Q1 2021 LKQ Corp Earnings Call
Okay.
Good morning, My name is Chris and I will be your conference operator today at this time I would like to welcome everyone to the LKQ Corporation fourth quarter 2020 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.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Please limit questions to one question and one follow up.
I would now like to turn the call over to Joe Butros, Vice President of Investor Relations you May begin your conference.
Thank you operator, good morning, everyone and welcome to Lkq's first quarter 2021 earnings conference call with US today are Nick Zarcone, Lkq's, President and Chief Executive Officer of our ruin the ROI of executive Vice President and Chief Financial Officer.
Please refer to the LKQ website, and LKQ Corp, Dot 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 event.
<unk> 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 Hope.
Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today.
And as normal we are planning to file our 10-Q and the next few days and with that I'm 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 Peru, and we'll dive into the financial details, including our banner margin and free cash flow performance as well as our improved 2021 outlook before I.
Come back with a few closing remarks.
While we've come a long way over the past 12 months a year ago at this time the threat of the pandemic had become a tremendous and painful reality.
Immediately our teams got into action with a key focus across the entire organization to rightsize the cost structure and maximize cash flow.
In order to adjust to this new paradigm, our teams had to make some very difficult decisions to protect the long term health of our company and the in the past three quarters have proven that our ability to reset the cost structure of LKQ.
Our global leadership team firmly believed we would come out of the pandemic period stronger and a better organization and our performance this past quarter, absolutely confirms that belief.
Let me restate, our key initiatives, which continue to be central to our culture and our objectives first we will continue to integrate our businesses and simplify our operating model.
Second we will continue to focus on profitable revenue growth and sustainable margin expansion.
Third we will continue to drive high levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy and finally, we will continue to invest and our future.
As you can see from our results our segment teams executed on each of these initiatives and the first quarter.
Alongside these operating initiatives. The continued build out of the comprehensive ESG program is a key focus for the organization.
And as promised during our last earnings call on the April six we released our inaugural corporate sustainability report.
This report validates our long term commitment to enhancing our ESG practices and will serve as a guidepost for the further embedding of ESG principles throughout our global operations.
Slide 16 of today's earning stack provides a brief one page overview of the CSR report if you have not already done. So I would highly encourage you to visit our website and download a copy of the pool of CSR.
And I wanted to the quarter.
Revenue for the first quarter was $3, one $7 billion and increase of five 7% as compared to $3 billion and the first quarter of 2020 parts and services organic revenue and the first quarter of 2021 increased six tenths of 1% on the reported base.
And two 2% on a per day basis, while the net impact of acquisitions and divestitures decreased revenue by six tenths of 1% and foreign exchange rates increased revenue and four 2% total parts and services revenue increased four 2% and the quarter.
The organic revenue growth for the quarter reflects the annualized nation of the initial pandemic impact last March.
Through February organic parts and services revenue was $4, 4% lower on a per day basis and March organic parts and services revenue grew by 15, 7% on a per day basis, recognizing we were coming off a lower comparable period.
Other revenue grew 27% and the first quarter of 2021, driven by higher scrap steel and precious metal prices, while consolidated revenue is still running below pre COVID-19 levels net.
Net income for the first quarter was $266 million as compared to $146 million last year and increase of 83% year over year.
Diluted earnings per share of for Q1 was 88 cents an increase of 83%.
On an adjusted basis net income and the first quarter was $286 million, a 62% increase year over year, while adjusted diluted earnings per share was <unk> 94 cents, a 65% increase.
Each of our segments achieved EBITDA margins well ahead of our expectations due to excellent execution. A continued focus on our cost structure and with respect to North America tailwind from scrap and precious metals pricing.
And when taken collectively these strong performances allowed the LKQ to record the record consolidated segment EBITDA margins of 14, 2% and the first quarter. This was a 350 basis point increase relative to the first quarter of last year.
Let's turn to some of the quarterly segment highlights.
Slide five and sets forth the monthly revenue trends for the quarter and as you can see all segments were positive in March on a per day basis of.
Obviously during the tail end of February and the entire month of March we were working from an easier comp, but we also benefited as mobility began to gain ground and certain markets. Additionally.
Additionally, the penetration rate of the vaccine and the United States is encouraging and as these trends gained ground and other key markets. We should begin to see a loosening of the stay at home mandates and we would expect a gradual improvement and vehicle miles traveled or B M T.
According to the U S Department of energy at the end of the second week of April fuel consumption with 71% above the prior year and just 3% below the same week of 2019.
According to the Apple mobility index, the trend and driving trips and our European markets was down early in the year relative to the third and fourth quarter levels of 2020, but as we progressed through Q1 of the index rebounded and by the third week of April the index had increased 33%.
And from the first week of January.
So there are clearly some green shoots of momentum and B M T around the globe, albeit we're still below pre COVID-19 levels.
Turning to North America on Slide six you will note that the organic revenue for parts and services for our North American segment declined eight 4% in the quarter on a reported basis and 7.1% on a per day basis, while still down on a year over year basis. It is and.
Proven relative to Q4 of last year.
We continue to outpace the market in North America, and especially when you consider that industry data suggest that collision and liability related repairable auto claims declined approximately 14% and the first quarter of 2021 compared to the prior year period.
Relative to the competitive landscape. We are confident that we are gaining market share on the small salvage and aftermarket operators that are typically capital constrained and facing lower inventory levels due to product availability and cost inflation and our strong balance sheet gives us the ability to continue to invest.
And our North American business, including inventory replenishment, and also and various technologies and programs to further enhance the efficiency of our operations and the service experience for our customers.
With the capital constraints, many smaller competitors lack the flexibility to stay relevant and competitive.
During the first quarter, our North American operations benefited from the disruption to the OE component supply chain, which impacted the oes the ability to build major mechanical inventory.
And this lack of major mechanical inventory for the Oes combined with our robust levels of recycled and remanufactured engine and transmission products provided the opportunity for our North American business the gain share on the quarter.
Our salvage operations had been extremely judicious and their procurement efforts and selling more parts from the vehicles, we procure enabling us to have stronger pro forma rates than the industry average and North America. During the first quarter. We continued our environmental stewardship efforts by processing 190.
<unk> thousand vehicles, resulting in among other things the recycling of 900000 gallons of fuel and 491000 gallons of waste oil 482000, and tires and 176000 and batteries.
During the first quarter, we also processed approximately 282000 tons of scrap steel.
Moving on to our European segment.
Organic revenue for parts and services and the first quarter increased 30 basis points as the largest pure play distributor of aftermarket automotive parts and Europe. This is a solid start to 2021, even in the face of continuing COVID-19 lockdowns in several regions of Europe.
Our regional operations experienced very and revenue performance and the quarter with positive year over year of performance in Germany, Benelux and the eastern Europe, with some softness and the UK and Italy, continuing to drag on the overall performance of the segment specific.
Specific to the U K. In addition to our two step distribution business of mechanical service parts, we operate a few other businesses, including our collision parts and coatings businesses, which registered materially lower growth than our two stop mechanical parts distribution business and the first quarter.
Importantly, with our corporate wide focus on profitable revenue. We've spent the past year rationalizing the footprint of our U K business, which eliminated over 40 unprofitable branches, resulting in a small negative impact on revenue, but a significant improvement and EBITDA margins.
Revenue growth from our ongoing mechanical service parts operations was positive and the quarter, while our data indicates the overall U K market was down on a year over year basis and total we are delighted with the performance of our U K operations.
Other items of note and Europe include the fact that we continue to add talent and expect the organizational design elements of the one LKQ Europe program will be largely completed by the end of Q2 of <unk>.
North Central distribution Center project remains right on track.
The ERP implementation and Italy. We also remains on track for a Q2 go live which will make it the first large platform company on our new European ERP system.
And we continue to expand our payables of optimization initiatives, which includes the vendor financing program.
Lastly, on Europe, and consistent with our ESG programs, we recently launched and electric delivery vehicle trial for our UK and Republic of Ireland operations the.
The pilot will run for about six months and we will take into account the charging point infrastructure to identify branches with fans from typical mileage is suited to the range and capability of the electric vehicle. LKQ is also considering pilot projects with fuel cell powered heavy trucks and once those vehicles and fill.
The <unk> stations become available.
Now, let's move on to our specialty segment, which absolutely knocked the cover off the ball during the first quarter by reporting organic revenue growth of 39%.
This represents the highest quarterly organic revenue growth since we bought this business and 2014 with Q4 of last year of being the second highest quarter.
The primary factor driving this tremendous performance is the ongoing demand for arby's and RV parts the.
The RV industry associations and February 2021 survey of manufacturers determined that total RV shipments increased 30%, making it the best February RV unit shipment total on record this.
And this is good for LKQ on a longer term basis, and it's a larger RV park should lead the more RV parts sales and the future of.
Also driving the specialty performance was the demand for light truck parts, we offer which during the first quarter increased 17% year over year with strong demand for products installed on jeeps and pickup trucks and.
We believe that the third round of stimulus checks benefited our specialty business and the quarter.
Across all of our segments and like many others and vehicle parts distribution. We are witnessing some supply chain disruptions, which have led to incremental cost and freight labor and cost of goods sold.
Related to Ocean freight.
<unk> capacity constraints that we first experienced last fall continues to be of challenge.
Our supply chain teams across the globe are in constant communication with our suppliers working to procure the products, we need to maintain and grow our market share and each of our segments.
Importantly, we have witnessed minimal impact to our fulfillment and customer service levels and believe the inventory challenges are subsiding.
As it relates to inflationary risks, we remain cautious near term, but as we progress through the year, we are expecting a continuing pandemic recovery, which should benefit each of our operating segments.
Again, we expect to see continued inflation related to freight labor and cost of goods sold that sad as witnessed throughout 2020 and then in the first quarter of this year, we have a number of levers that we can pull to help offset these inflationary risk including price.
From a corporate development perspective, and the first quarter, we acquired a diagnostics business that provides various mobile diagnostic and programming services to professional collision and mechanical repair shops, and Nebraska by year and this business will be fully integrated into our elite Tech vehicle services brand.
We have a couple of other diagnostic transactions and the pipeline.
Finally, I previously noted several senior level additions to the European team in the quarter, which will lead our efforts and the areas of strategy sales logistics and supply chain product pricing and the e-commerce.
Okay to Europe is viewed by candidates has been a unique and extremely well positioned enterprise with an exciting future and we've been able to attract great talent from across the European automotive industry and digital channels.
The corporate level during the first quarter, we brought on a new senior Vice President of human resources to the executive team Genevieve brings a wealth of experience and managing a large hourly based workforce and she has on point experience and building programs focused on employee engagement and diversity and inclusion.
And key elements of our ESG initiatives.
And I will now turn the discussion over to Barone, who will run through the details of the strong first quarter financial performance.
Thank you Mick and good morning to everyone. Joining us today, we entered the 2021 with strong momentum coming off the two highest quarterly results and the company's history the tech.
Third and fourth quarter of 2020.
This morning, I'm pleased to report that we were able to build on that momentum and the first quarter and take advantage of some tailwind to produce yet another record quarter.
As we've said repeatedly over the last year, we can't control when revenue growth will return to pre COVID-19 levels. However, we are able to manage our costs and have focused on right sizing the cost structure and emphasizing efficiencies. So that we can generate operating leverage when revenue growth returns.
The permanent cost reductions that we enacted in 2020 continued to drive year over year profitability group and Encouragingly, we got an additional boost and the first quarter as we were able to support the sequential revenue growth across all our segments without adding back cost at the same.
Great.
SG&A expenses as the percentage of revenue should this operating leverage dropping to 26, 8% and the quarter, all 320 basis points better than Q1 of 2020.
We were also able to improve our gross margin by being disciplined on pricing to ensure that our strong inventory availability and service levels, well recognized and the industry.
We believe that these operational strength are sustainable going forward and will drive our results as the recovery picks up pace as expected and the second half of the yeah. We sold this transpire in the month of March is rebounding economic activity generated healthy revenue growth and cost controls.
<unk> limited the amount of incremental expenses, which resulted in the highest monthly profitability and the Companys history.
I mentioned the benefit of tailwind from the quarter and commodity prices will most certainly significant and you can see on slide 20, scrap steel and precious metal prices, which should be mostly favorable over the last year provided additional benefits in the quarter we.
We estimate that scrap steel and precious metal prices added roughly $34 million and segment EBITDA, which would translate into about eight in adjusted diluted EPS relative to the prior year.
We expect that the commodities will be in net benefit and the short term, although likely at the lower level than Q1 as car costs continue to rise.
And to the commodity price changes and further moderate and the second half of the yeah.
Even with the tailwind related to commodity prices the largest share of the year over year increase and adjusted diluted EPS related to pure operating performance.
I'll now turn to that operating performance with our segment highlights.
On Slide 10, North America produced its highest segment EBITDA margin in the company's history at 19, 9%.
Q1 is the third consecutive quarter debt, we've been able to make the statement and is truly a testament to the resilience of the business and the management team's swift and decisive actions during the early days of the pandemic.
The segment continued to benefit from ongoing gross margin initiatives and the specific permanent cost reductions executed in 2020.
Additionally, the commodity pricing benefits I mentioned are seen here, helping to drive and North America margins above our long term expectation.
As seen on Slide 11, Europe reported a nine 6% segment EBITDA margin, which represented a 390 basis point improvement over last year.
We remain confident and our ability to deliver on the margin GUL and communicated last September at our Investor day and reaffirmed in February of falling for the quarter earnings Europe is benefiting from the revenue recovery and cost containment actions taken last year with more anticipated on both fronts.
Moving to slide 12, as Nick described the specialty results are truly outstanding we are super excited about the spectacular revenue growth and we're really pleased with the way. The segment team has delivered the group without adding back significant operating cost or sacrificing gross margin.
The segment EBITDA margin of 13, 4% is the highest Q1 result in the segments history by approximately 150 basis points and reflects the leverage benefits achieved in the period of rapid growth and the discipline and to pursue profitable revenue growth.
We talked last year about the shift to and emphasis on operational excellence and the first quarter results provide further evidence of this mindset of taking hold.
Each segment's disciplined execution of our strategic priorities has been excellent.
We are also delivering meaningful savings from our focus on the capital structure deploying free cash flow to debt pay downs and share repurchase is generated interest expense savings and an EPS benefit from of reduced share count. We estimate that these two factors added <unk> <unk> per share to our Q1 'twenty one result.
Additionally, mechanism and solid performance and other investment income generated another <unk> <unk> of year over year growth.
Given the improved expectation for full year profitability, we decreased our projected effective tax rate and our outlook from 28% to 26, 5%.
The reduced rates relative to 30% creates used in Q1 of last year contributed approximately two and a half of the year over year EPS growth. So to recap our adjusted EPS of <unk> 94 cents is at 37 and increase over Q1 of 2020.
The commodity benefit along with the increase is attributable to investments the tax rate on capital deployment and a slight tailwind from foreign exchange produced approximately 16 and sense of that improvement. The remaining 21 comes from our operating performance focusing on.
Profitable revenue growth enhancing gross margins and controlling our overheads and that should be the key takeaway when considering our Q1 profitability.
Now onto cash flow and liquidity Q1 was yet another successful quarter for cash flow generation.
As shown on slide 13, we delivered 523 million and operating cash flows and as we continued to benefit from the trade working capital programs, we've been driving since 2018.
And as benefits from payables more than offset the seasonal growth and receivables.
We expected inventory to be of larger outflow in Q1, the ongoing supply of delivery challenges exacerbated by the ocean freight and challenges have pushed the build two liter in the yeah. Despite the lower than anticipated inventory level, our teams with the support of our vendor partners skillfully.
And ensure that the right parts when the right places and thereby minimized stock out issues. So that our class leading fill rates were maintained.
Capex cash outlays were $42 million, resulting in free cash flow of $481 million.
And we use this cash to repay $83 million and debt and repurchase $57 million and LKQ stock. We also built on our cash balance mostly in Europe in advance of the early redemption on April 1st which was the earliest possible redemption date of three quarters of 1 billion euros.
Your notes due in 2026, we used a portion of the cash on hand to from the redemption and drew the remaining amount on our revolving credit facility.
The redemption replaces the eurobond with a coupon of three and five eights with credit facility borrowings of approximately 250 basis points of lower cost.
Do note that we had already anticipated the redemption and the resulting interest savings in our original earnings outlook provided in February.
On slide 15, you can see the fed the progress we have made to strengthen our liquidity position on net leverage ratio has decreased to one four times from one nine at the end of 2020 going to our strong profitability and cash flows and the first quarter.
We believe that we are very well positioned and our stated pursuit of an investment grade profile. We are also pleased with the positive developments from the subjective with both S&P and Moody's upgrading our credit rating and the first quarter.
I will close with our updated thoughts on 2021.
And with the ongoing COVID-19 uncertainties, especially concerning revenue trends, we are providing an abbreviated outlook. We are comfortable making the following statements all of which presume that one.
Additional and mobility restrictions beyond what is currently in place on not re implemented on exacerbated in our major markets to foreign exchange rates hold near recent levels and finally, three scrap and precious metal prices trend lower in the second half of the year.
With that on revenue, we reaffirm our belief that parts and services revenue will be higher on the full year basis in 2021 versus 'twenty 'twenty with the most significant growth coming in the second quarter, albeit of a low base.
We anticipate that the revenue recovery will continue in the second half of the year as vaccines of distributed more broadly and mobility restrictions decrease.
We do not currently expect to return to our 2019 annual revenue until 2022.
And as discussed previously we have two fewer selling days in North America in 2020, one with one already completed in Q1 and the second one and the fourth quarter, while Europe is flat with one fewer selling day in the first quarter, but made up in the second quarter with the additional day.
The other piece of it wanted to talk about what's the earnings per share and with a strong first quarter performance projected revenue growth and the ongoing benefit of our margin and operating expense programs. We expect our 2021 adjusted diluted earnings per share will be significantly above the comparable figure for 2000.
<unk>, we are projecting and adjusted diluted EPS range of $3 to $3 20, with the midpoint of $3 10.
On a GAAP EPS basis, this would be $2 68 to $2.88 the third.
5% or 13% increase at the midpoint reflects the Q1 outperformance and upside and the projected results for the last nine months compared to our prior outlook, we expect to achieve this upside while covering the effects of inflationary pressures being felt across the industry related to labor costs.
Yes.
<unk> and domestic freight expenses and higher input costs raising inventory prices and.
And finally on cash flow, we are indeed off to a terrific start on cash flow generation, and Q1, which gives us the confidence to raise our minimum free cash flow expectation.
We now project that free cash flow for the full year 2021 will be within the range of $815 million to $950 million with the midpoint of $900 million we.
<unk> inventory purchases to represent and outflow over the remainder of the year as we replenish on inventory levels to support the anticipated growth.
Essentially it is just going to happen later in the year than we had previously anticipated.
Some of the investment and inventory will be offset by continued improvements and days payables, resulting from the European payables optimization program, which is producing benefits and tracking well in line with the target. We had set out in September of 2019, when we initially launched the one LKQ Europe program.
So with that thank you once again for your on time this morning, and I'll now turn the call back to Nick for his closing comments.
Thank you Vern as a company we are always focused on financial performance, but we are equally focused on facing change head on and rapidly adapting and order to continuously deliver positive results for our stockholders employees and most importantly, our customer.
<unk>.
And the first quarter, our team of nearly 44000 employees globally maintained that focus which again allowed us to deliver positive results above expectations.
And I'm very proud of our team and the outstanding results, we posted in the first quarter of 2021.
And with that operator, we are now ready to open the call to questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad also please limit yourself to one principal question and one follow up question on before returning to the queue.
Your first question comes from Stephanie Benjamin of Truest. Your line is open.
Hi, good morning.
And Stephanie.
And my second question is just on as you pointed out you know, both Nick and Brian and just the impact from this inflationary environment and I think you called out some levers that you can pull including pricing.
Love to get an update on any pricing actions that may have been implemented and the first quarter and just overall customer response and as long as maybe hearing a little bit more on some of those other levels that you can pull just given the environment and then I just have the quick followup.
Thanks, Stephanie and.
The reality is.
The operating in and unusual environment.
And the <unk>.
Volumes in our North American and European businesses are okay. They are not great, but the okay and theres still constrained relative to 2019, but as maroon indicated we've been very disciplined on the pricing front and theres no need to give away product at a discounted price.
Mrs.
And in those cases, where we're the only supplier of that may have the products. So we've been very disciplined in our pricing we have seen some creep and the cost of goods sold just because of the inflationary pressures and some of our suppliers and we're doing our best to recover that and.
Maintain gross margins.
And.
We're comfortable with our approach we have not seen significant pushback from our from our customers. The reality is we're not alone I mean, the entire industry is facing the same set of conditions on the specialty side. The growth there was largely due to volumes.
And just going through the Europe, which was terrific and again, our specialty team is paying particular attention to be really disciplined on the pricing front.
Got it. Thank you and then this is the follow up specifically on the salad and side of the business have you see I know you called out.
Benefiting from the ability to prepare the OEM parts and remanufactured parts, just given the early and the shortage.
Have you seen any inflation and the quarter or and ability to procure some of those parts at auction just given the collision accidents are down on.
The higher demand from maybe other buyers would love just to hear how <unk> been able to procure of those salvage parts. Yes. So we're really proud of our manufacturing operations and they've done a terrific job over the last several quarters not just from the first quarter.
And the salvage markets are tight and.
The.
And the prices, we're paying for the cars are higher today than they were a year ago or even two years ago.
And part of it reflects the fact that the number of cars just going through the auctions are down just given the overall level of driving the overall level of accidents and and total losses, but again, we're working hard to make sure that we keep our margins.
It really healthy levels.
And the fact debt.
Got a great team on.
On the re manufacturing side, that's able to produce the products that the customers are meeting is.
Has really helped.
Great. Thank you so much of the time.
Okay.
Your next question comes from Brian Butler of Stifel. Your line is open.
Hey, good morning, Brian.
Good morning, taking my questions.
You guys hear me, yes, you're fine.
Great perfect.
I guess just at high level, maybe we could talk a little bit about the trends that you've seen to date on the driving side and the U S and Europe and then just kind of thoughts on on how that plays out and the impact it could have.
And and the rest of 2021.
Sure I'll take that.
But the interesting year a year ago at this time.
On April through June.
Vehicle miles traveled were down significantly and the United States and in Europe.
And the us at a low point and it really and the second and third week of April of 2020, being down and better part of 55% or so.
If you look at.
Really from kind of mid to late June through the November timeframe.
And the United States was down in and around anywhere from 9% to 12% kind of weekend week out.
So glass part of 2020.
It was down about 15% really from and through Thanksgiving and to the end of the year.
And then more recently, though it's picked up and.
And the last few weeks BMT in the U S is down and say 5%.
And I'm talking about passenger cars of truck miles.
It has actually been positive really since <unk>.
Last summer.
Almost all of our revenue relates to the passenger vehicles and that's what we focus on.
And.
As I mentioned and some of my prepared remarks the European.
Activity and mobility again, and the first quarter started off really slow it did rebound.
And here in April we're still below 2019 levels.
But.
You know only down kind of low and we believe low single digits from of BMT perspective.
In Europe.
But there are some variations country by country.
So when you look at the question behind your question I believe is when do we get back to 2019.
And kind of revenue levels, and BMT levels right and.
We think of the United States, it's going to take us a bit longer and we think it's going to take until 2022.
To get back to 2019 levels.
In Europe, which is a little bit closer.
From a starting point of perspective.
We can see getting back from 2019 levels now.
In the third and fourth quarter of this year.
It all depends on how the vaccine gets rolled out and whether people truly get back.
Back on the road and then the specialty business has been running above 2019 levels.
And for several quarters now and.
So that's a little bit different.
Okay, and then I guess as a follow up just to be clear and Thats kind of whats built into the current the updated guidance that you gave and then second would be what what part of the commodity metals upside.
And two are the expectations built into the the revised guidance that you gave thank you.
Hey, Brian it's the borrowing now chip so yes as part of my prepared comments I did mention the fact that as of now we do see some moderation on the the metals pricing, both scrap and precious metals and the second half of the year and so batches of the piece that has been built into the outlook at this point of time we've.
<unk> previously also commodity prices.
Incredibly volatile, we certainly benefiting from the upswing at this point of time with the sequential rise.
But again make no mistake, there are others and the industry also that are faced with a similar set of commodity price increases. The question really is we believe.
Salvage teams and self service and full service by far the best and the industry and essentially are doing an incredible job and operationally taking advantage of the upswing out that clearly we are.
Keeping of lookout on when these moderate but tens of now the absolute.
Contemplates a second half moderation.
Yeah.
Okay.
Okay. Thank you.
Your next question comes from Scott <unk> of C. L. King Your line is open.
Good morning, guys and thanks for taking my questions. Good morning, Scott.
I'm, just trying to breakout March a little bit better.
I think you partially answered my question with commentary about reaching 19 levels again, but in March.
And we saw some nice increases specialty.
The specialty up 61% could you maybe go through the three businesses and just how much of it is easy comps.
Do you if you want to flush of everything out did you see inherent improvements and March.
Sequentially month over month of it.
On the January and February timelines of into March.
Yeah.
Sure. The reality is March was a good month for us.
Especially was off the charts.
And we're not going to begin to imply and we're going to be able to continue to grow at 60% year over year every.
Every month for the rest of the year of the growth rate is going to come down but.
The absolute dollars should be strong.
The comparison for Europe, and North America, obviously, we're happy that it's up on a year over year basis.
But it's somewhat off.
Easy comps, but the March levels were better than the February and and January levels again, not back to 2019.
Levels, but they were better sequentially and that's what gives us a little bit of confidence going forward that we will slowly creep back.
Two of those 2019 levels.
A little bit faster and Europe, a little bit slower and the U S, but we're headed and the right direction.
Okay, and just last question on supply chain and I think you touched on some of this early but.
Full of quarters ago specialty was meaningfully impacted there and it appears that.
You've been able to work through that just the can you just talk about some of the counterbalance countermeasures that you have in place which are helping you.
And get through this.
Well we have.
A lot of orders out there for inventory.
We have products, that's coming into our receiving day and how did it out of our shipping days.
Almost on the same day, we've got products, that's not even touching the shelves because of the velocity of the business and the demand is just so significant.
We're doing the best we can we're working.
And in hand, with our vendor partners.
Reality is the industry as a whole the vendors are are running hard to keep pace.
And we're working very closely with our vendor partners to make sure that we can get the product we need when we need it.
<unk>.
We anticipated and not just and specialty but and all of our businesses that we would have added more to our inventory levels from the first quarter, but the <unk>.
Supply constraints are what they are and we.
We think we'll get back to the slightly higher inventory levels.
And the second half of the year.
Got it thanks, so much.
Yeah.
Your next question comes from Craig Kennison of Baird. Your line is open.
Hey, good morning, Thanks for taking my questions as well and good morning kind of like your good morning. It sounds like your competitive advantage, especially as it relates to inventory availability has really strengthened during the pandemic and and I'm wondering to what extent you think that is sustainable.
And what what does the competitive landscape look like you know do you think you've seen any are any of those competitors exit exit permanently.
I wouldn't say that we've seen.
A rash of competitors exit Craig.
But as most people know ocean freight as the significant consideration for all industries anybody importing products, particularly.
Particularly from the far east.
The the lack of containers the backlog at the ports I mean, it all creates a bit of a.
Bottleneck.
And the differences is we're not importing.
Few dozen or a few hundred containers, a year and North America, we import over 16000 containers a year and so we use that to our advantage of that position to our advantage.
Are the orders from the.
The vendors are big orders.
We are very important customer and I think we get.
We've got great relationships with our vendor partners and the working hard the.
Help us be successful and a fewer of us.
Smaller business you don't have that same flexibility.
And the to have.
The power with the.
With the vendors and or what's the shipping lines and.
And we use our size and scale to our advantage.
Thank you and then sort of related but you know the other impact of the pandemic has really forced yourselves to.
Look at the your operating performance and to make some tough.
The decisions Unfortunately in terms of head count and.
As you look to add staff to meet the new resurging demand.
And how to what extent do you need to add back staff and can you get by with a leaner footprint going forward.
Well, we clearly leaned out the organization globally as we went through the depths of the pandemic right and.
And my marching orders to all of my operating heads out and the field and.
As we need to keep that lean this going forward.
Yes, we will need to bring back.
And people and add people as revenue improves.
But we're not going to bring the people back until the revenue is up and we know it's sustainable.
And the goal is this is the new cost structure of Craig.
This is how we're going to operate the business going forward.
Great Hey, thank you.
Your next question comes from Gary Press Defino of Barrington. Your line is open.
Hey, good morning, everyone. Good morning, Gary Gary.
Got a question here and maybe you know.
A little bit different and what you were expecting the.
In terms of questions for the call on the quarters numbers, but can you give us an idea of on the mechanical side for <unk> what.
What kind of parts demand you're seeing.
Initially I just want to get to that because obviously, we're going to start seeing more <unk> come until the car Park.
So.
Very little demand for electric vehicle parts, almost I wont say, none, but almost non and you have to keep in mind, our sweet spots Gary.
Is the.
And the aftermarket products.
From a collision perspective and.
And the salvage parts from our college and perspective, sweet spot being kind of three to 10 years of vehicles three to 10 years old.
And on the mechanical parts of the sweet spot is even older John.
Generally kind of and that four to five the kind of 15 years and so there's a pretty big lag.
The.
Between kind of one of the cars come off the showroom floor and when there's a real demand for the types of parts that we and others and the industry.
And so youre not going to see and impact of EV related parts for quite some time.
Okay. Thank you.
Your next question comes from Bret Jordan of Jefferies. Your line is open.
Hey, good morning, guys good morning, Brett.
Pretty good sequential improvement and the payables ratio.
How high do you think you can get accounts payables of percentage of inventory without getting to investment grade.
So as of now and the first quarter as I mentioned in my prepared comments, Brett. We certainly saw the payables continued to deliver the overall payables program deliver it again was not only the European and payables program on North America team also did an outstanding job.
But really two of the case of not being able to get the inventory built to take place. So in Q1.
While the number for the conversion is above 100% in terms of free cash flow to EBITDA as I've mentioned previously the old so that is not a sustainable number.
The conversion factor on an annual basis is the 55% to 60%.
But again I'm really happy with how the payables program is growing across the board, but clearly the largest opportunity being over in Europe as of now the first quarter with the lack of the inventory build its basically timing and from the second quarter onwards, we expect that inventory build to take place.
<unk> is back into that 55% to 60% conversion ratio with regards to what the long term hypotheses is or what the long term plan is with regards to payables as a percentage of inventory we can be known for our European business. There are some north American comps that we are targeting it certainly takes time.
But really happy with the progress of that team is making.
Okay and then the question on the UK mechanical I think you'd called out of spread between Europe mechanical business and the collision business.
One of your peers and called out the U K is particularly strong are you seeing any market share shifts on the mechanical side of that market or is your <unk>.
Regional softness more tied to the product mix.
Brian it's tied to product mix as I indicated I mean, the of the collision and coatings activities and our UK operations were down double digits and.
And the environment, there is not too different from the collision environment here and the United States fewer miles traveled less collisions and all the rest right.
Our core continuing operations.
On the mechanical parts side.
Was up and the first quarter the market was down we took some share.
And that's our goal.
As to the continuing to take share.
And most importantly, though and our U K business, we're highly focused on.
On the profitability and the cash flow of the business.
Does it.
It's not how much you take in and how much your key price and.
Our focus is the keepers.
And as much of that revenue in the form of profits and cash flow and.
We're happy with the growth of our business.
And you said you'd rationalize the footprint and the UK is that done now is Europe, because as your store base pretty static GAAP.
All done.
Okay, great. Thank you.
And again, if he would like to ask a question Press Star then the number one on your telephone keypad your net.
Question comes from Daniel Embryo of Stephens. Your line is open.
Yeah.
Hey, good morning, guys and congrats on the sorts of the year good morning, Daniel.
Nick I wanted to start on the diagnostics piece could you talk a little bit more about greenlight and maybe what they bring to the table and then taking a step back you mentioned in your prepared remarks, there was the more diagnostics the old and the pipeline can you expand on what you're looking for and these target is it just scale as the new capabilities kind of how that fits into the north American outlook.
And thanks, Daniel the acquisition was similar to the other small acquisitions, we've made and the diagnostics space.
And again this is very much of a local business not unlike the rest of our North American operations, where you you're really selling into the local markets.
We're going to continue to do.
Acquisitions that give us geographic coverage across the United States.
Because you can't service body shops.
Andrew and mechanical shops, and California, with a diagnostics team that is in Texas or Colorado. It just doesn't work and so we are going to continue to build out the footprint from of diagnostics perspective.
All of our activities. Thus far are what we would call mobile related where we actually have feet on the ground people inside our customer shops.
Doing the calibration work and on the diagnostic work.
We're going to continue to build that out and we're looking for other ways and quite frankly to service our body shop and mechanical shop customers.
And perhaps using technology.
Really really helpful and then maroon and just one on the balance sheet. Obviously your leverage is down to one four times and you mentioned you reduced further on April 1st with the Euro bonds can you talk about the uses of free cash from here, obviously inventory will build but you're still guiding to call. It $900 million of free cash do you think about the primary use.
That being buybacks now that leverage is comfortable or how are you planning on deploying that capital yeah. So a great question and thank you for raising of Danielle.
Yes, the first priority has been and remains to reinvest into our business.
Apart from Capex, which we are very comfortable with and what we've called out for quite some time and the two to two and the quarter percentage of revenue that remains stable. In addition to that as Nick mentioned, a few minutes ago, our ability to do high synergy transaction small tuck ins and building up.
Critical capabilities remains the primary use in terms of priority of the free cash as you rightly pointed out leverage is well within our target corridor. We don't expect to see further deleveraging taking place from a debt perspective, and arguably yes profitability grows.
And the Delevering will take place in any case, so not really looking to pay down further debt, which obviously as you can make out doesn't leave too many <unk>.
Avenue's left for the free cash flow with the.
Share repurchases, which obviously, we resumed the program and the fourth quarter of last year.
And up being the primary deployment for that capital that we are building up.
Great Congrats again and best of luck. Thank you.
There are no further questions at this time I will now return the call the Mr. Sacconi for closing remarks.
Well, we certainly thank you for your time and attention. This morning, and we look forward to providing another update in late July when we report our second quarter results again.
In summary, we are thrilled with our first quarter.
I think all of the 44000 people of LKQ for working so hard to bring such terrific results to bear and.
And we are very optimistic about the future of <unk>.
Q and so thanks for your time, and we'll chat again in the three months.
This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
And.
[music].
And.
[music].
Okay.
[music].
Okay.
[music].
[music].
And.
[music].
Okay.
And.
Yes.
Yeah.
And.
And.
And.
Yes.
[music].
Okay.
Yes.
Okay.
Okay.
[music] zone.
[music].
Okay.
Yes.
And.
And then.
And then.
[music].
And then.
[music].
Yeah.
[music].
Yeah.
Yes.
[music].
Yes.
And then.
[music].
And then.
[music].
Yes.
Yes.
[music].
Uh huh.
Okay.
Yes.
[music].
Yeah.