LKQ Corporation

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's first quarter 2022 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Joe Boutros, Vice President of Investor Relations for LKQ Corporation. You may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to LKQ's first quarter 2022 earnings conference call. With us today are Nick Sarconi, 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 hardware. 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 are planning to file our 10Q 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 everyone.

I will provide some high-level comments on what was a robust quarter for LKQ from many different perspectives before Varun walks you through some of the financial details in our increased financial guidance. I will then close with a few observations before opening the call to your questions. As we entered 2022, who would have thought the world would experience events more traumatic than the pandemic we all have been living through? Just when everyone thought we had turned the corner and were headed toward the new normal, in late February, Russian tanks rolled into Ukraine and everything changed overnight. In retrospect, issues related to tight labor markets, supply chain challenges, and inflationary pressures pale in comparison to the needless loss of human lives. Yet out of the ashes, we are all able to watch the evening news and see true leadership and courage in action and incredible solidarity in a time of crisis. Yes, I'm talking about the Ukrainian people. But the same is true for the 950 people in Ukraine who are LKQ associates. These employees are truly remarkable. So too are their colleagues in Poland, Hungary, Slovakia, and Romania, who welcomed hundreds of family members of our Ukrainian employees at the border to provide food, housing, medical assistance, and schooling to those fleeing the country. They are all defining what it means to be LKQ proud. As to the business, We exceeded our expectations for Q1 in terms of both revenue and profitability, and this gives us confidence to increase our financial guidance for the year. The key word in the economy the past several quarters has been inflation. During periods like this, companies have a choice. Wait and see the impact and play defense or anticipate the impact and play offense. LKQ chose to play offense. and the benefits of doing so can be found in our results. This is particularly true with respect to the exceptional organic revenue growth achieved in our North American wholesale and European segments, both of which benefited from strong demand for automotive products as mobility and claims volumes increased, while pushing prices in an attempt to offset most of the inflationary pressures. Managing through this environment is hard, And I am extremely thankful for the efforts of the global LKQ leadership team, which is doing a terrific job of balancing the best interest of our customers, suppliers, employees, and shareholders. Now on to the quarter. Revenue for the first quarter of 2022 was $3.3 billion, an increase of 5.6% as compared to $3.2 billion in the first quarter of 2021. Total parts and services revenue increased 5.9% in Q1, comprised of organic revenue increases of 6.9%, plus the net impact of acquisitions and divestitures of 1.7%, offset by foreign exchange rates, which decreased revenue by 2.7%. Net income for the first quarter of 2022 was $269 million, as compared to 266 million for the same period of 2021, an increase of 1.1%. Diluted earnings per share for the quarter was 94 cents as compared to 88 cents for the same period last year, an increase of 6.8%. On an adjusted basis, net income in the first quarter of 2022 was $287 million compared to $286 million in the same period of 2021. Adjusted diluted earnings per share for the first quarter was $1 as compared to 94 cents for the same period of 2021, a 6.4% increase driven by a reduction in the average share count. Let's turn to some of the quarterly segment highlights. And please note, this is the first quarter of separating the self-service business from the core North American wholesale business. Turning to North America, from slide six you will note that organic revenue for parts and services in our North American wholesale segment increased 13.6% in the quarter on a reported basis and 11.8% on a per day basis. During the first quarter, industry-wide, overall claim counts increased 12.2% versus Q1 of 2021. According to the U.S. Department of Energy, during the first quarter of 2022, U.S. weekly supplied motor gasoline volume was approximately 4.9% above last year, but still 4.7% below the first quarter of 2019 pre-pandemic. And according to the Department of Transportation, highway miles driven during Q1 increased 4.9% above last year, but lagged 2019 levels by approximately 2.2%. From a product line perspective, recycled and remanufactured parts demonstrated higher growth, including gains in both volumes and price relative to last year. On the aftermarket front, we have been successful in passing through inflationary cost increases despite the supply chain challenges, which are causing volumes to be down relative both to last year and 2019. April has started off on a positive note, following the pattern established in Q1. We don't anticipate achieving double-digit revenue growth in our North America wholesale operation for the rest of the year, but we expect it to be in the mid to high single digits. In part due to headwinds from parts availability and more so due to labor constraints, during Q1, the national average scheduling backlog at collision repair shops reached four and a half weeks two and a half times the length of the typical first quarter backlog. Additionally, since 2016, average vehicle repair costs have risen steadily every year, with the largest increases occurring in the past two years, reaching an all-time high in 2021. Our parts provide a strong solution for shops and insurance carriers to manage costs. As we inevitably begin to witness some relief in the supply chain, and a steadier flow of aftermarket product, the value proposition of our parts becomes even more attractive as shops continue to face headwinds related to labor costs and overall inflation. As we indicated in our last call, this quarter we began reporting self-service as a separate segment. This new segment provides investors with greater transparency into the commodities dynamic of our business. given the majority of our other revenue category, which primarily consists of scrap and precious metals, comes from our self-service operations. Varun will cover more details on the margins of this segment shortly. During the first quarter, total revenue for self-service was flat compared to last year, reflecting the relative softness in metals pricing. Organic revenue for parts and services for this segment increased 14.6%, largely driven by price. Also, the average revenue per admission, a key productivity metric, rose during the first quarter of 2022 relative to 2021. Moving to our European segment, organic revenue for parts and services in the first quarter increased 6.9% on a reported basis and 6% on a per day basis. As the largest pure plate distributor of automotive aftermarket parts in Europe, This is a tremendous start to 2022, even in the face of an extremely challenging geopolitical environment on the continent. So we are quite pleased with the organic growth in Europe. While different by market, overall consolidated organic growth was split evenly between volume and price. According to the Apple Mobility Index, The trend in driving trips in our European markets was down earlier in the year due to normal seasonal patterns. As we progressed through Q1, the index rebounded. Encouragingly, despite all the fear of a dramatic drop-off in demand due to global macro headlines, at this point we have not seen any noticeable shift in European mobility as we've entered the second quarter. Our regional operations experienced varying revenue performance in the quarter, but all posted positive growth with very solid year-over-year performance. The UK and Benelux operations were particularly strong with high single-digit organic growth, while Germany and Central Europe, excluding Ukraine, posted mid-single-digit organic growth. Italy also demonstrated progress, posting positive organic growth for the first time in several quarters. The Russian invasion of Ukraine had a direct impact on our revenue in late February and all of March due to having to close certain branches that we operate in Ukraine. And those that remained open, as you would assume, saw a significant drop in demand. Also, immediately following the invasion, we ceased all sales to Russian-based parts distributors. We estimate the impact of the war on European organic revenue growth during the quarter was approximately 60 basis points. And as these conditions continue, we anticipate the impact on our full year European growth to be about 120 basis points. We continue to pay our Ukrainian employees, regardless of whether they are working, and we are supporting their families who have fled to neighboring countries. As I've always said, our people are our most important assets. And in Ukraine, the well-being of our people is our primary focus today. Varun will provide some additional financial-related details to this unfortunate situation shortly. Now let's move on to our specialty segment. Organic revenue for parts and services for our specialty segment declined 8.3% in the quarter on a reported basis, and 9.8% on a per-day basis, largely due to a very tough year-over-year comp. You may recall this segment reported 33% organic growth in Q1 of last year. So on a two-year stack, the annual revenue growth is still well into double digits. We anticipate another tough comparison in Q2 against the 30% growth recorded in the second quarter of last year, with a positive recovery and a return to year-over-year organic growth in the back half of this year. A few other key highlights for specialty during the quarter. In the first quarter, specialty hosted our annual Big Show, a customer event which is focused on SEMA-related parts, and also hosted our annual RV Expo for our RV-focused customers. Both events booked solid year-over-year increases in attendance and sales, suggesting good demand in the future. Also, in March, our specialty team opened a 210,000 square foot distribution center in Orlando, Florida. While it will create a very slight drag on near-term margins while it ramps up, this new distribution facility will help create higher revenue as it will service Florida and Georgia both of which are very attractive markets for our RV and marine-related product lines. The supply chain continues to provide challenges, and we're doing our best to get the inventory needed to service customer demand. During the quarter, key port cities in China were shut down for a while. This shifted container capacity to other countries like Taiwan giving our North American team an opportunity to get some incremental inventory on the water. March was the second best container volume that we've witnessed in 24 months. We expect some of this benefit to continue into April and likely May, and this inventory should be at our warehouses by mid to late summer. Once the China lockdowns reopen, we will likely see a regression back to the lane bottlenecks that we've endured over the past 12 months as the pent-up demand from China comes through. In Europe, product availability remained challenging through Q1, with back orders still running high, but we are witnessing some signs of improvement as we enter Q2. Turning to ESG, during the first quarter, we continued our environmental stewardship efforts by processing 193,000 vehicles resulting in, among other things, the recycling of approximately 970,000 gallons of fuel, 562,000 gallons of waste oil, 501,000 tires, and 178,000 batteries. During Q1, we also processed approximately 260,000 tons of scrap steel. On the social front, During the quarter, we focused on some key initiatives around the financial and mental health well-being of our employees. As an example, in North America, we implemented a profit-sharing plan where we made a special contribution of $1,000 to the 401k accounts of all eligible team members. Alongside this contribution, we provided services to educate our team on how to think about and plan for retirement. From this initiative alone, we witnessed over 4,000 new 401k account openings. We want all employees to benefit from our success, and this plan allows us to reward and thank them for their relentless focus on results, which made a huge impact on our 2021 performance. In Europe, we launched a program called Inspired to Thrive that lets our team know that their mental well-being matters. The goal of this program is multifaceted, including creating a supportive culture, addressing factors that may negatively affect mental wellbeing, addressing negative perceptions of mental wellbeing issues, providing support to colleagues suffering from mental health issues, and developing management skills to address issues when they arise. Operationally, we believe this program will have many benefits, such as higher retention, reductions in sick leave, and enhanced productivity. More importantly, however, it's simply the right thing to do for our team in helping them maximize their overall well-being. Lastly, from a corporate development perspective, during the quarter we entered into a transaction to sell our PGW class business. While I fundamentally saw that operation, we had come to the conclusion that LKQ was not the best owner of this business and the margins were always going to be dilutive to the overall North American segment margins. This transaction closed last week, and we are extremely pleased with the outcome. As we enter Q2, we are witnessing a healthy pipeline of potential token acquisitions, and since April 1st, we have closed on two small European transactions. And I will now turn the discussion over to Varun. who will run you through the details of a strong first quarter financial performance and our increased guidance.