Q3 2021 LKQ Corp Earnings Call
[music].
Okay.
Good morning, My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to LKQ Corporation's third quarter 2021 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.
I would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Withdraw your question press the pound key.
I would now like turn the call over to Joe Boutros, Vice President of Investor Relations for LKQ.
Corporation.
Thank you operator, good morning, everyone and welcome to Lkq's third quarter 2021 earnings conference call with US today are Nick Zarcone, Lkq's, President and Chief Executive Officer, and Bruno Roy Our Executive Vice President and Chief Financial Officer, Please refer to the LKQ.
Site of 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 events or results may differ materially.
Lee 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 earlier today and as normal we are planning to file our 10-Q in the next few 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 be rune will dive into the financial details as well as our outlook for the balance of 2021 before I come back with a few closing remarks.
This was another quarter of significant operating progress at all K Q, driven by excellent execution and delivering solid financial performance all while navigating the challenges with the supply chain and the current cost environment, we were able to produce yet another record.
Order and this represents the fifth consecutive quarter with the highest EPS reported in their respective quarters. The third quarter also reflects the second time, we've been able to achieve more than one dollar of earnings per share on an adjusted basis and reflects the highest third quarter segment EBITDA.
Margin in the history of the company.
We are particularly pleased that our European business delivered its highest segment EBITA level in over nine years exceeding the 11% level.
Rune will dig into the margin detail shortly.
While I recognize the listeners are primarily focused on the financial results I know our performance is a reflection of the dedication and effort of our 45000 team members around the globe, who are working hard to serve our customers I hope you can appreciate that I am more excited.
About the performance of my team and the quarterly results as they are key to continued excellence.
With respect to capital allocation as you hopefully read from our press release issued this morning, I am very pleased to announce that our board of directors has declared the companys first ever quarterly cash dividend.
This dividend declaration and our existing stock repurchase program are key components of our strategic plan to drive total long term returns for our stockholders.
Our solid balance sheet and sustainable cash flow generation, coupled with our leading market positions across our operating segments provide us with the opportunity to execute on that plan.
The quarterly dividend up 25 cents per share will be paid on December 2nd 2021 to stockholders of record at the close of business on November 11th.
Now onto the quarter.
Revenue for the third quarter of 2021 was $3.3 billion, an increase of eight 2% as compared to the $3.1 billion in the third quarter of 2020.
During the third quarter total parts and services revenue increased 6% comprising organic growth of 4% the net impact of acquisitions and divestitures, you're increasing revenue by one half of 1% and foreign exchange rates, increasing revenue I wanted and a half.
5%.
Net income for the third quarter of 2021 was $284 million as compared to $194 million for the same period last year, an increase of 46, 4%.
Diluted earnings per share for the third quarter was 96 cents a share as compared to 64 cents a share for the same period of 2020, an increase of 50%.
On an adjusted basis net income in the third quarter was $300 million.
Compared to $228 million in the same period of 'twenty 'twenty at 31, 6% increase adjusted.
Diluted earnings per share for the third quarter was $1 <unk> as compared to 75 for the same period of 2020, a 36% increase.
Now, let's turn to some of the quarterly segment highlights.
Slide five sets forth the revenue trends for the quarter and you can see growth rates improved year over year for all segments.
The vaccination rates in our key geographic markets continued to improve but as we progressed throughout the quarter, we started to face headwinds related to the rise in the adult variant and also challenges with the aftermarket supply chain.
Both of which impacted organic growth across each of the segments.
Turning to North America. According to the U S Department of energy fuel consumption for the third quarter was eight 6% above the prior year and one 3% below the third quarter of 2019.
From a slide six you will note that organic revenue for parts and services for our North American segment increased five 9% in the quarter on a year over year basis.
When looking at our performance relative to collision and liability repairable claims this quarter given the aberrations associated with the significant swings in 2020, we believe the most relevant comparison is to the third quarter of 2019.
During Q3 organic revenue for parts and services for our North American segment declined about 7% on a per day basis relative to 2019 levels. While we parable claims declined 10, 6%. So it was another period of outperformance for our North American.
Operations.
During the third quarter, our salvage business and the growth of our major mechanical product groups had solid performance.
Although fill rates have been challenged we are witnessing a positive offset from our quote conversion rates on salvage parts importantly, as we progressed through the third quarter and entered Q4, we witness an increase in availability at the auctions and prices are moderating versus what we.
Earlier in the year.
Also elite Tac, our diagnostic and calibration services business continued to exceed our expectations with September being the highest monthly level of diagnostics scans since building out this business a clear sign that shops and carriers are embracing this unique service offering.
For those on the call that we'll be attending the Sema event next week elite Tac will have a presence at the show. So please come visit and you can see why we are excited about this growth opportunity.
Moving onto our European segment organic revenue for parts and services in the third quarter increased 110th of 1% on a reported basis and three tenths of 1% on a per day basis, when compared to the third quarter of 2019, our European revenue was down just 1%.
On a per day basis. So we have made progress on getting back to pre pandemic levels and are optimistic we will move ahead of the 2019 levels in the next quarter or two.
From an overall mobility perspective, virtually every European market experienced flat growth in the quarter, which we believe is a sign that the spike we witnessed in the second quarter due to the reopening of the economy subsided sequentially in Q3.
Our regional operations continued to experience Varian revenue performance in the quarter, our eastern European business had the strongest recovery, despite a very competitive pricing environment.
Germany, and the Benelux markets also delivered well above total segment growth.
Dragon growth was primarily driven by negative growth in Italy, a market that continues to face very difficult conditions.
Other items to note in Europe would include the fact that on September six we celebrated the Grand opening of our new innovation and service center in Kenna, I bet Shay, Poland that began operations earlier in the quarter.
Also on October 1st just after the close of the third quarter, we acquired a company named <unk>, which operates nine locations in the Central Netherlands region.
With over 100 employees, who is one of the largest independent automotive parts wholesalers in the Netherlands.
Now, let's move on to our specialty segment, which again delivered solid performance during the third quarter by reporting organic revenue growth on a same day basis of 13, 7%.
As witness in the first half of the year. The drivers of this ongoing performance continued to be strong demand for parts related to rvs and light trucks as well as our drop ship business.
October 1st we finalized the acquisition of Cys Marine distribution, a nationwide electronics wholesale distributor that supplies electrical and electronic products for the marine outdoor and personal navigation markets.
This acquisition is consistent with our strategy of entering adjacent markets that Bill Rogers highlighted during our 2020 Investor day.
Marine products overlap nicely with our RV and tolling product portfolio importantly, see why now has the benefit of leveraging our network of eight specialty distribution centers and over 40 Cross docks that are strategically located to provide next day service throughout North America.
According to the National Marine Manufacturers Association, the total addressable market for the wholesale products see wide offers is over $3 billion.
Lastly, I want to acknowledge and congratulate the specialty team for being recognized as the RV industry Association distributor of the year at the recent 2021 RV aftermarket conference in Atlanta, a tremendous accomplishment.
In addition to the Moon and see wide marine acquisitions.
Their corporate development transactions included divesting all of our equity interest in a very small joint venture in the U K.
And acquiring a business in the United States that we manufacturers torque converters a product used in the remanufacturing of automatic transmissions.
The global supply chain continues to be under duress.
It is widely known that today a record number of ships are anchored off the coast of California waiting for port lanes to unload containers, some of which hold our aftermarket inventory and are eventually headed to LKQ facilities.
High demand for oversea products congestion within the ports and at the rail hubs in a severe shortage of truck drivers has led to delays and increased cost for ocean and land freight both in North America and in Europe.
The recent initiatives across the globe to begin tackling components of these root issues such as the measures implemented by the port of Los Angeles on the October 12th are encouraging.
But we expect overarching supply chain issues to persist in the near to mid term.
We are doing our best to effectively navigate the difficult environment and we are hopeful that we won't be talking about the supply chain challenges and reading draconian headlines on a daily basis at this time next year.
Alongside supply chain inflationary pressures like many businesses across the globe, we are facing wage inflation and increased competition for labor.
We are constantly looking at our wage structure and turnover rates across all of our segments to ensure we stay ahead of any competitive pressures and to help backfill the open positions with the best candidates we can attract.
Now a brief update on some of our ongoing ESG efforts.
During the quarter, we established the LKQ cares ESG Advisory Committee, which is comprised of key leaders across our company. The purpose of the committee is to support and provide advice regarding LKQ corporation's ongoing commitment to environmental matters social responsibility.
The corporate governance, and many other public policies relevant to our company.
Additionally, with inclusion being a core value at al K Q I am excited to announce that LKQ has joined the second chance business coalition.
A nationwide effort to create economic opportunity for approximately 78 million Americans trying to get back on their feet and contribute to society.
We are proud to be alongside 35, other large public and private companies, but also believe that supporting those seeking a second chance in life not only provides opportunities for the individual but also for their families and for their communities. It is simply the right thing to do.
Lastly, as you may have read we are both humbled and honored that all kicks you in North America has been recognized by work Baas and independent global employee engagement firm as a five star employer after receiving positive feedback from our first ever employee engagement survey.
Part of our mission statement is to build strong partnerships with our employees and the communities in which we operate and this award validates that our inclusive and engaged teams are probably carrying this mission forward.
And I will now turn the discussion over to <unk>, who will run through the details of the strong third quarter financial performance.
Thank you and making good morning to everyone joining us today.
Third quarter results reflect continued evidence of the benefits of the operational excellence initiatives, we instituted a few years ago.
Our record profitability and continued robust free cash flow just don't happen by accident.
The team's focus on getting the fundamentals right.
This improvement and winning each D has driven the strong results under water incredibly challenging conditions with a congested supply chain and strong inflationary pressures.
I'd like to start with a few highlights before getting into the details.
As you heard from Nick Europe achieved segment EBITDA of 11, 5% for the quarter.
This gives us the confidence to narrow the full year segment EBITDA range for 2021 further to nine 8% up to 10, 3% effectively lifting the floor by a further 30 basis points.
Specialty delivered yet another excellent organic revenue quarter at 13, 7%, despite the ongoing supply chain challenges.
This is the fourth consecutive quarter of robust double digit organic revenue growth for the segment.
Cash flow generation remains strong and the conversion ratio relative to earnings continues to be above our long term expectation despite a challenging environment.
The share repurchase program carried on with a further four 3 million shares purchased in the quarter.
The year to date total to 12 million shares and the program to date of $29 three shares repurchased and finally, the initiation of a regular quarterly dividend reflects the confidence in our strategy and the strength of our business underscoring our commitment to deliver long term value to our.
Stockholders.
Now I'll move to the consolidated financial results.
As Nick described Q3 was another successful quarter with group in revenue EBITDA margin cash flow and earnings per share.
Gross margin was again, a highlight for the quarter, increasing 150 basis points relative to the prior year, we continue to feel pressure on input costs across each of our segments, but we have been able to mitigate the effects by being nimble to adjust to the new reality of higher input costs by adjusting pricing.
Gross margin also benefited from the tail winds of commodity prices, although at a much lower level than we've seen in prior quarters.
<unk> costs remain relatively high and with the moderation of precious metal prices in the quarter as seen on slide 27, the benefits dipped relative to the first half of the yeah, we estimate that scrap steel and precious metal prices added roughly $12 million in segment EBITDA.
<unk> <unk> and adjusted EPS grew relative to last year.
As a reminder, this benefit is well below the $57 million in segment, EBITDA and 14, and adjusted EPS from metal prices experienced in the second quarter of 2021.
Overhead expenses as a percentage of revenue increased 50 basis points year over year, largely driven by personnel costs. The tight labor market has pushed wages higher in many of our markets. Additionally, strong performance across all three segments is contributing to increased levels of incentive compensation in 2021.
Which represents a 30 basis points of higher expense.
Other overhead expenses are slightly favorable as we offsetting inflation in freight and fuel through operating efficiencies and leverage from highest scrap and core revenue.
I'll now turn to the segment operating results starting on Slide 10, North America produced an EBITDA margin of 17, 3% for the quarter down 30 basis points from a year ago gross margin was favorable by 60 basis points, primarily coming out of the ongoing margin initiatives in the wholesale business.
This and improved pricing.
Self service increased gross margin dollars compared to 2020, but generated a lower margin percentage due to an increase in cost and moderating metal prices.
Segment overhead expenses increased by 100 basis points with the largest change to personnel expenses.
Roughly half of the increase is attributable to wages and temporary labor with the remainder in higher incentive compensation.
And the segment EBITDA line the metals prices benefit noted previously generated 20 basis points of improvement relative to last year.
I previously mentioned Europe strong margin for the quarter and slide 11 shows the details adjusted gross margin increased by 240 basis points to the highest level in recent years, primarily owing to better match pricing, while overhead expenses grew by 30 basis points, driven by higher wages and <unk>.
Center of compensation.
Moving to slide 12 specialty grew EBITDA dollars Boe experienced 100 basis points of dilution in margin. The primary factors contributing to the decrease of one higher incentive compensation.
Inflationary pressures in the segments, one operations, which are behind the 30 basis point decrease in gross margin and finally duplicative costs associated with acquisitions done in the current fiscal year, which we expect to be transitory as the team integrate the acquired businesses over the remainder of the year and into <unk>.
Early 2022.
Similar to the first half of 2021, we are also delivering benefits from our focus on the capital structure.
The early redemption of the 2026 Euro notes in April of this year created interest expense savings. Additionally, deploying free cash flow to debt pay downs and share repurchases generated interest expense savings and an EPS benefit from a reduced share count.
We estimate that these factors added roughly <unk> <unk> per share to a third quarter results and based on the characteristics of these initiatives I expect it to continue to deliver over multiple periods.
Additionally income from our equity method and other investments generated a further <unk> of year over year growth.
Given the improved expectation for full year profitability, we decreased our projected effective tax rate in our outlook from $26, two 5% to 25, 75%, which contributed to a four cents a share year over year benefit in the third quarter.
So to recap.
Our adjusted EPS of $1.02 is a 27% increase over the third quarter of 2020.
The commodity benefits as previously stated what <unk>.
Investments generated a further <unk> the tax rate, our capital deployment and a slight tailwind from foreign exchange produced about 10 cents of the improvement. The remaining 12 cents comes from our operating performance by far the single largest contributor to the results.
Shifting to liquidity and capital allocation, we continued the trend of robust cash flow generation in the third quarter with $429 million of operating cash flow and $384 million of free cash flow.
Conversion of EBITDA to free cash flow was a very strong 84% roughly in line with our year to date ratio as seen on slide 14.
Our operating cash flows were driven by cash earnings and favorable movements in trade working capital balances payables represented an inflow for the quarter as we benefit from extended payment terms, including our European vendor financing initiative.
Inventory was an outflow of $60 million for the quarter, but similar to the second quarter, we were unable to increase our purchasing to the desired level willing to the supply chain issues that are affecting many sectors of the economy.
We are actively working to rebuild inventory levels, and we believe that our excellent relationships with suppliers and liquidity on hand.
Puts us in a good position to acquire the needed inventory when supply chain congestion finally eases.
We deployed the free cash flow to repurchase four 3 million shares in the quarter for $219 million acquired two tuck in businesses for $37 million and repaid $23 million in outstanding borrowings.
Our net leverage ratio dropped to one one times EBITDA and interest coverage now exceeds 24 times compared to the credit facility requirements of four to five times and three times respectively.
Or said differently at this point in time, we do not need to devote further capital towards paying that and as you saw in the third quarter results also.
With $1 6 billion in availability on our credit facility and approximately $400 million in cash we have over $2 billion in liquidity to fund our strategic objectives.
The liquidity amount is roughly $800 million below our December 31st 2020 figure, reflecting the use of liquidity to redeem the 2026 three quarters of a billion Euro Euro notes prepay, our outstanding term loan balance of $319 million as well as etame.
Nation of the $110 million receivables securitization program earlier this year in July we felt comfortable reducing the overall capacity going to our ability to sustainably generate robust free cash flow.
As you can imagine we have carefully considered our liquidity position and future cash flow generation prospects in reaching the decision to initiate a quarterly cash dividend. We are confident in the company's ability to convert earnings to free cash flow in a ratio of 55% to 60% on a long term basis.
Which provides us with sufficient cash to fund a dividend while continuing to repurchase shares.
Reinvest in the business and make accretive acquisitions.
Initiating a dividend is an important milestone in the company's history and reflects the board and the management team's confidence in our near and long term prospects. The decision to pay a dividend is consistent with and does not change our approach to capital allocation, which prioritizes group investments and.
Returned excess cash to shareholders to enhance their returns our share repurchase program will run in tandem with the dividend program as part of our balanced approach to capital allocation.
I will wrap up my prepared comments with our updated thoughts on the full year 2021, consistent with the level of detail. We have provided in recent quarters. We are comfortable making the following statements all of which that assume that there are no significant negative developments related to the COVID-19 in our major markets or <unk>.
Foreign exchange rates and scrap and precious metal prices hold near recent levels in the remainder of the year.
The first statement being with yet another excellent quarter in Q3, we are projecting full year adjusted diluted EPS in the range of $3 78 to $3 88, with a midpoint of $3.83.
This is an increase of 18 cents or 5% at the midpoint over our prior quarter guidance and an increase of $1 <unk> or 39% relative to our original 2021 full year guidance.
The increases reflect the benefits of our ongoing margin and operating expense programs.
And our strategic cash deployment, which have allowed us to mitigate strong inflationary headwinds related to labor freight fuel and inventory costs prevalent throughout the industry.
While we expect our operational performance in Q4, two play out roughly in line with prior guidance, we are projecting a negative impact of roughly two cents a share resulting from metal prices as these moved lower going into the fourth quarter.
As you think about the comparison to the fourth quarter of 2020, we are forecasting a seven cent a share negative year over year effect related to sequential movements in metal prices.
Additionally, having one fewer selling day in the North America and specialty segments in the fourth quarter of 2021 creates a further two cent headwind.
Lower share count and tax rate in 2021 should mitigate some of the year over year headwinds.
The second statement I would like to share with the with everyone is we are narrowing the range for full year European segment, EBITDA margin to nine 8% up to 10, 3% effectively raising the floor by a further 30 basis points similar to what we did roughly 90 days ago following the second quarter.
Earnings and finally, we continue to generate outstanding free cash flow through strong profitability and judicious use of trade working capital with this in mind, along with higher projected net income for the year, we are raising our free cash flow guidance to a range of 1.15 billion to $1 3 billion.
With one to two 5 billion at the midpoint. Despite the supply chain challenges, we still anticipate an inventory increase in the fourth quarter ahead of the traditionally strong Q1, and Q2 seasonal demand, although not to the level assumed in prior guidance as the Pope.
And of the build would likely be deferred into 2022 with that thank you for your time this morning, and I'll turn the call back to Nick for his closing comments.
Thank you Vern.
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 fourth as always we will continue to invest in our future.
As Henry Ford Once said obstacles are those frightful things you see when you take your eyes off of your goal.
1021 continues to be a year, where our global teams have never lost sight of our shared goal of driving long term value for our stockholders.
And for that I offer a heartfelt. Thank you to each of our 45000 plus team members that make it happen each and every day.
And with that operator, we are now ready to open the call for questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Our first question comes from the line of Bret Jordan with Jefferies Hey, good.
Good morning, guys good morning, Brett.
What do you think about the AMETEK are elite tech business and I guess, the incremental margin on the hardware and I guess scans would have a fairly high incremental margin how do you see that business sort of shaping out.
Longer term contribution I guess more sort of size and maybe what the margin profile might be if you think out a year or two or three.
Yeah, Great question Brett.
First started thinking about services as a nice adjacency to our parts distribution business and that came back in 2017.
Part of the reason it was so attractive.
<unk> is 'cause services businesses have significantly higher margins and I will tell you that our elite Tech margins are well ahead of our parts distribution margins.
And it requires relatively little capital. So the return on invested capital is very attractive very attractive again. This is still a relatively small business for us kind of in and around that $50 million range, but our goal is to grow at very very rapidly.
Not by orders of five or 10% a year, but our goal would be to the <unk>.
Multiply the size of the business over the next several years.
Probably never be one.
1 billion or $2 billion business for us, but it's a great adjacency at really attractive margins and probably most important importantly, a really good return on invested capital.
Okay and a quick question one of your one of your peers in Europe was commenting about share shifts and maybe share gains, particularly around the U K market do you see anything.
Changing over there from a competitive landscape or smaller players.
Up share at a higher rate or maybe give us some color there.
Sure overall.
Overall, Brian I will tell you we are incredibly pleased incredibly pleased with how our UK business performed in the quarter.
<unk>.
There's no great data with respect to share on a quarterly basis, but we are absolutely sensing.
And this goes across pretty much all of our businesses not just the U K.
That small distributors are getting squeezed right now in the larger more well capitalized market participants are doing much better you know our revenue was not overly robust in the third quarter in the U K, but our margins hit an all time high since we've acquired the ECP back in 2000.
<unk> 11.
We continue to be the market share leader in the U K by a wide margin.
We think we're going to we're going to continue to.
Keep that position into perpetuity and we are very happy with our third quarter performance and long term outlook for the business over there.
Great. Thank you.
Your next question comes from the line of Stephanie more with truest.
Hi, Good morning, Thanks, Brad good morning, and congrats on a nice quarter.
Thank you.
I wanted to touch a little bit I know.
Your prepared remark.
Definitely stated that a lot of the margin improvement in Europe, what was pricing driven but also I know that there's a lot of moving pieces at the current moment as you've kind of worked through your ear. One LKQ. So maybe if you could just give us an update on where we stand today, if anything was accelerated versus prior plans and how we should think about.
Progression as they go into the fourth quarter in terms of some of these initiatives and as Covid has kind of gotten bland.
Yeah, a great question.
You know, we would probably characterize if since the world series going on use a baseball analogy, we're probably in the fourth inning and the one LKQ Europe program.
We stated back in 2019, and then again at our Investor Day in 2020.
Our mid term goal was to get.
Annual margins not quarterly margins by annual margins.
In and around that 11% range, we think we can do better than that on a longer term basis.
We've gone from effectively.
8%, when we announced our whole program margins in Europe to what we think it can be as Bruce indicated pretty close to 10%. This year and so yeah. We would think we're in about the fourth inning Covid clearly has thrown everybody. Some curve balls here through has thrown out some curve balls.
Some things.
Just got delayed a little bit other things got accelerated originally the.
The innovation and service center in Cat of HCA, Poland was later in our plan and we actually pulled that forward.
That really think about that as a shared service center.
Moving some administrative activities to a much lower cost a marketplace and so that's gotten pulled forward.
ERP implementation got pushed back effectively by a quarter or two but we are we still have a lot of runway to go on our program. There is a lot of initiatives that are still in the forefront that we need to execute on but overall, we are extremely pleased with our progress thus far in <unk>.
<unk> and our ability to get to the longer term goals.
Great and then.
Talking about the supply chain disruption and I agree there's always a new headline every day.
I think you made the point it, particularly with the free cash flow is unable to purchase some of the inventory to meet desired demand level that you would like.
In the quarter, but you're working with your partners now I mean is this a function of it's just taking longer and its just being more the ability to kind of.
Have that flexibility that if she's on a rising as quickly or are you having to use other modes of transportation would love just to get more color as you manage this the current situation, yes, the big issue with the supply chain and this is not unique to LKQ, it's not unique to our industry right.
The fact of the matter is.
Out in California, There's 80 ships anchored waiting for a berth in the ports. If you did that on a national basis, I think youre somewhere around 100 chips.
Many of those ships have our product or our container sitting on it right.
And it's not just an issue with the ports.
The reality is there's a lot of data out there.
Thats showing that there's just not enough truckers, turning up to get the containers out of the ports.
There is a severe shortage of drivers most folks.
Folks estimate this country is down about 80000 truck drivers.
Warehouses, where the containers ultimately need to go are clogged and.
And importantly containers get put on a chassis.
Which is unconnected to the tractor of the of the semi tractor combination there's a severe shortage of chassis available. So the supply chain is a bit of a mass completely.
And so yes, its taking much longer for us to get our product say from Taiwan into the United States, It's costing us some more money.
It's important to recognize that the inventory is ours when it hits the port in Taiwan.
So that's our inventory not the suppliers' inventory sitting out on the water.
And so we're being very thoughtful as to putting in advanced orders, making sure. We can do whatever we can to get the inventory that we need.
The Bad news is we're not we don't have the inventory levels that we prefer the good news is we think we're doing significantly better than our small competitors I mean think about it we bring in 16000 containers a year that's about 300 a week.
The far east for our North American aftermarket parts business.
Our small competitors they'd be lucky if they bring in 300, a year or even.
<unk> 50, a year. So we feel we are from a fulfillment rate basis, we're doing much better than the small competitors.
And we know that because there've been a few smaller folks basically waving the white flag and asking if we'd be interested in buying their business. So again it's.
It's going to be a challenge going forward, we think we're doing a pretty effective job of managing our way through that challenge.
Got it thanks, so much.
Your next question comes from the line of Craig Kennison with Baird.
Hey, good morning, Thanks for taking my question just a follow up Nick on your last point.
With respect to looking at small businesses to acquire would there be any case to make that you could buy them for something close to the value of their inventory just to help with your own fulfillment rates.
Well.
In many of the cases, the only thing of value to us would be their inventory.
We don't need additional warehouses in the United States, we don't need more fleet.
Clearly we have we all share the same customers, so inventory would be particularly attractive.
Okay, and then I guess I wanted to ask a question about the innovation center in Poland.
Which.
We watch the video on that earlier this quarter, but could.
Could you just give us a feel for the kind of tools or applications that you would expect to develop and how those tools kind of improve your your moat in Europe.
Hey, Craig Good morning, It's <unk>, let me let me take this one so essentially the innovation center is effectively what we had talked about his book the one LKQ Europe program.
Setting up a lower cost.
So shared service center no different to global business services the public companies.
Within the industry, but also among product companies, having a lower cost back office to do Commoditized transaction processing, but also in the case of Poland. We believe there is.
Good digital and technology talent and that really is the background to what we're trying to do from a try to reach a perspective as you know, we obviously have Bangalore and not putting up another center certainly gives us the geographic breadth language capabilities.
Not just to do some of the more I would say.
Irregularly expected back office activities, but also to.
To invest in things such as digital we clearly knew that a while.
<unk> and the different market the do it for me market is clearly the biggest piece over in Europe, but there is.
Some adjacency associated with B to C and being able to do some of that back office work and the technology work.
Out of country reach in Poland, which does have talent. We believe there is some goodness associated with it that really is the backdrop to the country of Egypt Poland.
Innovation Center.
<unk>.
Great. Thank you.
Your next question comes from the line of Brian Butler with Stifel.
Good morning, Brian Brett how are you doing good morning.
Just.
Can we circle back on the metal and both scrap and fresh it when do you think about what's kind of yeah.
Maybe what's embedded in the full year guidance and how that compares to historical.
Historical levels that typically have been a little bit lower.
Brian as far as <unk>, let me take that one so yes.
In the third quarter as I called out the total <unk> benefit both scrap and catalytic converters to precious metals was about $12 million or roughly about <unk> within the dollar two of adjusted EPS relative to what we experienced in the first half of the year.
Recall in Q1, it was at $34 million upside in Q2 was roughly $57 million, so significant upside, but really what we saw come through was starting in September we saw scrap metal prices, but also more to the point precious metal prices began to drop pretty significantly.
And so that despite the fact that those metal prices were dropping car costs remained relatively high and so the overall metals benefit was muted and really what we've seen exiting.
Timber as you've shown on slide number 27 also for the benefit of everybody you see that bigger slide begin to take place in September and so from a Q4 forecast perspective, we are actually as of now anticipating.
That to be a negative.
Back from metals pricing, rather than a ongoing benefit. So if you think about the first half versus the second half in the first half we said, we pretty much got close to I'd say $19 million.
EBITDA from metals be precious or scrap in the third quarter was about 12, which kind of gives you a year to date of about $103 million in the fourth quarter, we see an unwind of anything up to $30 million taking place. So that's how you should think about it clearly.
Okay.
Volatile market as of now things are changing on a daily weekly basis, but thats, how we think about the metals pricing, which underpins our forecast that we've provided.
Alright, that's very helpful.
And then shifting gears can we talk about.
Collision repair and with the supply chain disruptions that youre seeing.
Has there been a greater demand for recycled parts and just kind of what trends you're seeing there maybe on price and that the attractiveness of those those items.
Yes, Brian this deck you've hit the nail on the head.
Obviously, the aftermarket part availability is constrained a bit because of all the supply chain challenges, we've already talked about.
<unk>.
Salvage parts.
Come from.
Come from the local markets right, we buy total loss vehicles locally we dismantle them locally and then we can distribute on a local basis and there absolutely has been a bit of a shift.
And I would say this primarily benefits hours relative to anybody else because we are the only company that can offer both.
Salvage and recycled product and the aftermarket collision parts.
And so we have absolutely are seen or the growth in our salvage business.
In the quarter and actually for the last few quarters has been well above the growth.
And the revenue trends in the aftermarket product.
And part of that is due to the strong.
Mechanical business engines and transmissions that we've talked about in our formal comments and part of it is the ability to.
In certain times a shift the customer.
From an aftermarket product that we may not have inventory to a salvage product that we can get to them same day or next day.
So the salvage business has been very good and again, we're the only company in this country that offers both product lines.
Perfect and then if I could I, maybe just ask one last one.
You look at the.
No replacement parts costs for EV vehicles versus.
Internal combustion.
Friends are you still seeing there I mean is it still EV parts continue to be more expensive ours, we're seeing more evs out there are those prices coming down for the replacement parts.
Yes no.
Rob Lee, we are where maybe in the top of the first Athena and the whole EV marketplace in the transition and the like so there are no big trends. There are no ships. What we will tell you is that when you look at hybrids.
<unk> electric vehicles and battery electric vehicles.
Technical service parts.
Amanda anywhere from a two <unk> to <unk> premium relative to their comparable internal combustion engine counterparts, and there is a number of reasons for that one is the technical complexity not just with batteries, but also with the electrification of components previously belt, driven such as air conditioning.
<unk> compressors and water pumps for an example of this is just one example, a 2013 pre us with an electric water pump that water pump cells for three times the value of a 2013 corolla that has a golf driven water pump.
In the U K for example.
A 2017 golf with an internal combustion engine that water pump sells for about 77 pounds Sterling.
The less the Lexus hybrid EV, a water pump is 278 pounds sterling.
And so yes, the EV parts are much more expensive, we think thats going to continue to be the case for for a long long time and that's why we are doing what we can we're at the initial stages of gearing up.
Our ability to distribute those EV related parts. The reality is the aftermarket for EV vehicle parts.
Is nascent but there's nobody in a better position to distribute those parts then I'll take you.
Perfect. Thank you very much for taking my questions. Congratulations on the quarter. Thanks, Brian Ryan.
Your next question comes from the line of Daniel Enbrel.
With Stephens Inc.
Good morning, Daniel Yes, Hey, good morning, guys and congratulations on the good quarter.
Thank you.
A couple of questions one on the follow up on pricing I don't think you just mentioned it there, but obviously pricing in the Oems took it up during the quarter can you quantify maybe how much same SKU inflation you saw in North America here, and then longer term related to price now the Oems took up price and I saw that you guys followed very rash.
Italy.
Is there maybe a backdrop for the Oems become more rational thinking of price going forward. Knowing that you are you going to follow in and maybe the whole market can be more rational with passing through some of these costs in North America.
Let me, let me answer that one with regards to inflationary pressures, let's be clear about that no. One is immune to them at this point of time, Okay. It's not just us it's not just the Oems it's across every pretty much sector across the economy. So that's kind of point number one it's just a fact of life at this point of time.
The second one is yes.
Looks that are acting on a rational basis. They are trying to protect margins you've obviously seen two of the three big Oems report in the last 48 hours.
As to what they've been talking about with regards to chip shortages and as to what's happening to new car sales and stuff.
But yes, there's less discounting taking place within their markets wholesale and obviously I think you've followed some of the auto retail retailers also so in terms of what's happening out there. So at this point of time, given the scarcity of.
Being able to get product and given the supply chain challenges.
We expect folks are acting in a rational basis, because no one really knows as if now how long the supply chain congestion is expected to last so if someone does want to not act on a rational basis for a week two weeks a month a quarter at some point of time, it will come back and bite them it gets and no different to what we <unk>.
You did when the pandemic initially struck in Q1 of 2020.
Move incredibly fast to kind of take care of what we could control, which was our cost structure and that obviously has now morphed into inflation and also supply chain congestion.
So we expect folks will be acting in a rational basis, because no one really knows how long. This is going to continue to last and what the Oems do listen icon speculate sitting out yet that is backhaul. We do know that what we had LKQ do and what we plan to do given the market conditions the key.
All of this is to be nimble is to be agile and to be dynamic and be able to react as an organization at relatively short notice and just really happy with the way our teams continue to do that.
Yeah that makes sense and then a follow up on personnel expenses Arun I think in your prepared comments you noted that in North America and Europe saw some pressure from from temporary labor. Obviously, you would think about what you just said over the last 18 months you guys took out a bunch of cost a bunch of.
Duplicative positions can you maybe talk about how transitory you view these labor headwinds, how you're navigating the backdrop and whether you are having to add back any of those costs or is this just something to do with the demand you're seeing today.
Absolute and great question out there Daniel yes listen.
18 months ago, when the pandemic initially struck it was a case of ensuring that.
Our balance sheet and our cost structure was aligned toward the new demand forecast realities web and so as the distribution business, we were able to move quick and as that dragged on I think before the end of the second quarter of 2020, we'd actually move those temporary reductions into pet introductions and I think folks appreciate it.
What we did at this point of time. It is all demand related whether it be in Europe, whether it'd be in North America or for that matter in our specialty segment and that piece is being exacerbated by the fact that there's just a real shortage of talent Nick talked about say for example on the delivery side. It's the same thing across the.
Because as of now folks have kind of moved onto online in a pretty big way and so warehouse demand warehouse.
<unk> elements, which we believe are gonna drive talent retention rather than someone wanting to move just for the next extra dollar or two as such but that's really how are we thinking about it.
Thanks for and best of luck.
At this time there are no further questions I would like to turn the call back over to Nick Zarcone for closing remarks.
Well. Thank you everyone. We certainly appreciate your time and attention I hear this morning, we look forward to chatting with you on the 17th of February when we announce our fourth quarter results and importantly, I'd like to just highlight and have you circle. Your calendars, we are going to be having.
An analyst and Investor day.
In February or late February or early March probably the last week in February or the first week of March in 2022, and so we look forward to having an opportunity to more broadly share our thoughts as to the future of our company at that point in time. So again, we appreciate your time and attention and we hope you have a great day.
This concludes today's conference you may now disconnect.
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