Q3 2023 LKQ Corp Earnings Call

Yeah.

Okay.

Thank you for joining the El cute LKQ Corporation third quarter 'twenty tweet twenty-three earnings call. At this time all lines have been placed on mute to prevent any background noise.

Wed like to go ahead and introduce.

Our speakers today.

Joe.

Butros.

With al Q.

LKQ Corporation.

Please go ahead.

Thank you operator, good morning, everyone and welcome to Lkq's third quarter 2023 earnings.

Call with US today are nixdorf, Kony, Lkq's, President and Chief Executive Officer, and Rick Galloway, Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at LKQ Corp. Dotcom for earnings release issued this morning as well as the accompanying slide presentation for this call now let me quickly cover the safe Harbor some of the statements. We make today may be considered.

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.

Filled with the SEC. During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today and as normal we are planning to file our 10-Q in the coming days.

And with that I'm happy to turn the call over to our CEO Nick Zarcone.

Thank you Joe good morning to everybody on the call and thank you for joining US. This morning, I will provide some high level comments related to our performance in the quarter and then Rick will dive into the financial details and provide an overview of our updated guidance before I come back with a few closing remarks.

The third quarter of 2023 represented some mixed results, which collectively fell short of our expectations wholesale North America continued to outperform all while working on the integration of the units like the acquisition.

However, we experienced some unusual transitory events that in aggregate effect that the short term performance of our European operations. We also had continued pressure on commodities, which impacted self service along with less than expected demand for our specialty products.

Yeah. Okay youth culture is one that takes accountability for results and as humble enough to understand that this quarter's results fell short of both our expectations and the expectations of many of you on the call.

Make no mistake this shift to our operational excellence strategy implemented in 2019 has not changed structurally our business model and financial outlook are sound and we continue to be very optimistic about the future of LKQ1 quarter does not define the resiliency of our biz.

This model the uniqueness of our global enterprise or the long term opportunities that lie ahead for LKQ.

They are perpetual challenging macroeconomic conditions are not unique to LKQ and they will continue to persist, but the <unk> team will move forward on.

On the positive side, we continue to experience strong organic revenue growth in our North American and European businesses, achieving same day growth of 5.8% and six 2% respectively nor.

North America achieved excellent EBITDA margins, which were ahead of expectations and our free cash flow was excellent, particularly in North America and Europe.

On the downside during the quarter, we faced a few unusual and transitory headwinds.

In late September our Italian subsidiary, we are <unk>.

Completed a negotiation with the Italian tax authorities and the remediation of a value added tax violation that was committed by certain of our third party suppliers dating back to 2017.

These suppliers are no longer in business and thus we are agreed to remit the disputed amounts to the Italian revenue agency to remedy any damage caused by the VAT violations of the former suppliers.

Additionally, our German operation was hit with periodic strikes at our large distribution center, which reduced our ability to fully replenish the branch network with inventory on a daily basis.

Negotiations with the works council are ongoing but there have been additional strikes in October which will affect our Q4 results.

It's important to note that resolving the matter is not fully in our control is the labor contract involve multiple employers in southern Germany that must agree on terms through the Employers' Association.

These two items alone reduced our European organic growth by approximately 160 basis points and reduced segment EBITDA margins by 110 basis points. While we are disappointed with these two transitory items, our long term view of the growth and margin potential of our European business has.

Not changed.

Related to commodities pricing pressure continued in the third quarter with scrap and precious metal down sequentially, 14% and 23%, respectively, decreasing both margins and earnings per share.

For context in Q3 catalytic converter prices fell below $100 for the first time since early 2019 versus the third quarter of last year when they averaged $197. This difficult commodity environment again had a particularly negative impact on the profitability of our.

Self service segment.

Work will provide a deeper dive into the EPS and segment margin details in the quarter when he discusses our updated guidance.

The quarter included many other highlights worth noting.

The company generated robust free cash flow and we are on target to again reach $1 billion for 2023.

On August 1st we announced the completion of the units like the acquisition, a bespoke and a highly synergistic opportunity that will add positive long term shareholder value and further widen the competitive moat around our north American business.

Yesterday, we completed the sale of GE as Hap car parts to appear as a private equity firm based in the UK. The proceeds from the sale will be used for debt repayments.

And finally, our board has declared a 9% increase in our quarterly cash dividend from $27.05 to <unk> 30 per share of common stock.

This increase reflects the boards ongoing confidence in our ability to continue to generate solid free cash flow and drive long term value for our shareholders.

Now onto the third quarter 2023 results and year over year comparisons.

Revenue for the third quarter of 2023 was $3 $6 billion, an increase of 15%.

Parts and services organic revenue increased 3% on a reported basis and four 3% on a per day basis.

Diluted earnings per share was <unk> 77.

As compared to 95 for the same period last year, a decrease of 18, 9%.

While adjusted diluted earnings per share was <unk> 86 cents.

Compared to <unk> 97 for the same period of 2022, a decrease of 11, 3%.

Let's turn to some of the quarterly segment highlights.

As you will note from slide eight organic revenue for parts and services for North America increased four 1% on a reported basis and five 8% on a per day basis.

We continue to perform well in North America, especially when you consider that non comprehensive related auto claims were down four 3% year over year in the third quarter.

Similar to the first half of the year the growth in North America was a combination of price and volume improvements with the organic growth in our aftermarket collision products predominantly been volume related.

These nice volume increases were driven by our disciplined procurement efforts that allowed us to achieve the proper levels of inventory and the ability to stabilize and maintain our industry, leading pro forma rates of over 93%, which helped us grow the business.

The strong volume was also attributable to state farm expanding their usage of aftermarket headlights, taillights and bumpers beginning earlier this year.

Further on state farm during our last call I mentioned that stayed firm launched another pilot program in California, and Arizona for the use of a full range of aftermarket collision parts, including sheet metal products like fenders hoods and trunk leads and other items like side mirrors and grills.

I am pleased to share that on October 16th State farm announced that they are rolling out the use of these parts nationally to collision repair shops, which are part of their DRP program.

We expect the incremental lift from this expansion at a full run rate will reflect a $20 million to $30 million annual benefit in revenues once fully ramped up.

With respect to the UAW strikes, we believe that a continuation of the strikes will create incremental demand for our aftermarket and to a lesser extent our recycled collision parts.

Because the strike started in late September there was no impact on our third quarter results, but we are starting to see an incremental per day volume uptick across all product lines with some lines that have historically been sourced primarily from the OE is expanding at a faster rate.

Obviously, we don't know how long this demand benefit will last so we have not adjusted guidance for the UAW strike.

North America, EBITDA margins exceeded our expectations for the quarter and we are on track to achieve the greater than 19% full year target. We have previously discussed.

Excluding the anticipated dilution of units left.

Let's move to our European segment.

Europe's organic revenue for parts and services in the quarter increased five 1% on a reported basis and six 2% on a per day basis, while the market remains competitive the business is performing well by increasing the organic growth rate in the quarter, mostly driven by volume.

In the third quarter, we saw solid organic growth in all of our regions. Despite the impact of the strikes in Germany.

With regional same day organic growth ranging from approximately four 7% on the low end to 16, 3% on the high end and a total same day growth rate of six 2%, excluding the impact of the strike. The same day growth rate was just shy of 8% which is outstanding.

The diversity of our European platform is also highlighted by the dispersion in EBITDA margins with key lines of business and markets posting margins in the low teens, while certain smaller markets delivering mid single digit performance.

While the labor situation and will weigh on our margins in Q4, we remain confident in the long term margin potential of our European operations.

Now, let's move on to our specialty segment, which continues to face a soft demand environment.

During the third quarter, especially reported a decrease in organic revenue of six 1% on a reported basis and four 6% on a per day basis, which again was below our expectations.

As in the past there were major differences in the demand for various part types.

With the RV OEM warranty products and tracking off road products up, 3% and 2% respectively. During the quarter, while RV accessories and towing related products were off double digits on a year over year basis.

The RV portion of our specialty business was impacted by the wholesale shipments and retail unit sales of Rvs, which were down 45% and 17% year to date through August respectively.

Though still down the specialty revenue decline in the third quarter was less significant than in the first half of the year.

Still we don't see a natural near term catalyst for demand to bounce back and we anticipate tough comparisons into the start of 2024.

Now onto the self service segment organic revenue for parts and services for our self service segment increased five 1% in the third quarter self service was again confronted by the decreasing metals pricing I mentioned earlier, particularly with respect catalytic converters, which are linked to <unk>.

Precious metal prices.

Operationally the self service team also had challenges with their ability to source vehicles at the appropriate cost simply put car costs have not declined in lockstep with commodity prices, creating significant margin pressures and pushing self service into a loss position for the third quarter.

We have already taken action with our buying practices and have installed and operational leader to drive standardization and process improvements across our self service buying group. The leadership team has also taken actions to reduce overhead costs and the early returns have been positive we expect this business to be.

Marginally profitable in Q4.

As reported we closed on the units collect acquisition on August one.

The integration activities and synergies are on target and in some cases ahead of schedule. This past week. We completed the first wave of finished master facility optimizations with 10 locations being folded in to an existing LKQ aftermarket warehouse location and two other finished master locations being.

Merged.

From here, we will begin to see an acceleration of our footprint optimization.

Our sales force and operations teams dedicated to the paint and related products market have been fully aligned and we've built out a synergy tracking team with various tools and metrics to assure we hit the targets. We established when we announced the transaction back in February.

Now that we've owned the business for a few months, we see a slight shift in the finish master business with Msos, representing a slightly larger share of activity. As you know the msos are some of our largest customers on the parts side of the business.

The bumper to bumper business in Canada is actively working with our European team to SaaS and take advantage of the procurement leverage that exists between their respective businesses. We have completed two tuck in acquisitions in Canada that unit select had in the Hopper and we have another small transaction.

That will close shortly.

Thank you for joining the LQ, LKQ Corporation, third quarter, 23 earnings call. At this time, all minds have been placed on mute to prevent any background noise.

We're excited about the growth opportunities in Canada, and believe we have a great team to execute the plan overall I am confident in our North America team managing the units like the integration and that they will deliver the same strong results as they've had with their operational excellence efforts over the last three years.

Joseph Boutross: I would like to go ahead and introduce our speaker of today. Joe Boutross with LQ, LKQ Corporation. Please go ahead. Thank you, operator. Good morning, everyone, and welcome to LKQ's third quarter, 2023 earnings conference call.

Let me now turn the discussion over to Rick who will run you through the details of the segment results and discuss our updated outlook for 2023.

Yeah.

Yeah.

Thank you Nick and welcome to everyone joining us today as Nick mentioned, our third quarter results reflected a mix of positives and negatives, but on balance was below our expectations, our cash flow generation and our North America segment margins continued to be bright spots for us and we will continue to build on these strengths.

The earnings pressure was attributable to a combination of unusual items softness in precious metal prices and difficult market conditions impacting our specialty and self service segments.

Joseph Boutross: With us today, our Nick Zarcone, LKQ's President and Chief Executive Officer and Rick Galloway Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at LKQCorp.com for earnings release issued this morning, as well as the accompanying slide presentation for this call.

While we expect challenges around economic conditions commodity prices and exchange rates to impact the fourth quarter, we remain highly confident in the prospects of the overall business as the fundamental strengths that have driven strong results since he implemented since we implemented our operational excellence strategy in 2019 remain intact.

Joseph Boutross: 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.

I will now provide further details on the financials, starting with cash flows and the balance sheet.

As of June 30, we had total debt of $4 zero billion ish.

Including the $1 4 billion bond bond offering for May with a total leverage ratio of two three times EBITDA.

Joseph Boutross: For more information, please refer to the risk factors discussed in our form 10k and subsequent reports filed with the SEC.

With the August 1st acquisition of Uni select we drew down a $700 million Canadian dollar term loan and approximately $150 million on our revolving credit facility to complete the funding.

Joseph Boutross: During this call, we will present both gap and non-gap financial measures. A reconciliation of gap to non-gap measures is included in today's earnings press release and slide presentation. Hopefully, everyone has had a chance to look at our AK, which we filed with the SEC earlier today. And as normal, we are planning to file our 10Q in the coming days.

By hedging the Canadian dollar exchange rate after announcing the transaction, we were able to save almost $50 million on the U S. Dollar equivalent of the purchase price, which is a terrific outcome.

Dominick Zarcone: And with that, I'm happy to turn the call over to our CEO, Nick Zarcone. Thank you, Joe. Good morning to everybody on the call and thank you for joining us. This morning, I will provide some high-level comments related to our performance in the quarter. And then recall dive into the financial details and provide an overview of our updated guidance before I come back with a few closing remarks.

Factoring in the proceeds from the hedge settlement and the cash acquired our net cash out for the unit select acquisition drops down from $2 1 billion to 2.0 billion.

We committed to paying down debt post acquisition to bring our total leverage ratio below 2.0 times again within 18 months.

Dominick Zarcone: The third quarter of 2023 represented some extra results, which collectively fell short of our expectations, wholesale North America continued to outperform all while working on the integration of the units like acquisition. However, we experienced some unusual transitory events that in aggregate affected the short-term performance of our European operations. We also had continued pressure on commodities, which impacted self-service, along with less than expected demand for our specialty products. The okay to culture is one that takes accountability for results and is humble enough to understand that this quarter's results fell short of both our expectations and the expectations of many of you on the call. Make no mistake. This shift to our operational excellence strategy implemented in 2019 has not changed. Structurally, our business model and financial outlook are sound, and we continue to be very optimistic about the future of LKQ.

And we got to work on this pledge in August and September during which we paid down over $200 million.

Of revolver debt with our free cash flow as.

As of September 30, our total leverage ratio was two three times, so consistent with the June level, and we expect a reduction in the leverage ratio as of year end the <unk>.

Proceeds from the sale of <unk> will be utilized to reduce our total debt putting us in a better position to begin implementing a more balanced capital allocation strategy, which includes share repurchases.

Q3 debt repayments were possible because of our solid balance sheet and the generation of $344 million.

And free cash flow during the quarter through September free cash flow is $911 million and we are raising our full year guidance to approximately 1.0 billion in recognition of the strong performance year to date.

I'm pleased with our ability to meet the free cash flow expectations. Despite the headwind from acquisition related transaction restructuring and financing costs of almost $50 million.

Dominick Zarcone: One quarter does not define the resiliency of our business model, the uniqueness of our global enterprise or the long term opportunities that lie ahead for LKQ. The perpetual challenging macroeconomic conditions are not unique to LKQ and they will continue to persist, but the LKQ team will move forward. On the positive side, we continue to experience strong organic revenue growth in our North American and European businesses, achieving same-day growth of 5.8% and 6.2% respectively. North America achieved excellent EBITDA margins which were ahead of expectations in our free cash flow was excellent, particularly in North America and Europe.

Also during the quarter, we invested $65 million on tuck in acquisitions, and we paid a dividend of $74 million in September.

As Nick mentioned, we raised our quarterly dividend to <unk> 30 per share, which speaks to our confidence in being able to generate robust free cash flows through economic cycles.

Our effective borrowing rate rose to five 5% for the quarter due to global market rate increases.

We have $2 $1 billion in variable rate debt of which $700 million has been fixed with interest rate swaps at four 6% and four 2% over the next two to three years respectively.

Moving to segment performance.

Starting on Slide 10, North America reported a segment EBITDA margin of 17.0%, which includes the results of Uni select effective August 1st.

Dominick Zarcone: On the downside, during the quarter, we faced a few unusual and transitory headwinds. In late September, our Italian subsidiary Ryag completed a negotiation with the Italian tax authorities on the remediation of a value added tax violation that was committed by certain of our third-party suppliers dating back to 2017. These suppliers are no longer in business and thus Ryag agreed to remit the disputed amounts to the Italian revenue agency to remedy any damage caused by the bad violations of the former suppliers.

As we've previously disclosed unit select operates at a lower margin than our legacy North America business because of the mix of product itself.

Adding units select diluted the North American margins by 180 basis points without Uni Select North America continued its strong performance with a Q3 margin of 18, 8% and stayed on track to finish the year with a segment EBITDA margin in the low 19% range consistent with what we disclosed last quarter.

North America gross margin decreased 60 basis points in line with expectations with a decrease in salvage margins tied to car costs overhead expenses were roughly flat year over year.

Dominick Zarcone: Additionally, our German operation was hit with periodic strikes at our large distribution center which reduced our ability to fully replenish the branch network with inventory on a daily basis. Negotiations with the Work Council are ongoing but there have been additional strikes in October which will affect our Q4 results. It's important to note that resolving the matter is not fully in our control as the labor contract involves multiple employers in Southern Germany that must agree on terms through the employer's association. These two items alone reduced our European organic growth by approximately 160 basis points and reduced segmented but not margins by 110 basis points.

After the acquisition of Uni select the North America team was able to work on integration and achieve a better understanding of the timing of our original assumptions.

With increased access to personnel and visibility of financial and operational data. We are updating our projections for 2023 for unit select to be dilutive in the range of <unk> to <unk>.

As Nick mentioned, we are focused on integration and are accelerating synergies related to finish master branches to drive improvement relative to the estimated range and maximize the 2024 benefits. We remain confident in our investment thesis of Uni select and we believe the transaction will be accretive in 2024.

Europe delivered segment EBITDA margin of nine 3% down 200 basis points from the prior year period.

Dominick Zarcone: While we are disappointed with these two transitory items, our long-term view of the growth and margin potential of our European business has not changed. Related to commodities, pricing pressure continued in the third quarter with scrap and precious metal down sequentially 14% and 23% respectively decreasing both margins and earnings per share. For context, in Q3, catalytic converter prices fell below $100 for the first time since early 2019 versus the third quarter of last year when they averaged $197.

There were a couple of unusual items that had a negative effect of 110 basis points on the results. Nick mentioned first we booked a charge for value added tax audit matter in Italy related to prior years for $11 million, which impacted the margin by 70 basis points.

We are comfortable that this issue has been addressed and won't have a recurring effect.

Second the strikes that our primary distribution center in Germany had an estimated negative effect.

Segment EBITDA of 40 basis points.

The remaining margin variance is attributable to gross margin compression, primarily in our central and eastern European regions related to customer price sensitivity with difficult macroeconomic conditions. We are addressing this matter with specific category management actions to meet price point expectations in the region, while helping to improve margins.

Dominick Zarcone: This difficult commodity environment again has a particularly negative impact on the profitability of our self-service segment. Work will provide a deeper dive into the EPS and segment margin details in the quarter when he discusses our updated guidance. Jones.

Moving to slide 12 specialties EBITDA margin of eight 6% declined 220 basis points compared to the prior year gross margin, which was down 300 basis points year over year is under pressure from increased price competition as inventory availability continues to improve for our competitors. In addition to unfavorable product mix.

Dominick Zarcone: The quarter included many other highlights worth noting. The company generated robust free cash flow, and we are on target to again reach $1 billion for 2023. On August 1st, we announced the completion of the UNICE-elect acquisition, a bespoke and highly synergistic opportunity that will add positive long-term, sureholder value and further widen the competitive mode around our North American business. Yesterday, we completed the sale of GSF car parts to appear as a private equity firm based in the UK that proceeds from the sale will be used for debt repayments.

As lower margin lines, such as auto and marine have been less affected by revenue reductions.

SG&A expenses were favorable by 80 basis points, mostly related to personnel and primarily coming from restructuring efforts in the last 12 months to align the cost structure with revenue trends.

As the year over year organic revenue decrease has narrowed each quarter in 2023 versus the prior year. The same as occurring with segment EBITDA margin and we expect the trend to continue in Q4 with the margin near last year's figure.

Dominick Zarcone: And finally, our board has declared a 9% increase in our quarterly cash dividend from 27.5 to 30 cents per share of common stock. This increase reflects the board's ongoing confidence in our ability to continue to generate solid free cash flow and drive long-term value for our shareholders.

As you can see on slide 13, self service profitability declined sequentially to a loss of <unk>, 6%. This quarter from four 1% in the second quarter and decreased relative to the two 6% reported in Q3 2022.

Dominick Zarcone: Now on to the third quarter, 2023 results in your over-year comparisons. Revenue for the third quarter of 2023 was $3.6 billion in increase of 15%. Parts and services organic revenue increased 3% on a reported basis and 4.3% on a per-day basis. Deluted earnings per share was $0.77 as compared to $0.95 for the same period last year, a decrease of 18.9%. While adjusted deluded earnings per share was $0.86 compared to 97 cents for the same period of 2022, a decrease of 11.3%.

Metal prices had a net negative effect on results of $7 million with lower precious metal prices, representing a $17 million reduction in EBITDA and lag effects from sequential scrap steel price changes driving a $10 million improvement.

Other revenue decreased by 24, 4% in total contributing to a reduction in operational leverage of 590 basis points.

While car cost typically move in tandem with changes in commodity prices, we continue to experience a stickiness in car cost, which is contributing to margin compression.

Now for further details on the consolidated results as mentioned adjusted diluted earnings per share of <unk> 86 was down 11 relative to Q3 last year the.

Dominick Zarcone: Let's turn to some of the quarterly segment highlights. As you will note from slide 8, organic revenue for parts and services for North America increased 4.1% on a reported basis and 5.8% on a per-day basis. We continue to perform well in North America, especially when you consider that non-comprehensive related auto claims were down 4.3% year over year in the third quarter. Similar to the first half of the year, the growth in North America was a combination of price and volume improvements with the organic growth in our aftermarket collusion products predominantly being volume related.

The primary negative factors were <unk> from the impacts of metals prices as shown on slide 27, <unk> from the VA charge in Italy, <unk> and higher interest expense, resulting from rate increases, excluding <unk> cost and <unk> attributed to the effects of strikes in Germany.

Our operational performance was a slight negative after excluding the items noted previously as solid gains in North America of two <unk> were offset by the decline in specialty business of <unk>.

We benefited by <unk> <unk> due to the lower share count, resulting from our share repurchase in 2022 and foreign exchange translation contributed to <unk> <unk> of higher earnings with a stronger euro and pound Sterling on.

Dominick Zarcone: These nice volume increases were driven by our discipline procurement efforts that allowed us to achieve the proper levels of inventory and the ability to stabilize and maintain our industry leading fulfillment rates of over 93% which helped us grow the business. The strong volume was also attributable to state farm expanding their usage of aftermarket headlights, tell lights and bumpers beginning earlier this year. Further on state farm, during our last call I mentioned that state farm launched another pilot program in California and Arizona for the use of a full range of aftermarket collusion parts including sheet metal products like fenders, hoods, and trunk lids and other items like side mirrors and grills.

On the tax rate, we applied an annual effective rate estimate of 27.0%, which is consistent with the rate in our prior guidance.

I'll conclude with our current thoughts on projected 2023 results. Our guidance is based on current market conditions, and recent trends and assumes scrap and precious metal prices hold near September levels.

On foreign exchange our guidance includes balance of the year rates for the euro of $1 <unk> and the pound Sterling at $1 23 in line with current rates.

We expect reported organic parts and service revenue in the range of $4, 75% to 575% organic growth was five 3% through September we decreased the range in recognition of the estimated revenue loss associated with the German strike activity difficult macroeconomic conditions in parts of Europe and the ongoing.

Dominick Zarcone: Today, I am pleased to share that on October 16th, state farm announced that they were rolling out the use of these parts nationally to collusion workshops which are part of their DRP program.

Dominick Zarcone: Graham. We expect the incremental lift from this expansion at a full run rate, will reflect a $20 to $30 million annual benefit in revenues once fully ramped up. With respect to the UAW strikes, we believe that a continuation of the strikes will create incremental demand for our aftermarket, and to a lesser extent are recycled collision parts.

The challenges at specialty.

North America has potential upside in Q4 related to the state farm rollout and the UAW strike, which could push the full year result above the midpoint of the range.

We expect adjusted diluted EPS in the range of $3 68.

The $3 82, which brings in both the high and low ends of the range from our previous estimate the.

Dominick Zarcone: Because the third quarter results. But we are starting to see an incremental per day volume uptick across all product lines, with some lines that have historically been sourced primarily from the UAE's expanding at a faster rate. Obviously, we don't know how long this demand benefit will last, so we have not adjusted guidance for the UAW strike. North America, EBITDA, our emergency exceeded our expectations for the quarter, and we are on track to achieve the greater than 19 percent full-year target we have previously discussed, excluding the anticipated delusion of UNICEF.

The midpoint is now $3 75 per share down from the prior figure of $4 provided last call.

Primary drivers of the decrease in the midpoint are as follows <unk> <unk> from last earnings related to the German strike activity <unk> <unk> of dilution from the unit select acquisition that was not included in the prior guidance as we had not yet closed the transaction.

<unk> from the VA charge in Italy, <unk> for metal prices <unk> from operations, primarily related to self service and specialty and <unk> from foreign exchange rates.

Slide five shows the full bridge of the EPS guidance change we.

We increased our free cash flow guidance to approximately 1.0 billion.

Dominick Zarcone: Let's move to our European segment. Europe's organic revenue for parts and services in the quarter increased 5.1 percent on a reported basis, and 6.2 percent on a per day basis. While the market remains competitive, the business is performing well by increasing the organic growth rate in the quarter, mostly driven by volume. During the third quarter, we saw solid organic growth in all of our regions, despite the impact of the strikes in Germany.

From $975 million with a 55% to 60% annual EBITDA conversion.

With our year to date free cash flow of $911 million, we're anticipating roughly $90 million in Q4, which would be our lowest quarter Lee amount. This year part of the sequential decrease is seasonal as we build inventory ahead of the winter busy winter season, and we also have higher interest payments scheduled for Q4.

Dominick Zarcone: With regional same-day organic growth ranging from approximately 4.7 percent on the low end to 16.3 percent on the high end and a total same-day growth rate of 6.2 percent. Excluding the impacts of the strike, the same-day growth rate was just shy of 8 percent, which is outstanding. The diversity of our European platform is also highlighted by the dispersion in EBITDA margins with key lines of business and markets posting margins in the low teens, while certain smaller markets delivering mid-single digit performance.

This year as the semiannual interest payment of the $1 4 billion units like bonds is due in December thank.

Thank you for your time today with that I'll turn the call back to Nick for his closing comments.

Thank you Rick for that financial overview.

Before we open the call for questions I want to reiterate what our global team has accomplished since starting the operational excellence journey back in 2019.

In 2022, North America, adjusted EBITA margins reached our highest full year level in the company's history at 18, 7% excluding the impact of units that we are on track to beat that record again. This year as a reminder, North America ended 2018 with SEC.

Dominick Zarcone: While the labor situation will weigh on our margins in Q4, we remain confident in the long-term margin potential of our European operations.

Dominick Zarcone: Now, let's move on to our specialty segment, which continues to face a soft demand environment. During third quarter, especially reported a decrease in organic revenue of 6.1 percent on a reported basis and 4.6 percent on a per-day basis, which again was below our expectations. As in the past, there were major differences in the demand for various part types. With the RV OEM warranty products and track them off road products, up 3 percent and 2 percent respectively during the quarter, while RV accessories and towing related products were off double digits on a year-over-year basis.

EBITDA margins at 12, 6%.

The one LKQ Europe program has generated tremendous results since introducing the plan in September 2019, and this segment is on track to consistently drive full year double digit EBITDA margins importantly.

Importantly, there is further runway for leveraging our scale and unparalleled distribution network. This is demonstrated by the strong organic revenue growth in the quarter and the first nine months of the current fiscal year and a significant year on year increase in segment EBITDA of $40 million.

After taking into account the two unusual items that cost a segment $19 million in aggregate.

Dominick Zarcone: The RV portion of our specialty business was impacted by the host sales shipment and retail unit sales of RVs, which were down 45 percent and 17 percent year-to-date through August, respectively. Though still down, the specially revenue decline in the third order was less significant than in the first half of the year.

We've generated free cash flow at or above $1 billion for three years in a row and we are on target to make 2023 the fourth.

We've divested <unk> businesses, representing over $625 million of revenue that did not fit our strategic objectives. We've.

Dominick Zarcone: Still, we don't see a natural near-term catalyst for demand to bounce back and we anticipate tough comparisons into the start of 2024.

We've achieved investment grade ratings from each of standard and Poor's Moody's and Fitch.

We have repurchased $2 $4 billion of stock since initiating our first repurchase plan in October of 2018, we've distributed $578 million in quarterly dividends to our shareholders.

Dominick Zarcone: Now onto the self-service segment. Organic revenue for parts and services for our self-service segment increased 5.1% in the third order. Self-service was again confronted by the decreasing metals price and I mentioned earlier, particularly with respect to catalytic converters which are linked to precious metal prices.

And we've achieved a AAA ESG rating from MSCI and built out a team to drive our global sustainability efforts forward with targeted objectives. So yes, we are very LKQ proud.

Dominick Zarcone: Operationally, the self-service team also had challenges with their ability to source vehicles at the appropriate cost. Simply put, car costs have not declined in lockstep with commodity prices, creating significant margin pressures and pushing self-service into a loss position for the third quarter. We have already taken action with our buying practices and have installed an operational leader to drive standardization and process improvements across our self-service buying group. The leadership team has also taken actions to reduce overhead costs and the early returns have been positive. We expect this business to be marginally profitable in Q4.

As we move forward towards the end of 2023, let me restate the key strategic pillars, which remain central to our culture and objectives.

First we will continue to integrate our businesses and simplify our operating model.

Second we will continue to focus on profitable revenue growth and sustainable margin expansion.

Third we will continue to drive high levels of cash flow, which in turn give us the flexibility to maintain a balanced capital allocation strategy and lastly, we will continue to invest in our future.

As always I want to thank the over 49000 people who work for <unk> for all they do to advance our business each day and for driving our mission and our al <unk> delivers values forward regardless of the challenges.

Dominick Zarcone: As reported, we closed on the UNICE select acquisition on August 1st. The integration activities and synergies are on target and in some cases are ahead of schedule. This past week, we completed the first wave of Finnish Master of Facility optimizations with 10 locations being folded in to an existing LKQ after-market warehouse location and two other Finnish Master locations being merged. From here, we will begin to see an acceleration of our footprint optimizations.

Without a doubt our people are <unk> biggest asset.

And with that operator, we are now ready to open the call to questions.

Before we open the line for Q&A. Please note that analysts are permitted to ask one question and one follow up before re queuing, having said that we are now opening the question and answer session, if you'd like to ask a question.

Dominick Zarcone: Our sales force and operations teams dedicated to the pain and related products market have been fully aligned and we have built out a synergy tracking team with various tools and metrics to assure we hit the targets we established when we announced the transaction back in February. Now that we've owned the business for a few months, we see a slight shift in the Finnish Master business with MSOs representing a slightly larger share of activity.

And number one on your telephone keypad, we have our first question from Bret Jordan of Jefferies. Your line is now open.

Hey, good morning, guys good morning, Brad.

Could you give us a little more color I guess on the UK asset sale, maybe subtle either quantified or maybe EBITDA multiple you got for that sale.

Dominick Zarcone: As you know, the MSOs are some of our largest customers on the part side of the business. The bumper to bumper business in Canada is actively working with our European team to assess and take advantage of the procurement leverage that exists between their respective businesses. We have completed two Kuckin Acquisitions in Canada that UNISLECT had in the hopper and we have another small transaction that will close shortly. We are excited about the growth opportunities in Canada and believe we have a great team to execute the plan. Overall, I am confident in our North America team managing the UNISLECT integration and that they will deliver the same strong results as they have had with their operational excellence efforts over the last three years.

Sure Brad Great question anticipated the definitive sale agreement includes a provision where and we are not allowed to disclose any of the terms of the transaction, but I will tell you is that we ran a full and complete auction process that started out with dozens and dozens of potential buyers with <unk>.

Closed the transaction at the highest value that was.

That was came out of the option process.

We had fully anticipated that the multiple that we would receive for <unk> would be materially less than the multiple that we paid for the other businesses and we built that into all of the original analysis and that exactly proved to be the case.

All things considered we're happy to get the transaction behind us.

Rick Galloway: Let me now turn the discussion over to Rick who will run you through the details of the segment results and discuss our updated outlook for 2023. Thank you, Nick, and welcome to everyone joining us today. As Nick mentioned, our third quarter results reflected a mix of positives and negatives, but on balance was below our expectations. Our cashflow generation and our North America's segment margins continued to be bright spots for us, and we will continue to build on these strengths.

As Rick indicated we're going to use the proceeds to repay debt.

And the other thing I would say as you know.

The multiple we flex the current M&A environment and the impact of higher interest rates, particularly for leveraged transactions we sold this.

Two.

Our p/e shop over in the UK.

But again it.

It was generally in line with what our going in expectations were maybe a little bit on the.

Rick Galloway: The earnings pressure was attributable to a combination of unusual items, softness and precious metal prices, and difficult market conditions impacting our specialty and self-service segments. While we expect challenges around economic conditions, commodity prices and exchange rates to impact the fourth quarter, we remain highly confident in the prospects of the overall business as the fundamental strengths that have driven strong results since we implemented our operational excellence strategy in 2019 remain intact.

On the skinny side, but not materially different.

Okay, and then a follow up I guess, the Canadian business could you maybe talk about where you see working capital trending there I mean, obviously it should be a source of cash.

Maybe what their working capital investment is and how you might lever that.

Yeah. Thanks, Brad for the question I'll take that one.

So one of the things that we're pretty excited about is the ability that the CG group a bumper to bumper group has with the vendor financing program, we got about $65 million and the vendor financing program is one of the components.

Rick Galloway: I will now provide further details on the financials starting with cash flows and the balance sheet. As of June 30, we had total debt of $4.0 billion, including the $1.4 billion bond offering from May, with a total leverage ratio of 2.3 times EBITDA. With the August 1st acquisition of UNICELECT, we drew down a $700 million Canadian dollar term loan and approximately $150 million on our revolving credit facility to complete the funding.

To drive performance it was underutilized and something that we think we can grow fairly significantly.

The overall trade working capital that we inherited from the.

Transaction roughly call it $200 million.

That we think we can continue to.

Enhanced and benefit within the payables are similar to what we're doing over in Europe.

Rick Galloway: By hedging the Canadian dollar exchange rate after announcing the transaction, we were able to save almost $50 million on the US dollar equivalent of the purchase price, which is a terrific outcome. Factoring in the proceeds from the hedge settlement and the cash acquired, our net cash out for the UNICELECT acquisition dropped down from $2.1 billion to $2.0 billion. We committed to paying down debt post acquisition to bring our total leverage ratio below 2.0 times again with an 18 months and we got to work on this pledge in August and September, during which we paid down over $200 million of revolver debt with our free cash flow. As of September 30, our total leverage ratio was 2.3 times, so consistent with the June level and we expect a reduction in the leverage ratio as of your end.

Okay, great. Thank you.

Yeah.

Ken comes from Craig Kennison.

Ken.

Baird. Your line is now open.

Hey, good morning, Thanks for taking my question good morning.

Correct.

Hey, Nick Good morning, so in the guidance walk you pegged a unit select impact at a <unk> <unk> headwind I think Rick you said, 4% to six.

I believe that last quarter that was a <unk> <unk> headwind projection I know thats, a small move but it's in the wrong direction I'm. Just wondering if you uncovered something that wasn't as good as you hoped or is that just a function of rounding.

Okay, Craig I'll take that one.

We're analyzing the negotiation negotiating the transaction some nine to 10 months ago.

We were working off of the units like annual budget for 2023.

Rick Galloway: The proceeds from the sale of GSF will be utilized to reduce our total debt, putting us in a better position to begin implementing a more balanced capital allocation strategy which includes share repurchases. The Q3 debt repayments were possible because of our solid balance sheet and the generation of $344 million in free cash flow during the quarter. Through September, free cash flow is $911 million and we are raising our full-year guidance to approximately $1.0 billion in recognition of the strong performance year-to-date.

To make some estimates on our side as it relates to the quarterly phasing of how their business was going to unfold. We're now sitting here in October and we recognize that our estimates as it relates to the seasonality and the phasing of their business, where we're off a bit.

With.

Kind of a more of their activity hitting earlier in the year than we anticipated and a little bit less late in the year.

In response, we're working hard to realize the synergies sooner.

Rick Galloway: I am pleased with our ability to meet the free cash flow expectations despite the headwind from acquisition-related transaction, restructuring, and financing costs of almost $50 million. Also, during the quarter, we invested $65 million on tuck-in acquisitions and we paid a dividend of $74 million in September. As Nick mentioned, we raised our quarterly dividend to $0.30 per share which speaks to our confidence in being able to generate robust free cash flows through economic Rebels.

Rather than later as Rick indicated.

From our perspective, nothing really changes in a material manner related to the long term economics of the transaction.

And what I'd also highlight for you as Rick mentioned is between the benefits of the FX hedge on the original purchase.

Some of the higher than expected cash on the balance sheet at closing that transaction value actually declined by about $100 million.

Rick Galloway: Our effective borrowing rate rose to 5.5 percent for the quarter due to global market rate increases. We have $2.1 billion in variable rate debt of which $700 million has been fixed with interest rate swaps at 4.6 percent and 4.2 percent over the next two to three years respectively.

Which helps offset some of that earnings difference.

From a return perspective not necessarily from a.

From an EPS perspective.

Maybe I'll just add just a little bit more to that.

You talked about the synergy piece, Craig it's important to understand on the synergy piece.

Accelerating some stuff we've talked about how we closed 10 facilities within the finish master business as far as the overall synergies, we're roughly 20% of our synergies have already been achieved on a run rate basis.

Rick Galloway: Moving to segment performance.

Rick Galloway: Starting on slide 10, North America reported the segment even a margin of 17.0 percent which includes the results of unicelect effective August 1st. As we previously disclosed, unicelect operates at a lower margin than our legacy North America business because of the mix of product itself. Adding unicelect diluted the North America margins by 180 basis points. Without unicelect, North America continued its strong performance with a Q3 margin of 18.8 percent and stayed on track to finish the year with a segment even a margin in a low 19 percent range.

As of.

Today.

And as a follow up to that Rick I saw a lot of those synergies were tied to leases which may.

It may be three years before their exploration. So how are you able to accelerate what are essentially contractual agreements yes.

They werent all tied to that there is a fair amount on the finish master side that go throughout the period. So if theres something that is a little bit tighter a little bit closer to thats. The area that we were able to identify in say a pull in that opportunity and closing facilities at an earlier time.

Rick Galloway: Consistent with what we disclosed last quarter. North America gross margin decreased 60 basis points in line with expectations with a decrease in salvage margins tied to car costs. Overhead expenses were roughly flat year over year. After the acquisition of unicelect, the North America team was able to work on integration and achieve a better understanding of the timing of our original assumptions. With increased access to personnel and visibility of financial and operational data, we are updating our projections for 2023 for unicelect to be dilutive in the range of four cents to six cents.

Thank you.

Yes.

Our next question comes from Scott Steinberg from Aitken and.

Hey, Adam.

Partners. Your line is now open.

Rick Galloway: As Nick mentioned, we are focused on integration and our accelerating synergies related to finish master branches to drive improvement relative to the estimated range and maximize the 2024 benefits. We remain confident in our investment thesis of unicelect and we believe the transaction will be accretive in 2024.

Good morning, guys and thanks for taking my questions as well good morning, Scott.

Can you talk about in Europe, and Germany, you mentioned that it sounded like there was some progress in negotiations I guess later in the quarter.

Are we trending in the right direction I'm, just trying to get a sense of.

How long this could potentially last and how far into 2024.

Are you talking about the the strikes in Germany, Yes, yes, sorry about that yes, the strike in Germany.

Yes so.

Look.

Employees are certain employees at our big distribution center in Salt Spark Rosenberg, which fulfills all of our branches in Germany.

Rick Galloway: Europe delivered segment even a margin of 9.3 percent, down 200 basis points from the prior period. There were a couple unusual items that had a negative effect of 110 basis points on the results Nick mentioned. First, we booked a charge for value-added tax audit matter in Italy related to prior years for $11 million, which impacted the margin by 70 basis points. We are comfortable that this VAT issue has been addressed and won't have a recurring effect.

A number of those folks belong to.

Our Union our works Council is are called <unk>.

Over on the other side of the pond.

We don't have advanced warning as to when they decided to call a strike it's very episodic.

The issue is we're down head count not all the members go on strike, but probably we lose about 40% of our workforce. When they are out on strike and that creates significant issues and trying to move product into and out of.

Rick Galloway: Second, the strikes that our primary distribution center in Germany had an estimated negative effect on segment EBITDA of 40 basis points. The remaining margin variance is attributable to gross margin compression primarily in our central and eastern European regions related to customer price sensitivity with difficult macroeconomic conditions. We are addressing this matter with specific category management actions to meet price point expectations in the region while helping to improve margins.

The distribution center.

But we need to replenish our branches on a daily basis because of the product is not out in the branch and the next morning.

Rick Galloway: Moving to slide 12, specialties EBITDA margin of 8.6 percent declined 220 basis points compared to the prior year. Gross margin which was down 300 basis points year over year is under pressure from increased price competition as inventory availability continues to improve for our competitors in addition to unfavorable product mix as lower margin lines such as auto and marine have been less affected by revenue reduction, as GNA expenses were favorable by 80 basis points mostly related to personnel and primarily coming from restructuring efforts in the last 12 months to align the cost structure with revenue trends.

It can't be sold.

And some of the key bottlenecks are actually on the inbound movement of goods as you can imagine with less people to bring all of that product and the vendor delivery trucks get stacked up out in the drive et cetera et cetera right.

We have a phenomenal team at stall goober, that's doing everything possible to mitigate the issues.

We are in flight in bringing in a second DC online up in <unk> field, which is in the northern part of Germany, but thats not going to come online in time to help with this strikes.

The branch and corporate personnel in Bavaria, we pull some of those folks into the distribution center to help with staffing.

Rick Galloway: As the year-over-year organic revenue decrease has narrowed each quarter in 2023 versus the prior year, the same is occurring with segment EBITDA margin, and we expect the trend to continue in Q4 with the margin near last year's figure.

We're still down even after that from a overall head count perspective, and obviously those employees are not as productive because youre doing new things, we're trying to push more inventory out into the branches and non strike days, but there are limits as to how much the branches can hold from a practical perspective, and we have to make educated guesses as to what prop.

Rick Galloway: As you can see on slide 13, self-service profitability declined sequentially to a loss of 0.6% this quarter from 4.1% in the second quarter and decreased relative to the 2.6% reported in Q3 2022. Metals prices had a net negative effect on results of $7 million with lower precious metal prices representing a $17 million reduction in EBITDA and lag effects from sequential scrap steel price changes driving a $10 million improvement. Other revenue decreased by 24.4% in total, contributing to a reduction in operational leverage of 590 basis points. While car costs typically move in tandem with changes in commodity prices, we continue to experience a stickiness in car costs which is contributing to margin compression.

Each particular branch may need in the future, which is not the same as fulfilling orders based on actual sales to prior night.

As I indicated.

<unk>.

Yes.

<unk>.

The employees have been on strike for several days here in October.

And we anticipate that's going to continue.

The biggest part of it is it's not like in the U S, where say for GM and Chrysler are all negotiating separately with the UAW here, there's a group of employers including store Goober.

Rick Galloway: Now for further details on the consolidated results. As mentioned, adjusted deluded earnings per share of 86 cents was down 11 cents relative to Q3 last year. The primary negative factors were 4 cents from the impacts of metals prices as shown on slide 27, 4 cents from the VAT charge in Italy, 4 cents in higher interest expense resulting from rate increases, excluding units like costs, and 2 cents attributed to the effects of strikes in Germany.

Are all part of the same.

Works Council, and we need to get to a settlement as a group we cannot do a one off.

Settlement with the with.

With the Union.

We're hopeful we can bring this to a close yet this year.

Yes.

Like many unions around the globe, they've got really big expectations.

And there is a difference both in the amount of wage increases.

Rick Galloway: Our operational performance was a slight negative after excluding the items noted previously as solid gains in North America of 2 cents were offset by the decline in specialty business of 3 cents. We benefited by 2 cents due to the lower share account resulting from our share repurchase in 2022 and foreign exchange translation contributed to 2 cents of higher earnings with the stronger euro and pound sterling. On the tax rate, we applied an annual effective rate estimate of 27.0%, which is consistent with the rate in our prior guidance.

The term of the contract, we obviously want to lock in longer term. So we're not here next year.

And about the same kinds of things so.

The impacts of the strike are continuing into the fourth quarter.

And we anticipate that they will continue at least through November Scott, maybe just throw a couple of numbers to that.

In Q2, we saw about <unk> <unk> a share.

Our guidance, we essentially double that for Q4, so we're optimistic that it will close out in.

In 2023, and not have an impact on 2024, but as of right now in our guidance. We have a total of six 2% in Q3, and then four and in Q4 okay.

Rick Galloway: I will conclude with our current thoughts on projected 2023 results. Our guidance is based on current market conditions and recent trends and assumes scrap and precious metal prices hold near September levels. On foreign exchange, our guidance includes balance of the year rates for the euro of $1.06 and the pound sterling at $1.23 in line with current rates. We expect reported organic parts and service revenue in the range of 4.75% to 5.75%.

Got it and Thats just a quick last question on the.

Bumper to bumper business.

I don't know if you've mentioned this before can you just give us an indication of how the organic sales growth has been really just some of the industry dynamics up in Canada on mechanical repair side.

Yes, it's bumper to bumper is pretty much right on track right on plan.

Rick Galloway: Organic growth was 5.3% through September. We decreased the range in recognition of the estimated revenue loss associated with the German strike activity, difficult macroeconomic conditions in parts of Europe and the ongoing challenges at specialty. North America has potential upside in Q4 related to the state farm rollout and the UAW strike which could push the full-year result above the midpoint of the rate. We expect adjusted deluded EPS in the range of $3.68 to $3.82, which brings in both the high and low ends of the range from a previous estimate.

So we are really pleased with that business and with the team.

As I mentioned, we've got a couple of small tuck in acquisitions that we've already completed another one that will happen in Q4, So we anticipate nice.

Nice growth up in Canada.

Yes, it is growing.

Number one it's got high single digits as the way you should kind of think about that business right now.

Organically organically.

Organically, yes, okay got it.

Thank you guys. Thank you.

Our next question comes from Gary Cresta P&L from Barrington Research. Your line is now open.

Rick Galloway: The midpoint is now $3.75 per share, down from the prior figure of $4 provided last call. The primary drivers of the decrease in the midpoint are as follows. Six cents from lost earnings related to the German strike activity, five cents of delusion from the unicellect acquisition that was not included in the prior guidance as we had not yet closed the transaction. Four cents from the VAT charge in Italy, four cents from metal prices, five cents from operations primarily related to self-service and specialty and one cent from foreign exchange rates. Slide five shows the full bridge of the EPS guidance change.

Hey, good morning, everyone. Good.

Good morning, Gary.

Rick could you maybe go into.

Some of the issues I mean, you mentioned pricing, but what exactly is going on for the 140 basis point decline in gross margin in Europe.

<unk>, you talked about something pricing in eastern Europe.

Having some issues and could you maybe going a little more detail on that.

Yeah. So.

If you think about what's going on over there with the recessionary environment.

And the activity is going on there is a little bit of price sensitivity. So what I was talking about in my prepared remarks is some price sensitivity in Europe that is.

Rick Galloway: We increased our free cash flow guidance to approximately $1.0 billion from $975 million with a 55% to 60% annual EBITDA conversion. With our year-to-date free cash flow of $911 million, we are anticipating roughly $90 million in Q4, which would be our lowest quarterly amount this year. Part of the sequential decrease is seasonal as we build inventory ahead of the busy winter season. And we also have higher interest payments scheduled for Q4 this year as the semi-annual interest payment of the $1.4 billion unicellect bonds is due in December.

Think of the good better best product offerings that we offer the customers are moving from the best of the better better to the good.

And we're seeing that come down what we have seen and what we think the opportunity is is in our overall category management think of things like private labeling right. So so private labeling we have businesses not in central and eastern Europe that are getting in the call. It 35% north of 35% on private labeling and we also we also have businesses in central Eastern Europe that are at.

Single digits mid to high single digits in that private labeling branding as those customers move down to a different product offering that's where we think we're going to be able to really drive overall.

Dominick Zarcone: Thank you for your time today. With that, I'll turn the call back to Nick for his closing comments. Thank you, Rick, for that financial overview.

Dominick Zarcone: Before we open the call for questions, I want to reiterate what our global team has accomplished since starting the operational excellence journey back in 2019. In 2022, North America adjusted EBITDA margins reached their highest full-year level in the company's history at 18.7%. Excluding the impact of unicellect, we are on track to beat that record again this year. As a reminder, North America ended 2018 with the segment EBITDA margins at 12.6%. The one LKQ Europe program has generated tremendous results since introducing the plan in September 2019, and the segment is on track to consistently drive full-year double-digit EBITDA margins.

Profitability to move them over to a different product offering that actually helps us out. So it's just a consumer price sensitivity. They really good news Gary that I would tell you is.

Our products are non discretionary as we've been saying volume is really solid that continues to be the case, both in central and eastern Europe. The team is doing a fantastic job as far as delivery performance and all of that it's just a little bit of sensitivity on that recessionary environment that is squeezing the margins a bit that we think we're going to be able to rectify here in the next couple of quarters.

Okay. Thank you and then.

Yes.

Versus the EPS bridge that you put in Q2 to Q3.

It looks like operationally you were looking for five positive in Q2 now slipped to <unk> negative in Q.

With the Q3 guidance is that all specialty.

Dominick Zarcone: Importantly, there is further runway for leveraging our scale and unparalleled distribution network. This is demonstrated by the strong organic revenue growth in the quarter and the first nine months of the current fiscal year, and the significant year-on-year increase in segment EBITDA of $40 million after taking into account the two unusual items that cost the segment $19 million in aggregate. We've generated pre-cast flow at or above $1 billion for three years in a row, and we are on target to make 2023 the fourth.

It is making that shift.

It's primarily actually self serve so Nick talked about some of the changes that we're making within seltzer itself, serving specialty that makes up that <unk>, Gary but it's overweighted on the self serve side. So it's big of the car costs that need to come down what Nick did.

The team did is put some new leadership and then you talked about in his prepared remarks to drive down that overall procurement and enhance the overall margins. The good news is is that early in the quarter. We actually saw negative performance negative EBITDA that flipped to a decent size profitable September as we're going into Q4, So we're seeing.

Dominick Zarcone: We've invested 16 businesses representing over $625 million of revenue that did not fit our strategic objectives. We've achieved investment-grade ratings from each of standard importers, Moody's and Fed. Edge. We've repurchased $2.4 billion stock since initiating our first repurchased plan in October of 2018. We've distributed $570 million in quarterly dividends to our shareholders, and we've achieved a AAA ESG rating from MSCI and built out a team to drive our global sustainability effort forward with targeted objectives. So yes, we are very LKQ proud.

The trends in the right direction, but it's still that squeeze between the car cost and what the commodities have done so.

Zinc over weighted on self serve versus what's going on in specialty specialty what I talked about if you think about especially in Q4, we've tightened up the margins. What we've done is we've tightened up both the revenue side and the margin side as we've gone through the year. When you think year over year, and we think Q4, we believe Q4 will be pretty much on par on our margin base.

<unk> versus what Q4 was last year.

Thank you.

If you'd like to ask any questions. Please press star are number one on your telephone keypad.

Our next question comes from Brian Butler from Stifel. Your line is now open.

Dominick Zarcone: As we move forward towards the end of 2023, let me restate the key strategic pillars, which remain central to our culture and objectives. First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high levels of cash flow, which in turn give us the flexibility to maintain a balanced capital allocation strategy, and lastly, we will continue to invest in our future.

Hey, good morning, Thanks for taking my questions Good morning, Bryan Bryan.

Just on the first one back to specialty there can you maybe break it down how much of this is macro driven higher interest cost and buying cars.

Is just tough compares from what was a stronger <unk>.

'twenty two.

Okay.

Yes, it's a little bit of both trying to tell you the truth.

As you know, our north American and European businesses, largely sell non discretionary parts that are used to repair vehicles, while specially primarily sells parts to accessorize their vehicles.

Dominick Zarcone: As always, I want to thank the over 49,000 people who work for LKQ for all they do to advance our business each day, and for driving our mission and our LKQ delivers values forward, regardless of the challenges. Without a doubt, our people are LKQ's biggest asset.

Specialty is going to be more directly impacted by the broader macroeconomic environment things related to economic growth interest rates consumer balance sheets and the like.

The sale of light trucks, <unk> and Suvs has been reasonably okay.

While the sale of new RV units has been very depressed as you know so with that it should be no surprise that the sale of RV accessories and related products like hitches and other towing equipment have been much softer than the traditional sema product.

Operator: And with that operator, we are now ready to open the call to questions. Before we open the line for Q&A, please note that analysts are permitted to ask one question and one follow-up before re-tooling.

We believe that retail sales of RV units.

Operator: Having said that, we are now opening the question-and-answer session. If you'd like to ask a question, please press star a number one on your telephone keypad.

A better leading indicator for the potential demand for our RV accessories and wholesale shipments from the OEM to the dealers because of unsold units to the United deal or a lot doesn't do anything to generate demand for the types of parts that we sell and so with interest rates going higher and the financial health of the consumers eroding.

Brett Jordan: We have our first question from Brett Jordan of Jeffries. Your line is now open. Thank you, morning, guys. Good morning, Brett. Could you give us a little more color? I guess on the UK asset sale, maybe some either quantified or maybe even them multiple you got for that sale. Sure, Brett. Great question anticipated.

That's why I said, we don't see a near term catalyst for a quick rebound.

In the RV marketplace now as we get into next year, we obviously have an easier set of comps.

Rick Galloway: The definitive sale agreement includes a provision where we are not allowed to disclose any of the terms of the transaction. What I will tell you is that we ran a full and complete auction process that started out with dozens and dozens of potential buyers. We closed the transaction at the highest value that came out of the auction process. We had fully anticipated that the multiple that we would receive for GSF would be materially less than the multiple that we paid for the other businesses.

Because 2023 has been very soft.

And so we wouldn't anticipate the same kind of negative growth in 2024, then compared to what we have here in 2023.

Yeah.

On the on the free cash flow side.

Working capital as year to date 100.

$50 million benefit when you look at that $25 million increase in the free cash flow outlook for the full year can we go back to that and just what kind of is that just working capital all of that benefit or is there some other pieces.

Rick Galloway: We built that into all the original analysis and that exactly proved to be the case. All things considered were happy to get the transaction behind us as we are indicated. We are going to use the proceeds to repay debt. In the other thing I would say is the multiple we left the current M&A environment and the impact of higher interest rates, particularly for leverage transactions. We sold this to a PE shop over in the UK, but again it was generally in line with what are going in expectations for maybe a little bit on the on the skinny side but not materially different.

Within there thats driving that slightly higher.

Free cash flow outlook.

Yes, it's a great question.

You look at the free cash flow you think year over year.

When you combine three three items interest capex and <unk> transaction costs $250 million come down off of last year's number where we were at a roughly 1 billion, making all of that up.

And delivering.

A fantastic result, its a little bit higher than $150 million. If you think about the trade working capital.

It's more like $180 million as we go into Q3, it's things like our vendor financing program that the European team does the operational excellence initiatives span way beyond just the P&L side. They go to the balance sheet side as well the team is doing a fantastic job driving the performance there up 12% versus year end.

Rick Galloway: Okay, and then follow up I guess the Canadian business because you maybe talk about where you see working capital trending there. I mean obviously it should be a source of cash. You talk about maybe what their working capital investment is and how you might lever that.

Up about $35 million on the vendor financing program up 10% in payables and so driving that over and over again is something that we see as a continuous improvement so I would tell you.

Rick Galloway: Yeah, thanks, thanks Brett for the question. I'll take that one. So, you know, one of the things that we're pretty excited about is the ability that the CAG group or bumper to bumper group has with the vendor financing program. We got about $65 million in the vendor financing program is one of the components to drive performance. It was underutilized in something that we think we can grow fairly significantly. The overall trade working capital that we inherited from the transaction roughly caught $200 million that we think we can continue to enhance and benefit within the payables similar to what we're doing over in Europe. Okay, great. Thank you.

The performance is good.

Really solid performance year over year.

And that trade working capital really is the catalyst behind driving that performance.

Okay, and if I can maybe slip one last one how much debt do you expect to repay in the fourth quarter.

To repay.

How much debt how much debt paydown.

We should have roughly.

About 150 ish, but about 150.

Pay down in the fourth quarter.

Okay.

Operator: And comes from paying attention from beard.

Thank you.

Our next question comes from Bret Jordan from Jefferies. Your line is now open.

Craig Kennison: Your line is now open. Hey, good morning. Thanks for taking my question on you. Hey, Nick, good morning. So in the guidance walk, you peg the unit select impact at a five cent headwind. I think Ricky said four to six cents. I believe that last quarter that was a four cent headwind projection. I know that's a small move, but it's in the wrong direction. I'm just wondering if you uncovered something that wasn't as good as you hoped is that just a function of rounding.

Second round here you gave us the auto claims number year over year could you give us the total loss rate for Q3.

Yes, total losses at least according to.

Our best.

The sources that we have here Brett.

Was approximately 26%.

In Q3 of 2023.

Is up a bit from both 2022 and 2020 you want so total losses were up a bit that in part is why we think.

Craig Kennison: Craig, I'll take that one, you know, when we were analyzing and negotiating the transaction some nine to 10 months ago, you know, we were working off of the unit select annual budget for 2023. We had to make some estimates on our side as relates to the quarterly phasing of how their business was going to unfold. We're now sitting here in October and we recognize that our estimates as relates to the seasonality and the phasing.

Repairable claims was down four 6%, Brian because total lot you get a few more total losses as we've always said, we're agnostic to the total loss rate because in reality the more cars that rolled through the auctions creates more opportunities for our salvage operations at reasonable prices.

Craig Kennison: Of their business were we're off a bit with kind of more of their activity hitting earlier in the year than we anticipated in a little bit less late in the year. You know, in response, we're working hard to realize the synergies and rather than later as as Rick indicated. You know, from our perspective, nothing really changes in a material manner related to the long term economics of the transaction. And, you know, what I'd also highlight for you as Rick mentioned is between the benefits of the FX hedge on the original purchase.

Yes.

Key.

We believe is what's powering the overall demand for products and while repairable claims may be down a little bit Apu is going north.

And Apu is going north in part because the average number of parts required to repair a vehicle hit an all time high.

$15 seven parts in the third quarter.

Obviously the industry is fully recovering.

From our aftermarket parts availability as we said our fulfillment rates were back to over 93%, which is pretty close to our target and then you've got things like the benefit of the state farm program, which will take a little bit of share away from the Oes as well.

Craig Kennison: Some of the higher than expected cash on the balance sheet at closing the transaction value actually declined by about a hundred million dollars. You know, which helps offset some of that earnings difference from a return perspective, not necessarily from a from a EPS perspective. And so maybe I'll just add just a little bit more to that. You know, you talk about the synergy piece. Craig, it's important to understand on the synergy piece.

<unk>.

So.

Our sense is that our same day organic of five 8% outstripped, what we believe would be the net impact of all of the other headwinds and <unk> given us confidence that we're continuing to take share.

Craig Kennison: We've accelerated some stuff. We've talked about how we closed 10 facilities within the finished master business. As far as the overall synergies, we're roughly 20% of our synergies have already been achieved on a run rate basis as of today. As a follow-up to that, Rick, I thought a lot of those synergies were tied to leases, which took maybe three years before their expiration, so how are you able to accelerate what are essentially contractual agreements?

Okay and then one quick question in the prepared remarks, you talked about finish master, having a slightly higher MSR mix could you give.

Give us more color on that is that.

Is pricing on finished master products lower on average than your traditional paint business.

There is no doubt that the.

The way that the accounting works.

And the way the contracts are written that the margin on the MSR business is.

Is less than the margins on a non MSR.

Craig Kennison: Yeah, they weren't all tied to that, you know, there's a fair amount on the Finnish Master's side that go throughout the period, so if there's something that is a little bit tighter, a little bit closer, that's the area that we were able to identify and say a pull in that opportunity and close those facilities at an earlier time.

Because it's basically a service quotient to service fee if you will.

Even though we have to record the full value of the other products that are sold.

And as I mentioned in my.

My comments.

Rick Galloway: Thank you. Yeah.

MSR MSR volumes were a little bit higher as a percent of the total.

Scott Stember: Our next question comes from Scott Stember, from AKM partners, your line is now open. Good morning, guys, and thanks for taking my questions as well. Good morning, Scott. Can you talk about, in Europe and Germany, you mentioned that it sounds like there was some progress and negotiations, I guess, later in the quarter. Are we trending in the right direction, just trying to get a sense of, you know, how long this could potentially last and how far into 2024?

Than they've been in the past and that quite frankly that happens every time one of the Msos buys an independent shop it switches from.

It switches to volumes all in all were happy with the.

With where we stand with the paint business.

Great. Thank you.

Our next question comes from Daniel <unk> from Stephens. Your line is now open.

Yep. Thanks, everybody. Thanks for squeezing me in at the end here.

Scott Stember: Are you talking about the strike in Germany? Yeah, yeah, sorry about that, yes, the strike in Germany. Yeah, so, look, employees, there's certain employees at our big distribution center in Salzbach-Rosenberg, which fulfills all of our branches in Germany, you know, a number of those folks belong to a union or a works council, as they're called, over on the other side of the pond. You know, we don't have advanced warning as to when they decide to call a strike, it's very episodic.

Nick I wanted to talk about North American organic growth, obviously, you're not guiding but if we look.

Scott Stember: The issue is, we're down the headcount, not all the members go on strike, but probably we lose about 40% of our workforce when they are out in strike, and that creates significant issues in trying to move product into and out of the distribution center, but we need to replenish our branches on a daily basis, because if the product's met out in the branch the next morning, it can't be sold. And some of the key bottlenecks are actually on the inbound movement of goods, as you can imagine, with less people to bring all that product in, the vendor delivery trucks get stacked up out in the drive, et cetera, et cetera, right?

We're seeing more disinflation growth is slowing.

Great Thats offset by state farm, but can we do the 2% to 3% kind of a long term organic growth in North America. During this period of maybe disinflation and price competition.

We believe absolutely.

The reality is we posted up five eight on a same day basis in the third quarter again as I just mentioned in answering bretts question, that's coming from better Apu, it's coming from.

Taking share.

From some of the smaller competitors. Our guess is that North America will probably have some similar growth in the fourth quarter as in the third quarter.

On the one hand, obviously, the comps get harder right because last.

Q4 of last year, we were starting to get back to our pro forma rates into the low 90% range.

In the fourth quarter were in earlier in the 2022 were still down while down in the Eighty's. So the comps were easier at the beginning of the year than they are going to be here at the end of the year and on the other hand, though we've got the benefits associated with state farm and some of the benefits related to the UAW strike and Theres no doubt that the UAW strike.

Helps our north American business on a long term basis, we absolutely are confident in all the.

Scott Stember: We have a phenomenal team at Stahlgruber, that's doing everything possible to mitigate the issues, you know, we are in flight in bringing a second DC online up in Bigletfield, which is in the northern part of Germany, but that's not going to come online in time to help with this strike, the branch in corporate personnel in Bavaria. We pull some of those folks into the distribution center to help with staffing. We're still down even after that, from an overall headcount perspective, and obviously those employees are not as productive because they're doing new things.

The expectations, we set including those back in our analyst day in 2022 and.

What we think.

Couple of percentage points of growth excluding inflation it is absolutely.

Within our capability.

Okay. That's helpful. And then maybe just a follow up Rick you mentioned in your script that buybacks are a part of the capital deployment, but it does feel like you guys have done more M&A, whether it's the small ones in Canada. You just bought select can you maybe talk about like what is the strategic rationale at buying at this point in the cycle could you do you typically get better price.

Scott Stember: We're trying to push more inventory out into the branches on non-strike days, but there are limits as to how much the branches can hold from a practical perspective, and we have to make educated guesses as to what products each particular branch may need in the future, which is not the same as fulfilling orders based on actual sales to prior night. As I indicated, the employees have been on strike for several days here in October and we anticipate that's going to continue.

If we do enter a downturn and just I guess, how you plan on spending the 1 billion of free cash of a $150 million of debt pay down of work you, but what do you plan to do with the rest of it.

Yes. Good question Danielle Thanks for thanks for.

As you start thinking about the overall capital allocation strategy that Hasnt changed. So if you think about on an ongoing basis $1 billion, we have $300 million roughly four dividend. We obviously raised the dividend 9% based off of what the board has approved and the solid cash performance that we have then we earmark about call it $200 million annually.

Scott Stember: The biggest part of it is it's not like in the U.S, where, say, you know, Ford, GM and Chrysler are all negotiating separately with the UAW. Here there's a group of employers, including Stalgoober, that are all part of the same works council and we need to get to a settlement as a group. We cannot do a one-off settlement with the union. You know, we're hopeful we can bring this to a close yet this year.

<unk> for tuck in acquisitions, and then the remainder or about $500 million to do.

Kind of what we want with a range of whether we do share repurchases, whether we do.

Some debt Paydown, what we've said is we'd be overweighted until we get below two times will be overweighted on that remaining $500 million.

On debt Paydown, so that's going to continue but we constantly are looking at our opportunities whether there is.

An opportunity on the share price. If there is some timing that offers us we will continually look at that but we're committed to is within 18 months will get down below that two times and so thats something thats wane in the back of our minds. So that's the way you should think about that capital allocation.

Scott Stember: You know, like many unions around the globe, they've got really big expectations and there's a difference both in the amount of wage increases and the term of the contract. We obviously want to lock in a longer term so we're not here next year talking about the same kinds of things. So the impacts of the strike are continuing into the fourth quarter and we anticipate that they will continue, you know, at least through November.

Great. Thanks, so much.

Thank you.

There are no further questions at this time I'd like to turn back the call to Nick Zarcone.

Well certainly we want to thank everybody for your time and attention. This morning. We know this is a busy reporting period and we certainly appreciate spending some of your time here with LKQ. We obviously look forward to chatting with you again in February late February of 2020 for when we're going to announce our fourth quarter.

Scott Stember: Scott, maybe just throw a couple of numbers to that. In Q2, we saw about two cents a share. In our guidance, we essentially doubled that for Q4. So we're optimistic that it will close out in 2023 and not have an impact on 2024. But as of right now, in our guidance, we have a total of six cents, two in Q3 and then four in Q4. Scott, and that's just a quick last question on the bumper to bumper business.

<unk> full year 2023 results and obviously, we'll set the guidance for next year with all of you.

So again, thank you for your time and attention and we'll be talking in February.

This concludes today's conference call you may now disconnect.

Scott Stember: I don't know if you've mentioned this before. Could you give us an indication of how the organic failed for office has been running just some of the industry dynamics up in Canada on mechanical repair sites? Yeah, bumper to bumper is pretty much right on track right on plan. So we are really pleased with that business and with the team. As I mentioned, we've got a couple of small tucking acquisitions that we've already completed another one that will happen in Q4.

Scott Stember: So, you know, we anticipate, you know, nice growth up in Canada. You know, to throw a number at it's got the high single digits is the way you should kind of think about that business right now. Organically, organically. Okay, good enough. Thank you, guys. Thank you.

Gary Prestopino: Our next question comes from Gary Presipino from Barrington Research. Your line is now open. Thank you. Good morning, everyone. Good morning, Gary. Rick, could you maybe go into some of the issues? I mean, you mentioned pricing, but what exactly is going on for the 140 basis point decline in gross margin in Europe? That you cited you talking about something pricing in Eastern Europe that was having some issues and could you maybe go in a little more detail on that?

Gary Prestopino: Yeah, so if you think about what's going on over there with the recessionary environment and the activity is going on, there is a little bit of price sensitivity. So what I was talking about in my prepare remarks is some price sensitivity in Europe that is. I think of the good, better, best product offerings that we offer the customers are moving from the best to the better, better to the good. And we're seeing that come down.

Gary Prestopino: What we have seen and what we think the opportunity is is in our overall category management. Think of things like private labeling, right? So, so private labeling. We have businesses not in Central and Eastern Europe that are getting and called 35% north of 35% on private labeling. And we also have businesses in Central Eastern Europe that are at single digits, you know, mid to high single digits in that private labeling branding.

Gary Prestopino: As those customers move down to a different product offering, that's where we think we're going to be able to really drive overall profitability to move them over to a different product offering that actually helps us out. So it's just that consumer price sensitivity that they've really good news Gary that I would tell you is our products are non discretionary. As we've been saying volume is really solid that continues to be the case both in Central and Eastern Europe. The team is doing a fantastic job as far as delivery performance and all of that.

Rick Galloway: It's just that little bit of sensitivity on that recessionary environment that is squeezing the margins a bit that we think we're going to be able to rectify here in the next couple of quarters. Thank you. And then versus the EPS bridge that you put in Q2 to Q3, it looks like operationally you were looking for a 5 cent positive in Q2. It's now slipped to 5 cent negative with the Q3 guidance.

Rick Galloway: Is that all specialty that is making that shift? It's primarily actually self-serve. So Nick talked about some of the changes that we're making within self-serve. It's self-serve and specialty that makes up at 5 cents, Gary, but it's overweighted on the self-serve side. So think of the car costs that need to come down. What Nick did and the team did is put some new leadership and he talked about in his prepared remarks to drive down that overall procurement and enhance the overall margins.

Rick Galloway: The good news is that early in the quarter we actually saw negative performance, negative EBITDA that flipped to a decent size profitable September as we're going into Q4. So we're seeing the trends in the right direction, but it's still that squeeze between the car cost and what the commodities have done. So think overweighted on self-serve versus what's going on in specialty. Specialty, what I talked about, you know, if you think about especially in Q4, we've tightened up the margins.

Rick Galloway: What we've done is we've tightened up both the revenue side and the margin side as we've gone through the year when you think you're over year. And we think Q4, we believe Q4 will be pretty much on par on a margin basis versus what Q4 was last year. Thank you. If you'd like to ask any questions, please press start a number one on your telephone keypad.

Brian Butler: Our next question comes from Brian Butler from Stifle. Your line is now open. Hey, good morning. Thanks for taking my questions. Good morning, Brian. Just on the first one back to specialty there, can you maybe break it down?

Rick Galloway: How much of this is macro driven, you know, higher interest cost and buying cars versus just tough compares from what was a stronger 2022. Yeah, it's it's a little bit of both trying to tell you the truth. As you know, our North American and European businesses largely sell non discretionary parts that are used to repair vehicles, while specially primarily sells parts to access rise to vehicles. So especially is going to be more directly impacted by the broader macro economic environment, things related to economic growth, interest rates, consumer balance sheets and the like.

Rick Galloway: The sale of light trucks, jeeps and SUVs has been reasonably okay, while the sale of new RV units has been very depressed, as you know. So with that, it should be no surprise that the sale of RV accessories and related products like hitches and other towing equipment have been much softer than the traditional SEMA product. You know, we believe that retail sales of RV units is probably a better leading indicator for the potential demand for our RV accessories and wholesale shipments from the OE to the dealers.

Rick Galloway: Because unsold unit city and on a dealer lot doesn't do anything to generate demand for types of parts that we sell. And so with interest rates go on higher and the financial health of the consumers are voting, that's why I said we don't see a near term catalyst for quick rebound in the RV marketplace. Now, as we get into next year, we obviously have an easier set of comps because 2023 has been, you know, very soft.

Rick Galloway: And so we wouldn't anticipate the same kind of negative growth in 2024 than compared to what we have here in 2023. On the free cash flow side, you know, working capital is year-to-date for 150 plus million benefit. When you look at that $25 million increase in the free cash flow, I'll look for the full year. Can we go back to that and just, and what kind of, is that just working capital?

Rick Galloway: All of that benefit, or is there some other pieces, you know, within there that's driving that, you know, slightly higher free cash flow out of it? Yeah, no, it's a great question. I mean, you know, you look at the free cash flow, you think you're over a year, when you combine three items. Interest, CapEx, and Unified Transaction Costs, $250 million come down off of last year's number, where we were at roughly a billion, making all of that up, and delivering, you know, a fantastic result.

Rick Galloway: It's a little bit higher than $150 million if you think about the trade working capital. It's more like $180 million as we go into Q3. It's things like our vendor financing program that the European team does. The operational excellence initiatives span way beyond just the P&L side. They go to the balance sheet side as well. The team's doing a fantastic job driving the performance. They're up 12% versus year end up about $35 million on the vendor financing program, up 10% in payables.

Rick Galloway: And so driving that over and over again is something that we see as a continuous improvement. So I would tell you, you know, the performance is good, really solid performance year over year, and that trade working capital really is the catalyst behind driving that performance.

Rick Galloway: Okay, and if I can get maybe slip one last one in, how much debt do you expect to repay in the fourth quarter? To repay? Yeah, how much debt, how much debt pay down? We should have roughly about 150 ish, about 150 debt paid down in the fourth quarter. Okay. Thank you.

Brett Jordan: Our next question comes from Brett Jordan from Jeffries. Your line is now open. Hey, good second round here. You gave us the auto claims number year over year. Could you give us the total loss rate for Q3? Yeah, total losses, at least according to our best sources that we have here, Brett, was approximately 20.6% in Q3 of 2023, which was up a bit from both 2022 and 2021. So total losses were up a bit.

Brett Jordan: That in part is why we think repairable claims was down 4.6% because total, you had a few more total losses. You know, as we've always said, we're agnostic to the total loss rate because in reality, the more cars that roll through the options, creates more pine opportunities for our salvage operations, every reasonable prices. You know, the key, we believe, is what's powering the overall demand for products. And while repairable claims may be down a little bit, APU is going north, and APU is going north in part because the average number of parts required to repair a vehicle hit an all-time high of 15.7 parts in the third quarter.

Brett Jordan: Obviously, the industry is fully recovering from our aftermarket parts availability as we said, our performance rates were back to over 93%, which is pretty close to our target. And then you've got things like the Benefit of the State Farm Program, which will take a little bit of share away from the OEs as well. So, you know, our sense is that our same day organic of 5.8% outstripped, what we believe would be the net impact of all the other headwinds and tailwinds, given us confidence that we're continuing to take share.

Dominick Zarcone: Okay, and then one quick question. In the parody marks, you talked about Finnish master having a slightly higher MSO mix. Could you give us more color on that? Is pricing on Finnish master products lower on average than your traditional paint business? There's no doubt that the way that the counting works and the way the contracts are and that the margin on MSO business is less than the margins on a non-MSO because it's basically a service question to service fee, if you will, even though we have to record the full value of the product that is sold.

Dominick Zarcone: And as I mentioned in my comments, MSO volumes were a little bit higher as a percent of the total than they've been in the past. And that quite frankly, that happens every time one of the MSOs buys an independent shop, right? It switches from, it switches the volumes. All in all, we're happy with the, with where we stand with the, with the paint business. Great, thank you.

Daniel Imbro: Our next question comes from Daniel Imbro from Stephens. Your line is now open. Thanks, everybody. Thank you. We have the man of the end here. Nick, I wanted to talk about North American organic growth. Obviously, you're not guiding, but if we look, you know, we are seeing more disinflation, growth is slowing in North America. That's offset by state farm, but can we do the two to three percent kind of long-term organic growth in North America during this period of maybe disinflation and price competition?

Daniel Imbro: We believe absolutely. The reality is we posted up 5.8 on a same day basis in the third quarter. Again, as I just mentioned in answering press question, that's coming from better APU. It's coming from, you know, taken share from some of the smaller competitors. You know, our guess is that North America, we'll probably have some similar growth in the fourth quarter as in the third quarter. On the one hand, obviously the cops get harder, right?

Daniel Imbro: Because last, Q4 of last year, we were starting to get back to our fulfillment rates into the low 90 percent range in the fourth quarter. We're in earlier in the 2022. We're still not well down in the 80s. So the cops were easier at the beginning of the year than they are going to be here at the end of the year. And on the other hand, though, we've got the benefits of associated with state farm and some of the benefits related to the UAW strike.

Daniel Imbro: And there's no doubt that the UAW strike helps our North American business. On a long-term basis, we absolutely are confident in all the, you know, the expectations we set, including those back in our analyst day in 2022. And where we think, you know, a couple of percentage points of growth, excluding inflation, is absolutely within our capability, at the top floor, and then maybe just to follow up, Rick, so you mentioned in your script that my back shirt are part of the capital deployment, but it does feel like you guys have done more M&A, whether it's the small ones in Canada, you just bought UNO Select.

Rick Galloway: Can you talk about what just the strategic rationale is at buying at this point in the cycle, could you typically get better prices if we do enter a downturn and just I guess how you plan on spending the billion of free cash, give a 150 million a debt paid out of working you, but what do you plan to do with the rest of it? Yeah, it's a good question Daniel, thanks for, thanks for, you know as you start thinking about the overall capital allocation strategy that hasn't changed, so if you think about on an ongoing basis, a billion dollars, we have 300 million dollars roughly for dividend, we obviously raise the dividend 9% based off of what the board has approved and the solid cash performance that we have, then we earmark about, call it 200 million dollars annually for tuck-in acquisitions, and then a remainder about 500 million dollars to do kind of what we want with it, right?

Rick Galloway: Whether we do share repurchases, whether we do, you know, some debt paid down, what we've said is we'd be overweighted until we get below two times, we'll be overweighted on that remaining 500 million on debt paid out, so that's going to continue, but we constantly are looking at our opportunities, whether there is, you know, an opportunity on the share price, if there's some timing that offers us, we'll continually look at that, but what we're committed to is with an 18 months, we'll get down below that two times, and so that's something that's wind in the back of our mind, so that's the way you should think about that capital allocation. Great, thanks a lot. Yeah, thank you. There are no further questions at this time.

Dominick Zarcone: I'd like to turn back the call to Nick Zarpone, thanks. Well, certainly, we want to thank everybody for your time and attention this morning. We know this is a busy reporting period, and we certainly appreciate spending some of your time here with OKQ. We obviously look forward to chatting with you again in February, late February of 2024, when we're going to announce our fourth quarter results, full year 2023 results, and obviously we'll set the guidance for next year with all of you. So again, thank you for your time and attention, and we'll be talking in February. This concludes today's conference call. You may now disconnect.