Q1 2022 LKQ Corp Earnings Call
Good morning, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the LKQ Corporation first quarter 2022 earnings conference call all.
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 followed by the number one on your telephone keypad, if you'd like to withdraw your question again press Star one. Thank you Joe Butros Vice President.
Investor Relations for LKQ Corporation, you May begin your conference.
Thank you operator, good morning, everyone and welcome to Lkq's first quarter 2022 earnings conference call with US today are Nick Zarcone, Lkq's, President and Chief Executive Officer, and rerun, the ROI, our executive Vice President and Chief Financial Officer. Please.
Please refer to the LKQ website at LKQ Corp, Dot Com for 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 booking. These include statements regarding our expectations beliefs hopes intentions or strategies.
Actual events or results may differ materially from those expressed or implied in the forward looking statements. As a result of various factors, we assume no obligation to update any forward looking statements for more information. Please refer to the risk factors discussed in our Form 10-K , and subsequent reports filed with the SEC during this call.
We will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today and as normal we are planning to file our 10-Q in the coming days.
And with that I am happy to turn the call over to our CEO Nick Zarcone. Thank you Joe and good morning to everyone. I will provide some high level comments on what was a robust quarter for LKQ from many different perspectives before maroon walks you through some of the financial details and our increased financial guidance I will then close with a few.
Observations before opening the call to your questions.
As we enter 2022, who would've thought the world would experience events more traumatic than the pandemic, we all had been living through.
Just wanted everyone thought we have turned the corner and we're headed towards the new normal in late February Russian tanks, roped into Ukraine, and everything changed overnight in retrospect issues related to tight labor markets supply chain challenges and inflationary pressures pale in <unk>.
Parison needless loss of human lives.
Out of the Ashes, we are all able to watch the evening news and see true leadership and courage in action and incredible solidarity in a time of crisis, yes, I'm talking about the Ukrainian people.
But the same is true for the 950 people in Ukraine, who are al <unk> Associates. These employees are truly remarkable so too are their colleagues in Poland, Hungary, Slovakia, and Romania, who welcomed hundreds of family members of our Ukrainian employees at the border.
Good food housing medical assistance and schooling to those fleeing the country.
They are all defining what it means to be LKQ proud.
As to the business, we exceeded our expectations for Q1 in terms of both revenue and profitability and this gives us confidence to increase our financial guidance for the year.
The keyword in the economy in the past several quarters has been inflation.
During periods like this companies have a choice.
Wait and see the impact in play defense or anticipate the impact and play offense.
Okay, Q chose to play offense and the benefits of doing so it can be found in our results. This is particularly true with respect to the exceptional organic revenue growth achieved in our north American wholesale and European segments, both of which benefited from strong demand for automotive products as well.
Building claims volumes increased while pushing prices in an attempt to offset most of the inflationary pressures.
Managing through this environment is hard I am extremely thankful for the efforts of the global LKQ leadership team, which is doing a terrific job of balancing the best interest of our customers suppliers employees and shareholders.
Now onto the quarter.
Revenue for the first quarter of 2022 was $3 3 billion, an increase of five 6% as compared to $3 2 billion in the first quarter of 2021.
Total parts and services revenue increased five 9% in Q1 comprised.
Organic revenue increases of six 9%.
Plus the net impact of acquisitions and divestitures of one 7% offset by foreign exchange rates, which decreased revenue by two 7%.
Net income for the first quarter of 2022 was $269 million as compared to $266 million for the same period of 2021, an increase of one 1% diluted earnings per share for the quarter was <unk> 94.
As compared to 88 for the same period last year, an increase of six 8%.
On an adjusted basis net income in the first quarter of 2022 was $287 million compared to $286 million in the same period of 2021 adjusted diluted earnings per share for the first quarter was $1 as compared to <unk> 94 for the same period of 2021.
A six 4% increase driven by a reduction in the average share count.
Let's turn to some of the quarterly segment highlights and please note. This is the first quarter of separating the self service business from the core North American wholesale business.
Turning to North America from Slide six you will note that our organic revenue.
For parts and services in our North American wholesale segment increased 13, 6% in the quarter on a reported basis and 11, 8% on a per day basis.
During the first quarter industry wide overall claim counts increased 12, 2% versus Q1 of 2021. According to the U S Department of energy during the first quarter of 2022.
<unk> weekly supplied motor gasoline volume was approximately $4, 9% above last year, but still four 7% below the first quarter of 2019 pre pandemic.
And according to the Department of Transportation Highway miles driven during Q1 increased four 9% above last year, but lagged 2019 levels by approximately two 2%.
From a product line perspective, recycled and remanufactured parts demonstrated higher growth, including gains in both volumes and price relative to last year on the aftermarket front, we have been successful in passing through inflationary cost increases.
Despite the supply chain challenges, which are causing volumes to be down relative both to last year and 2019.
April has started off on a positive note. Following the pattern established in Q1, we don't anticipate achieving double digit revenue growth in our North America wholesale operation for the rest of the year, but we expect it to be in the mid to high single digits.
In part due to headwinds from parts availability and more so due to labor constraints. During Q1, the national average scheduling backlog at collision repair shops reached four five weeks.
Two five times the length of the typical first quarter backlog.
Additionally, since 2016 average vehicle repair costs have risen steadily every year with the largest increases occurring in the past two years, reaching an all time high in 2021.
Our parks provide a strong solution for shops and insurance carriers to manage cost as we inevitably begin to witness some relief in the supply chain and a steadier flow of aftermarket product the value proposition of our parts becomes even more attractive as shops continued to face headwinds related to labor.
Cost and overall inflation.
As we indicated in our last call. This quarter, we began reporting stopped service as a separate segment. This new segment provides investors with greater transparency into the commodities dynamic of our business.
Given the majority of our other revenue category, which primarily consists of scrap from precious metals comes from our self service operations grew.
<unk> will cover more details on the margins of this segment shortly.
During the first quarter total revenue for self service was flat compared to last year, reflecting the relative softness in metals pricing.
Organic revenue for parts and services for this segment increased 14, 6% largely driven by price.
Also the average revenue per admission a key productivity metric rose during the first quarter of 2022 relative to 2021.
Moving to our European segment organic revenue for parts and services in the first quarter increased six 9% on a reported basis and 6% on a per day basis.
As the largest pure play distributor of automotive aftermarket parts in Europe . This is a tremendous start to 2022, even in the face of an extremely challenging geopolitical environment on the continent.
So we are quite pleased with the organic growth in Europe .
While its different by market overall consolidated organic growth was split evenly between volume and price.
According to the Apple mobility index the trends in driving trips in our European markets was down earlier in the year due to normal seasonal patterns as we progressed through Q1 the index rebounded.
Encouragingly, despite all the fear of a dramatic drop off in demand due to global macro headlines at this point, we have not seen any noticeable shift in European mobility as we've entered the second quarter.
Our regional operations experienced bearing in revenue performance in the quarter, but all posted positive growth with very solid year over year performance.
The U K and Benelux operations were particularly strong with high single digit organic growth, while Germany, and central Europe , Excluding Ukraine posted mid single digit organic growth.
Italy also demonstrated progress posting positive organic growth for the first time in several quarters.
The Russian invasion of Ukraine had a direct impact on our revenue in late February and all of March due to having to close certain branches that we operate in Ukraine.
And those have remained open as you would assume saw a significant drop in demand.
Also immediately following the invasion, we ceased all sales to Russian based parts distributors, we estimate the impact of the war on European organic revenue growth during the quarter was approximately 60 basis points and as these conditions conditions continue we anticipate the <unk>.
On our full year European growth to be about 120 basis points.
We continue to pay our Ukrainian employees, regardless of whether they are working and we are supporting their families who have fled to neighboring countries.
As I've always said our people are our most important assets.
And in Ukraine, the wellbeing of our people is our primary focus today.
<unk> will provide some additional financial related details to this unfortunate situation shortly.
Now, let's move on to our specialty segment.
<unk> revenue for parts and services for our specialty segment declined eight 3% in the quarter on a reported basis and nine 8% on a per day basis, largely due to a very tough year over year comp.
You May recall this segment reported 33% organic growth in Q1 of last year. So on a two year stack. The annual revenue growth is still well into double digits. We anticipate another tough comparison in Q2 against the 30% growth recorded in the second quarter of last year.
With a positive recovery and a return to year over year organic growth in the back half of this year.
A few other key highlights for especially during the quarter.
In the first quarter specialty hosted our annual Big show a customer event, which is focused on sema related parts and also hosted our annual RV Expo far RV focused customers.
Both events booked solid year over year increases in attendance and sales, suggesting good demand in the future.
Also in March our specialty team opened a 210000 square foot distribution center in Orlando, Florida.
While it will create a very slight drag on near term margins, while it ramps up this new distribution facilities will help create higher revenue as it will service, Florida, and Georgia, both of which are very attractive markets for our RV and marine related product lines.
The supply chain continues to provide challenges and we're doing our best to get the inventory needed to service customer demand.
During the quarter key port cities in China were shut down for a while this shifted container capacity to other countries like Taiwan, given our north American team an opportunity to get some incremental inventory on the water.
March was the second best container volume that we've witnessed in 24 months.
We expect some of this benefit to continue into April and likely may and this inventory should be at our warehouses by mid to late summer.
Once the China Lockdowns reopen we will likely see a regression back to the labor bottlenecks that we've endured over the past 12 months as the pent up demand from China comes through.
In Europe product availability remained challenging through Q1 with back orders still running high but we are witnessing some signs of improvement as we enter Q2.
Turning to ESG during the first quarter, we continued our environmental stewardship efforts by processing 193000 vehicles, resulting in among other things the recycling of approximately 970000 gallons of fuel 562.
Gallons of waste oil 501000 tires and 178000 batteries.
During Q1, we also processed approximately 260000 tons of scrap steel.
On the social front during the quarter, we focused on some key initiatives around the financial.
Mental health well being of our employees.
As an example, and in North America, we implemented a profit sharing plan, where we made a special contribution of one.
Two the 401K accounts of all eligible team members alongside this contribution we provided services to educate our team on how to think about and plan for retirement.
From this initiative alone we witnessed over 4000, new 401, K account openings, we want to all employees to benefit from our success. In this plan allows us to reward and thank them for their relentless focus on results, which made a huge impact on our 2021 performance.
In Europe , we launched a program called inspire to thrive.
Now, let's our team now that their mental wellbeing matters.
The goal of this program is multi faceted, including creating a supportive culture addressing factors that may negatively affect mental wellbeing addressing negative perceptions of not LLP issues, providing support to colleagues suffering from mental health issues.
And developing management skills to address issues when they arise operationally. We believe this program will have many benefits such as higher retention reductions in sick leave and enhanced productivity more importantly, however, it's simply the right thing to do for our team and helping them maximize their overall.
Well being.
Lastly from a corporate development perspective during the quarter, we entered into a transaction to sell our P. GW class business.
While I fundamentally solid operation, we had come to the conclusion that <unk> was not the best owner of this business and the margins were always going to be dilutive to the overall North American segment margins.
This transaction closed last week and we are extremely pleased with the outcome.
As we enter Q2, we are witnessing a healthy pipeline of potential tuck in acquisitions and since April one we have closed on two small European transactions.
And I will now turn the discussion over to <unk>, who will run you through the details of our strong first quarter financial performance and our increased guidance.
Thank you and making good morning to everyone joining us today.
While I am excited to be able to present, another strong set of financial results and I'll cover the details on the quarter. Shortly I want to begin with comments on a very eventful start to 2022.
As you know LKQ entered the year with momentum coming off record revenue and profitability in 2021.
But to also anticipating challenges from the <unk> supply chain constraints.
Constraints inflationary pressures and volatile commodity prices.
These factors created headwinds in the quarter and we've had to react quickly to counteract the effects. While there is more work to be done to improve our inventory availability and manage the cost pressures. We are comfortable with the direction. We are headed and importantly, our position relative to the competition.
<unk>.
The Ukraine, Russia conflict has been a further source of volatility both with its direct impact on our business and the indirect effects on currencies and commodity prices.
As Nick mentioned, our revenue at risk owing to the conflict isn't material, but we experienced a negative effect of about a penny in Q1 and expect a further five cent headwind relative to our original EPS guidance over the balance of the year due to the ongoing conflict.
Please note that the impacts associated with lost revenue and other indirect effects of the conflict or not being considered for adjustment in our calculations of segment EBITDA and adjusted diluted EPS.
Direct impacts related to asset write downs and ore reserves are being excluded from the calculations of these metrics. The Q1 exclusion totaled roughly $6 million.
As expected scrap steel in precious metal prices, what are drag on results year over year due prices were better than projected in the quarter and thus the negative impact was less severe than anticipated.
Pads to Q1 of 2021 metals prices generated a $32 million negative effect on segment EBITDA and each cent impact on adjusted EPS.
As discussed in the fourth quarter call. We are now presenting the self service operating unit as a reportable segment to provide investors with greater visibility into our operating results I hope that you have had an opportunity to review our form 8-K filed with the SEC on Monday, the 20 <unk> of April .
Which shows the segment financial information recast under the new presentation.
As noted on prior calls self service generates a large portion of its revenue from scrap steel and the precious metals and catalytic converter.
Which makes it the results more volatile than the wholesale North America segment.
Of the eight negative year over year impact from metals approximately two tabs is derived from the self service segments.
Last week, we completed the sale of our P. GW after market lost distribution business for gross proceeds of $362 million.
<unk> generated almost $400 million of revenue and its EBITDA margin was approximately 10% in 2021.
By divesting P. GW will see an improvement in EBITDA margin as the business generated a lower margin than the wholesale North America segment.
We intend to use excess cash to repurchase shares in the coming months. So given the timing of the transaction will be dilutive to full year 2020 to EPS by approximately <unk> <unk>, which is built into our updated guidance the full year share count reduction benefits in 2023 will further mitigate.
Los <unk> earnings while we expect to report a gain on sale or U S. GAAP EPS outlook does not include again has the amount has not been finalized any gain would be deducted from U S. GAAP EPS in the calculation of adjusted diluted EPS Finally S&P.
Upgraded LTE Q2, Triple B minus with a stable outlook last week.
Achieving an investment grade rating from S&P. In addition to the same from Fitch ratings a year ago is a tremendous accomplishment for the organization and is a testament to our operational excellence program launched in 2019.
This program has supported the consistent operating performance robust cash flows and resilient business model that S&P cited as reasons for the upgrade.
The immediate implication of the upgrade is that collateral requirements for all of our senior secured revolving credit facility and over time, we expect the added flexibility to allow the company to drive EBIT higher levels of free cash flow to invest in growing our business and returning capital to stockholders.
Specifically, there will be opportunities to extend vendor payment terms and increased payables and we expect this benefit to come through over the next few years.
I will now shift to the quarterly results.
Our first quarter results reflect a solid start to the year with improving revenue.
Net income and EPS year on year, despite the negative impact of metals challenges related to inflation and the global supply chain. The omicron variant the ongoing conflict in the Ukraine and foreign exchange volatility linked to a stronger U S. Dollar grew.
Gross margin decreased by 30 basis points compared to the first quarter from 2021 with 40 basis points negative effects coming from the self service margin, which declined owing to metals.
Overhead expenses as a percentage of revenue rose 80 basis points year over year with higher bad debt expense and inflationary increases in vehicle freight and fuel expenses.
Income taxes in the first quarter of 2022 were booked at 25, 1% consistent with our prior guidance and finally as Nick mentioned diluted EPS was <unk> 94 for the quarter and adjusted diluted EPS was $1 even.
I will now turn to the segment operating results.
Darting on slide nine wholesale North America produced an EBITDA margin of 18, 1% for the quarter.
Down 30 basis points from the prior year period.
Gross margin was roughly flat as pricing improvements were offset by unfavorable impacts from metals, which had a negative 70 basis point effect in the first quarter segment overhead expenses increased by 50 basis points with the negative effects from inflation on personnel and freight costs, we have pre.
Obviously communicated our expectation for the North American margin to run in the mid to high sixteens without the metals effects with the new segment breakout and the sale of the glass business. We now believe that wholesale North America EBITDA margin should run approximately 70 basis points higher after.
Normalizing for metals effects.
Europe reported an eight 8% EBITDA margin for the quarter down 80 basis points from the prior year period as you can see on slide 10. The margin decrease was attributable to movements in both gross margin and overhead expenses with negative effects from inflation higher bad debt expense and effects.
From the Ukraine, Russia conflict as mentioned, we anticipate a negative impact on Europe from.
Lost revenue related to the conflict do the team believes they can deliver a double digit margin for the full year.
Moving to slide 11 specialty gross margin grew 110 basis points with benefits from net pricing and mix more than offsetting in 90 basis point negative effect from acquisitions, primarily see wide.
Overhead expenses increased by 190 basis points, driven by personnel cost inflation and higher vehicle fuel and freight costs.
The overhead expense increases were partially offset by 60 basis points of benefits from operating expense synergies and leverage mostly agenda generated from the <unk> acquisition.
While the specialty EBITDA margin of 12, 6% is down relative to the prior year, it's important to acknowledge the progress the business has made over the last three years.
Pre pandemic in Q1, 2019 specialty reported a segment EBITDA margin of 10, 7%.
The team has done a fine job rationalizing the cost structure and protecting its product margin, resulting in a 190 basis points improvement from Q1 of 19 through to Q1 of 2022.
<unk> reported an EBITDA margin of 20% for Q1 2022, a strong result for the segment, but below the record margin achieved last year as you saw in the form 8-K with recast historical segment results self services margins can be can vary significantly.
Difficultly, depending on metals prices.
Since the beginning of 2019, we've seen the low point for the margin at six 3% in the third quarter of 2019, and a high point of 27, 9% in Q1 of 2021.
While there are performance elements that we control for example car buying product pricing and labor efficiency. The self service business results are driven by trends in scrap steel and precious metals prices when prices are moving higher, especially when it occurs rapidly we'll see strong module.
In this business and we will see the downside when prices go the other direction.
We believe that breaking up self service will provide greater clarity to investors.
With that background the decrease in South services margins in Q1 of 2022 is driven by movements in metals prices and costs estimated at <unk>.
1100 basis points negative effect, partially offset by improved pricing.
Shifting to liquidity and capital allocation, we sustained the positive momentum we built in recent years around cash flow generation with free cash flow of approximately $350 million in the first quarter.
As a conversion ratio of almost 80% of EBITDA, we are delivering free cash flow above our long term expectation.
For sure there are some timing elements that will reverse over the course of the yet and.
And we are confident in our ability to generate significant and sustainable free cash flow in line with expectations of converting EBITDA to free cash flow in the 55% to 60% range for the full year.
We are cautiously optimistic about the progress we have made with inventory procurement.
Access to after market products and causes auction improved relative to the same period in 2021, and we were able to deploy more cash to build inventory.
As shown on slide 24, we increased our inventory spend and purchase more salvage vehicles than we did in the first quarter of 2021.
And as you can see on slides 25, and 26, our inventory levels have increased in all four segments relative to December excluding the impacts of the held for sale reclassification and foreign currency translation.
As of the 31st of March the wholesale North America inventory excludes approximately $100 million of lost inventory, which is presented in the held for sale asset line on the balance sheet. We remain confident that our inventory position will enable each segment to continue to offer best in class.
Availability and service relative to our competitors, despite the ongoing supply chain challenges.
Our capital spending for the quarter of $59 million was in line with our expectation and following a balanced capital allocation philosophy, we repurchased two 7 million shares in the quarter for $144 million and issued our quarterly dividend with a 70.
$1 million payment in the month of March.
We also paid down our debt balance by approximately $53 million in the quarter.
Our net leverage ratio came in at one three times EBITDA and interest coverage exceeds Turkey times compared to the credit facility requirements of four times and three times, respectively and short <unk>.
Very comfortable with our credit metrics, which support our investment grade rating.
As our earnings release. This morning indicated the board has approved a quarterly cash dividend of <unk> 25 per share, which will be paid in June to stockholders on record as of the 19th of May.
And finally, I will wrap up my prepared comments with our updated thoughts on 2022.
<unk> assumes that there are new significant negative developments related to COVID-19 in our major markets.
Scrap and precious metal prices hold near the average for the first quarter and the Ukraine, Russia conflict continues without further escalation.
On foreign exchange rates have been moving rapidly in recent days with the euro hitting a five year low on Wednesday.
Guidance includes weakening European rates in the second quarter, followed by a recovery in the second half of the year we.
We've dialed in a full year average rate for the euro at $1 nine.
And the pound Sterling at $1 30.
Since current rates are below these figures we have about three tenths of risk over the balance of the year if rates hold at current levels.
Having said that with the strong start to the year, we are increasing our organic parts and services revenue growth expectation to between four 5% and six 5%.
We are projecting full year adjusted diluted EPS in the range of $3 82.
Two $4 10, with a midpoint of $3 95.
This is an increase of eight <unk> compared to the prior midpoint. The range is primarily attributable to our first quarter performance as the balance of year has mostly offsetting effects as shown on slide 19 of the earnings deck related to benefits.
Due to organic growth and related operating performance metals prices above our original forecast and share repurchases offset by headwinds from last earnings tied to the glass disposal in April weakening FX rates and the impact of the Ukraine, Russia conflict.
Please note that the share repurchase benefit is attributable both to the shares that we purchased in the first quarter, which will give us a benefit of roughly <unk> <unk> on a full year basis.
And the anticipated repurchases from the proceeds of the glass sale of approximately five.
While there are lots of puts and takes in the forecasted numbers I want to specifically highlight the operating performance component as I previously stated our operational excellence initiatives have created a significantly stronger and more resilient business, which is helping us to improve operating <unk>.
Despite the current inflationary environment and supply chain challenges.
And finally, we remain on track to deliver at least $1 billion of free cash flow for the year, achieving strong free cash conversion in line with our expectations for the business.
Thank you once again for your time this morning, and with that I'll turn the call back to Nick for his closing comments.
Thank you for around for that financial overview.
We believe our unique competitive position across all of our operating segments continues to translate into strong results for our company during difficult conditions I am extremely proud of how our team of 46000 employees tackled the headwinds we've faced over the past two years, which sub.
Secondly, positioned us well as we entered 2022.
Our strong first quarter performance and raising our guidance for 2022 is a true validation of our confidence and commitment to creating long term value for our stockholders.
And again I would like to acknowledge the bravery encouraged of our Ukrainian team as they operate in an unthinkable environment.
Our thoughts and Hearts are with you all.
And with that operator, we are now ready to open the call for questions.
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.
And your first question comes from the line of Bret Jordan from Jefferies. Your line is open.
Hey, good morning, guys. Good morning, Brett Good morning, Brett Vroom now that you've got the investment grade rating and you called out the opportunity to extend payment terms do you have any better visibility as to how far you might be able to extend them here I mean, obviously you've got it.
You have the rating now so <unk> had conversations around those terms yes.
Yes, absolutely and thank you for raising that piece and acknowledging <unk>.
<unk> is now an investment grade company.
Taken a lot of time and the overall pivot to operational excellence has certainly been.
Looking at every aspect of our business income statement functions and also the overall balance sheet, yes, we do anticipate several hundred million dollars.
Up side related to getting the investment grade. However, it will not happen overnight. If you think about our European vendor financing program, which is coming along incredibly well, we still have a gap and really what we do is we benchmark ourselves given the product assortment with <unk>.
While the folks here in the U S are doing right and so in terms of even being able to get to a one to one with regards to AP offset by inventory or inventory offset by AP.
We have a gap of.
A significant gap and backgrounds into.
A fair bit so again it won't happen overnight. We obviously do have these contractual negotiations with our vendors.
Annual basis, the team is moving in the right direction and so we really don't see it in the short term I E. Within 2022, but I think from 2023 onwards, we certainly will see that piece continued to climb further.
Okay and then a quick question I think you said March was one of the best shipping volume months in the last couple of years, but is there a way to quantify your.
North American aftermarket in stock levels.
Where you are on inventory fill versus target.
Brett This is Matt. Thanks for the question our fill rates are not where we would like them to be we tend to run well into the nineties.
We are not in the nineties today will probably in the mid to high <unk>.
So.
There's progress to be made it all relates to the supply chain challenges again, it has nothing to do with our suppliers being able to produce the product.
It all has to do with transporting the product from Taiwan into the U S and Canada again, we.
Got some incremental containers on the water in March we're hoping for a few incremental containers in April and May as well, but it takes with the port congestion and transportation issues here in the U S. We won't see any of that inventory until mid to late summer.
When that hits that should help a little bit.
A pro forma perspective, we do not believe it's going to take us back to our historical levels.
But it will help what we do feel very confident about is our pro forma levels are the best in the industry, even with the challenges that we're facing.
The realities are smaller competitors are struggling.
To get product.
And.
From overall perspective or from a competitive perspective, we think we're still at the.
We're still leading the pack.
Yeah.
Your next question comes from the line of Michael Hoffman from Stifel. Your line is open.
Thank you very much and great opening round here. Thanks I appreciate it.
On the wholesale side just to dig a little deeper total volumes were down just the mix inside whether it was a new aftermarket versus a recycled remanufactured is that correct.
That's correct, we had good volume growth in our salvage products our recycled products.
Particularly as it relates to mechanical parts transmissions were particularly strong.
We had great growth from a from a.
Volume perspective, and our remanufactured products.
Again, largely engines and transmissions.
The aftermarket collision parts, where we saw volumes down and of course, that's the largest share of our north American revenue.
Okay, but the good news is youre able to shift around even as fulfillment came down that's part of your competitive advantages are able to shift around to support volume.
The only folks who have the ability to sell recycled product. If we don't have the aftermarket product.
Got it and then Ron on the guidance. So everything goes up except the free cash flow I'm, assuming versus February you're you're planning on spending more on inventory and thats the difference and what is that delta well listen while inventory certainly as we've said.
We're trying to build that piece up and we're making some good progress in Q1, Michael every segment too far so all four segments, we're actually able to generate more inventory and secure more inventory I think when you look at the numbers specifically.
North America was up specialty was up self service was up as was Europe in the case of Europe , obviously, the stronger dollar clip the translation piece of fit and also in North America with the held for sale classification for P. GW. It seems as if it did not group, but that also grew.
But with regards to free cash specifically.
Any inventory increase we see ourselves being able to offset with our payables program, but really if you think about wireless free cash not kind of gone up despite the <unk> raise on a full year basis from a cash perspective. It really is from a receivables perspective with the strong organic growth that.
We are now forecasting from.
From a midpoint of between 3% to 5% previously and now taking that up by 150 basis points at both the bottom end and the top end receivables and Thats a good problem to have because with higher economic activity, we see higher receivables coming through we saw that come through in Q1 also and so it'll just be a cycle more than anything.
<unk> that economic activity will raise receivables, but in terms of inventory, yes. It will go up but we believe we can offset that with payables.
Your next question comes from the line of Daniel <unk> from Stephens. Your line is open.
Yeah, Hey, congratulation guys in the quarter and thanks for taking our questions. Thanks Daniel.
Nick I wanted to ask you mentioned it during your prepared remarks, but given the inflationary environment are you seeing insurance companies up more often for alternative parts. I mean are you seeing or do you expect the Apu finally take a meaningful step higher and I guess, while we're on that topic, how state farm progressing or are they still increasing their alternative part usage.
And what does that mean for your North American wholesale growth.
Yes, so at this point in time.
Based on the backlog that I mentioned in the repair shops, the insurance companies just wanted to get parts on the car.
And.
Whether it's an aftermarket part of recycled part or quite frankly, an OEM part.
Because every day that that cars in the shop, they're generally pain.
A rental car fee.
Which greatly increases their prices. So it's not that they are trying to aggressively move to a higher apu given the inflationary environment.
It's whatever part is available we do believe as I mentioned in my formal comments that once the supply chain kind of works its way through and.
Some of the challenges we have more fulfillment perspective.
Again to normalize that our product set provides a great opportunity for a shop for insurance carriers to lower their overall cost and they can use the <unk>.
Price benefit that we have relative to OEM pricing.
Offset some of their other inflationary costs.
Got it that's helpful.
And then I guess I also wanted to just follow up on the competition side. You just mentioned the smaller guys are struggling with inventory do you expect.
How does that play out or theres going to not be able to compete longer term do they start using price to try to gain share back.
Kind of trying to think through what the derivative impacts are of the smaller guys continuing to struggle to keep up with you.
Our sense is that at some point in time, and we can't put a time frame on it Danielle at some point in time, the supply chain will balance itself out and that will obviously help us and it will help the smaller folks as well.
Nobody is trying to buy volume these days because there's a shortage of product and so pricing is strong. So we don't anticipate anybody not us not our even our smaller competitors are trying to buy volume through price because.
When there is not enough.
Inventory to go around to begin with.
That would not be a smart move right.
They will continue to compete we will can continue to compete we think we've got significant advantages from a product breadth perspective from a product perspective and from a service capability and that's how we're going to continue to compete and grow our market share in the in the months and quarters to come.
Your next question comes from the line of Stephanie Miller from Suntrust. Your line is open.
Good morning, Stephanie.
Congrats on a great start to the year.
Thank you.
I wanted to touch on the European.
Margin expectations for the year clearly.
Some headwinds, but I think were not originally expected, but still looks like we'll continue to move forward with nice double digit margins and maybe just talk through.
<unk> that you've been able to pull on your end to offset some of these headwinds as well as maybe give us an update on where we stand on the the one LKQ program.
Stephanie let me start off with the European margin piece of it and then.
Nick will pick up on.
Where we are with the one LKQ Europe program, Yes, this and in terms of.
European margins came in slightly softer, but I think it's fair to know the fact that.
The Ukraine, Russia conflict was not anticipated so that certainly has clipped the margin trajectory of the business in Q1.
And there was the odd customer bankruptcy also but really on a full year basis for balance of year. The team all of US we are very confident of being able to hit what we have put out there from a public commitment perspective of hitting a sustainable double digit margins and so while Q1 kind of clipped it.
So about just over a penny in the Ukraine, Russia conflict on a full year basis, we think we'll kind of keep us for about six months. So theres. Another five yet to go and Thats really what you see in the earnings deck, where we've given a walk from the prior original guidance to what we now suggesting but in terms of.
How the business is progressing the organic growth is coming through strongly and we expect the operational side of things with the higher organic revenue growth that Europe has put up and really what it continues to forecast, which again is not all price essentially a good mix of volume and price and which is actually incredibly hot.
And the same thing as Nick mentioned about North America beyond the ones that do have good product availability, we would like to have some more but in terms of.
The investments that we have been making those are certainly beginning to bear fruit and really shows the resiliency of the business that we've built up on both sides of the pond.
But again, if anything else you'd like to add from our one LKQ Europe perspective, yes. The one LKQ Europe program is right on track.
Organizationally, we've gotten that behind this now for several quarters, our orange has the full team in place.
One full set of management talent.
The individual platforms are working together much more on a on a day in day out basis, we're getting the benefits that we were hoping to achieve from a procurement perspective, there is still room to go there.
Not remotely done there is still room to go.
And.
The focus in the future is getting a little bit.
Better labor efficiency.
By consolidating.
Some of the.
Our roles.
In our shared service centers, whether that's in southern Poland or in Bangalore, and we think there is some further opportunity there and then the rollout that's going to be like we said originally that was going to be kind of a four year journey, where a couple of years into it but it's right on track in just about on budget. So we're really pleased there.
Great. Thank you that's very helpful. And then maybe lastly for me if you wanted to just touch on.
Kind of a longer term view.
The vehicle dynamic changes across the globe changing from ice to EV and how you think you're positioned with just with the investments that you've made.
Yes, so there is no doubt.
That there are changes to the car park, both in North America, and Europe , but they are evolutionary very evolutionary not revolutionary.
The reality is the impact of.
Of Evs, probably won't be felt until well into 2000 thirty's.
And.
Our goal and if you were to.
Read some of the materials, we've put out there for our European business. The goal is to be first as it relates to being able to supply.
Our repair shops with parts for electric vehicles.
EV <unk> and Orange and the team are putting plans in place to do that.
We suspect that most everybody in.
In Europe .
Folks like us is trying to figure out a way to.
To support electric vehicles, because they will grow from being <unk>.
Two or 3% of the car Park, maybe 10% of the car park over the next 10 years.
It's going to be a real opportunity, we don't view it as a big.
As a huge threat, we view it more as an opportunity to expand expand the product set into <unk>.
Provide our customers with even a broader array of products.
Same in North America, though I think the EV.
<unk> is going to be a little bit slower here in North America.
And just.
Just like we've made.
The acquisition of <unk>.
Of a battery re manufacturing business, we are in the process of buying a second battery technology related business again. These are small nascent operations, but they will give us key technology that we will need as we move forward to provide a good set of products and services to our.
Customers.
Your next question comes from the line of Craig Kennison from Baird. Your line is open.
Hey, good morning, Thanks for taking my questions as well I wanted to follow up Nick on one LKQ Europe could you just shed a little more light on progress you are making on your private label program in Europe .
Sure. So the first thing we did.
Craig on our private label front.
As we had to rationalize and consolidate all of the various brands because when you take a look at all the companies we have acquired in Europe .
Essentially we had 90 different private label brands that we have bought along the way and there is no need for us to have 90 different brands. So we have rationalized that out significantly.
We have put all of our private label product activity and the growth of that business under the leadership of a single person on a pan European basis.
We refer to it.
As our components business.
And.
We have an individual who came out of the store group organization that is focused on growing that business across the European platform.
Some countries are.
Ahead.
Like the U K, we have the highest penetration of <unk>.
<unk> owns a brand or private label products.
And other countries like in Germany.
It's significantly lower our goal is to raise the total.
So they have a higher penetration in each of the countries in which we operate.
And it's not going to happen overnight part of it is made.
Making sure that the private label product out there is extremely high quality.
Because.
Ultimately the customers will not react well with low quality products. So we're working with.
With all of our vendors to make sure we have great quality product.
And then the goal is in each of the countries, where we operate two to get the percentage of private label.
Revenue up.
When we do that private label is less expensive.
And very price competitive for the customer and so that will have a little bit of an impact on revenue, but the margins are significantly better.
And.
And Thats all part of the thought process.
And just as a follow up first are you willing to share like the percentage of private label today, and what that margin differential looks like and then second.
Do you need to make investments in a single unified European private label brand or will they be multiple brands in multiple countries.
Okay.
We will probably have multiple brands, but we are consolidated and are down significantly from what we started with and we do have a brand called the emotive.
We have.
In the very very early stages, maybe not even may.
It may be.
Kind of batting practice warm ups, where we're starting to roll that brand out across the European platform, we have not disclosed our private label.
Penetration in Europe .
Again, we are the highest in the U K and probably the lowest in Germany and all the other countries are somewhere in between.
In total today probably.
Around 10%.
Your next question comes from the line of Gary <unk> from Barrington Research. Your line is open.
Good morning, Gary.
Good morning, all Hey.
Hey.
Now that you've got this investment grade on your debt.
Would you say that your priorities could shifts to more aggressive share repurchases overall, I mean is there a real need to.
Continue to pay down debt as you have done.
Great question, Gary and good morning, No I don't think anything really changes on a day to day basis. If you think thats too we've been operating with investment grade credit metrics now for probably six quarters right and so from that perspective that as well kind of arguably.
Under leveraged at this point of time, but kind of following a balanced allocation.
Our capital allocation policy.
We've been kind of talking about the fact that we are not prioritizing debt paydowns at this point in time.
The investment grade rating that comes through I think there was a previous question on the call also.
Over time, it doesn't happen overnight, but as we go renegotiated <unk>.
Vendor partner contracts that higher level of trade payable days, certainly lifts and that certainly will release.
Few hundred million dollars of incremental free cash flow over the next few years with debt levels arguably below where they need to be.
We are happy with what the overall debt leverages, so nothing really changes because we've been operating at those metrics for quite some time.
Key piece really is that we continue to look for opportunities to grow our business.
Organic is obviously that much better seeing the level of organic revenue growth coming through our businesses is incredibly heartening. So that really is the key focus making sure that we provide all the capital required to continue to stretch out our lead from an organic perspective, and as and when opportunities come.
Up to do some corp. Dev activities, we'll certainly do that but again, we're not going out that wale fishing elephant hunting, it's basically high synergy tuck ins building up.
Incremental adjacencies critical capabilities, and then whichever is the excess free cash.
Yes, having a share repurchase program is incredibly helpful.
Okay. Thank you and then.
Last question.
Nick you mentioned that because of supply chain issues, some aftermarket parts, particularly around collision repair are in short supply.
Are you starting to see or because of this shift where.
Sure.
Salvage parts are being substituted for what could have been.
<unk>.
More of an aftermarket part usage just because of this.
Yes, not really unchanged, yes, absolutely I mean every time, we have a customer on the phone if we do not have the aftermarket part in stock, but we do have a recycled part in stock which will be in cross sell.
Again, we're the only company that can do that because we're the only company that offers both recycled and aftermarket parts and our salespeople have.
The inventory screens for both product sets right in front of them when they're talking to their customers.
So we try and cross sell opportunity we have Macao you also I think it's fair to say it really shows the <unk>.
Power of what we've built up out here.
No one at this level of size and scale has the dual sourcing strategy of kind of after market and recycled box and so that's really where we've been investing a lot a salvage recycle business has been doing an outstanding job and as you kind of saw from the slides in the earnings deck, we are certainly investing more.
It would be buying debt to kind of set up a salvage yards.
And for that matter of making sure that we continue to be a very active player in the salvage market with regards to the number of total loss vehicles that were purchasing.
That business is rock solid.
And your final question comes from the line of Ryan Brinkman from Jpmorgan. Your line is open hi, Thanks for taking my questions. Good morning, Ryan.
You mentioned getting ahead of inflation as opposed to waiting to see what impact might be I'm. Just curious what measures you may have taken whether it's primarily passing along higher costs or maybe proactively taking pricing in anticipation of higher future cost maybe it's a combination of pricing and cost containment efforts and then as you are taking price presumably youre testing.
I'll ask destiny of demand for various different products in different markets and I'd be interested what you might be learning in terms of the customers' ability or willingness to pay higher prices for the various different products that you. Distribute for example are you seeing greater ability to pass along price for more non discretionary products relative to discretionary products or are you.
We are able to raise price for higher end products versus lower end products or is it the other way around.
Whatever insight you might be gleaning as you go through this process. So a lot of questions there Ryan.
<unk> is.
Again, we did well I wouldn't say that we took prices up.
In anticipation of higher cost later.
Not that we were ahead of it but we didn't wait to see our costs go up and then do prices I'd say we.
I think we timed it pretty well.
Again, it's a very competitive market out there in.
At the end of the day your ability to push price ultimately is dependent upon overall market pricing.
Like I said supply is short.
That's true with all different types of parts.
And so nobody out there is is leading with price.
As a way to buy volume right everyone. I think is is trying to hold their prices tight again, we knew inflation was coming it was no surprise and so we werent shy. The reality is no customer likes prices to go up just like nobody listening to this call likes to pay more.
If anything right, but the reality is.
Governments around the world have 32 trillion of capital into the marketplace. As a result of the pandemic and when you have more units of currency chasing a mixed basket of goods and services prices go up and there is no.
Probably a country in the world that hasnt seen the negative impact of inflation.
And if you don't stay on top of it you fall behind and you never catch up and we made a conscious decision not to come out of the box behind the curve.
Yeah, So I'm not I don't want to imply that we're leading.
The curve, but we're staying constant I think we're doing a good job of matching.
The ability to push prices along.
The higher cost and.
Look everyone knows that shipping containers from the far east into North America is up 5% to six fold from where it was a couple of years ago.
It's not six or 7% inflation right.
That's significantly more.
Labor is up more along lines of normal inflationary.
Statistics that you've read.
And so we have moved prices up and.
We've had customers who haven't been happy, but they understand that right because they know what's going on in their own businesses as well and there is no free lunch and we're humbled distributor and we have no intention of.
Of getting caught holding the inflation bag. If you will it's not our job to fund.
The parts and services industry.
In the automotive.
Repower marketplace, and so we're going to do what we can to protect.
Ourselves from inflationary pressures there haven't been huge differences between.
Kind of the type of parts.
That we've been able to move price along again, we've done our best to move it along on all types of parts again every market is a little bit different every country is a little bit different.
Depending on overall.
<unk> dynamics and the like.
The inflationary pressures in the U S are higher than in Europe that doesn't mean that the Europe doesn't have inflationary pressures they absolutely do but we see it a little bit more intense here in the U S than overseas.
And there are no further questions Mr. Nick Zarcone, I turn the call back over to you for some closing remarks, well I want to thank everyone for your time and attention. This morning, and we certainly look forward to continuing the discussion with you I think as everyone knows we're hosting our investor day on June 1st.
And we would hope to be able to see most of you there in Nashville, we're hosting at our National our North American headquarters.
It will be a live event, we understand that some of you may not be able to find your way to Nashville and for those of the event will also be virtual nature. It will be telecast and you have the ability to.
Come in via the Internet.
That's June 1st in Nashville, and then again, obviously, we will be speaking with everyone. In late July when we report second quarter results, so with that I'd like to bring this call to a close again, we thank you for your time and attention and we hope you have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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