LKQ Corporation

Good day, and thank you for standing by. Welcome to the LKQ Corporation's fourth quarter and four-year 2021 earnings call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star zero. I will now like to hand the conference over to your speaker today, Joe Boutrous, Vice President of Investor Relations for LKQ Corporation. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to LKQ's fourth quarter and full year 2021 earnings conference call. With us today are Nick Starconi, LKQ's President and Chief Executive Officer, and Varun Laroia, Executive Vice President and Chief Financial Officer. Please refer to the LKQ website at 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 8K, which we filed with the SEC earlier today. And as normal, we are planning to file our 10K in the coming days. And with that, I am happy to turn the call over to our CEO, Nick Zarconi.

Thank you, Joe, and good morning to everybody on the call. This morning, I will provide some high-level comments related to our performance in the quarter and full year 2021. And then Varun will dive into the financial details and discuss our 2022 outlook before I come back with a few closing remarks. Before I begin, on behalf of everyone at LKQ, I again want to express our sincere thanks to all those on the front lines who are working hard to keep our communities and our citizens safe and healthy. I also extend condolences to all those who have suffered a personal loss during this unfortunate pandemic. It seems like everyone knows someone who has been seriously impacted by COVID. While we've made great strides across the globe combating the pandemic, it is still a harsh reality that we all have to confront in our daily lives. As most of you know, LKQ spent two decades consolidating fragmented markets into centralized businesses. And in the process, we created the largest and best-in-class operators in each of our major markets. Then in 2019, we pivoted our strategy to focus on operational excellence. Some folks may have been skeptical about this pivot, but they may not have had a true understanding of our culture, a culture that is centered on outcomes, not obstacles, a culture that is agile and nimble, and a culture that is LKQ proud. It is with great pride that I can say our teams across all of our segments embraced and delivered on our operational excellence initiatives throughout all of 2021. Before I move on to fourth quarter results, let me highlight just a few of the milestones we achieved in 2021. We had record corporate-wide revenue and profitability, North America EBITDA and EBITDA margins reached their highest full-year level in the history of the company. Europe had full-year double-digit EBITDA margins for the first time in over five years and reached the upper end of the expectations we set forth a year ago. And there was more runway ahead. Specialty realized record full-year revenue and EBITDA margins. We generated our second year of pre-cash flow of over $1 billion. We maintain net leverage well below our target of two times. We achieved an investment grade rating from Fitch. We purchased 17.2 million shares of stock for a total of $877 million. We issued the first dividend in the history of the company. and we issued our inaugural corporate sustainability report and received an ESG rating of AA from MSCI, which puts LKQ in the top 19% of our index group. These achievements are the result of the combined effort of each individual at LKQ, and for that, I extend a great big thank you to my entire organization. Now on to the quarter. Revenue in the fourth quarter of 2021 was $3.2 billion, an increase of 7.9% as compared to the $3 billion in the fourth quarter of 2020. For the fourth quarter, parts and services organic revenue increased 6.6% on a reported basis and 7.3% on a per day basis. While the net impact of acquisitions and divestitures increased revenue 1.7%, and foreign exchange rates decreased revenue 0.8%. For total parts and services, revenue increased of 7.5%. Net income for the fourth quarter of 2021 was $236 million as compared to $180 million for the same period of last year, an increase of 30.6%. Diluted earnings per share for the fourth quarter was $0.81 compared to $0.59 for the same period of 2020, an increase of 37.3%. On an adjusted basis, net income in the fourth quarter was $254 million compared to $212 million in the same period of last year, a 20% increase. Adjusted diluted earnings per share for the fourth quarter was 87 cents as compared to 69 cents for the same period of 2020, a 26.1% increase. Net income for the full year of 2021 was $1.1 billion, as compared to $639 million for 2020, an increase of 70.7%. Diluted earnings per share for the full year of 2021 was $3.66, as compared to $2.09 for 2020, an increase of 75.1%. On an adjusted basis, net income for the full year of 2021 was $1.2 billion, compared to $777 billion last year, a 51.8% increase. Adjusted diluted earnings per share for the full year 2021 was $3.96, as compared to $2.55 for 2020, a 55.3% increase. These net income numbers represent a tremendous achievement for the company as we achieved net income in excess of $1 billion in 2021 for the first time in our history. Let's turn to some of the quarterly segment highlights. As you will note from slide six, organic revenue for parts and services increased in the quarter for our North American segment increased 8.3% on a reported basis and 9.9% on a per-day basis compared to the fourth quarter of 2020. When comparing to pre-pandemic levels, organic revenue for parts and services for our North American segment in Q4 of 2021 declined around 5% on a per-day basis relative to 2019 levels. industry data indicates repairable claims declined mid-teens relative to 2019 so it was another quarter of outperformance for our north american operations our salvage business and the growth in our major mechanical product groups continued its solid performance during the quarter although fill rates for aftermarket collision parts have been challenged We are again witnessing a positive offset from our quote conversion rates on salvage parts. Given the supply chain disruptions, it's no surprise that our aftermarket parts business lagged the results of our recycling and remanufacturing businesses. In 2021, our North America salvage operations continued its leadership as the largest recycler of vehicles by processing over 783,000 vehicles, resulting in, among other things, the recycling of 3.9 million gallons of fuel. 2.2 million gallons of waste oil, 2.1 million tires, 740,000 batteries, and 1.2 million tons of scrap metal. Moving to our European segment, organic revenue for Parks and Services increased 5.7% on a reported basis and 5.4% on a per-day basis in the quarter. Demand trends strengthened sequentially in the fourth quarter across all of our European regions. Most of our regional operations experienced similar levels of revenue growth with standout performance from our forest business in the Benelux region and solid contributions from Germany, the UK, and Central and Eastern Europe. On a full year basis, these businesses performed quite well, both on revenue and profitability. Italy, again, lagged relative to our other markets. Now let's move on to our specialty segment. During Q4, specialty reported organic revenue growth of 5.7% on a reported basis and 7.3% on a per day basis. Considering the tough comparison to an exceptionally strong 2020, this organic growth exceeded our expectations and reflected a tremendous effort by our specialty team. a few specialty operational highlights would include the fact that due to the specialty segments department of transportation safety scores and positive inspection history the team is now eligible to participate in the department's pre-pass program this program allows our drivers to bypass way stations and certain ports of entry the benefits of this program will include faster travel time to the docks less idling time, and higher driver retention. Importantly, this program highlights that health and safety of our employees and our other stakeholders is paramount within our organization. Secondly, during the quarter, our specialty segment moved their industry-leading product catalog to a digital format. At the peak, specially printed over 300,000 copies of these catalogs, each consisting of over 1,000 pages. So this represents a savings of 300 million printed pages. This green focus and shift to a digital catalog is another example of how our teams across all segments are driving our environmental leadership into all facets of the business. Looking ahead, we expect solid revenue growth across all three of our segments in 2022 as we creep back to pre-pandemic volumes, get some relief from the aftermarket supply chain in the back half of the year, and utilize strategic pricing initiatives. Specifically, we are still running behind 2019 revenue in North America, but we are closing the gap and expect to approach pre-pandemic revenue levels as we exit 2022. Europe is back to pre-pandemic revenue levels, and we look forward to continuing the positive momentum from Q4 as we move forward in 2022. And specialty is obviously already running well ahead of pre-pandemic revenue levels. On the corporate development front, as mentioned in our last call, in the first week of October, we completed the acquisition of Hamu, one of the leading independent car parts wholesalers in the Netherlands, and Seawide Marine Distribution, a nationwide electronics wholesale distributor that supplies electrical and electronic products for the marine, outdoor, and personal navigation markets. During the fourth quarter, we continued the build-out of our ESG program by implementing various social initiatives. In December, the company launched our LKQ Cares Holiday Vote, a unique program in which all employees had a voice in determining how LKQ's donations are allocated. With this program, LKQ donated funds to 10 separate nonprofit organizations across the globe during the holiday period. Also in December, the LKQ Community Foundation donated monies to assist various nonprofits with relief and recovery efforts from the long track tornado that produced severe catastrophic damage in several states in numerous communities. Let's now turn to the inflationary environment, a key item of interest for most listeners on this call. Inflation was a harsh reality across each of our segments, especially during the fourth quarter when inflation climbed to a 39-year high in December. The rise in prices is fairly straightforward. A combination of unprecedented supply chain and labor disruptions, which choked output, and monetary and fiscal stimulus, which accelerated demand. Global disruptions of this size and philosophy do not reset overnight, and we suspect it will continue to be a headwind throughout 2022. But make no mistake, we are not resting and waiting for this to reset. Our segment teams have implemented processes with our supplier and customer partners to deal with price changes in a more planned and structured way, ultimately staying ahead of the inflationary trends. Of course, the success of these ongoing processes will depend on the timing of the recovery in the supply chain, including some relief in ocean freight costs. Related to labor, by the end of December 2021, there were 11 million job openings in the United States. simply stated there is a battle to hire and retain talent at all levels of the organization, and prospective hires clearly have leverage, and that comes at a cost. Our North American operations have over 1,000 open positions, which represents roughly a 6% vacancy rate. In 2021, we witnessed 5% to 7% net increase in wages for our business in North America. we are working diligently to develop creative ways to recruit potential candidates beyond just compensation. To expand recruiting efforts, we are building partnerships that focus on the skills needed for the open positions and exploring how we can attract talent. In 2021, we invested in the benefit plans provided to our employees, including, but not limited to, enhancements to our core behavioral health and paid parental leave programs. Our European operations are facing the same challenges and are currently running at a 3.5% vacancy rate, with wages increasing between 3% and 5% in 2021. Focusing on retention and recruiting as well, at the end of the fourth quarter, our Europe team launched a comprehensive employee engagement survey with with WorkBuzz to further understand the employee experience and how we can be their employer of choice. The team invested in development for their leadership team and mental well-being training for all colleagues across Europe. The labor impact is an industry-wide issue. In the fourth quarter, the national average scheduling backlog for collision repair shops was 3.4 weeks versus pre-pandemic levels of just 1.7 weeks. The doubling of the backlog is predominantly due to technician shortages and, to a lesser extent, parts availability. Based on the milestones we achieved throughout 2021, clearly our teams have been judicious with quickly driving change, and I am confident we will operate with the same level of vigor to combat the headwinds we face with the supply chain and labor and freight costs, all against the backdrop of the ongoing pandemic. Lastly, before I turn the discussion over to Varun, who will run through the details of the segment results and discuss our outlook for 2022, I am pleased to announce that on February 15th, 2022, our board of directors approved our second quarterly cash dividend of 25 cents a share, payable on March 24th, 2022, to all stockholders of record at the close of business on March 3rd, 2022. And with that, I will turn it over to Varun.