide services for the marketplace. Okay our business.
Is.
And is just shy of the.
The $50 million Mark today, and it's growing the great thing about the services business.
And has.
Better EBITDA margins than our North America and parts business.
And so that should help as that business continues to grow.
We're not going to be able to grow that business by.
And that's certainly true acquisition to gain significant scale.
Most of these operators are tiny tiny so we will buy and look to buy and perhaps some of the.
Larger groups, even though that's still pretty small and.
Rollout on a greenfield basis.
And really educating.
Technicians, and then putting them out on the field and as part of our elite.
Service offering.
And so we're excited about the business.
Alright, thank you.
Youre welcome.
Your next question comes from Stephanie Benjamin of Truest. Your line is open.
Hi, Good morning, Good morning, Stephen Good morning Congrats.
And congratulations again on a really nice here I wanted to touch on.
And you kind of brought at the beginning of your prepared remarks that really the fourth quarter exceeded your expectations and EBIT, Ken Powell you outlined the last time, we spoke and love.
And here you have some color about what.
And your direction during the quarter and kind of how you're seeing things.
Try and out in the beginning of 2021. Thanks.
Sure Greg.
Great question.
The revenue didn't help us and if you go back to that page when we laid out last four months and you can see.
That same for the specialty group.
Shipped rock between the fourth quarter.
Although the revenue in both North America and Europe were.
Down pretty consistently from the prior year levels, obviously, Europe is doing better than North America, because of our collision focused here.
So really wasn't revenue.
That led to the outperformance Stephanie it.
It was our operating margins.
Had good improvement on the gross margin line.
And while on a consolidated basis it looks like gross margins came in.
A couple.
A couple of basis points, that's just a mix shift because the.
The North American business has margins north of 46% the specialty business has margins around 28% and yet the high margin business.
<unk> falling 13% and the.
Now the low margin growth margin business roughly 16%. So you shouldn't take anything from that at all the key is the operating leverage that we got on each.
Each of our <unk>.
Segments.
Hard to get the cost structure.
To reflect the current state of demand and we're very proud of what our folks have done. Unfortunately, a lot of that has come on the backs of labor.
We're down substantially from a total number of employees today versus where we were a year ago, but that's just what it took to right size the business and those are those are permanent reductions, we're going to be very cautious.
Add people and organic.
And back to the SG&A line.
Until we see the revenue rebound and then we will need to add some people back.
And keep our customer service levels, where they need to be.
So think about the <unk>.
Intense focus on controlling our costs because we are in an environment, where we don't necessarily control our revenue.
Absolutely that's very helpful and ill get back in the queue. Thank you.
Your next question comes from Gary Fresh Casino of Barrington Research. Your line is open.
Good morning, everyone.
Very helpful questions here and what are your is your priority for your free cash flow and what would be paying down debt. This year.
Yes, I think it's a great question, Gary simply put if you kind of go back to our Investor day presentation from September.
Probably around 456 months ago, we would make share in terms, if we expected our free cash flow generation on a sustainable basis to kind of continue.
And we've kind of reset the overall business model, so that kind of starting off is a great option to have as a business. We've always said that.
Key priority is investing and our own business. So capital expenditures will be kind of priority number one.
Following that we've said high synergy tuck ins and building up critical capabilities. There was a question earlier on the call about scanning and diagnostics that is a business that we are investing heavily into again as Nick said that based on more transactions six to 12 technicians and on a market by market basis are set to be wherever we have the ability to sell.
Italy, acquiring those but really also supplementing it with.
Capital expenditures to kind of expand that specific service, we do not have any large platform transactions.
On the horizon, we do not see we need those at this point of time, which essentially leads us to a point, where the excess free cash flow really would go towards either debt paydown older as you've seen we've certainly made a tremendous amount of progress being on 1 billion and full in 2020, we are well would not target leverage at this point.
And so really it becomes the highest.
Return on capital opportunities and we still believe that our shares are undervalued and we certainly see no reason given the authorization we have from the board to be able to repurchase our stock.
Okay. Thank you and then just just lastly in terms of.
And what you've done with the cost structure and what you can do obviously future as you move from an acquisition growth strategy Tomorrow.
Oh.
And integrating and bettering your operations and you.
Every year.
I would assume you're really pushing your divisional heads.
To get the cost down.
And just wanted to.
<unk> is the biggest component of costs going to come out and the future.
For the company and.
And I assume you go into a program every year, we need to get.
Our costs better and line on an annual basis.
Absolutely Gary.
And that chip two years ago as you rightly pointed out we've pivoted to and operational excellence.
Good and.
And ever since that we've essentially and driving productivity to integration and these programs you really see in terms of how on North America business has taken the lead on that front just look at fourth quarter operating expenses from that business. Yes, we certainly had challenges and in terms of what the BMT has been and so collision.
Rates have come down.
But as we think about how our collision business has performed relative to the data we are getting them from CCC. We are performing much better than what the repairable claims are out debt. So thats kind of good but really it is the productivity piece of fit that on North America leadership team has just done an outstanding job. You then kind of move over to <unk> for example.
The next largest component of our overall business and that is in Europe and Europe also has kind of begun to make some progress there'll be set these saw some operating expenses come down and the fourth quarter and.
And there is a lot more productivity to go get all back and Thats really is the overall one LKQ program, we need to make investments out debt for example, and the European.
And ERP program setting up a back office. For example, there is really the longer term productivity really is from our European business and that is something that we know our European team has a laser light focus and making sure that they set the flow from within the portfolio companies as we share best practices between our businesses.
And our divisions I know on North American leadership team has spent time with our European team also.
It's one thing, Nick and I kind of pushing and pulling certain levels, but Jeff.
And as the peers speak with one another largely gets the base similar business at the distribution business and that certainly has helped a lot wholesale but yes youre right overall.
Productivity programs every business of Faas every function of Oz as productivity programs to essentially offset the inflationary pressures.
Typically come around in any case, but its the nimbleness and agility that we are tremendously proud of and that really came through in spades with the onset of the pandemic I hope that responds to your question sure does thank you.
And again, if you would like to ask a question for Istar and from the number one on your telephone keypad.
Our next question comes from Daniel and growth from Stephens. Your line is open.
Yes, good morning, guys. Thanks for taking my questions.
Good morning.
I wanted to start on a broader supply chain question. Obviously, you mentioned maritime rates are much higher and the problem getting things over from overseas.
That impacted your aftermarket supply here in North America, and related to that with limited supply and auction and potentially disruption and the aftermarket side.
And you think your supply chain can support the anticipated return to growth and North America or could that be a pinch point this year as we look forward.
Yes, listen and Donnie and good morning to expand on our share I think it's a great question.
We've got tremendous vendor partners on the after market side of the business.
They have been tremendously supportive not just now but ever since we got into the business. So that was kind of one thing with regards to kind of ocean freight and the challenges associated with it whether it would be the number of.
And the carriers that are more outside of.
The port of La Long Beach for example on for that matter getting those empty cans back to Asia to kind of get refilled and come over and we.
Have long term contracts with vessel providers, but also with certain brokers. So we are still being able to get space.
And having to pay up for it we still being able to get space for on those carriers and then the other one as you probably know is LKQ has always had a class leading inventory and fill rates and so we've made sure that we always had the products, yes, they're offset and the areas, where we're having to run local.
Or shuttles between within the region. For example, so we won't kind of ship something from some new England to California.
And within the region, we are kind of making sure that our fill rates remains so we do have the inventory. It may not always been the right odd, but we certainly learned a lot over the past few years in terms of making sure our fill rates remain but at the same time, we are not taking on excessive cost associated with it over time.
Note that the Chinese new year had kind of caused a sudden splurge and turns of the amount of ocean freight that was coming over and we expect that to abate a little in the coming weeks and months, but clearly there is a risk but as I've said previously we.
We have products, we have more products on the way in any case, we think this will even itself out as we return to a growth mode stock and Q2, which is largely kind of easy comps, but really getting back to growth and the second half of per year.
Great that's helpful and.
And then.
Yes.
And then we just think we're better positioned than the typical competitor out there and given the size and scale and depth and breadth of the inventory coming into this.
And.
This time, we're shipping as an issue.
And we will be able to work our inventory and it to be a competitive advantage.
That's helpful. Thanks, Nick and then the related follow up to that would be a follow up on an earlier question on inflation, obviously cost inflation is coming and we just talked about and happening.
Any signs of being able to pass that through on like for like pricing amidst that cost inflation and if not why.
What do you think it's going to take to see that revenue tailwind of return considering cost pressures right now and feel pretty broad.
Yes listen.
Again, just to kind of add to what had on fidelity on the call Daniel.
We have a dynamic pricing model and.
And we said to be make sure that.
While we have a certain.
Threshold or cases ceiling associated web where OEM boxer Kelly, if those kind of begin to move that would certainly help but we do know that our teams are doing a fantastic job on the pricing side.
As I've said previously on our salvage business has been doing really well from and after market perspective, there is limited.
Supply in the market, we do have the products and.
And we want to help everybody.
Specifically, the carriers and our customers, making sure we get the right price at the right time.
No.
Associated with kind of having the products. The second one clearly is making sure that we are that much more productive and the.
Costs that we've been able to take out initially walk was temporarily in the second quarter and kind of switching back into permanent cost reductions.
That is certainly working out well for the entire enterprise, but obviously, we cant wait for kind of growth to return essentially helps us get more of our folks back in the field, but as of now we are happy with the way our teams and navigating the various puts and takes that out of that.
Got it thanks, so much growth.
Your next question comes from Brian and bustling with Stifel. Your line is open.
Good morning, Thanks for taking my questions.
No problem.
Just a quick one on the cash flow and the outlook on the minimum kind of $800 million.
And from a $1 three that you saw in 2020 can you maybe break out the buckets that go from the one per $1 $3 billion and $800 million. Obviously inventory is a piece of it you talked about dsos, a little bit on Opex and capex, but could you give a little bit more fall on that yes.
Yes, listen, it's actually very simple and interest in my prepared comments during.
During 2020, we essentially.
And realigned our inventory base with what demand projections, where our inventory balances came down by over $400 million.
And that really is the kind of.
Delta between call it the one three and the minimum 800 million that we're talking about.
So it's all.
It's all inventory is really and then.
And a little bit of Capex.
Capex is about $100 million, yeah, that's basically inventory by over 400, and Capex of about 100, and Thats basically youre kind of $500 million right back on the one $3 million to $800 million.
Okay. That's good and then follow up just on the.
And of the pace of the growth kind of going into or through 2021.
First quarter remains kind of weak and based on the January revenue that you showed.
Should we think about that kind of pace of growth per second quarter, and then into the second half.
Yeah, Great question. So as we indicated we are anticipating Q1 is going to be down year over year, largely because we started off last January and February of 2020, very strong and obviously.
You can see the January numbers are down February will be down.
And then March.
Year comparison second quarter off would be up because even if we just stay at these levels of revenue.
The revenue came off so dramatically in Q3 last year second quarter will be up and then the third and fourth quarters.
Those are obviously hard to predict further away.
And we're anticipating a little bit of upward movement on it.
And year over year basis.
But again not back fully to 2019 kinds of levels.
Great. Thank you.
And just one additional piece to kind of highlight.
We do have one less selling day in Q1.
Across the entire enterprise and North America, there's one fewer selling day in Q1, our second fewer selling day in the fourth quarter and in Europe, We have one fewer selling day in Q1, but we make up that day in Q2 for the European business. So just to kind of think about this is something that we've talked about previously and just wanted to make sure that you had that into your models.
There are no further questions at this time I will now turn the call to just to circle on that.
Okay, well as on.
Always we greatly appreciate your time and attention. We know this is a very.
On a busy for everybody on the call earning season.
Lots going on and we appreciate your listening to our story, we are incredibly proud of what we've been able to deliver in 2020.
Particularly given all the challenges that companies around the globe have had to deal with and we had our fair share of challenges as well the team I could not be more proud of and they can.
Aim through beyond any expectations and.
And.
I could not be more proud.
B.
As to work alongside all of them.
We look forward to chatting with everybody at the end of April when we will announce our first quarter results and.
And again, it's going to be more of the same and we're going to keep our head down and drive as much revenue out of the.
Out of the market that we can but it's really going to be a more focus on keeping our costs under control and generating cash and with that we'll bring the cost per close and hope you all have a good day and we'll speak again in April and thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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