LKQ Corporation

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to LKQ Corporation's third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Joe Boutros, Vice President of Investor Relations for LKQ Corporation.

Joe Boutros Thank you, operator. Good morning, everyone, and welcome to LKQ's third quarter 2021 earnings conference call. With us today are Nick Sarconi, LKQ's President and Chief Executive Officer, and Varun Leroya, Executive Vice President and Chief Financial Officer. Please refer to the LKQ website or lkqcorp.com for our earnings release issued this morning as well as the accompanying slide presentation for this call. Now let me quickly cover the safe harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation 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're planning to file our 10Q in the next few days. And with that, I am happy to turn the call over to our CEO, Nick Sarconi.

Thank you, Joe, and good morning to everybody on the call. This morning, I will provide some high-level comments related to our performance in the quarter, and then Varun will dive into the financial details, as well as our outlook for the balance of 2021, before I come back with a few closing remarks. This was another quarter of significant operating progress at LKQ, driven by excellent execution in delivering solid financial performance, all while navigating the challenges with the supply chain and the current cost environment. we were able to produce yet another record quarter, and this represents the fifth consecutive quarter with the highest EPS reported in their respective quarters. The third quarter also reflects the second time we've been able to achieve more than $1 of earnings per share on an adjusted basis and reflects the highest third quarter segment EBITDA margin in the history of the company. We are particularly pleased that our European business delivered its highest segment EBITDA level in over nine years, exceeding the 11% level. Varun will dig into the margin details shortly. While I recognize the listeners are primarily focused on the financial results, I know our performance is a reflection of the dedication and effort of our 45,000 team members around the globe who are working hard to serve our customers. I hope you can appreciate that I am more excited about the performance of my team than the quarterly results, as they are the key to continued excellence. With respect to capital allocation, as you hopefully read from our press release issued this morning, I am very pleased to announce that our board of directors has declared the company's first ever quarterly cash dividend. This dividend declaration and our existing stock repurchase program are key components of our strategic plan to drive total long-term returns for our stockholders. our solid balance sheet and sustainable cash flow generation, coupled with our leading market positions across our operating segments, provide us with the opportunity to execute on that plan. The quarterly dividend of 25 cents per share will be paid on December 2nd, 2021 to stockholders of record at the close of business on November 11th. Now on to the quarter. Revenue for the third quarter of 2021 was $3.3 billion, an increase of 8.2% as compared to the $3.0 billion in the third quarter of 2020. During the third quarter, total parts and services revenue increased 6%. comprising organic growth of 4%, the net impact of acquisitions and divestitures increasing revenue by one-half of 1%, and foreign exchange rates increasing revenue by 1.5%. Net income for the third quarter of 2021 was $284 million as compared to $194 million for the same period last year, an increase of 46.4%. Diluted earnings per share for the third quarter was 96 cents a share, as compared to 64 cents a share for the same period of 2020, an increase of 50%. On an adjusted basis, net income in the third quarter was $300 million, compared to $228 million in the same period of 2020, a 31.6% increase. adjusted diluted earnings per share for the third quarter was $1.02 as compared to 75 cents for the same period of 2020, a 36% increase. Now let's turn to some of the quarterly segment highlights. Slide five sets forth the revenue trends for the quarter, and you can see growth rates improved year over year for all segments. The vaccination rates in our key geographic markets continued to improve, but as we progressed throughout the quarter, we started to face headwinds related to the rise in the Delta variant and also challenges with the aftermarket supply chain, both of which impacted organic growth across each of the segments. Turning to North America, according to the U.S. Department of Energy, fuel consumption for the third quarter was 8.6% above the prior year and 1.3% below the third quarter of 2019. From slide six, you will note that organic revenue for parts and services for our North American segment increased 5.9% in the quarter on a year-over-year basis. When looking at our performance relative to collision and liability repairable claims this quarter, given the aberrations associated with the significant swings in 2020, we believe the most relevant comparison is to the third quarter of 2019. During Q3, organic revenue for parts and services for our North American segment declined about 7% on a per-day basis relative to 2019 levels, while repairable claims declined 10.6%, so it was another period of outperformance for our North American operations. During the third quarter, our salvage business and the growth of our major mechanical product groups had solid performance. Although fill rates have been challenged, we are witnessing a positive offset from our quote conversion rates on salvage parts. Importantly, as we progress through the third quarter and entered Q4, we've witnessed an increase in availability at the auctions and prices are moderating versus what we experienced earlier in the year. Also, Elite Tech, our diagnostic and calibration services business, continued to exceed our expectations, with September being the highest monthly level of diagnostic scans since building out this business, a clear sign that shops and carriers are embracing this unique service offering. For those on the call that will be attending the SEMA event next week, Elite Tech will have a presence at the show, so please come visit and you can see why we are excited about this growth opportunity. Moving on to our European segment, organic revenue for parts and services in the third quarter increased one-tenth of one percent on a reported basis and three-tenths of one percent on a per-day basis. When compared to the third quarter of 2019, our European revenue was down just 1% on a per day basis. So we have made progress on getting back to pre-pandemic levels and are optimistic we will move ahead of the 2019 levels in the next quarter or two. From an overall mobility perspective, virtually every European market experienced flat growth in the quarter. which we believe is a sign that the spike we witnessed in the second quarter due to the reopening of the economy subsided sequentially in Q3. Our regional operations continue to experience varying revenue performance in the quarter. Our Eastern European business had the strongest recovery despite a very competitive pricing environment. Germany and the Benelux markets also delivered well above total segment growth. The drag in growth was primarily driven by negative growth in Italy, a market that continues to face very difficult conditions. Other items to note in Europe would include the fact that on September 6th, we celebrated the grand opening of our new Innovation and Service Center in Katowice, Poland, that began operations earlier in the quarter. Also, on October 1st, just after the close of the third quarter, We acquired a company named Hamu, which operates nine locations in the central Netherlands region. With over 100 employees, Hamu is one of the largest independent automotive parts wholesalers in the Netherlands. Now let's move on to our specialty segment, which again delivered solid performance during the third quarter by reporting organic revenue growth on a same-day basis of 13.7%. As witnessed in the first half of the year, the drivers of this ongoing performance continue to be strong demand for parts related to RVs and light trucks, as well as our dropship business. On October 1st, we finalized the acquisition of SeaWide Marine Distribution, a nationwide electronics wholesale distributor that supplies electrical and electronic products for the marine, outdoor, and personal navigation markets. This acquisition is consistent with the strategy of entering adjacent markets that Bill Rogers highlighted during our 2020 Investor Day. Marine products overlap nicely with our RV and towing product portfolio. Importantly, CY now has the benefit of leveraging our network of eight specialty distribution centers in over 40 cross stocks that are strategically located to provide next-day service throughout North America.