Q4 2022 LKQ Corp Earnings Call
Good morning, My name is Rob and I will be your conference operator today at this time I'd like to welcome everyone to the LKQ Corporation fourth quarter and full year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.
Your 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 would like to withdraw your question again press the star one.
Thank you Joe Butros, Vice President of Investor Relations you May begin your conference.
Thank you operator, good morning, everyone and welcome to Lkq's fourth quarter and full year 2022 earnings conference call with US today are Nick Zarcone, Lkq's, President and Chief Executive Officer, and Rick Galloway, Our senior 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 those 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 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-K 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 everybody on the call. This morning, I will provide some high level comments related to our performance in the quarter and full year 2022, and then Brook will dive into the financial details and discuss our 2023 year outlook before I come back with a few closing remarks.
This month, we are celebrating the 25th anniversary of our company's founding in February 1998.
What started with a few salvage facilities in the U S has ground to a fortune 300 business with operations in 28 countries and over 45000 employees, providing a wide array of aftermarket and recycled parts used to repair maintain and accessorize vehicles.
Our operations are leaders in their respective markets and are well positioned to continued their success in the future.
Getting to this point has been the result of the dedication of our past and present teams.
Want to express my sincere appreciation for all of these efforts I am excited to see what this team can deliver in the future as the LKQ team is never satisfied never restaurants, laurels and there's always pushing to be the best.
Well I don't think he was founded ESG was not the hot topics.
But ESG has always been a vital part of our strategy.
Through our recycling operations, we are enabling the circular economy and doing our part to reduce waste I am proud of our contributions to date and I can assure you that our emphasis on sustainability will continue to be an integral part of our mission.
Our success in ESG has been recognized by external parties on December 5th of 2020 to MSCI upgraded LKQ to their highest ESG rating of AAA, placing the LKQ in the top 5% of all companies that they rate globally.
On January 31st of this year. Okay. Q was included in sustain Olympics 2023 top rated ESG companies list.
The fourth quarter of 2020 to close the year, where the resilience of our businesses shine through a myriad of uncontrollable headwinds ranging from economic softness inflation supply chain disruptions labor shortages energy cost spikes and a war in Europe .
From an operating perspective, the fourth quarter was a very strong set of results I could not be more proud of our team.
The continuation of exceptional organic revenue growth and strong margins in our North American wholesale segment, when combined with solid organic revenue growth and the highest fourth quarter EBITDA margins in the history of our European segment offset the impact of the continued headwinds experienced in our specialty.
And self service segments.
January revenue trends are similar to the levels generated in the fourth quarter.
While the operations were collectively right on target with the guidance that we provided back in October the annual tax provision was higher than anticipated, which drove a full year catch up in the fourth quarter and resulted in quarterly EPS at the low end of the guidance range, Rick will provide more detail.
On the tax provision in a few minutes now.
Now onto the strong quarterly results.
Revenue for the fourth quarter of 2022 was $3 billion, a decrease of five 8% as compared to $3 2 billion in the fourth quarter of 2021, driven by FX translation and the divestiture of P. GW.
Parts and services organic revenue increased four 5% on a reported basis and five 9% on a per day basis.
The net impact of acquisitions and divestitures decreased revenue by three 1% and foreign exchange rates decreased revenue by six 1% for total parts and services revenue decrease of four 8%.
Other revenue fell 21%, primarily due to a weaker commodity prices relative to the same period in 2021.
Net income in the fourth quarter was $193 million as compared to $235 million for the same period in 2021 diluted earnings per share for the fourth quarter was 72 cents as compared to 81 for the same period last year, a decrease of 11% during.
During the quarter, we had an unfavorable 15 cents year over year impact related to the higher than anticipated tax rates. The tax rate was also higher than anticipated during our third quarter call, which generated an unfavorable five cent effect on adjusted diluted EPS.
Relative to our guidance.
On an adjusted basis net income in the fourth quarter was $209 million as compared to $254 million for the same period of 2021, a decrease of 17, 5% adjusted diluted earnings per share in the fourth quarter was <unk> 78.
As compared to 87 for the same period of last year, a decrease of 10, 3%.
Net income for the full year of 2022.
Was $114 billion as compared to one point O $9 billion for the same period last year.
Diluted earnings per share for the full year of 2022 was $4 11 as.
As compared to $3 66 for the same period of 2021, and an increase of 12, 3%.
Please note that 2022 results include the gain on sale of P. GW.
On an adjusted basis net income for the full year of 2022 was $1 1 billion as compared to $1 $2 billion for the same period of 2021, a decrease of nine 4%.
Adjusted diluted earnings per share for the full year was $3 85 as compared to $3 96 for the same period of last year, a decrease of two 8% adjusted earnings exclude the gain of the Pea GW sale, but it includes the impact of the higher tax rate now.
Now, let's turn to some of the quarterly segment highlights.
As you will note from slide 12 organic revenue for parts and services in the fourth quarter for our North American segment increased 10, 3% on a reported basis and 12% on a per day basis compared to the fourth quarter of 2021, we continue to perform well in North America, especially when you consider that.
According to CCC collision and liability related auto claims were down nine tenths of 1% year over year in the fourth quarter.
Looking back at our performance through the financial crisis from 2008 to 2010, our North American business grew organically at an average of seven 5%, which drove the alternative part usage rate, our apu rate above its historical annual growth rates.
As we enter 2023 and face the reality of a global recession or alternative parts offerings clearly become more attractive during these challenging economic periods. We are also encouraged by the trend in parts per repair, which reached an all time high in 2022.
Important to note is that our sweet spot has expanded and today stands at model years four to 15 years of age all of these items combined positions North America, well for continued organic growth in 2023.
The upward trend in our aftermarket sales volumes and the ongoing improvement in our full rates continued in the fourth quarter with full rates, reaching their highest percentage levels in 2022 and today stands at close to the pre pandemic level of 93% in.
Importantly, as the supply chain recovered and fill rates increased the entire industry realized a 220 basis point improvement and the aftermarket percentage of Apu, taking share back from the Oes as we progress throughout the year the supply chain has.
<unk> and our inventory is generally where we want it to be.
The main issue we are confronting today are continued delays at some of the rail heads due to congestion.
As many of you know on December 7th of last year State Farm announced that they are rolling out expanded non OEM collision repair parts.
Use in most of the United States. We are excited state farm is embracing the aftermarket value proposition that the industry offers which will ultimately benefit the unconcerned Maher.
We continue to accurately analyze this opportunity and we are well positioned to compete for our fair share of this opportunity and have built our inventory appropriately to do so our salvage inventory is also healthy and we saw some relief on our cost per vehicle during the quarter.
The salvage business had solid organic growth largely driven by price, but as we entered December we witness in the upward trend in our salvage volumes.
Loss rates increased a bit in the fourth quarter, which were largely seasonal and as you can see it had no impact on our organic growth.
The slightly higher loss rates played a role in our ability to source the right level of inventory at auction at attractive prices.
As we have stated before fluctuations in loss rates are largely net neutral events for LKQ.
Moving onto our European segment.
Europe organic revenue growth of parts and services in the quarter increased four 6% on a reported basis and five 8% on a per day basis, which represents the best fourth quarter per day organic revenue growth since 2016.
I'd also like to highlight that Europe segment, EBITDA margin was the highest fourth quarter level since entering the European market in 2011.
On a full year basis Europes performance is another year of double digit segment, EBITA margins, which is consistent with our one LKQ Europe initiatives and strategy work will cover more margin details in his prepared remarks.
Throughout the quarter, our European team was laser focused on the cost structure, including rationalizing head count to create a more nimble and agile team and focusing our team on a narrow and actionable list of key projects.
These projects represent the highest return opportunities that the team can execute in the near term further cementing the long term resiliency and market leadership of our European segment.
On February <unk>, our <unk> Europe announced that it expanded its European salvage network with the acquisition of Dutch based <unk> group.
Founded in 1991, where annoy as a leading supplier of remanufactured engines and recycled OEM car parts.
<unk> operates a salvage dismantling facility in the Netherlands, and we manufacturing plants in both the Netherlands and Poland.
As you know the roots of our company lie in the dismantling of salvage vehicles to recycle OEM parts.
As part of our European strategic plan, we intend to capitalize on that history and.
Knowledge, coupled with our re manufacturing capabilities to grow our salvage network across our European footprint and with this tuck in acquisition, we take one small incremental step towards that objective.
I want to congratulate our style Gerber team on their 100th anniversary and commend them for building, a resilient and market leading business that continues to demonstrate an ability to adapt to the ever changing independent aftermarket.
A century since founding brothers, Idaho, and Willie Gruber started the business.
Today, The Star group of business continues its history of embracing change, which positions them well to capture further opportunity as the car park shifts towards Evs and other forms of mobility.
We can't wait to see the next what's the next 100 years brings for style Gruber.
Now, let's move on to our specialty segment during.
During the fourth quarter specialty reported a decrease in organic revenue of 10, 6%.
Throughout 2022 specialty was up against tough 2021 comparisons in the midst of decreased demand for certain key RV parts and a slower than expected recovery in U S light vehicle sales.
Looking at the specialty segment on a multiyear basis.
Since 2019 specialty has generated approximately a 4% compound annual growth rate for organic revenue outperforming the industry growth of sema and RV related products.
A few specialty operational highlights would include that specialty continued to realize the full benefits of the <unk> synergies, which exceeded our expectations in dollars and the operational execution.
Especially one <unk> 2022 top supply line award for the third year in a row.
Now onto our self service segment organic revenue for parts and services for our self service segment increased four 8% in the fourth quarter self service was again challenged by commodity pricing as seen in the material decline of other revenue, which impacted our expectations for the quarter.
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On the corporate development front, the fourth quarter was fairly quiet while.
While we did not.
<unk> any material transactions during the quarter, our corporate development team is actively assessing various opportunities that exist across our operating segments as.
As the global economies continue to soften.
That may lead to multiple compression and we are well positioned to execute on synergistic acquisitions that fit our strategic objectives.
Outside of Q4, our corporate development efforts I am pleased to announce that this past January we entered into a memorandum of understanding with Korea zinc company limited a world class General Nonferrous metal smelting company under the memorandum of understanding we will work.
Our towards a potential large scale joint venture related to the recycling of lithium ion batteries in the United States. This is again evidence that we will continue to strategically position the company to adapt to and sees the longer term opportunities that exist in the ever changing car Park.
Turning to ESG during the fourth quarter, we continued to build out our ESG program by focusing on our people efforts and various social initiatives here are a few worth noting.
Every colleague employed by LKQ elite Ukraine for at least six months, we received a onetime hardship payment to support pain for energy and the general increase in the cost of living owing to the Russian invasion.
Our UK and German operations also implemented onetime.
Hardship payments to support our employees in those markets given the state of the overall European economy.
We initiated a voluntary daily pay benefit in the United States that allows our employees to access a portion of their earned pay on demand. The company implemented this benefit with the financial wellness of our people in mind.
And we launched our first employee inclusion group the LKQ Veterans network, a program that embraces our proud community of employee veterans and bedroom allies, who support and encourage each other through shared experiences veteran recruitment career development.
Our word engagement professional growth and retention.
In 2020 to our North American salvage operations continued our leadership as the largest recycler vehicles by processing over 753000 vehicles, resulting in among other things the recycling of approximately $3 6 million gallons of fuel.
$2 2 million gallons of waste oil 2 million tires, 700000 batteries and approximately 955000 tons of scrap metal.
The end result of these efforts resulted in nearly $13 million recycled and repurpose parts being sold into the collision and mechanical repair shop industry that otherwise would have ended up in landfills.
Let's turn to the inflationary environment again, a key item of interest for most listeners on this call.
As I discussed this time last year, we expected inflation to be a headwind throughout 2022 and that expectation became a harsh reality all year across each of our segments. Fortunately we are beginning to see some moderation with inflation in the U S and recently, we witness the rate of inflation.
Rob for the last three months in a row across the eurozone.
Eurozone inflation stood at approximately eight 5% in January down from October where it was almost 11%.
Despite this drop many of our key operating markets continue to face high inflation rates with certain countries running in the high single to low double digits.
In the U S. The labor markets continue to be strained and unpredictable in the midst of higher interest rates and mounting fears of a recession.
Daily we read about high profile layoffs.
Net new claims for unemployment benefits remain at a historic low.
As of late wage inflation is beginning to slow and certain areas areas of our business are seeing reductions in turnover, but these reductions are not material and we are far from out of the words, but is validation that our retention and employee engagement programs are gaining traction.
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Our engagement efforts arent simply an HR mandate there are programs that stretch across all levels of the organization and are a key component of our culture.
Our global engagement score of 74 is significantly above the average for companies of our size.
Studies have shown that employees are engaged are 14% more productive and that companies with engaged employees are 23% more profitable than those with disengaged employees. So from a business perspective positive employee engagement is critical but importantly, it's the right thing to do.
Two of our most important asset our people.
Lastly, before I turn the discussion over to Rick who will run through the details of the segment results and discuss our outlook for 2023 I am pleased to announce that on February 21, Our board of directors approved a quarterly cash dividend of 27 five cents per share of common stock payable.
On March 30 of 2023 to stockholders of record at the close of business on March 16 2023.
Thank you Nick and good morning to everyone joining us today before I go into details of the fourth quarter I'd like to reflect on what <unk> accomplished in the last year. We entered 2022 with a strong position based on the success of our operational excellence initiatives and solid balance sheet after reporting the highest profitability in the Companys history in 2021.
We expected there to be headwinds in 2022 from the areas. Nick mentioned as you can see on the bridge on slide five these headwinds did set us back, but the LKQ team drove operational improvements to produce roughly 40 of operating increases relative to 2021, we also sustained the positive momentum around cash.
So generation with free cash flow of just over $1 billion in 2022, and healthy conversion ratio of 60% of EBITDA. Our work on free cash flow in recent years has supported some noteworthy accomplishments in the last year.
<unk> achieved investment grade ratings from all three major rating agencies.
Returned $284 million to shareholders through quarterly dividends and increased the quarterly amount by 10% in October repurchased roughly 20 million shares of LKQ stock for just over $1 billion.
Which combined with the carryover benefit from 2021 purchases added 23 of EPS compared to 2021.
And all while maintaining a net leverage ratio at less than one five times EBITDA.
In early January 2023, we replaced our prior credit facility, which included a $3 one 5 billion revolver with a new unsecured facility <unk>.
Including a $500 million term loan and a 2.0 billion revolver.
Our confidence in the balance sheet and ability to generate robust cash flow factored into the decision to reduce the size of the facility. We were pleased to complete this new facility ahead of the prior facility, becoming current and lock in funding over the next five years at a competitive rate structure.
Generating these successful outcomes. Despite challenging conditions is a credit to the entire LKQ team and I want to thank all of them for their contributions.
Now turning to the fourth quarter results, starting with segment performance.
Going to slide 14 wholesale North America continued its strong performance posting a record fourth quarter segment EBITDA margin of 18, 5%, a 330 basis point improvement over last year. We saw gross margin improvement of 150 basis points, driven by favorable mix and the sale of the lower margin <unk>.
Business as well as pricing and productivity initiatives.
Overhead expenses were favorable by 180 basis points, primarily related to nonrecurring expenses incurred in 2021.
Strong organic revenue growth aided by the rebound in aftermarket parts volume offset inflationary cost increases and benefited operating leverage as mentioned in prior quarters. We believe there will likely be some moderation in segment EBITDA margin in upcoming quarters as the benefits of.
The 2022 price increases fall away with the resulting EBITDA margin expected to be in the high <unk> low <unk> range for 2023.
Europe also delivered its highest ever fourth quarter margin at 10.0% up 110 basis points from the prior year period.
As seen on slide 15, gross margin improved by 10 basis points as we work to offset inflation with pricing and procurement initiatives overhead expenses decreased by 70 basis points with an emphasis on cost structure and improved leverage due to the five 8% per day organic growth revenue growth.
Inflation related to personnel freight and fuel costs remains a critical concern across the European markets.
The team is actively addressing.
The pressures through productivity initiatives Europe produced a segment EBITDA margin of 10, 2% for the full year, the second consecutive year of double digit margins.
I want to commend the Europe team for achieving this result, despite the onset of the war on the Ukraine and significant macroeconomic headwinds and we are optimistic about incremental margin expansion of 20 to 30 basis points in 2023, moving to slide 16 specials.
Specialties EBITDA margin of six 2% declined 130 basis points compared to the prior year coming from a decrease in overhead expense leverage driven by an organic revenue decline of nine 1% per day as they anniversary a tough comp from the prior year when the business delivered a 6% organic revenue growth in the fourth quarter.
Revenue dollars when we broke out self service as a separate segment in Q1 2022, we highlighted that this business would have cycles, mostly driven by commodity price volatility. We are working through a down cycle now and the team is focused on buying the right quantity of cars at the best price to drive margin dollars higher with the uncontrolled.
Commodity dynamic in this business, we will emphasize generating margin and.
Free cash flow rather than targeting a specific margin percentage.
Now onto the consolidated results.
We reported diluted earnings per share of 72.
And adjusted diluted earnings per share of 78, which was a nine cent reduction relative to queue for last year.
As previously mentioned are operational performance showed year over year improvement and was in line with our expectations.
However, the solid operational performance was more than offset by unfavorable year over year effects of four from volatility in metals prices and <unk> from the foreign currency exchange effects caused by the stronger dollar.
Additionally, we had a negative effect of three from higher interest rates as benchmark rates were markedly higher and <unk> and Q4 2022.
As Nick mentioned taxes were the most significant unfavorable variance for the quarter, reflecting a 15.
Year over year impact and a five cent negative variance relative to the guidance provided back in October .
As a reminder, in the fourth quarter last year, we recognized almost 10.
And tax provision benefits from discrete items and the reduction in our full year effective right.
We experienced the opposite effect in Q4 2022, as we recorded a negative provision effect of approximately five from increasing our full year effective rate and unfavorable discrete items.
The effective rate increase primarily related to this shifts two shifts and the geographic distribution of income.
We mitigated about seven cents of the decline with our lower share count, resulting from our share repurchase program.
During the fourth quarter, we incurred 11 million and restructuring expenses, the majority of which relate to a new program. We kicked off late in the year, we initiated the 2022 global restructuring program and recognition of the ongoing macroeconomic concerns heading into 2023 all of the segments have submitted plans to improve operational.
Efficiencies by streamlining functions closing underperforming locations and halting non essential projects. The total cost of the 2022 program are estimated to be in the range of $30 million to $40 million to be incurred over the next few years projected cost savings of $20 million related to the program are included in our 2000 twenty-three guidance and we <unk>.
Spect annual run rate benefits of approximately $30 million by 2025 <unk>.
Shifting to cash flows and the balance sheet, we produced $166 million in free cash flow during the quarter, bringing the year to date total to $1 billion $28 million. The third consecutive year, we have exceeded $1 billion.
With the supply chain issues abating, we've made good progress in rebuilding our inventory levels and wholesale North America and Europe .
As shown on slide 35, we increased our inventory values and <unk> and these segments, though note that the dollar increase doesn't directly equate to a quantity change given the higher input costs were comfortable with our current inventory holdings and are pleased with improvements an aftermarket fill rates.
We will continue to evaluate our inventory holdings and May increase our balances in 2023, but not to the extent seen in 2022.
The supply chain Finance program contributed to an increase in days payable outstanding in Europe in 2022 with the signing of the new credit facility certain restrictions around the program were eliminated and we view further program expansion to be an opportunity in the next few years.
For the year the cash conversion is 60% conversion of EBITDA to free cash flow in line with our targeted range of 55% to 60% we finish it at the high end of the range and our guidance, partially due to the lower than projected capital expenditures for the year capital expenditures were 1.7% of revenue.
Which is below are targeted 2.0% to 2.25% range, we have experienced delays in receiving capital assets such as trucks as a result of supply chain delays as a result, some of our 2022 orders will be delivered in 2023 and reflected in capital expenditures in the 2023 financials.
As of December 31, we had total debt of $2.7 billion with a total leverage ratio of 1.5 times EBITDA.
Which is comfortably inside our target range of below two times.
Please note that going forward I will reference total leveraged statistics, rather than net leverages, the new credit facility change the metric to total leverage.
Are effective borrowing rate rose to 4% for the quarter due to the market rate hikes in the U S and Europe , we have $1.8 billion in variable rate debt. So 100 basis point rise in interest rates would increase annual interest expense by $18 million.
In the fourth quarter, we repurchased 3 million shares for $152 million and paid a quarterly dividend totaling $74 million.
I will conclude our thoughts on projected 2000 twenty-three results as shown on slide six through eight.
Our guidance is based on current market conditions in recent trends and assumes that scrap in precious metals prices hold near December prices and the Ukraine, Russia conflict continues without further escalation or major additional impact on the European economy and miles driven on foreign exchange. Our guidance includes recent European rates with balance of the <unk>.
<unk> rates for the euro of $1.08 and the pound Sterling at $1.22.
We expect organic parts and service revenue growth of between six and 8%. Please note that we have one fewer selling day in 2023 and have included associated with the expansion of aftermarket parts volume, resulting from state farm, writing claims on Kappa certify parts and three product lines head.
Lights, Taillights and bumper covers.
We are projecting full year adjusted diluted EPS in the range of $3 90 to $4.20 with the midpoint of $4.05.
This is an increase of 20 or five 5% at the mid point relative to the 2022 actual figure.
Looking at slides seven in the presentation you can see how we get from the 2022 actually EPS to our 2000 twenty-three guidance.
Operating performance is expected to generate growth of twenty-four rare.
Relative to the 2022 results, mostly related to wholesale North America from volume growth in Europe due to margin improvement we.
We do expect a continuation of challenging conditions for specialty from softening demand for RV related products and self service related to commodity prices and input cost inflation.
Sure Count benefits are projected to add 10 to the full year 2023 EPS.
Over and above the share count benefit associated with the deployment of R. P. G. W proceeds.
Note that there are no share repurchases assumed for 2023 and this figure this amount reflects the carryover benefit from 2022 purchases. So we're expecting very solid improvement on the operations side in 2023, which will drive year over year growth. Despite some non operational challenges the.
The exchange rate benefit is nominal and is offset by softening in metals prices.
The P. G. W divestiture creates a two cent headwind, reflecting the net reduction caused by loss profits, partly offset by the share count benefit generated from the redeployment of proceeds into share repurchases.
Interest is projected to be a significant cost increase with our weighted average borrowing rate on variable rate debt, having already risen from close to 1% in 2022 about 4% by year end, we anticipate an additional 13.
Interest expense in 2023 on a year over year basis due to higher average market rates.
We have included an effective tax rate of 26, three and the 2023 guidance roughly in line with the final 2022 right.
We expect to deliver approximately $975 million a free cash flow for the year, achieving 55% EBIT conversion to free cash flow. Despite a few key headwinds.
<unk> on slide eight we expect to produce incremental cash flows relative to 2022 from operations, including increased profitability and trade working capital improvements to counteract the following uses of cash first as mentioned previously we underspent on Capex capital expenditures in 2022, including equipment delays and <unk>.
Checked to see an increase of approximately $78 million relative to the prior year second the higher interest rates will require increased cash payments for interest expense, which we are currently projected at roughly $50 million.
Third and final, we anticipate increased tax payments of $60 million due to profitability increases.
And the timing of payments.
Thanks for your time this morning with that I'll turn the call back to Nick first closing comments.
Thank you Rick for the financial overview.
In closing 2022 was another banner year for our company and again Bell day that the strength of our strategy our business model and most importantly, our people let.
Let me restate are a key strategic pillars, which continued to be central to our culture and objectives. As we've entered the new year first we will continue to integrate our businesses and simplify our operating model.
Second we will continue to focus on profitable revenue growth and sustainable margin expansion.
Third we will continue to drive high levels of cash flow, which in turn gives us the flexibility to maintain a balanced capital allocation strategy and fourth we will continue to invest in our future.
With these pillars in place coupled with our industry, leading teams we are well positioned to both faced the challenges your presents and to continue to deliver positive year over year operating results for our shareholders as.
I was always I want to thank the over 45000 people who work at Al K Q for all they do to advance our business each day and for driving our ambition forward, regardless of the challenges time and time again, our teams have shown that these challenges or opportunities for growth.
Well for themselves and for the overall organization 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.
We ask you to please limit yourself to one question and one follow up.
And your first question comes from the lineup Craig Kennison from Bird Your line is open.
Okay. Thanks, and good morning, I wanted to ask about your recycling business in Europe . After you required to annoy I mean, I know, it's not large in the scheme of things but.
Perhaps you could just update us on the recycling footprint you have today in Europe , and whether the time is right to maybe make a bigger push build something like your north American auto recycling business.
Now in Europe .
Good morning, Craig and thanks for the question.
So for many years.
We've had a.
An operation.
In Scandinavia in Sweden.
Call It a tracker.
Been operating.
Quite well for quite some time, it's not a huge business, but it is a nicely profitable business and we started in Scandinavian, particularly Sweden, because that recycling market looks the most like the U S market. When you think about how the the.
Insurance companies participate in the industry and the utilization of recycled parts and so that was our beachhead. If you will and it's proven to be a very nice investment.
Obviously minority as our maiden voyage onto the continent.
And we anticipate that there will be incremental opportunities to expand the footprint.
The recycling business in Europe is generally speaking is different than in the us. It is largely driven by the commodities as opposed to park sales and as you know as a distributor of parts were more focused on the park side commodity side.
So it's going to take some time for the European market to shift there are some regulatory changes going on in Europe as it relates to the circular economy and utilization of Green parts. We think this is going to be a good time to slowly.
Kind of build up our presence.
A bowl of intellectual capital here in the U S.
We think it's a going to be a good time to extend that to the other side of the Atlantic.
But it can be a slow process Craig you should not expect any major shifts over over the next year or two or three but.
But we think we're incredibly well positioned.
To to.
To expand our.
On the recycling side in Europe , and it's all a matter of finding the right businesses to acquire the right management teams the right values.
The right environmental practices.
But we are optimistic that there'll be more tuck in slight crinoid.
As time unfolds.
Thank you.
Your next question comes from the lineup Scott stemmed from Roth M. K M. Your line is open.
Good morning, guys and thanks for taking my questions as well good morning, Scott.
Could you talk about state farm, what you're seeing early experiences how fast it it's ramping up and then also.
How are you hearing anything about state farm potential the expanding past the two or three skews that are currently using right now.
Yeah. So state power made their announcement just in December .
Like going over to the wall and plug it into sweats right you have.
A couple of decades of history of repair shops.
Been kind of driven in their head that state farm did not use aftermarket parts and so it's going to be a slow transition.
Our volumes of those three part types.
They'd farm.
Claims is moving up and so we think that it's on track for the hit the.
The overall opportunity for 2023.
I think we quantified that in our last call is being under $100 million.
We've had one month bright January under our belt.
If you kind of extrapolate that out we think that they're going to continue to push their new policy throughout the marketplace, but it's gonna take a little bit of time to get up to four kind of full speed.
Got it and then.
There is no indication at this point in time, but again, we're not but what about 45 days after the announcement that they're going to extend the program to new product types that certainly our hope we think that is the logical thing to do but we thought that was the logical thing to do for the last 20 years.
Got it well clear and a better spot than we were 10 years ago. So absolutely [laughter] and just if I could just slip one last question in Europe I don't know if you gave.
Granular detailed by market, but what are you seeing.
Countercyclical benefits of the <unk> or the mechanical parts aftermarket starting to kick in maybe just give us a little color yeah. So.
<unk> and I, both indicated organic growth in Europe in the fourth quarter was a little bit over 5% on a per day basis on a same day basis.
Which was terrific every single one of our markets was up nicely.
Either.
Around that.
The mid single digit range with the exception of one business.
Which as we call it components of business on a.
A year over year basis that would still negative because that's the business that used to sell into Russia, and if you recall, we shot every single element of that down the day that proved enrolled tanks over the border and so on a year over year basis that volume has just gone, but all the geographic.
<unk> showed really good organic growth in the in the fourth quarter.
Got it thanks guys.
Okay.
Your next question comes from the lineup, Brian Jordan from Jeffries. Your line is open.
Hi, good morning, as when I brought this morning, you called out strength and alternative parts and utilization in North America is that a tailwind from OA certification programs are what they are doing and collision on the <unk> side driving prices up to the point, where it forces more alternative parts of utilization or what do you see as the tailwind of that mix.
<unk>.
We believe that in the fourth quarter of the biggest part of that tailwind is that the aftermarket including ourselves is by far the largest player. We actually had an inventory of the salt as you recall, we had supply chain challenges coming out of 2021 into 2022, and our fulfillment rates because of that.
We're down I mean, historically, we've been in this.
Mid 90% range.
And as we indicated in prior orders were down into the low to mid eighties right. The fact that we actually have the inventory we need to be responsive to customer demand is the primary reason the whole aftermarket industry was able to grab over two percentage points of share back from the <unk>.
And we think.
And we're very proud of that obviously, we're the largest player in the aftermarket parts space, we're charging hard.
Take sure not just from the OAS, but are smaller competitors as well.
Okay, Great and then on the recycling of batteries in North America. The partnership you talked about that gives us a little more detail sort of is that something that used to hear this existing infrastructure.
Obviously, not a lot of batteries in the vehicle park, yet, but where do you see that being a contributor. Yeah. This is this is not a play for 2023 or even 2025 breath. This is a this is a 10 to 15 year play right and what all totally we believe is.
Pretty well documented that there's not enough lithium being mind to produce all these battery. So I can go on the E Bay is that folks are anticipating going to be on the road and so recycling.
Elements out of existing EV batteries can become critical.
We don't have the technology to do that.
We recycle parts, but we don't know how to reset cycle.
<unk> Ah chemical elements, right, but that's where Korea as incomes and I mean, they are truly a world class organization. When it comes to reclaiming and recycling all sorts of various nonferrous metals and we believe that combination.
Of their ability.
And process technology on the one hand, with our ability to source cords and batteries on the other hand.
As a it could be a great partnership now it's a memorandum of understanding right. It's not a joint venture yet the goal over the next couple of years to figure out.
And work together to develop a plan that could be profitable for both companies.
Hi, Greg, it's it's moving us into the into the next generation of mobility and we're very excited about it and we think.
<unk> will be terrific partner for us.
Great. Thank you.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad. Your next question comes from the lineup Brian Butler from Stifel. Your line is open.
Hi, Good morning, guys. Thank you very much for taking my questions. Good.
Good morning, Brian .
Just on the first one on the guidance when you think about the $975 million in cash, though I mean, it sounds like that's kind of the the minimum and if you've already tried that back up into an EBITDA number using the conversion of the 55 to 60.
Yeah that kind of puts you at 1.77 billion kind of just under 13 per cent margins is that kind of the right way to think about the low end of EBITDA.
Yeah. So.
The way we're looking at it. Thanks. Thanks for the question the way we're looking at it as.
55% is the minimum of where we're sort of guiding on the on the conversion piece of it so.
As we're as we're driving into this thing.
The mix between what happened year over year in the earnings with the interest payments the tax payments coming down and the capital expenditures I would I think we've got a gap you know call at 50, plus or minus you know, we kind of gear right in right in that range that that's where I would kind of look on the free cash.
<unk> and then backing into that we we've got it to 55 to 60 per cent and we think that's a pretty reasonable approach, where we hit the 60 in the prior year 2022, bringing that down a little bit with the Capex expenditures in 2023 is how we end up getting to that 975.
Okay, but do you think I mean again, just kind of backing it into trying to trying to guess I'd be EBITDA. I mean is that gets to the 60 per cent you would expect that EBITDA to also be higher as well is that a fair fair way to look at it.
That's a fair way Yep Yep.
And then on a follow up question when when you think about the capex. The additional spend that kind of moved from 2022 2023, I mean, if you're kind of even that out over the two years you kind of were out $1 billion based on your guidance.
About 1 billion guidance, so yeah exactly.
Okay, Great could you give a little color just kind of on what drove that and then maybe kind of what's the right way to think about capex on a on a longer term basis.
Yeah. So we we look at 2% of revenue two to 2.25 per cent of revenue is usually the kind of guide that we've given we hit 1.75 I think it was 1.77 something like that in 2022 as things pushed out primarily trucks equipment pushed out with the supply chain issues.
And then when you think year over year right in that 2% range.
That we've been kind of guy and two so they're maybe ebbs and flows back and forth between different years, but that two to two and a quarter is the right way to look at it.
Okay Perfect and then this last one is there any risk on the inventory build at specialty if if cars kind of that that market that demand remains soft is that is that something we should be watching.
No I don't think so so we we have a traditional build throughout the year and we ended up decreasing that a little bit and then driving that down to the end of the year to end up virtually flat year over year on overall inventories and it's something that we're watching very closely with the demand and so nothing to be concerned about in that in that area.
Okay, great. Thank you for taking my questions.
Your next question comes from the line Daniel umbrella from Stevens Your line is open.
Yeah. Good morning, everybody. Thanks for taking our questions morning Danielle.
I want to start on the European side I think at the end of your prepared remarks, you talked about Europe , having some specific projects. They're working on can you provide some more color just about what those are that just to grow within <unk> are there other courts project that for ruining the team are working on any kind of quantification as we think about potential margin impacts from those initiatives.
The the answer Daniel not be snide, what the answer is yes, we've got a number of different projects over in Europe , a wreck mentioned restructuring.
2022 restructuring plan that hits all of these segments, including the European segment.
<unk> folks should think about restructuring that I'll take you as part of our continuous improvement plan that every year, we're looking to find ways to optimize our business and to get access costs are better throughput and efficiency from each of our operations and so yes. There are some restructure.
Plans over in Europe , just like North America, and and specialty.
We're looking at programs to continue to drive organic revenue growth, particularly volume growth and <unk> and team are focused on some key programs there.
They they Holden had count a little bit, particularly at the kind of at the head office levels not just in zube, but across the operating platforms as well just to make sure that our admins.
Administrative costs are aligned with the the realities of 2023 and the.
The economic climate, so it's a number of different initiatives, Daniel none of which we were going to put a a pinpoint as to what it means from a euro or a dollar perspective, but it's all with the goal of continuing to drive organic revenue growth.
Better margins.
And as I think I've authenticated and is prepared comments, we're anticipating that the margins in Europe will <unk> will go up by 2030 basis points in 2023, and that's been included in the.
In the guidance that works it out.
Great and a couple of color and then I wanted to just circle back on the potential of battery Remanufacturing J V.
Take a step back and just think about how state farm handled the aftermarket after one accident 20 years ago. I mean, do you guys talk to the insurance companies do you think that they're actually gonna reinsure remanufactured EEV batteries or if there's one accident does that become a category that insurance companies just won't touch because of liability just trying to.
Think through what the actual <unk> could be there can answer as companies actually do that yeah. So Daniel you need to separate the collision business from the <unk> mechanical repair business and the E. B batteries, what we're doing right now with bumblebee and green beans. The two companies that we bought over the last year or so.
That we manufacture batteries that has nothing to do with the collision business that just has to do with the failure of the batteries and the life batteries to extend the life of the vehicle. Okay. The the memorandum of understanding on recycling with Korea zinc again.
Has nothing to do with we manufacturing that is truly a recycling to get to the core elements that are inside the E V.
And so you need to keep them, there's a big difference between re manufacturing and recycling recycling, there's not there's not a battery left to go back into her.
Another vehicle right, we manufacturing is where we we truly look at the battery we replace certain solves that is not an insurance driven product.
If you if you have a nine year old D B and your battery is failing.
You are not going to get reimbursed Nicole from your insurance company.
To to go Ah replace that battery, that's that's going to be an out of pocket expense.
Got it. So this is more on the it sounded mineral extraction or or kind of reclining side. The pedals yeah. Okay. That's helpful.
Yep.
And there are no further questions at this time Mister Nick Zarcone I turn the call back over you for some final closing remarks, well as always we <unk>.
Greatly appreciate everyone's time and attention on this call. We know it's a busy reporting period and we appreciate you spending the hour with al K Q again, I couldn't be more proud of our our team and the results that we posted up not only in the fourth quarter of 2022, but the full year as a whole.
<unk>.
We're looking forward to being back on the line with you in about 60 days or so in late April when we announced our first quarter results. So thank you for your time and we'll be talking to you soon.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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