Q2 2022 LKQ Corp Earnings 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.
You would like to ask a question during this time.
Press Star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again.
Star one.
Yeah.
Mr. <unk> you may begin your conference.
Thank you operator, good morning, everyone and welcome to Lkq's second quarter 2022 earnings conference call with US today are Nick Zarcone, Lkq's, President and Chief Executive Officer, and Rune, Leroy Executive Vice President and Chief Financial Officer. Please refer to the LKQ website at 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 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.
<unk> 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 on the call.
I will provide some high level comments relative to our performance in the quarter and then perennial dive into the financial details and provide an update on our guidance before I come back with a few closing remarks.
The second quarter of 2022 was one of the most unusual and complicated operating environment, we've encountered maybe ever but clearly since the financial crisis. During the quarter, we were confronted with ongoing covered risk and the issues associated with an uptick in positive cases in our workforce.
Your labor constraints.
Ongoing supply chain disruptions, a challenging inflationary environment globally as evidenced by June being the highest level of inflation in the United States has seen in some 40 years.
Soaring energy prices commodity price volatility the unfortunate conflict in Ukraine, and political unrest across the globe.
And all of this has resulted in major volatility in the foreign exchange markets with the euro weakening materially in the quarter and reaching parity with the dollar in July .
I think I speak for all Ceos across all industries, when I say the sheer number of crosscurrents on headwinds have created some very challenging business dynamics.
The <unk> team delivered another quarter of solid performance driven by excellent focus and execution exceeding many expectations, both internally and externally I am very proud of the hard work and dedication demonstrated by our 45000 employees that enabled our company to deliver on behalf.
Of our stockholders and our customers during the quarter.
I am equally proud of the team's commitment to effectively manage the dynamics of our business, which they can control while not losing focus on growing the business developing our people and continuously looking for opportunities to generate leverage and synergies across our operating segments. This effective match.
That will serve the company well as we progress through the balance of 2022 and continued to confront many of the same headwinds.
Our confidence in our team's ability to manage through this environment is validated by the reaffirming of our 2022 guidance, which <unk> will discuss shortly now onto the quarter Rob.
Revenue for the second quarter of 2022 was $3 $3 billion.
A decrease of two 7% as compared to $3 4 billion in the second quarter of 2021.
Parts and services organic revenue increased three 8% on a reported basis and four 2% on a per day basis.
Net impact of acquisitions and divestitures decreased revenue by 1% and foreign exchange rates decreased revenue by five 6% for total parts and services revenue decrease of two 7% on a reported basis or two 4% on a per day basis other.
Other revenue fell two 9% driven by a decline in precious metal prices.
Net income for the quarter was $420 million as compared to $305 million for the same period of last year.
Diluted earnings per share for the quarter was $1 49.
As compared to $1 <unk> for the same period of 2021, and an increase of 47% and 5%.
These amounts reflect the $127 million gain on sale of the PG DW glass business in April or <unk> 45, a share.
On an adjusted basis net income in the quarter was $307 million as compared to $340 million for the same period of 2021 adjusted diluted earnings per share for the quarter was $1 nine.
As compared to $1 13.
For the same period last year, a three 5% decrease the adjusted results exclude the impact of the Pea GW sale.
Now, let's turn to some of the quarterly segment highlights.
In North America organic revenue for parts and services for our North American segment increased 10, 7% in the quarter on a year over year basis, which exceeded our expectations. This performance confirms the resiliency of our business model and our team's ability to effectively <unk>.
<unk> pricing initiatives to offset inflationary pressures.
As it relates to volume during the quarter, we saw some weakness which was consistent with a two 6% decrease in second quarter fuel consumption as measured by the US Department of energy. Additionally, vehicle miles traveled so a little year over year growth.
And Q2 growth was down relative to Q1.
The largest pressure point in North America continues to be the aftermarket collision parts product line.
Which experienced reduced year over year volumes due to lower pro forma rates associated with the supply chain disruptions.
During the quarter, we benefited from some minor relief in the aftermarket supply chain relative to Q1, which translated into a very modest increase in our fill rates with June aftermarket fill rates, reaching the highest levels of 2022.
While we are still well below historical levels. We are encouraged by the modest positive trend in the supply chain, which is also evidenced by the decrease of spot container cost the market witnessed during the quarter, albeit the shipping costs are still multiples above pre pandemic levels.
During the quarter, we were successful in <unk>.
Getting a higher level of aftermarket collision parts shipped from Taiwan, where most all of that inventory is still on the water and wont be too received on our warehouses until late summer or early fall.
Our salvage collision part volumes were up a bit compared to last year as we were able to shift some of the aftermarket demand over to recycled parts recycled than remanufactured mechanical part volumes were generally flat on a year over year basis.
The value proposition of alternative parts could not be more attractive F insurance carriers face loss pressures from an increased parts cost rising labor cost can technician shortages have to repair shops.
<unk> supply chain issues and decreased availability and increased cost of rental cars.
During the quarter collision repair cost increased 11, 6% year over year with cycle time still being over double the historical averages.
Recently, the value proposition of Capa certified aftermarket parts is being recognized by the largest auto insurer in the United States that being state farm through a small pilot program on June 20th State Farm began an eight week program, where it introduced.
Bumper covers headlights, and taillights when preparing repair estimates and suddenly the auto claims in the Oklahoma and Texas markets. As you all know state farm historically has not utilized the aftermarket collision parts, we cannot predict the outcome of the pilot or estimate how this will impact <unk>.
Pharmacy part strategy going forward and neither should you that said as with many things. The first step is to widen our cost and we are cautiously optimistic that aftermarket parts could potentially become a larger portion of state farms parts spanned over the long term as they worked through the outcomes of this.
Pilot program.
Moving onto our European segment organic revenue for parts and services in the second quarter increased four 2% on a reported basis and four 9% on a per day basis.
Our regional operations continued to experience varying revenue performance in the quarter.
But every geographic market was positive year over year, with our Benelux U K central and eastern European and salvage business has been the top performers.
Importantly, Italy realized year over year growth, which reflect the second consecutive quarter of positive revenue performance in that region.
As mentioned last quarter, we halted all sales of parts into Russia. When the work commenced this decision reduced same day organic growth for the European segment during the second quarter by approximately one half of 1% excluding the impact of the lost Russian revenue same day organic growth.
And Europe was five 4% when taken as a whole the European volumes were down a bit during the quarter our pricing was strong.
We continue to make great progress with our one LKQ Europe program.
Alongside solid organic growth during the quarter, our European segment achieved double digit segment, EBITDA margins, which we represented incremental improvements both sequentially and year over year.
Our European team is focused on pricing actions private label branding and procurement initiatives generated positive results in the quarter as Ive said before the execution element of the one LKQ Europe program will be with us forever and there will be the driving factor behind that productivity.
Improvements in years to come.
Given all of the current operating challenges in Europe , including the foreign exchange and geopolitical dynamics I am very pleased with <unk> performance in the quarter.
Now, let's move on to our specialty segment organic revenue for parts and services for specialty declined 11, 5% in the quarter largely due to a tough year over year comp as you may recall this segment reported 30% organic growth in the second quarter of last year. So on a two year.
Stack the annual revenue growth is still well into double digits India.
Indeed specialty revenue in the second quarter would have been a record for the team if not for the <unk> performance in 2021.
Our RV parts category performed better than the segment level growth as a whole during the quarter as demand for the majority of our RV parts offerings is driven more by the size of the RV Park and not new RV unit volume.
Certain product groups, such as towing that have some exposure to new unit volume underperformed in the quarter.
Also some of the softness that the sema related products based in the quarter was due to a year over year decrease in light vehicle sales in the U S. In particular pickup truck sales were down nearly 12% in the quarter and important vehicle category for our specialty offerings.
Now on to self service organic revenue for parts and services for our self service segment increased 13, 2%.
There were some softness towards the end of the quarter in precious metals prices, which also impacted segment EBITDA margins year over year.
Self service also had increased vehicle procurement cost as we were challenged to source inventory. The recent volatility in commodities further validates the rationale for breaking out this non distribution self service business as a separate segment given that represents the vast majority of the other revenue.
Category.
Let's move on to the initial Q3 revenue trends.
Revenue for North America wholesale operation.
Have gotten off to a solid start so we don't anticipate it will continue at a double digit growth rates experienced in the first half of the year our.
Our European segment is also witnessing a good start with growth rates continuing at second quarter levels.
Lastly, specialty revenue is slowly trending back towards prior year levels now that it has lapsed the incredibly strong growth rates experienced in the first half of 2021.
We are experiencing some level of supply chain shortages and disruptions across all of our segments. These disruptions are creating product scarcity and freight delays that are resulting in meaningful availability pressures.
While the supply chain challenges are also driving product inflation across all our segments. We have been very effective in passing along these higher costs as witnessed by our margin performance.
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 that we stay ahead of any competitive pressures and help backfill the open positions with the best candidates we can attract.
Our focus on the total rewards received by LKQ employees, not just compensation is helping us navigate the difficult labor markets.
From a corporate development perspective in the second quarter, we acquired four businesses.
The United States, we acquired Bumblebee batteries, another EV battery manufacturing operation.
In Europe , we acquired a workshop concept in the Netherlands to very small former Hess automotive branch locations in Germany.
And the equity interest of our former JV partner and a small aftermarket parts business in Germany.
In addition to closing on the sale of RPG W business during the quarter. We also divested our equity interest in two small joint ventures.
Lastly on the ESG front I may 23rd we released our 2021 sustainability report and unveiled our new brand identity, reflecting the company's transformation from a salvage dismantling and recycler to a leading global value added and sustainable distributor of vehicle parts.
Accessories and services.
<unk> is widely known and respected for our environmental stewardship.
Within our 2021 CSR, we provided a deeper understanding of our social impact initiatives and strong governance structure, both of which underpin the long term strength and success of our business.
This year's report is another step in evolving our holistic ESG focus across our global organization with new and robust disclosures and accomplishments.
Also during the quarter 50, 50 women on boards, a leading education advocacy campaign driving the movement towards gender balance and diversity on corporate boards recognize <unk> is a three plus company.
This award acknowledges our efforts in understanding the importance and advantages of having a diverse board that ultimately benefit stockholders customers employees and communities.
I will now turn the discussion over to <unk>, who will run you through the details of the strong second quarter financial performance.
Thank you Nick and good morning to everyone. Joining us today I'm excited to be able to report that we carried the momentum generated by our operational excellence initiatives to the second quarter and produced another strong set of financial results.
As Nick described there is a great deal of volatility in the market related to inflation and supply chain challenges exchange rate fluctuations and commodity price movements on top of the geopolitical events and the ongoing pandemic all of these factors could easily have become a distraction.
And taken our focus away from executing on our operational priorities I am proud to say that the LKQ team did not let that happen and our second quarter results reflect this ability to stay on point.
Let me start with some highlights of the last quarter.
As we announced in June Moody's became the final of the three rating agencies to assign LKQ and investment grade rating following previous upgrades by Fitch and S&P, We believe that we've taken the right actions over the last three years to strengthen our credit profile and the Moody's upgrade to <unk> with <unk>.
Outlook is further validation of our strategy.
As discussed last quarter, achieving an investment grade rating opens opportunities to improve free cash flow over the upcoming yes. In addition.
<unk> to the immediate drop off in the leans to the credit facility following the covenant suspension.
With respect to free cash flow, we produced a healthy $288 million in the quarter, bringing the year to date figure to $678 million and importantly, putting us on pace to achieve our full year guidance of $1 billion.
I am pleased that we were able to build our inventory to what the optimal level as shipping congestion ease a little bit which resulted in a net cash outflow for the quarter of $162 million on this specific account.
Strong free cash flow along with the proceeds from the <unk> sale allowed us to return a significant amount of capital to shareholders, we repurchased over 8 million shares for $404 million and paid a quarterly dividend totaling $17 million.
In just the last 12 months, we have repurchased over 20 million shares for approximately $1 1 billion.
And page $215 million in dividends in May our board authorized a further $500 million increase to our share repurchase program to a total of $2 5 billion being authorized.
We had about $600 million available as of the end of June and we have remained active in the market in July .
As previously stated.
In April we completed the sale of the Pea GW after market loss distribution business for gross proceeds of $361 million we.
We recognized a pre tax gain on sale of $155 million or $127 million after tax.
U S. GAAP EPS reflects the $45 <unk> gain do we have deducted the gain from the calculation of adjusted diluted EPS.
Now shifts to the quarterly results as expected and previously communicated precious metal prices were a drag on results year over year generating a $32 million negative effect on segment EBITDA and an <unk> <unk> headwind on adjusted diluted EPS.
Most of the impact related to the precious metals found in catalytic converter as the prices of which were near record levels in the second quarter of 2021.
Roughly $20 million of the negative effect was reflected in the self service segment.
Exchange rates created a further headwind has the average rates for the euro and pound sterling decreased by 12% and 10% respectively compared to Q2 of 2021.
The currency impact reduced segment EBITDA by $20 million and adjusted diluted EPS by <unk> <unk> relative to last year, and finally, not having to Pee GW business for the full quarter was a further $12 million headwind to segment EBITDA versus the prior year.
Keeping those external factors in mind, our second quarter results reflect a solid operating performance.
Gross margin decreased by 30 basis points compared to a year ago, a 70 basis points negative effect came from the metals prices alone.
Benefits and pricing and mix, partially offset the metals impact.
Overhead expenses as a percentage of revenue rose 60 basis points year over year due to inflationary pressures.
Income taxes were booked at 25, 3% for the year to date period, a 20 basis point increase over our prior guidance, reflecting the shift in the geographic mix of U S. Dollar earnings as impacted by the significant shift in FX rates since we spoke 90 days ago.
As Nick mentioned diluted EPS was $1 49 for the quarter, including the 45 P. GW gain in adjusted diluted EPS was $1 nine.
I'll now turn to the segment operating results starting on slide eight wholesale North America produced an EBITDA margin of 18, 7%.
For the quarter down 90 basis points from the prior year period.
Gross margin declined by 80 basis points.
Inflationary increases in material and freight costs were offset by higher parts pricing and productivity initiatives segment overhead expenses were roughly flat owing to lower personnel costs from incentive compensation and productivity initiatives to mitigate inflationary pressures.
Europe reported a 10, 8% EBITDA margin for the quarter up 10 basis points from the prior year period as Youll see on slide nine gross margin improved by 80 basis points, primarily from procurement initiatives and pricing.
Overhead expenses increased by 60 basis points from higher personnel freight and fuel costs.
The segment's strong second quarter performance reinforces the team's expectation that they will deliver a double digit margin for the full year.
Moving to slide 10 specialties EBITDA margin of 13, 4% declined 150 basis points compared to the prior year, mostly coming from a decrease in overhead expense leverage driven by an organic revenue decline of 11, 5% as the anniversary a very tough comp.
The prior year when the business delivered over 30% organic revenue growth in the first and second quarters of 2021 and.
Inflationary pressures also drove overhead expenses higher including personnel freight and fuel expenses.
The overhead expense increases were partially offset by 60 basis points of benefits from operating expense synergies, mostly generated from the <unk> acquisition.
To provide some context to the segment's performance pre.
Pre pandemic in Q2 of 2019 specialty reported a margin of 12, 7%.
Since then the team has made great progress on pricing and productivity, resulting in a 70 basis point improvement from the second quarter of 19 through to Q2 of 2022. In addition to growing the business by over $100 million in revenue.
Moving to self service self service reported an EBITDA margin of 15, 3% for the second quarter of 2022, our solid results for the segment, but below the heightened margin achieved a year ago.
The decrease in self services margin in Q2 of 2022 was driven by movements in metal prices estimated as an 840 basis points negative effect year over year higher costs and inflationary increases related to freight fuel and personnel expenses.
Third quarter will be markedly tougher for the segment as the higher costs from the second quarter cycled through in a significantly lower pricing environment for metals before stabilizing in the fourth quarter.
I touched on liquidity and capital allocation in the highlights so I'll reference a few other items of note as.
As shown on slide 13, our year to date conversion ratio of free cash flow to EBITDA is roughly 70%, noting that the glass proceeds and the gain on sale are not reflected in these figures.
That continued to be timing elements that will reverse over the course of the year and we are confident in our ability to generate 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 have made further progress in rebuilding our inventory levels to achieve our fill rates targets. As you can see on slides 31, and 32, we have increased inventory in three of our four segments. Since December of 2021 specialty was flat to December but was in a stronger position than our other segment.
<unk> and thus hasnt required a similar inventory build.
We remain confident that our inventory positions will enable each segment to continue to offer best in class availability and service reliability relative to our competitors.
Moving on to capital allocation.
We paid down our debt balance by $248 million in the quarter.
Our net leverage ratio came in at one two times EBITDA and interest coverage exceeds 30 times.
It's worth noting that our net leverage ratio of one two times is in line with the June 2021 figure. Despite the use of $1 3 billion for share repurchases and dividend payments over the last 12 months as our earnings release of this morning indicated the board has approved a quarterly cash dividend of <unk> 20.
<unk> per share, which will be paid on September 1st to stockholders of record as of August 11th.
I will wrap up my prepared comments with our updated thoughts on projected 2022 results.
Our guidance assumes there are no significant negative developments related to the COVID-19 in our major markets scrap and precious metal prices hold near average June prices and the Ukraine, Russia conflict does not escalate further on foreign exchange our guidance includes recent gear.
<unk> rates with the balance of your rates for the euro of $1 <unk> and the pound Sterling at $1 20.
Starting with the revenue outlook.
We remain comfortable with our revenue outlook and are holding our organic parts and services growth range between four 5% and six 5%.
We are projecting full year adjusted diluted EPS in the range of $3 85.
Up to $4 and five.
With a midpoint of $3 95.
We have narrowed the range as we are halfway through the year, but maintained the midpoint of our prior guidance to understand why we held the midpoint. Please refer to slide 18 in the presentation, which bridges, our prior and current guidance figures.
We generated operational benefits in the second quarter and expect further upside in the second half of the year.
The total operational improvement is 11.
Which highlights the resilience of the business in difficult trading conditions, while the Ukraine, Russia conflict is still negative on a full year basis, we have seen better than expected results as areas of the country reopened with fighting concentrated in the eastern part of Ukraine.
We are honored to be able to support critical mobility needs in the country, where feasible and are very proud of the work being done by our colleagues in Ukraine.
Capital allocation is also a benefit of <unk> relative to our prior guidance primarily related to timing.
Note that we are including share repurchases through the week ended the <unk> of July in our guidance and as in prior periods not assumed any further retail purchases for the balance of the year.
That's the good news, mostly tied to the areas directly under our control and then there are other negatives, which are primarily external factors.
<unk> from the weakening FX rates I mentioned earlier contributed a 6% reduction relative to prior guidance declining metals prices I expect it to have an additional negative 7% impact primarily in the third quarter as we turn caused patches in the first and second quarters when metals prices.
Were higher at the lower.
<unk> scrap and precious metal prices.
FX rates and metals prices can move significantly over time.
We may have further upside or downside if the actual figures play out differently than we have assumed in our guidance.
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. We haven't increased the minimum given the negative exchange rate effects and the projected tax payment for the <unk>, which in the aggregate.
Our estimated to be approximately $50 million, we expect to overcome both factors to meet or exceed the $1 billion estimate. Thank.
Thank you once again for your time this morning, and with that I'll turn the call back to Nick for his closing comments.
Thank you <unk> for that financial overview.
Let me restate, our key initiatives, which are central to our culture and our objectives first integrate our businesses and simplify our operating model.
Second focus on profitable revenue growth and sustainable margin expansion.
Third drive high levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy and fourth to continue to invest in our future.
As you can see from our results we are committed to driving these metrics forward regardless of the operating environment. We are doing our very best to effectively manage the items, which are under our control so as to offset the headwinds which are largely outside of our control and for that I offer a tremendous.
Thank you to our team members across the globe that make it happen each and every day they define what it means to be LKQ proud and with that operator, we are now ready to open the call to 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.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Scott's timber Youre line is open.
Good morning, guys. Congrats on the very strong results. Despite the nonstop headwinds that youre facing.
Thanks Scott.
First question I'm, just going to jump right to state farm.
Obviously.
They will have the market more than 20 years ago, and they've come back and dipping their toe in could you maybe just size this up versus.
Prior attempts of them going back in the market, how real this feels and how tangible.
How big this could be if it really does come to fruition.
So let's put everything in perspective, Great question, Scott stayed farmers the largest automobile insurance company in the United States of America, They have roughly an 18% market share.
They stopped to using aftermarket collision parts back in the late 19 nineties.
As a result of some policy language.
That certain of their customers took issue with it had nothing to do with the actual parts just had to do with policy language and they stayed on the sidelines.
Really throughout the entirety of their litigation, which lasted for 20 years and in 2019.
Finally settled that suit for about $250 million, which is.
Dropping the bucket right.
That was two months ago and over the last three years.
People have been wondering and now that that was settled are they going to come back state farm is a very thoughtful very conservative organization.
<unk>.
And they move pretty slowly and.
This is just a pilot.
Pilot in two states with three product lines.
That said it is encouraging as this is really the first time outside of some.
Pilots with chrome bumpers for pickup trucks that they are actively looking at the market and evaluating the utilization of a broader array of parts.
The reality is.
If they were to turn it off completely all at once which we don't think they will do we think this is going to again in classic stayed firm fashion this will draw out.
Fairly slowly over time, there is a potential of an 18% increase in aftermarket demand because there are 18% of the marketplace.
Okay.
Got it Don we don't anticipate any impact on our 2022 or 2023 results because again this will probably play out over a longer period.
Yes.
Alright, and just going back to North America, you talked about.
In June you saw some encouraging results from a fulfillment standpoint could you just.
Give a little bit more detail on that.
Certainly.
Historically, our fulfillment rates in North America had been well into the mid <unk>.
90% range.
Coming out of the pandemic with all the supply chain issues and alike.
We fell below 90%.
We picked up a couple of percentage points.
In the month of June which was good.
We are still well below where we wanted to be well below where we used to be.
The fact that were moving up as is encouraging and obviously a lot of that has to do with the aftermarket product, which as I indicated in my prepared comments.
Is the one product line that has been most affected.
The supply chain challenges.
<unk>.
<unk>.
The volume of aftermarket parts.
Is down.
<unk> is very strong, but the volume is down.
And.
We have a lot of inventory on the water as I mentioned.
We were very successful on getting containers filled and on ships in the second quarter, we won't see given the supply chain, we won't see that until late summer early fall.
With that we believe we will be in a good position to continue to drive fulfillment rates back North we do not believe we're going to get back to.
Plus 95%, but we're moving in the right direction.
Alright, and just lastly.
Four five to six 5% parts and service organic growth rate.
<unk> has not changed but has the composition.
By segment changed.
Not materially.
Europe is right on track with where we would expect them to be as I indicated North America in the first quarter and the second quarter ran ahead of our expectations.
And so theres, a little bit more of a shift in the <unk>.
Impact from the North American business.
Specialty business as we've seen given the monster comps that we had last year was down I think 15% in the first quarter of 11% in the second quarter.
And in the right direction again, we've only got 20 some days of data in Q3, we're closing the gap and our goal would be by the end of the year too.
I'll be a lot closer to prior year numbers, so maybe a little bit of shift.
From.
Especially in the North America.
But again comfortable with that 456, 5% range.
Got it that's all I have thanks for taking my questions. Thanks, Scott.
Okay.
Your next question comes from the line of Craig Kennison. Your line is open.
Hey, good morning, Thanks for taking my questions and thanks for the Great slides Super helpful. First question just on installation Nick can you characterize.
The rate of inflation in your and your cost structure and whether thats easing at all.
Thanks, Craig it's almost impossible to put a single number on inflation, because it's coming at us from so many different corners at different rates.
Fuel expenses.
Our up dramatically I mean gas used to be $3.50 a gallon.
During the quarter is as high as over $5, a gallon analyses and back a little bit, but thats not the 9% inflation that the rest of the.
That's been published about the United States inflationary factors right.
The bill rates are up significantly.
The good news was in.
In June for example, we then have to go to the spot market for container shipment at all.
It was all under contract and so while it is still above where it was pre pandemic.
It wasn't quite as bad as we had feared so it really varies almost by category of expense and by location.
Experiencing in North America is different than in Europe , but overall.
All of our costs are up because our cost of goods is up.
All the SG&A expenses are up nothing is almost nothing is down other than what we can do.
Have productivity measures to reduce the consumption of SG&A type items.
But it's yes.
Yes, it's a big headwind there is no doubt about it.
Yes.
Your next question comes from the line of Brian Butler. Your line is open.
Hey, good morning, Thank you for taking my questions.
Good morning, Brian .
Well I guess the first one can we talk about the trade working capital opportunity and how should we think about our model kind of the.
Trade working benefit.
Plays out in the second half of 2022.
Brian Good morning, it's of our underwear, calling a great question and set to be a topic very close to my heart, but also over the past few years for the entire organization out here. It is a key element of the.
Revised.
Annual cash incentive program since 2019, and just tremendously proud of.
The shoulder that every single individual across the enterprises put into it.
As you see we have.
Happy with the inventory build in some of the <unk>.
Supply chain congestion eased again it is all relatively speaking it set fees and back to pre pandemic levels, but if you think about where we've been over the past couple of years. The second quarter was a good quarter for us to be able to pick up inventory in our businesses and that certainly is what we had to.
Due to ensure the right parts available at the right place and at the right time.
So that really has been the key for US as you think about the second half of the year similar to what we've done in the first half we don't believe that we need to build up inventory levels significantly above where we currently are which as you know we typically do do an inventory build in the fourth quarter.
Because of the seasonality of the overall business coming out of the winter season in Q1 and Q2. So we do expect to build up some inventory towards the backend of the year, but the single biggest piece is you can think about as the payables offset and you certainly saw that in the second quarter also while there was inventory build.
Certainly had.
A nice move on accounts payable balances to offset that and then the final piece really within trade working capital as receivables and on the back of some strong organic revenue growth North America as you would've seen on slide number five reporting a 10, 7% organic revenue growth rate.
Europe at four 2% on a constant currency basis and four 6%.
We do expect receivable balances to move up and I'm perfectly okay with that as long as our teams continue to manage the past due receivables and so from that perspective, if the only big been at up is is on the receivables side. That's okay. That's kind of that's.
That's the sign of a good <unk> business. So overall, while we've had a good solid start in the first six months with a free cash at about $638 million, we feel comfortable about hitting the minimum billion dollars that we have committed you do need to note that with the FX challenges from a European perspective.
<unk> the free cash that gets translated back into U S. Dollars that obviously is is lowered as a result of that number one but the other piece really is if you think about the P. GW divestiture that we did in the second quarter.
Op bag and taxes to be paid estimated taxes to be paid in the third quarter. Those two elements as I mentioned in my prepared comments amount to about $50 million will overcome that and hence we still kind of maintaining a minimum of $1 billion of free cash for the full year.
Okay, that's very helpful.
My question was on kind of looking at can you talk a little bit about price and volume mix. When you look at the U S and the EU for the parts and service business for the second quarter.
Yes.
<unk>.
It's a great question as I, we tried to indicate in our prepared comments.
A lot of the organic growth no surprise, given the inflationary environment that we're dealing with has come through price.
The volume question again like the inflationary question, it really depends literally business by business product line by product line.
In North America.
The aftermarket product volumes were down.
Salvage collision volumes were actually up.
We were able to transfer some of that demand for aftermarket products into salvage product.
The salvage mechanical side of things.
We're kind of flattish we had some uptick in the reman business.
And so net net we had we were down in North America, but some things were down some things were up same in Europe , you really have to go geography by geography, we had some.
Some of our businesses, where the volumes were up low single digits, which was great.
We had other.
Areas, where volumes were down say, 1% or 1.25%.
Pricing was very strong again in.
In specialty.
With the 11, 5% decline in organic volumes were down, but again thats relative to the monster comp.
So it really depends business by business geography by geography, I believe our teams are doing a great job of managing.
We're always trying to.
I get the most volume that we can because ultimately thats important to sustaining the business but.
But equally as important particularly these days is making sure that we're we're covering the inflationary pressures through our pricing actions and so we are we believe the team is doing a nice job of balancing.
Those two objectives.
Your next your next question comes from the line of Daniel <unk>. Your line is open.
Yeah, Hey, good morning, guys. Thanks, taking my questions good morning, Daniel.
I wanted to start on the North American wholesale thoughts obviously the state farm.
<unk> feel like they're positive for growth, but also want to ask on pricing I think most of the quarter was driven by pricing or are we still seeing Oems raised prices further maroon and as you look to the back half and maybe into next year with the expectation be that given just the broader inflationary backdrop. These pricing increases continue or is there a risk that pricing.
Flows were positive.
To come down on the OEM side.
Yeah, Danielle this is Nick.
The Oes.
They don't just to increase all the prices on all of our parts.
Three months, that's not how they operate they are very selective in.
How they're pricing their parts some prices go up significantly some prices don't go up at all.
And obviously all the Oems have.
They are on strategy.
In general there are prices have gone up a little bit.
Less than.
Or generally less than overall inflation.
And so whenever they take their prices up there.
It provides us an opportunity not just us the whole alternative parts industry as a whole the ability to take pricing up a little bit as well.
I can't predict what they're going to do in the future ultimately they are dealing with the same types of inflationary pressures as is all of the other businesses as it relates to input costs.
Whether that be materials commodities labor all of Australia.
All I can say is we will try we keep a very close eye as to how the oes are pricing their product we need to maintain our competitive stance. We think we're doing a good job of doing that in this current environment.
Great. That's helpful. Nick and then maybe one on the European margins I think we touched on demand had been in the last question, but.
I think at the analyst day of our call you guys noted that further margin expansion with possible and above 10% profit levels given the change in the last 30 to 60 days and FX rates the economic backdrop inflation I mean do you still think a thoughtful to see EBITDA margin expansion. This year and next year for Europe as you look ahead.
Yes Allison.
Good question, Daniel and thank you for giving us the opportunity to respond to that.
Listen I think as you know Q1 with the Ukraine, Russia conflict there were some challenges associated with that.
The underlying business operates in a very resilient market.
Folks have kind of talked about the fact that energy prices have been moving up with what's happening further out that but we really haven't seen a significant drop off on a BMT basis number one and that really is a key driver for our European business. So from that perspective really happy with the way our European business continues to put.
<unk>, Nick obviously, you gave some color on the broader platforms.
In terms of how they've been performing also I think the key piece out here has been making sure that we have the inventory to satisfy the demand, which we do but overall very happy with the way the margin trajectory of the European business continues and we feel comfortable and confident about the double digits on a full year basis with.
Regards to 2023, we haven't given any guidance as of now, but needless to say if you kind of go back to our commitment to the markets way back in September of 2019, when we launched the one LKQ Europe program at that point of time, we said exiting 2021, we would be a sustainable double digit margin.
Business, we've certainly delivered that in 'twenty. One we are delivering that in 'twenty. Two there's no reason for us to start to backslide at this point of time, so while we haven't given any guidance. We do expect that to be further goodness unit from a margin and profitable growth perspective across our European segment.
Your next question comes from the line of Bret Jordan Your line is open.
Hey, good morning, guys.
Brian .
On that last question you said that DMT has remained pretty stable in Europe could you talk about the consumer demand trend I guess sort of the cadence in the quarter as obviously compounding volatility over there has it as it had any impact as we've progressed.
Actually the back part of the quarter was much stronger than the first quarter Brett.
Which we were heartened to see.
Again, you got to keep in mind.
Largely in what would be deemed a a consumer non discretionary business right.
Provide service parts that keep.
Vehicles on the road people need their cars.
For mobility to get to work.
Conduct their daily life and.
If the car can operate.
They're going to spend the money to put it back into operational mode.
And everyone knows.
In tough times, you can probably stretch out your oil change for a bit Ray you can stretch out some of the service items for a bit but sooner or later.
Need to repair your car you need to keep it serviced and and Thats, what we love about our business right, it's largely consumer non discretionary.
No business is totally recession proof if you if you want to use that word, but we feel very comfortable with where we are and again.
Our operating results in May and June were much better than they were in April so we're.
We're optimistic.
Okay, Great and then within specialty could you sort of carve out.
Performance differences between RV, which I think you called out as being pretty stable versus the sema related product and it is sort of within that total specialty decline could you give us a feeling on the pieces, yes. So the the RV side of it what I indicated was down less than the unit.
Business as a whole business as a whole was down 11, 5%.
RV was off less than that.
And again, you really have to almost go product set by product set.
No.
Core RV products.
Really are tied to less to the RV SAR breath, but more too.
The utilization of the RV and the size of the park, we've done a lot of correlation analysis over the years on this and what we've always seen is that RV revenues tied a lot closer to campgrounds spending than RV Saar.
Because a lot of what we sell are replacements and consumables and that all relates to the utilization of those units.
If you go back to the financial crisis right. The great recession campground spending was flat and stayed hung right in there.
And.
But there are some products.
Like towing a great example, which really crosses RV and and marine and.
Some of the similar product towing the soft.
And.
On the <unk> side, that's where.
A larger percent relative to rvs are large.
The spend.
Those onto newer vehicles right people buy the new pickup trucks are there new jeep and they they want to fit it out.
And pickup truck Saar was off 12% in the quarter, which was the second quarter in a row that it was downright, so thats, where theres a little bit more pressure.
But again some of it is a comp against almost are unrealistic comp of what we did in 2021 and like I said, the especially group, including all parts of the specialty group are are doing better than they are.
Or on their way back to prior year volumes at least in the first few days of of the third quarter, we probably won't get there for the quarter as a whole, but where we're closing the gap from our perspective Thats whats important.
Your final question comes from the line of Gary <unk>. Your line is open.
Hey, good morning, everyone. Good morning, Gary questions here.
<unk>.
First of all Nick.
You didn't cite the growth in collision claims in North America as a comparison to what you did in North America do you have that statistic handy.
Yes, so repairable claims in the second quarter.
We're up about.
6% compared to 2021, but still down 6% compared to 2019. So the industry is still down relative to pre pandemic levels.
Okay.
John .
And then maroon on on an absolute dollar basis, how much did was FX did FX positively impact SG&A.
We haven't called that piece out, but I will tell you from a North America perspective, clearly, there's little to none, but if you think about <unk>, where does the FX exposure come through its from our European business and so if you think about where the European business total SG&A was at around the four.
<unk> hundred 20 odd million and if you then kind of go out you can back into that number Gary and this is that we should think about it within the slide deck. We obviously have on slide number.
<unk> seven we obviously have the FX rates out there also but essentially the euro has been the big.
Kind of decline so roughly call it about a 10% decline on that.
So kind of run that piece of the $420 million, but that basically is what the what it.
It's kind of strange to see a benefit but the translation benefit if that's what you're referring to from a lower conversion rate, that's really where it would come through.
Okay.
And Gary I know important but keep in mind, it's important to keep in mind that the FX issues that we're dealing with our translation issues I E. Just converting the foreign currency into U S dollars by and large they are not transactional issues, but we do have some trans.
Action exposure some of the purchasing of parts in Europe is dollar denominated, particularly things like oil based products, which are dollar denominated, but those are things, where we know in advance we're going to be buying and we can we can do some hedging of that so.
Total.
Next.
Kind of exchange losses, if you will from a transactional perspective in the quarter was less than $2 million. So it's all just translation of foreign currency results into U S dollar results.
There are no further questions at this time, Mr. Zarcone, I'll turn the call back over.
While we will always want to thank everyone for their time and their participation in our call.
We know you're all very busy this is a busy time of the earnings season. We appreciate you spending some time with us and we look forward to joining back up at the end of October when we are going to be pleased to announce our third quarter results.
Thanks for your time and attention and.
We'll talk to you soon thank you.
Okay.
This concludes today's conference call you may now disconnect.
[music].
Yes.
[music].