Q3 2024 LKQ Corp Earnings Call
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Unknown Executive: Good morning, everyone, and welcome to the Alicate Q Corporation's third quarter 2024 earnings call.
Speaker Change: Good morning, everyone and welcome to the LKQ Corporation third quarter 2024 earnings call.
Operator: My name's Lydia, and I'll be your operator today.
Lydia: My name is Lydia and it'll be your operator today.
Operator: After the prepared remarks, there'll be an opportunity for you to ask questions. If you'd like to ask a question during Q&A, you can do so by pressing star followed by one on your cell phone keypad.
Lydia: After the prepared remarks, there will be an opportunity for you to ask questions.
Lydia: You'd like to ask a question during Q&A you can do so by pressing star followed by one on your telephone keypad.
Joseph Boutross: We ask that you kindly ask one question and one follow-up on our hands; you over to Joe Boutross by the president investor relations to begin.
Lydia: We asked the economy ask one question and one follow up.
Speaker Change: I'll now hand, you over to J P Trust, Vice President Investor Relations to begin please.
Unknown Executive: Please go ahead. Thank you, operator.
Speaker Change: Please go ahead. Thank you operator, good morning, everyone and welcome to Lkq's third quarter 2024 earnings conference call with US today are adjusted Jude Lkq's, President and Chief Executive Officer, and Rick Galloway, Senior Vice President and Chief Financial Officer.
Justin Jude: Good morning, everyone, and welcome to LKQ's third quarter 2024 earnings conference call. With us today are Justin Jude, LKQ President Chief Executive Officer, and Rick Galloway, Senior Vice President Chief Financial Officer.
Rick Galloway: Please refer to the LKQ website at lkqcorp.com for our earnings release issue this morning, as well as the accompanying slide presentation for this call. Now let me quickly cover the safe harbor. Some of the statements that we make today may be considered forward looking. These includes statements regarding our expectations. We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both gap and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and flight presentation.
Please refer to the LKQ website at LKQ Corp, Dot com for our earnings release issued this morning as well as the accompanying slide presentation for this call now let me quickly cover the safe Harbor some of the statements that we make today may be considered forward. Looking these include statements regarding our expectations beliefs hopes intentions or strategies actual events or results may differ materially.
Speaker Change: Clearly from those expressed or implied in the forward looking statements as a result of various factors.
Speaker Change: Assume no obligation to update any forward looking statements for more information. Please refer to the risk factors discussed in our Form 10-K, and subsequent reports filed with the SEC.
Speaker Change: 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.
Joseph Boutross: Hopefully everyone has had a chance to look at our AK, which we filed with yesterday, earlier today, and as normal, we are planning to file our 10-Q in the coming days. With that, I'm happy to turn the call over to our CEO, Justin Jude.
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 my dad I'm happy to turn the call over to our CEO Justin Jude.
Justin Jude: Thank you, Joe, and good morning to everyone joining us on the call.
Justin Jude: Thank you Joe and good morning to everyone joining us on the call.
Justin Jude: I want to start by saying that our thoughts and prayers are with all of those that have been affected by the hurricane to Lean and Milton. The Southeast in particular is one of LKQ's strongest regions, which is a testament to our many dedicated employees and longstanding relationships with our customers in the region. We are grateful to report no fatalities among our LKQ team members, but property damage and disruptions to daily life have affected many. At LKQ, we pride ourselves on being a good corporate citizen and partnering with the communities in which we operate. In response to the hurricanes, we have earmarked funds to cover requests into our employee assistance fund for financial release and reached out to our employees for recommendations of local causes that could use our health.
I want to start by saying that our thoughts and prayers are with all of those that have been affected by the hurricane saline and Milton.
Justin Jude: The southeast in particular is one of LKQ strongest regions, which is a testament to our many dedicated employees and long standing relationships with our customers in the region.
We are grateful to report no fatalities, among our LKQ team members.
Justin Jude: Property damage and disruption to daily life has affected many.
Justin Jude: I don't think we pride ourselves on being a good corporate citizen and partnering with the communities in which we operate.
Justin Jude: In response to the Hurricanes, we have earmarked funds to cover request into our employee assistance fund for financial relief and reached out to our employees for recommendations of local causes that could use our help.
Justin Jude: We also have made donations to charitable organizations involved with the disaster response efforts. I would also like to thank the LKQ team members who jumped into action to aid their colleagues and communities. While there are too many individuals to name, I am truly inspired by their efforts to gather and deliver supplies to those in need in the system to clean up. As the region begins its recovery period, LKQ stands ready to continue to provide support.
Justin Jude: We also have made donations to charitable organizations involved with the disaster response efforts.
Justin Jude: I would also like to thank the LKQ team members, who jumped into action to aid their colleagues and communities. While there are too many individuals to name I'm truly inspired by their efforts to gather and deliver supplies to those in need in the system to cleanup.
As the region begins its recovery period, Okay, Q stands ready to continue to provide support.
Justin Jude: Shifting down to the quarter, last month we held an Investor Day where I laid out my management style and priorities. As a reminder, I stated that my priorities would focus on operational excellence and maximizing total shareholder return. In the third quarter, we evident this focus by taking action to simplify, integrate, and rationalize the business while returning value to our stakeholders. Let's start with the capital allocation and shareholder returns. At recent trading levels, we believe the best use of our capital is repurchasing our shares. We were active in the quarter, repurchasing three million shares for approximately $125 million.
Justin Jude: Shifting now to the quarter last month, we held an investor day, where I laid out my management style and priorities.
Justin Jude: As a reminder, I stated that my priorities would focus on operational excellence and maximizing total shareholder return.
Justin Jude: In the third quarter, we evidenced this focus are taking action to simplify integrate and rationalize the business, while returning value to our stakeholders.
Justin Jude: Let's start with the capital allocation and shareholder returns.
Justin Jude: At recent trading levels, we believe the best use of our capital is repurchasing our shares we were active in the quarter repurchasing 3 million shares for approximately $125 million.
Justin Jude: With 800 million left on our authorization and plans to remain active in the market in the coming years, I am pleased to announce our Board of Directors approved a resolution to increase the authorization under our share repurchase program by an additional $1 billion, with an extension through October 2026. Management's recommendation to increase and extend the authorization and the Board's approval thereof is evidence of our confidence in the LKQ's future and our ability to generate robust free cash flow. In August, we paid a quarterly dividend totaling 79 million, and our Board approved a quarterly cash dividend of $0.30 per share to be paid in November.
Justin Jude: With $800 million left on our authorization and plan to remain active in the market in the coming years I am pleased to announce our board of directors approved a resolution to increase the authorization amount under our share repurchase program by an additional $1 billion.
Justin Jude: With an extension through October 2026.
Justin Jude: Managements recommendation to increase and extend the authorization and the board's approval thereof is evidence of our confidence in <unk> future and our ability to generate robust free cash flow.
Justin Jude: In August we paid a quarterly dividend totaling $79 million and our board approved a quarterly cash dividend of <unk> 30 per share to be paid in November.
Justin Jude: Moving to our operational excellence initiatives, the simplification of our portfolio and operations is a key pillar to drive better returns. As part of our portfolio review, we completed the sale of our poll and operation to Mekanoman in July and recently finalized the sale of our Bosnia business. Additionally, we have another small transaction nearing completion in the coming weeks. While this transaction is a very small component of our North American operation, the sale will eliminate a loss-making business while freeing up management's time. On the integration front, we continue to work on merging our recent acquisitions into existing LKQ operations.
Justin Jude: Moving to our operational excellence initiatives.
Justin Jude: The simplification of our portfolio and operations is a key pillar to drive better returns as part of our portfolio review, we completed the sale of our Poland operation to mechanism and in July and recently finalized the sale of our Bosnia business <unk>.
Justin Jude: Additionally, we have another small transaction nearing completion in the coming weeks and while this transaction is a very small component of our north American operation the sale will eliminate a loss, making business, while freeing up management time.
Justin Jude: On the integration front, we continue to work on merging our recent acquisitions into existing LKQ operations.
Justin Jude: While most of the heavy lifting is done on Unislux footprint rationalization, the teams are identifying additional efficiencies and selected seven more locations for closure. Andy Hamilton talked about the C rationalization effort in Europe, and I am pleased to report the team pushed this project forward in the quarter and now reviewed over 25 product groups representing 425,000 SKUs for more than 50% of our project scope. Also in Europe, we are working on restructuring activities to reduce costs and increase efficiencies related to our logistics network. We will have more details on these efforts in 2025, and lastly, our specialty business recently completed the combining of two warehouses near Dallas, a legacy facility and a facility we acquired as part of a 2023 transaction, into a new, more efficient single location.
Justin Jude: While most of the heavy lifting is done on unit flex footprint rationalization. The teams are identifying additional efficiencies in our selected seven more locations for closure.
Justin Jude: Andrew Hamilton talked about the SKU rationalization effort in Europe, and I am pleased to report the team pushed this project forward in the quarter and have now reviewed over 25 product groups, representing 425000, skus, where more than 50% of our project scope.
Justin Jude: Also in Europe, we are working on restructuring activities to reduce costs and increase efficiencies related to our logistics network.
Justin Jude: We will have more details on these efforts in 2025.
Justin Jude: And lastly, our specialty business recently completed the combining of two warehouses near Dallas, a legacy facility and the facility we acquired as part of a 2023 transaction and to a new more efficient single location.
Justin Jude: Our commitment to lean operating culture is critically important, especially in a period when the top line is facing headwinds. In addition to the substantial cost actions we have already taken this year, all of our businesses are undertaking another review of the cost structures as part of our annual budget process. Additionally, we are conducting a benchmark study on our overhead cost to determine where we have opportunities to be more productive and cost-effective.
Justin Jude: Our commitment to lean operating culture is critically important, especially in a period when the topline is facing headwinds and.
Justin Jude: In addition to the substantial cost actions, we have already taken this year all of our businesses are undertaking another review of the cost structures as part of our annual budget process. Additionally, we are conducting a benchmark study on our overhead costs to determine where we have opportunities to be more productive and cost effective.
Justin Jude: Growth is our final operational excellence pillar, and we strive to grow organic revenue and increase operating margins. We were not wholly successful in this regard during the third quarter, as many of the economic and industry headwinds we faced in the first half of 2024 continue to have a negative impact on our results. While Barks and Services revenue was down roughly 4% organically on a per day basis, there were some positives to take away. North America declined 7.5% on a per day basis, but aftermarket down to a greater extent than South America. Judge, Q3 extended the trend of year-of-year repairable claims decreases, with claims falling 9.5% following a 7.5% drop in the second quarter.
Justin Jude: Growth is our final operational excellence pillar and we strive to grow organic revenue and increase operating margins.
Justin Jude: We were not wholly successful in this regard during the third quarter as many of the economic and industry headwinds we faced in the first half of 2024 continue to have a negative impact on our results.
Justin Jude: While parts and services revenue was down roughly 4% organically on a per day basis, there were some positives to take away.
Justin Jude: North America declined seven 5% on a per day basis, but aftermarket down to a greater extent in salvage.
Q3 extended the trend of year over year Repairable claims decreases with claims falling nine 5% following a 7% drop in the second quarter.
Justin Jude: Our collision volumes were down only 6%, showing that despite the drop in claims, we did not lose share. We believe the decrease in claims are still tied to the economic factors we discussed the last quarter, such as the rising insurance premiums into the increase in use car pricing. While we anticipated claims volumes would not rebound quickly in the second half, the Q3 decrease was higher than we projected and contributed to an underperformance of revenue relative to guidance. The Q3 claims figures suggest the possibility of a longer recovery period than we previously thought, and we are working through this evaluation with our strategy and operations teams as part of our 2025 budget process.
Justin Jude: Our collision volumes were down only 6% showing that despite the drop in claims we did not lose share.
Justin Jude: We believe the decrease in claims are still tied to the economic factors, we discussed last quarter, such as the rising insurance premiums and a decrease in used car pricing.
Justin Jude: While we anticipated claims volumes would not rebound quickly in the second half.
Justin Jude: Q3 decrease was higher than we projected and it contributed to an underperformance of revenue relative to guidance.
Justin Jude: The Q3 claims figures suggest the possibility of a longer recovery period than we previously thought.
Justin Jude: We're working through this evaluation with our strategy and operations teams as part of our 2025 budget process.
Justin Jude: Europe's revenue was flat on a per day basis, but was an improvement from the 1.3% decrease we reported in the second quarter. Certain markets showed single-digit growth, while others declined in a similar range. Economic conditions remained challenging across most markets in Europe, notably in Germany and the UK. Competition is also contributing to the challenging condition, as consistent with last quarter, some of the smaller players are aggressively pushing price. The North American revenue decline of 7.5% per day was larger than what we reported in the first two quarters. The sequential change is attributable to recoverable claims in Q3 and the mixed impact of an incremental paint revenue in the organic calculation.
Justin Jude: Europe's revenue was flat on a per day basis, but was an improvement from the one 3% decrease we reported in the second quarter certain markets showed single digit growth, while others declined in a similar range economic conditions remained challenging across most markets in Europe, notably in Germany, and the U K.
Competition is also contributing to the challenging condition as consistent with last quarter. Some of the smaller players are aggressively pushing price.
Justin Jude: The North American revenue decline of seven 5% per day was larger than what we reported in the first two quarters.
Justin Jude: The sequential change is attributable to renewable claims in Q3, and the mixed impact of incremental paint revenue and the organic calculation. We passed the one year Mark since the <unk> acquisition on August one 2024, and as a result, the finished master revenue became part of the organic calculation for part of Q3.
Justin Jude: We passed a one-year mark since the UNICE-elect acquisition on August 1, 2024, and as a result, the finished master revenue became part of the organic calculation for part of Q3. Organic paint revenue was down by a greater percentage than the segment as a whole, resulting from softness in finished masters direct sales. There were some revenue loss post-acquisition as customers re-valuated their supplier situation, and sales reps left the joint competitors. As we integrated the business and aligned our sales teams, we believe the situation has stabilized and the team is working to win back business with LKQ's combination of superior availability and service.
Justin Jude: Organic paint revenue was down by a greater percentage than the segment as a whole resulting from softness in Finnish Masters direct sales.
Justin Jude: There were some revenue loss post acquisition as customers reevaluate their supplier situation and sales reps left the joint competitors as we integrated the business and aligned our sales teams. We believe the situation has stabilized and the team is working to win back business with LTE accused combination of superior availability and service.
Justin Jude: Specialty took a step backward in the third quarter, with organic revenue down 10% on a per-day basis compared to 2% in the first half. Economic conditions, including higher interest rates and relatively low consumer confidence, have contributed to lower vehicle and RV sales, thus creating a significant headwind for our part sales.
Justin Jude: Specialty took a step backward in the third quarter with organic revenue down 10% on a per day basis compared to 2% in the first half.
Justin Jude: Economic conditions, including higher interest rates and relatively low consumer confidence having contributed to lower vehicle in RV sales, thus, creating a significant headwind for our part sales we expect the challenging conditions to continue through the fourth quarter.
Justin Jude: We expect the challenging conditions to continue through the fourth quarter. Shifting to our profitability measures, adjusted diluted earnings per share increased by 2% compared to Q3 last year, and the segment EBITDA margin improved by 30 basis points. Rick will provide further details on these numbers in his remarks.
Justin Jude: Shifting to our profitability measures adjusted diluted earnings per share increased by 2% compared to Q3 last year and the segment EBITDA margin improved by 30 basis points.
Speaker Change: Rick will provide further details on these numbers in his remarks.
Justin Jude: Before turning to call to Rick, I want to mention a few notes where the items are the quarter. Hurricane Zilline and Milton have affected our operations in North America, as some of our locations and many of our customers were shut down as a result of the storms and the after effects. To give an idea of the impact on LKQ's operations, Halene forced four closures of nearly 25% of our locations in the Southeast, and these locations were down between 1 and 6 days. Milton forced closures of nearly 75% of our quarter locations for between 1 and 4 days.
Speaker Change: Before turning the call to Rick I want to mention a few noteworthy items for the quarter Hurricanes you lean in Milton have affected our operations in North America as some of our locations and many of our customers were shut down as a result of the storms and the after effects.
Speaker Change: To give an idea of the impact on <unk> operations Helene <unk> foreclosures of nearly 25% of our locations in the southeast and these locations were down between one and six days.
Speaker Change: Milton and forced closures of nearly 75% of our quarter locations for between one and four days.
Justin Jude: News. Thankfully, we didn't incur any significant property damage, so the impact will be mostly related to loss of revenue.
Speaker Change: We didn't occur any significant property damage. So the impact will be mostly related to lost revenue.
Justin Jude: Earlier this month, dock workers on the East and Gulf Coast went on strike for three days.
Speaker Change: Earlier this month the dockworkers on the eastern Gulf Coast went to strike for three days.
Justin Jude: A sensitive agreement got them back to work as negotiations continue on a final contract. We expect the strike days to have an impact on our inventory, as each day off was estimated to require a week to catch up. We were already experiencing delays for shipments brought into the East Coast, and while we believe our current inventory levels are adequate to support the business, there could be some minor impacts to our flow rates over the coming months. We are also contingency planning in case a final contract is agreed to by January.
Speaker Change: A tentative agreement got them back to work as negotiations continue on a final contract.
Speaker Change: We expect the strike base to have an impact on our inventory at each day off was estimated to require a week to catch up.
Speaker Change: We were already experiencing delays for shipments brought into the east coast and while we believe our current inventory levels are adequate to support the business there could be some minor impacts to our fill rates over the coming months.
Speaker Change: We're also contingency planning in case the final contract is and agreed to by January.
Justin Jude: Last quarter, we reported that we reached an agreement with the Trade Union, representing a number of our employees in Germany. And we were pleased with the progress in restoring normal operating performance, and branch availability improved in a quarter, rising to nearly 95%.
Last quarter, we reported that we reached an agreement with the trade Union, representing a number of our employees in Germany, and we are pleased with the progress in restoring normal operating performance and branch availability improved in the quarter rising to nearly 95% I'll now turn the call to Rick for a review of the financials and guidance.
Rick Galloway: I'll now turn to call to Rick for a review of the financials and guidance. Thank you, Justin, and welcome to everyone joining us today. Third quarter results reflect solid overall performance, but with some variability across the business. Europe performed well in the face of challenging macroeconomic conditions, where revenue in our North America and specialty segments came in lower than expected due to factors mentioned by Justin. As discussed during the investor day, we were experiencing softer than anticipated revenue in North America in July and August numbers. This softness continued into September, with preliminary repairable claims data indicating a larger than expected decrease in total Q3 year-over-year repairable claims. Additionally, Hurricane Helene had a small but negative impact on the final week of the quarter.
Thank you Justin and welcome to everyone joining us today third quarter results reflect solid overall performance, but with some variability across the business Europe performed well in the face of challenging macroeconomic conditions, while revenue in our North America and specialty segments came in lower than expected due to factors mentioned by Justin.
Speaker Change: As discussed during the Investor day, we were experiencing softer than anticipated revenue in North America in July and August numbers. The softness continued into September with preliminary repairable claims data, indicating a larger than expected decrease in total Q3 year over year Repairable claims. Additionally.
Speaker Change: Additionally, hurricane ALLETE had a small but negative impact.
Speaker Change: On the final week of the quarter. These.
Rick Galloway: These challenging economic conditions, including further declines and collision claims from Q2 to Q3, were difficult to overcome, but we are proud of all of our 48,000 employees who remained focused on delivering solid operating performance through our lean operating model.
These challenging economic conditions, including further declines in collision claims from Q2 to Q3 were difficult to overcome but we are proud of all of our 48000 employees, who remain focused on delivering solid operating performance through our lean operating model.
Rick Galloway: Turning now to the third quarter consolidated results. Our actions to simplify the business and align cost structures to demand levels contributed to improvement in our segment even margins by 30 basis points year over year. Adjusted deluded earnings per share of 88 cents was 2 cents higher than the prior year figure. Lower share counts due to our ongoing share repurchase program and lower taxes contributed to a year-over-year improvement in adjusted EPS of approximately 4 cents. These were offset by roughly 2 cents of a net decline in operating results. We saw significant improvements in EBITDA in both our Europe and self-service segments.
Speaker Change: Turning now to the third quarter consolidated results.
Speaker Change: Our actions to simplify the business and align cost structures to demand levels contributed to improvement in our segment EBITDA margins by 30 basis points year over year.
Speaker Change: Adjusted diluted earnings per share of 88 was <unk> <unk> higher than the prior year figure.
Speaker Change: Our share count due to our ongoing share repurchase program and lower taxes contributed to a year over year improvement in adjusted EPS of approximately <unk> <unk>.
Speaker Change: These were offset by roughly <unk> of a net decline in operating results. We saw significant improvements in the EBITDA in both our Europe and self service segments.
Rick Galloway: Europe posted double-digit EBITDA margins for the second straight quarter despite a challenging macroeconomic environment. Self-service benefited from their focus on improved vehicle procurement costs and productivity, with some additional help from more favorable movement in scrap steel prices during the quarter. However, organic revenue declines in North America, driven largely by aftermarket and paint volumes, contributed to a mixed decrease and ultimately lower EBITDA for the North America segment. Difficult economic conditions in the auto and RV markets also led to a decline in organic revenue and earnings in our specialty segments.
Speaker Change: Europe posted double digit EBITDA margins for the second straight quarter, despite a challenging macroeconomic environment.
Speaker Change: Self service benefited from their focus on improved vehicle procurement costs and productivity with some additional help from more favorable movements in scrap steel prices during the quarter.
Speaker Change: However, organic revenue declines in North America, driven largely by aftermarket and paint volumes contributed to a mixed decrease and ultimately lower EBITDA for the North American segment.
Speaker Change: Difficult economic conditions in the auto and RV markets also led to a decline in organic revenue and earnings in our specialty segment.
Rick Galloway: As noted in Q1, we implemented a global restructuring program focused on enhanced profitability. In Q3, we have standard the 2024 restructuring plan to simplify the business and to align with current demand, including additional footprint rationalization and streamlining our logistics models. Given the persistent market demand pressures and macroeconomic challenges, we are continuing to execute on our restructuring plans in North America and Europe to reduce headcount and exit under performing locations. As a result, we incurred $14 million in charges for the quarter. Further charges are expected in future periods for severance, lease termination costs, and other related expenses.
Speaker Change: As noted in Q1, we implemented a global restructuring program focused on enhancing profitability.
Speaker Change: In Q3, we expanded the 2020 for restructuring plan to simplify the business and to align with current demand, including additional footprint rationalization and streamlining our logistics models.
Speaker Change: Given the persistent market demand pressures and macroeconomic challenges we are continuing to execute on our restructuring plans in North America, and Europe to reduce head count and exit underperforming locations as.
Speaker Change: As a result, we incurred $14 million in charges for the quarter.
Speaker Change: Further charges are expected in future periods for severance lease termination costs and other related expenses.
Rick Galloway: Now for segment results. Going to slide 8, North America posted a segment even a margin of 16.1%, a 90 basis point decrease relative to last year. Last quarter, we projected the full year margin would be around 17 percent with the full year impact of Unicelect dilution. The report of margin for the third quarter was below expectations as the cost actions taken, including unicelect synergies from integration and other restructuring efforts, were not enough to offset the lower aftermarket revenue with the related mix effect on gross margins. As aftermarket collision revenue has a higher margin than our other wholesale product lines.
Speaker Change: Now for segment results.
Speaker Change: Going to slide eight north.
Speaker Change: North America posted a segment EBITDA margin of 16, 1%, a 90 basis point decrease relative to last year.
Speaker Change: Last quarter, we projected the full year margin would be around 17% with the full year impact of Uni select dilution.
Speaker Change: The reported margin for the third quarter was below our expectations as the cost actions taken including units like synergies from integration and other restructuring efforts were not enough to offset the lower aftermarket revenue with the related mix effect on gross margins.
Speaker Change: As aftermarket collision revenue has a higher margin than our other wholesale product lines.
Rick Galloway: Relative to the prior year, salvage margins were also down, reflecting more favorable revenue, vehicle cost trends, and commodity prices in the prior year period. Overhead expenses decreased 90 basis points in North America, reflecting lower personnel costs, primarily related to incentive compensation, with the unicelect synergies and productivity largely offsetting significant inflationary pressures and the leverage effect of the organic revenue decline. With the headwinds on repairable claims and salvage margins, as well as the impact from the hurricanes, we estimate North America's even margins will be in the low to mid-16s for the full year. Looking at slide 9, Europe reported a segment even a margin of 10.2%, a 90 basis point improvement over last year.
Speaker Change: Relative to the prior year salvage margins were also down reflecting more favorable revenue vehicle cost trends in commodity prices in the prior year period.
Speaker Change: Overhead expenses decreased 90 basis points in North America, reflecting lower personnel costs, primarily related to incentive compensation.
Speaker Change: With the unit select synergies and productivity initiatives, largely offsetting significant inflationary pressures and the leverage effect of the organic revenue decline.
Speaker Change: With the headwinds on repairable claims and salvage margins as well as the impact from the Hurricanes, we estimate north Americas EBITDA margins will be in the low to mid <unk> for the full year.
Speaker Change: Looking at slide nine.
Speaker Change: Europe reported a segment EBITDA margin of 10, 2%, a 90 basis point improvement over last year.
Rick Galloway: Gross margin rose slightly, despite the difficult economic conditions, as we were able to pass along some pricing to help offset input cost increases in certain markets. Overhead expenses were favorable by 70 basis points compared to the prior year period. While productivity measures largely offset inflationary pressures, our prior year SG&A expenses included a 70 basis point chart related to a non-recurring value added tax audit matter in Italy. We remain focused on productivity measures to offset the ongoing inflationary pressures on overhead expenses and cost of goods sold and have expanded the 2024 restructuring plan in Europe to support these efforts.
Speaker Change: Gross margin rose slightly.
Speaker Change: Fight the difficult economic conditions, as we were able to pass along some pricing to help offset input cost increases in certain markets.
Speaker Change: Overhead expenses were favorable by 70 basis points compared to the prior year period.
Speaker Change: While productivity measures largely offset inflationary pressures our prior year SG&A expenses included a 70 basis point charge related to a nonrecurring value added tax audit matter in Italy.
Speaker Change: We remain focused on productivity measures to offset the ongoing inflationary pressures on overhead expenses and cost of goods sold and have expanded the 2020 for restructuring plan in Europe to support these efforts.
Rick Galloway: Many of these actions have been initiated and are in process, but the benefits will be more notable in the fourth quarter and heading into 2025. When we talked 90 days ago, we expected even a margins in Europe to be in the mid to high nines. With current volume expectations and the actions we've taken to address productivity, we believe even a margins will fall in line with this range. on a long-term basis, we expect to deliver double-digit EBITDA margins in Europe. Moving to slide 10, Specialty's EBITDA margin of 7.3% declined 130 basis points compared to the prior year, primarily driven by a decline in organic revenue and resulting leverage effect on overhead costs.
Speaker Change: Many of these actions have been initiated and are in process, but the benefits will be more notable in the fourth quarter and heading into 2025.
Speaker Change: When we talked 90 days ago, we expected EBITDA margins in Europe to be in the mid to high nines with current volume expectations and the actions we've taken to address productivity. We believe EBITDA margins will fall in line with this range.
Speaker Change: On a long term basis, we expect to deliver double digit EBIT margins in Europe.
Speaker Change: Moving to slide 10.
Speaker Change: Specialties EBIT margin of seven 3% declined 130 basis points compared to the prior year, primarily driven by a decline in organic revenue and resulting leverage effect on overhead costs.
Rick Galloway: Demand softness in the auto and RV product lines, and competitive pricing pressures remain challenges for the business. We have been implementing changes to improve our net pricing and saw sequential quarterly improvement in gross margin in the last three quarters. Overhead expenses were roughly flat in dollar terms, but we're higher as a percentage of revenue, primarily due to lower operating leverage on the organic revenue decline. We believe the full year's segment EBITDA margin will be closer to 7% given the continued organic revenue declines. Self-service generated a 7.3% segment EBITDA margin in Q3, which is an almost 800 basis point improvement from last year.
Speaker Change: Demand softness in the auto and RV product lines and competitive pricing pressures remain challenges for the business.
Speaker Change: We have been implementing changes to improve our net pricing and saw sequential quarterly improvement in gross margin in the last three quarters.
Speaker Change: Overhead expenses were roughly flat in dollar terms, while were higher as a percentage of revenue primarily due to lower operating leverage on the organic revenue decline.
Speaker Change: We believe the full year's segment EBITDA margin will be closer to 7% given the continued organic revenue declines.
Speaker Change: Self service generated a seven 3% segment EBITDA margin in Q3.
Speaker Change: Which is an almost 800 basis point improvement from last year in dollar terms segment EBITDA increased by $11 million.
Rick Galloway: In dollar terms, segment EBITDA increased by $11 million. Efforts to manage vehicle procurement costs, combined with overhead cost controls and favorable movements in scrap steel prices, help drive an improvement in profitability.
Speaker Change: Efforts to manage vehicle procurement costs combined with overhead cost controls and favorable movements in scrap steel prices helped drive an improvement in profitability.
Rick Galloway: Shifting to cash flows and the balance sheet. We produce $341 million in free cash flow during the quarter, bringing our year-to-date total to $661 million. We invested approximately $16 million in two small tuck-in acquisitions, including one in Canada and one in Europe. In addition, we paid down approximately $35 million in outstanding debt. In the third quarter, we continued to return value to our shareholders with $125 million for share repurchases and our quarterly dividend totaling $79 million. We will also continue with our 30-step per share quarterly dividend into 2025. At this level, the dividend payout aligns with our stated capital allocation policy and allows us to retain strategic flexibility for capital allocation.
Speaker Change: Shifting to cash flows and the balance sheet.
Speaker Change: We produced $341 million in free cash flow during the quarter, bringing our year to date total to $661 million.
Speaker Change: We invested approximately $16 million and two small tuck in acquisitions, including one in Canada and one in Europe.
Speaker Change: In addition, we paid down approximately $35 million in outstanding debt.
Speaker Change: In the third quarter, we continued to return value to our shareholders with $125 million for share repurchases and our quarterly dividend totaling $79 million.
Speaker Change: We will also continue with our <unk> 30 per share quarterly dividend into 2025.
Speaker Change: At this level the dividend payout aligns with our stated capital allocation policy and allows us to retain strategic flexibility for capital allocation.
Rick Galloway: We have committed to allocating at least 50% of our free cash flow towards dividends and share repurchases, and our third quarter activity kept us on pace to deliver on this commitment. On a year-to-date basis, we have generated free cash flow of $661 million and invested $520 million for share repurchases and dividends, or almost 80% of our free cash flow. As of September 30, we had total debt of $4.4 billion with a total leverage ratio of 2.4 times, even a slight increase from the prior quarter but within a range of expectations. We remain committed to maintaining a manageable debt level and our investment grade rating.
Speaker Change: We are committed to allocating at least 50% of our free cash flow towards dividends and share repurchases and our third quarter activity kept us on pace to deliver on this commitment.
Speaker Change: On a year to date basis, we have generated free cash flow of $661 million and invested $520 million for share repurchases and dividends or almost 80% of our free cash flow.
Speaker Change: As of September 30, we had total debt of $4 $4 billion with a total leverage ratio of two four times EBITDA.
Speaker Change: A slight increase from the prior quarter, but within our range of expectations.
Speaker Change: We remain committed to maintaining a manageable debt level and our investment grade rating.
Rick Galloway: Our effective borrowing cost was 5.5% at the end of Q3, slightly down from Q2, as a result of recently lowered benchmark rates. We have $1.7 billion in variable rate debt, of which 700 million has been fixed with interest rates loss, which effectively provides a fixed rate on over 75% of our debt.
Speaker Change: Our effective borrowing cost was five 5% at the end of Q3 slightly down from Q2 as a result of recently lowered benchmark rates.
Speaker Change: We have $1 7 billion.
Speaker Change: And variable rate debt of which $700 million has been fixed with interest rate swaps, which effectively provide a fixed rate on over 75% of our debt.
Rick Galloway: I will close with an update on our full-year 2024 guidance. We expected in our prior guidance the drop in repairable claims volumes in North America will remain at the same level of year-over-year declines into the back half of the year. Given the greater than anticipated drop in the third quarter, weighing down organic revenue, combined with lower than expected volumes in our specialty business and headwinds from hurricanes in the southeastern portion of the U.S., we are adjusting our full year guidance. As mentioned previously, we view the market-driven volume declines will abate, but expect them to impact us in the fourth quarter and eventually level off in 2025.
I will close with an update on our full year 2024 guidance wed.
Speaker Change: We expected in our prior guidance the drop in Repairable claims volumes in North America would remain at the same level of year over year declines into the back half of the year.
Speaker Change: Given the greater than anticipated drop in the third quarter weighing down organic revenue combined with lower than expected volumes in our specialty business and headwinds from hurricanes in the southeastern portion of the U S. We are adjusting our full year guidance.
Speaker Change: As mentioned previously we view the market driven volume declines will abate.
Speaker Change: But expect them to impact us in the fourth quarter and eventually level off in 2025.
Rick Galloway: While we have taken action to mitigate these effects through cost controls and margin actions, those will not be enough to offset the full-year impact of the lower revenue expectations. Our guidance is based on current market conditions and recent trends and assumes that scrap and precious metal prices hold near September prices. On foreign exchange, our guidance includes rates roughly in line with the third quarter. The global tax rate edged up slightly to 27.0% due to shifts in our geographical mix of earnings. Our full year guidance metrics on slide 12 have been updated from Q2 earnings call.
Speaker Change: While we have taken action to mitigate these effects through cost controls and margin actions.
Speaker Change: Those will not be enough to offset the full year impact of the lower revenue expectations. Our guidance is based on current market conditions, and recent trends and assumes that scrap and precious metal prices hold near September prices.
Speaker Change: On foreign exchange our guidance includes rates roughly in line with the third quarter.
Speaker Change: The global tax rate edged up slightly to 27.0% due to shifts in our geographical mix of earnings.
Speaker Change: Our full year guidance metrics on slide 12 have been updated from Q2 earnings call.
Rick Galloway: We expect reported organic parts and services revenue in the range of negative 275 basis points to negative 175 basis points. At the negative 2.25% midpoint, this is a decrease of 175 basis points from the prior guidance. The continued softness in Q3 organic revenue in North America and specialty, along with the impact of the hurricanes in the U.S. drove the decision to lower the full year range. We expect the top line headwind in North America will linger into 2025.
Speaker Change: We expect reported organic parts and services revenue in the range of negative 275 basis points to negative 175 basis points.
Speaker Change: At the negative $2 two 5% midpoint. This is a decrease of 175 basis points from the prior guidance.
Speaker Change: The continued softness in Q3 organic revenue in North America, and specialty along with the impact of the Hurricanes in the U S drove the decision to lower the full year range.
Speaker Change: We expect the top line headwinds in North America will linger into 2025, we.
Rick Galloway: We are working through our budgeting process for next year and will update you on the expectations during our Q4 earnings release in February. In Europe, the top line recovery from the difficult economic environment in several markets is slower than originally anticipated, and we expect Q4 organic growth to be similar to what we saw in Q3. As a result of these headlines, we expect adjusted diluted EPS to be slightly lower and in the range of $3.38 to $3.52. A decrease of 15 cents from our previous midpoint. The primary driver of the decrease includes the market-driven demand dynamics in North America and specialty.
Speaker Change: We are working through our budgeting process for next year and we'll update you on the expectations during our Q4 earnings release in February.
Speaker Change: In Europe, the topline recovery from the difficult economic environment in several markets is slower than originally anticipated and we expect Q4 organic growth to be similar to what we saw in Q3.
Speaker Change: As a result of these headwinds we expect adjusted diluted EPS to be slightly lower and in the range of $3 38 to $3 52.
Speaker Change: A decrease of 15 from a previous midpoint.
Speaker Change: The primary driver of the decrease includes the market driven demand dynamics in North America and specialty while we expect to see volatility in these revenue trends.
Rick Galloway: While we expect to see volatility in these revenue trends, the team is focusing on addressing those items within our control, including our cost structure, and will continue to execute on productivity and restructuring initiatives, which will partially offset these revenue trends in Q4 and will further benefit us heading into 2025. The free cash flow targets at 50% to 60% annual EBITDA conversion and approximately $850 million remain unchanged from prior guidance. Dilligent balance sheet and capital expenditure management will help deliver the full-year target despite the lower expected profitability, while continuing to balance trade working capital needs heading into 2025.
Speaker Change: The team is focusing on addressing those items within our control, including our cost structure and we will continue to execute on productivity and restructuring initiatives, which will partially offset these revenue trends in Q4 and.
Speaker Change: And we will further benefit us heading into 2025.
Speaker Change: The free cash flow targets of 50% to 60% annual EBIT conversion and approximately $850 million remain unchanged from prior guidance diligent balance sheet and capital expenditure management will help deliver the full year target. Despite the lower expected profitability, while continuing to balance trade working.
Speaker Change: Needs.
Speaker Change: Heading into 2025 thanks.
Rick Galloway: Thanks for your time.
Speaker Change: Thanks for your time I will now turn the call back to Justin for his closing comments.
Justin Jude: I will now turn the call back to Justin for his closing comments. Thanks for it for the financial commentary. As I close the book on my first quarter as CEO, I want to thank all of my LKQ colleagues for what they do each and every day to make LKQ an exceptional company.
Justin Jude: Thanks, Rick for the financial commentary.
Justin Jude: As I close the book on my first quarter as CEO I want to thank all of my LKQ colleagues for what they do each and everyday to make LKQ an exceptional company.
Justin Jude: Things don't always go according to plan in Q3; through us a few curveballs, but the LKQ team immediately went to work addressing these issues. Their knowledge, resilience and work ethic are second to none, and we will help us emerge even stronger from the challenging conditions facing our industry. I am very proud to work with this team, and I am excited about LKQ's future.
Justin Jude: Things don't always go according to plan in Q3 through US a few curve balls, but the LKQ team immediately went to work addressing these issues their knowledge resilience and work ethic are second to none and we will help us emerge even stronger from the challenging conditions facing our industry.
Justin Jude: I am very proud to work with this team and I am excited about <unk> future.
Operator: I now ask the operator to open up a line for questions.
Justin Jude: I'll now ask the operator to open up the line for questions.
Operator: Thank you, Justin. Again, if you have a question for the management team, it's staff followed by one, and please ensure your device is unmuted locally when it's your turn to speak. A kind reminder to please limit yourself to one question and then one follow-up.
Speaker Change: Thank you Justin.
Speaker Change: Again, if you have a question for the management team.
Speaker Change: And can you give us all your devices Amit.
Speaker Change: Ah Condra reminder, to please limit yourself to one question and then one follow up.
Craig Kennison: Our first question today comes from Craig Kennison. With Bret, please go ahead. Your line is open. Hey, good morning. Thanks for taking my question. I just wondered if you could shed more light on the issue with respect to paint and the competition that you're seeing there. What's going on in that category? Do you think it's a change in the competitive landscape or just a tactical move by your competitors?
Speaker Change: Our first question today comes from Craig Kennison with Baird. Please.
Speaker Change: Please go ahead your line is open.
Craig Kennison: Hey, good morning, Thanks for taking my question I, just wondered if you could shed more light on the issue with respect to paint.
Craig Kennison: And the competition that Youre seeing there what's going on.
Craig Kennison: That category and do you think it is a change in the competitive landscape or just a tactical move by your competitors.
Justin Jude: I'd say maybe a mixture of both, Craig.
Craig Kennison: I'd say, maybe a mixture of both Craig This is Justin thanks for the question.
Justin Jude: This is Justin. Thanks for the question. You know, if you remember last year, we announced the intent to acquire Unit Select. And then it went six months. We were kind of in a quiet period. We couldn't talk to finished master folks. We couldn't talk to the customers. And at that time, that quiet period creates some unsureness. And finished master was had lost some accounts pre-acquisition or pre-closing and leading in the post-acquisition. As you know, some of those contracts get worked on six months in advance. Additionally, there was a larger NSO that had been lost by Finished Master and that business was being migrated away after we acquired and closed on Finished Master.
If you remember last year, we announced the intent to acquire units select and then it went to six months, we were kind of in a quiet period, we couldnt talk to finish master folks, we kind of talk to the customers at that time that quiet period create some insurance.
Craig Kennison: <unk> finished master was lost some accounts pre acquisition pre closing and leading in the post acquisition as you know some of those contracts get worked on six months in advance.
Craig Kennison: Additionally, there was a larger NSO that had been lost by finish master and that business was being migrated away. After we acquired and closed on finish master.
Justin Jude: So we obviously talked about rapidly integrating the footprint, integrating the sales teams. And so we kind of started off with a lost position of where we expected to be. But the teams have aligned to sales, refocus the groups collectively. And right now, we think that we're showing that we've moderated the loss and started to grow share. And really, we don't think there's anybody that can compete with us on our service and availability.
Craig Kennison: We talked about rapidly integrating the footprint integrating our sales teams and so we kind of started off with a at a loss position of where we expect it to be but the teams are aligned to sales.
Craig Kennison: Refocused the groups collectively and right now we think that we're showing that we have.
Craig Kennison: Moderated the loss and started to grow share.
Craig Kennison: And really we don't think there's anybody that can compete with us on our service and availability.
Justin Jude: Maybe just Justin, if you could shed light on the value proposition, LKQ has with respect to having paint as part of your overall portfolio and whether that's persuasive to your customers. Thank you. Yeah, I mean, as you guys may know, the margin on paint is lower than typically on parts. And so a lot of the pain competitors that we deal with, even finished master prior to LKQ acquiring them, would cut their costs from service level to make sure that they can maintain their profits, such as delivering once a week or delivering twice a week. So now when we've integrated the warehouses, finished master into the LKQ footprint, you know, we're delivering our body shops two times a day in some markets.
Craig Kennison: Maybe just Justin if you could shed light on the value proposition of LKQ has with respect to having paint as part of your overall portfolio and whether thats persuasive to your customers. Thank you.
Craig Kennison: Okay.
Justin Jude: Yes, I mean as you guys may know the margin on paint is lower than typically on parts and so a lot of the pain competitors that we deal with even finished master prior to LKQ acquired them would cut their costs from a service level to make sure that they can maintain their profits such as delivering once a week or delivery twice a week. So now when we've integrated the warehouses are finished.
Craig Kennison: Master into the LKQ footprint.
Craig Kennison: We're delivering to our body shops, two times a day in some markets of same day everyday of the week and so we're able to put paint on that on that vehicle. So from a service level from an inventory depth standpoint, and availability. It's hard for any of these other paying distribution businesses to compete with us on a like for like just because our cost structure, we already have the truck going there once again.
Justin Jude: Same day every day of the week. And so we're able to put pain on that on that vehicle. So, from a service level, from an inventory depth standpoint and availability, it's hard for any of these other paint distribution businesses to compete with us on a light-for-light, just because our cost structure we already have the truck going there. Once again, once a day or twice a day with parts, both use an aftermarket and then for us to add paint out of the same warehouses is just a marginal increase in cost. So, from a service level and cost to serve, it's my opinion very hard for our competition to compete with that.
Craig Kennison: Once a day or twice a day with parts both use in aftermarket and for us to add paint out of the same warehouses. It's just a marginal increase in cost so from a service level and cost to serve its my opinion, it's very hard for our competition to compete with us.
Justin Jude: Thanks, Justin.
Speaker Change: Thanks, Justin.
Scott Denver: And the next question comes from Scott Denver with Roth MKM.
Speaker Change: Our next question comes from Scott <unk> with.
Speaker Change: Well and Ken please.
Scott Denver: Please go ahead. Good morning, guys, and thanks for taking my questions as well. You want to check?
Speaker Change: Please go ahead.
Scott <unk>: Good morning, guys and thanks for taking my questions as well.
Speaker Change: Maybe one just yet.
Scott Denver: With the North America, trying to parse out what happened in the aftermarket. I remember last year you guys caught lightning in a bottle because of State Farm coming back into the market and the availability of aftermarket parts increased. It's more a function of tough comparisons for aftermarket, or is there something going on where customers are shifting their focus and preference back to salvage.
Okay.
Speaker Change: Within North America.
Speaker Change: Parse out what happened in the aftermarket I remember last year.
Speaker Change: You guys caught lightning in a bottle because of state farm coming back into the market and the availability of aftermarket parts increased.
Speaker Change: Is this more a function of tough comparisons for aftermarket or is there something going on where cut.
Speaker Change: Customers are shifting their focus of preference back to salvage.
Justin Jude: I'm going to use that line, by the way, letting you in the bottle. I like that, Scott. Yeah, I would say it's really tied to a terrible claims piece. I mean, if you look at our aftermarket business, it's 100% tied to collision. And so when you see the claims drop, that puts a lot of downward pressure on the aftermarket piece. Like anytime we talked about in the last call, anytime the market drops, our competitors don't necessarily what that's OEM or whether that's other aftermarket distributors or competitors don't necessarily know if it's the market or if it's the if they're losing share.
Speaker Change: I'm going to use that line by the way, let me a bottle I like that Scott.
Speaker Change: Yes, I would say, it's really tied to variable claims piece I mean, if you look at our aftermarket business, it's 100% tied to collision and so when you see the claims drop that puts a lot of downward pressure on the on the aftermarket piece like any time, we've talked about in the last call anytime the market drops our competitors don't necessarily whether it's OEM or what.
Speaker Change: Other aftermarket distributors, our competitors don't necessarily.
Speaker Change: No if it's a market or if it's the if they are losing share so they get a little bit more aggressive on price trying to get some share. So we don't we don't chase price down, but it does create some pressure on the margin a little bit, but aftermarket, but the lion issue with the drop in aftermarket would be tied to the variable claims piece.
Justin Jude: So they get a little bit more aggressive on price, trying to get some chair. So we don't we don't chase price down, but it does create some pressure on the margin a little bit, but aftermarket, but the line issue with the drop in aftermarket would be tied to the repairable claims piece.
Scott Denver: Okay, you know, Scott, just to add on to that, just a minute. The other thing to think about is with with. State Farm coming up last year and you look at that compared to the repairable claims, there was a significant difference between the downgrade and the comparable claims in the back half of last year versus where revenue was that plus the strike that happened at the Louise last year did help our over revenue. And so the comps, you're correct on the aftermarket piece; there are tougher comps than you when you're looking at what happened within the industry last year as well.
Speaker Change: Okay, Scott just to add on to that.
Speaker Change: Minute.
Speaker Change: The other thing to think about is with with.
Speaker Change: With.
Speaker Change: State farm coming up last year, and you look at that compared to the repairable claims there was a significant difference between the downgrade in the variable claims in the back half of last year versus where revenue was that plus the strike that happened at <unk> last year did help our overall revenue. So the comps youre correct on the aftermarket piece there are tougher comps when you when youre looking at would have.
Speaker Change: And within the industry last year as well.
Scott Denver: Got it.
Speaker Change: Got it and then just last question.
Scott Denver: And then just last question, there was a lot of things, a lot of the transitory address, which impacted this quarter and probably the fourth quarter as well from the storms and strikes. Is there any way to quantify the impact from the storms for the full year, or how much of your guidance? Coming down was because of that and the strike.
Speaker Change: A lot of things a lot of transitory items, which impacted this quarter and probably the fourth quarter as well from the storms in <unk>.
Strikes is there any way to quantify the impact from the storms for the full year or how much of your guidance.
Speaker Change: Coming down was because of that and the strike.
Speaker Change: Yeah.
Justin Jude: Yeah, so let me take that one, Scott. As far as the third quarter impact, it was minimal impact on the storms. There was a lean hit at the very end, and I talked about it just briefly that there was a little bit of an impact on the last week of the quarter going into Q4. We did see, obviously, noten hit the southeast as well. And there was significant cleanup, and there's still to clean up on the lean. No, we're still trying to quantify. We didn't receive very much; it is just and talked about property damage, but we are still seeing the impacts of revenue.
Speaker Change: Yes, So let me take that one Scott.
Speaker Change: As far as the third quarter impact there was minimal impact on the storms. There was there was helene hit at the very end and I talked about it just briefly that there was a little bit of an impact on the last week of the.
Speaker Change: The quarter going into Q4, we did see obviously Milton.
Speaker Change: Hit the southeast as well.
Speaker Change: And there were significant cleanup and they are still considered to be cleaned up on helane.
Speaker Change: We're still trying to quantify we didn't receive very much as Justin talked about property damage, but we are still seeing the impacts of revenue. So part of what we're doing within our revenue and our overall EPS guidance. If you think about what we talked about at Investor Day, Investor Day, I talked about as being below our previous midpoint I think when we look back to <unk>.
Justin Jude: So part of what we're doing within our revenue and our overall EPS guidance. If you think about what we talked about at Investor Day, Investor Day, I talked about us being below our previous midpoint. I think when we look back to where consensus was, is the below $3.50 cents. $3.53, I think, is what was for the year. So if you think about the only thing that's really happened since then is a little bit further decline in the parable claims than what we had expected. We were expecting about what we saw in Q2, which was around 7%, and now it's a little north of nine.
Speaker Change: Census was below $3 $53 53, I think is where it was for the year. So if you think about the only thing Thats really happened. Since then is a little bit further decline in repairable claims than what we had expected we were expecting about what we saw in Q2, which is around 7% and now it's a little north of nine so.
Justin Jude: So we're training that out, and then additionally, there's two hurricanes and a strike that happened. So that's how we get essentially that seven cents dropping from that roughly 353 consensus down to our 3,045 sets.
Speaker Change: Train them that out and then additionally, theres two hurricanes and a.
Speaker Change: And a strike that happened so that's how we get essentially that seven dropping from that roughly 353 consensus down to Earth.
Speaker Change: <unk> 3045 sets.
Speaker Change: Got it.
Speaker Change: All I have thank you.
Speaker Change: Yes.
Brian Butler: Thank you. Annette's question comes from Brian Butler with Steve Fulk. Your line is open. Good morning, thanks for taking the questions. What are you looking at at 2025, and you talk about macro pressures abating at some point. What gives you confidence? I mean, you know, that you will see some kind of abatement of the claims, the claims issue into 2025, and is that a second half of 25 or is that kind of a first half just trying to get a sense of what you're thinking about from a perspective of timing on that.
Speaker Change: Thank you. Our next question comes from Brian Butler with Stifel.
Speaker Change: Your line is open.
Justin Jude: Yeah, Brian, I mean, if you on the repairable claims pieces, I talked about it, it's really an output of how the insurance costs is affecting the consumers, whether that's in their premiums, whether that's acceptable that they may have raised, then relative to what that used car value is after that vehicle is fixed. And I think we've seen there might have been a couple of increases with a couple months here and there, but we've almost seen two years of declining used car pricing. And so we kind of, and as we talked to people in the industry and outside of industry, we kind of forecast that used car pricing at some point should moderate hopefully the back half of 2025 and start to show some improvement as those used car values start to increase.
Justin Jude: It makes it more economical for consumers to repair their vehicles, whether it's from a collision or even general maintenance. So we think overall the some headwind of use car pricing should start should start subsiding.
Justin Jude: I would say in the mid mid 2025 and start to show some improvements at a back up the next year.
Speaker Change: I would say in the mid to mid 2025 and start to show some improvements in the back half of next year.
Brian Butler: Okay, that's helpful, and then on the free cash flow, you maintain to that $850 million for 2024.
Speaker Change: Okay. That's helpful and then on the free cash flow you maintain to that $850 million for 2024.
Rick Galloway: What capital spending is either being pushed out or foregone, kind of to hit that age 50 number. And how do we think about that again coming back online in 2025?
Speaker Change: What what capital spending is either being pushed out or are foregone kind of to hit that $8 50 number and how do we think about that again coming back online in 2025.
Rick Galloway: Yeah, Brian, I can start off and take that. What I talked about, and it's, I think it is important just, you know, cash is king, right? So if we look at $850 million, which is what we had all year long talking about our free cash flow, the team has done a tremendous job managing trade working capital. Trade working capital, the usage of our supply chain financing has been going up. The extension of terms, a large focus on trade working capital, is the bulk of how we're able to achieve this even with decline and overall, either the dollars.
Speaker Change: Yes, Brian I can I can start off and take that.
Speaker Change: What I talked about I think it is important to us.
Speaker Change: Cash is king right. So if we if we look at $850 million, which is what we've had all year long talking about our free cash flow. The team has done a tremendous job managing trade working capital trade working capital the usage of our supply chain financing has been going up.
Speaker Change: The extension of terms, a large focus on trade working capital.
Speaker Change: Is the bulk of how we're able to achieve this even with a decline in overall EBIT of $1. When you look at some of the Capex items that were pushing off.
Rick Galloway: When you look at some of the cat backs items that we're pushing off, there's always a need for, but what we're saying, look, let's make sure that there's nothing that's going to impact our overall earnings, nothing's going to impact our growth. And so there's, there's some of the things that you can delay for three months, six months, something like that that we're looking at the overall returns and keep in mind as well. When Justin came on, he looked at the hurdle rates, and he wasn't just talking about acquisitions or divestitures. He's looking at overall hurdle rates.
Speaker Change: Theres always a need for it but what we're saying, let's make sure that there's nothing.
Speaker Change: That's going to impact our overall earnings nothing is going to impact our growth and so there is there is some of the things that you can delay for three months six months something like that.
Speaker Change: We're looking at the overall returns and keep in mind as well when Justin came on he looked at the hurdle rates and it wasn't just talking about acquisitions or divestitures. He's looking at overall hurdle rates. So there is some items that just quite honestly don't pass the hurdle rate.
Rick Galloway: So there's some items that just, quite honestly, don't pass the hurdle rate that we've got in there. And so there's been a little bit of a change of look. If it's not going to pass the hurdle rate, there's a better use of our cash. And so that's the way to think of that. It's not delaying repairs or anything like that that would come and sort of increase the number next year because we've delayed it this year. It's more of, it just doesn't pass the hurdle rate, and it's a project that we're probably not just going to deal.
Speaker Change: That we've got in there and so there's been a little bit of a change of look if it's not going to pass the hurdle rate, there's a better use of our cash and so that's the way to think of that it's not delaying repairs or.
Speaker Change: Like that that would come in sort of increased the number of next year, because we have delayed this year. It's more of it just doesn't pass the hurdle rate and it's a project that we're probably not because you're going to do.
Speaker Change: Yeah.
Rick Galloway: Okay, thank you.
Speaker Change: Okay. Thank you.
Operator: Thank you, and just a final reminder: if you'd like to take this opportunity to ask a question, please press staff below by the number one on your telephone keypad now.
Speaker Change: Thank you and just a final reminder, if you'd like to take this opportunity to ask a question. Please press star followed by the number one on your telephone keypad now.
Gary Prestopino: And the next question comes from Gary Prestopino, with Barrington Research.
Speaker Change: Our next question comes from Gary <unk> with Barrington Research. Please go ahead.
Gary Prestopino: Please go ahead.
Justin Jude: Hi, good morning, everyone. Justin, you mentioned that in Europe, you reviewed 25 product categories, 425,000 SKUs, about 50% of what you want to do. Will this be completed by the end of 2024? And then we can, you start implementing changes that would benefit us going in 2025.
Speaker Change: Good morning, everyone.
Justin Jude: Yeah, Gary, we do not forecast that we're going to be completed by the end of 2024. Our expectation is, I mean, you're talking obviously hundreds of thousands of SKUs needing to understand the market dynamics of what those brands may, whether they're relevant in those markets or not, making sure that we have coverage by an application more so than coverage by a brand. We're projecting that the completed analysis will be done in early 2025, and we'll start to be able to make changes on our SKU, our stocking level of certain SKUs, and start to show some of those improvements, although small, in a backup of 2025.
Justin Jude: But it won't be done by the end of this year, but it should be done by the early Q1 or early 2025. Okay.
Justin Jude: Okay, and then just lastly, with the exit of operations in Poland and Bosnia, I mean, in Europe, do you have any other small operations that you're considering closing in these various countries? That are you basically done with all that with these smaller cats and dog operations? Yeah, there is a review of the portfolio as a constant ongoing. There are smaller, you know, other smaller operations, both in North America and in Europe that we're always analyzing. There may be some more on the horizon. On, you know, anytime we do the vestiture or something like that, my preferences just show you.
Justin Jude: Don't tell you about it. So, once again, our portfolio review is constant, ongoing, and we'll continue to look at that. Okay.
Speaker Change: And ongoing and we will continue to look at that.
Ryan Brinkman: Thank you. And the next question comes from Ryan.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from Ryan Brinkman with Jpmorgan. Please go ahead. Your line is open.
Josh Butler: Brinkman with JP Morgan. Please go ahead. Your line is open. Hi, good morning. This is Josh Butler on for Ryan Brinkman. Thanks for taking my questions.
Josh <unk>: Hi, Good morning. This is Josh <unk> on for Ryan Brinkman, Thanks for taking my questions.
Justin Jude: Justin, with industry headwinds weighing on top, playing growth in the near term and visibility around the coffee timeline seemingly low as of now in both, you know, North America and Europe, do you expect to see incremental acquisition opportunities in the market as well as a relatively less sophisticated skills start to face the proctorality front of these broader headwinds, especially given the lack of pricing discipline. This time, a gate of the current environment, you know, could provide a conducive environment for accelerated industrial consolidation, and whether LKC would be willing to lean incrementally into M&A if the opportunity arises.
Speaker Change: Justin with the industrial headwinds weighing on top line growth in the near term and visibility around her coffee timeline seemingly low as of now in both North America and Europe.
Speaker Change: Do you expect to see incremental acquisition opportunities in the market as relatively less sophisticated feel start to face their profitability quantities broader headwinds, especially given the lack of pricing discipline. This time period of the current environment.
Speaker Change: <unk>, a conducive environment for accelerate industry consolidation and whether L case, you would be willing to lean incrementally into M&A, if the opportunity arises constant as a quick follow up.
Justin Jude: Thanks. Another quick photo. Yeah, I guess, I mean, mainly around the acquisition piece, we have definitely came out publicly and said we're not looking after large acquisitions with the way our stock prices are now. We're heavily waiting towards share repurchase. There are acquisitions that will bring into the company, but these are smaller, synergistic, highly synergistic, tucked-in acquisitions that bring returns and emit upper teams over a short period of time. Think of acquisitions where we may have a market that has three-step distribution. One of our customers is that wholesale distributor, and we can acquire that wholesale distributor that may be our customer and convert that market from three step to two step.
Speaker Change: Yeah, I guess, I mean, mainly around the acquisition piece.
Speaker Change: We are definitely came out publicly and said we're not looking after any large acquisitions with the way our stock prices right now we're heavily weighted towards share repurchase there are acquisitions that will bring into the company. But these are smaller synergistic highly highly synergistic tuck in acquisitions that bring returns in the mid to upper <unk>.
Speaker Change: <unk> has over a short period of time.
Speaker Change: Think of acquisitions, where we may have a market that has three step distribution one of our customers as a wholesale distributor and we can acquire that wholesale distributor that maybe our customer and convert that market from three step to two step.
Rick Galloway: So, there are some better opportunities, and we've done some. We'll continue to look at those, but they're going to be small and highly synergistic.
Speaker Change: So there are some that are opportunities and we've done some will continue to look at those but they're going to be small and highly synergistic.
Rick Galloway: I think just to add on to one of the things I heard you talking about was consolidation within the overall marketplace. One of the things with LKQ having so many acquisitions over the last 25 years, we're involved with a lot of the discussions, and there's not anything that we're a little concerned about or something that we're seeing that is a major change in the overall market conditions that we won't be able to combat with the footprint that we have and something that we're pretty confident on. One thing, the line was a little bit shaky when you were talking. If there's anything that we missed on there, just let us know and we can respond to that.
Speaker Change: I think just to add on to one of the things I think I heard you talking about was consolidation within the overall marketplace.
Josh Butler: No, that's very helpful color. Thanks for that.
Justin Jude: And I just wanted to, you know, get, just get if you could give us an update on the Alitec diagnostic and calibration business. Any color around how that business has scaled over the past couple years, you know, how are you anticipating, go forward, grow to your, and how should we think about the scope and potential implications of the ongoing lawsuit with Repair Fire. Yeah, on the Alitec piece, the majority of our business there is mobile where we actually have technicians going and augmenting by shops, work to make sure they can calibrate the vehicle and do technical repairs.
Justin Jude: That business was growing pretty strong for us for a while, but with the repairable claims coming down as. Have it's kind of given some extra free time to body shops in some case some of the MSOs to figure out how to do it internally right now. That business is still strong, a good margins for us that grow to slow down, but it's still growing on the repair if I said any, you know, not much of our businesses on the mobile. I'm sorry is on the remote piece, but we don't have any concerns with the IP on that case.
Bret Jordan: And our next question comes from Brett Jordan with Jeffrey. Please go ahead. Thank you, morning guys. I'm going to wear a little cash flow that you're seeing.
Rick Galloway: Could you talk about sort of what eating your app there and how much you'll see us will still available after you generate cash from working capital this year? Yeah, Brett, we've been seeing about a 10% improvement when we look at our overall trade working capital, particularly the payables and as well as the supply chain financing. We're seeing that again this year. If I look at our European operations, we're up almost 12% versus year-end on our supply chain financing program. I would expect we'd probably have another year or two to be able to go with those.
Speaker Change: 10% improvement when we look at our overall trade working capital, particularly the payables.
Speaker Change: As well as the supply chain financing.
Speaker Change: We're seeing that again this year, if I look at our European operations.
Speaker Change: We're up almost 12% versus year end.
Speaker Change: On our supply chain financing program.
Speaker Change: I would expect we probably have another year or two to be able to go with those.
Rick Galloway: And then you know, then it starts to weigh in. It's as far as the working capital goes, we're obviously making a really big push this year, especially with what's going on in the overall market dynamics to drive free cash flow and make sure that we deliver on the free cash flow commitment that we made beginning the year. And so the teams doing a tremendous job of doing that. I think we have a little bit more time to be able to enhance that going into 2025. And then, you know, it starts tapering off probably the back end of 2026.
Speaker Change: And then and then it starts to.
Speaker Change: We in.
Speaker Change: As far as the working capital because we're obviously, making a really big push this year, especially with what's going on in the overall market dynamics to drive.
Speaker Change: Free cash flow and make sure that we deliver on our free cash flow commitment that we've made the beginning of the year.
Speaker Change: And so the team is doing a tremendous job of doing that I think we have a little bit more time to be able to enhance that going into 2025.
Speaker Change: And then it starts tapering off probably the back end of 2026.
Rick Galloway: Okay.
Speaker Change: Okay.
Rick Galloway: And then I think you're prepared to march; you talk about sort of competition in Europe.
Speaker Change: Then I think in your prepared remarks, you talked about sort of competition in Europe is that primarily <unk> in the UK or is there other competition in other regional European markets and could you may be sirna.
Justin Jude: Is that primarily GSF in the UK, or is there other competition in other regional European markets? And could you maybe sort of parse out this version in Europe, you call that Germany UK as weaker, was that a locks and Italy relatively stronger, all sort of in the same bucket. I would say the worst economic ones were the UK and Germany economic slowdown in the Benelux area. Go back to your comment on competition. I mean obviously GSF is in the UK market, but we have competitors in every market for which we operate in. So anytime there's some of those headwinds or market dynamics, you know, sometimes the smaller competitors react differently.
Speaker Change: Parse out.
Speaker Change: Dispersion in Europe, you called out, Germany, and UK is weaker or was that a locks in Italy relatively stronger all sort of in the same.
Speaker Change: Bucket.
Speaker Change: I would say the worst economic ones, where the UK and Germany.
Speaker Change: Economic slowdown in the Benelux area.
Going back to your comment on competition I mean, obviously <unk> is in the U K market, but we have competitors in every market for which we operate in so anytime there is some of those headwinds or market dynamics, sometimes with smaller competitors react.
Justin Jude: But I would say every market, we have several different competitors that we could be with day in and day out.
Speaker Change: Differently, but I would say every every market we have several different competitors that we compete with day in day out.
Unknown Executive: Great.
Rick Galloway: Thank you. One thing I think we're getting close to the end of the overall question. One of the things that came in through a couple of the analysts, I just want to make sure we're there in the effort of doing our simplification and simplifying our new document that we put out for the press release. And then also for the earnings presentation, we did pull out gross margin by segment. Let me give that to you; that's something that we don't have a problem giving. I just had pulled it out of the overall document. So I know there's a couple questions.
Speaker Change: Okay, great. Thank you.
Speaker Change: One thing.
Speaker Change: Getting close to the end of the overall question is one of the things that came in.
Rick Galloway: Craig, I know you had mentioned that as well. In North America, we had 42.8% in Q3 in Europe. We had 38.4% in specialty. We had 26.0% and then in self service, we had 41.7%. So that helps you guys with your models. I just want to make sure you had the data on the call.
Justin Jude: And with that, looks like we're going to wrap up the call. I want to give a huge shout out and huge thanks to over 50,000 employees for what they do every day. Our industry is facing challenges right now. It's not the first time. It won't be the last time. But I'm extremely proud of each and every one of our employees on how they reacted on the cost structure, how they reacted on making sure that we grew share or did not lose share. Our company LKQ is with our size and scale, and quite honestly, our winning culture.
Operator: There's nobody that could be this in the future. So huge thanks to the employees for everything that you guys do. And I'll say huge thanks for all those that participate on the call today. We appreciate it, and we will talk to you guys on the next slide. Thank you.
Operator: This concludes our call today. Thank you for your participation. You may now disconnect your line. Thank you.
Yeah.
Speaker Change: Okay.