LKQ Corporation

to one question with an additional follow-up. I'm now going to hand over to Joe Boutros, Vice President of Investor Relations at LKQ Corporation. Joe, please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to LKQ's fourth quarter and full year 2023 earnings conference call. With us today are Nick Zarconi, LKQ's President and Chief Executive Officer at Rick Galloway, Senior Vice President, Chief Financial Officer, and Justin Jude, Executive Vice President and Chief Operating Officer. Please refer to the LKQ website at lkqcorp.com for earnings release issued this morning, as well as the accompanying slide presentation for this call. 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. As many of you know, in late November, we announced my intention to retire as CEO effective June 30th, 2024, and that the board unanimously selected Justin as my successor following an intensive planning process that had been initiated well over a year ago. In the interim, Justin is serving as our global chief operating officer, and I look forward to working with him and our segment teams to ensure the continuation of our operational excellence program that we started late in 2018. Nowhere has this program been more evident than in our wholesale North America segment, which under Justin's direction, has significantly expanded margins, improved cash flow, all while enhancing our leading market position. Time and again, Justin has proven himself as both a strong operating executive and an effective leader who definitively embodies LKQ's values. It is a pleasure having Justin on the call today in his well-deserved new role. I'm going to start by providing some high-level comments related to our performance in the quarter and the full year 2023, followed by Rick, who will dive into the financial details and discuss our 2024 guidance. And then Justin will provide some initial thoughts and commentary on our businesses, the path forward, and an update on our unit select integration. Let me start with what LKQ accomplished in the last year. a year where operational excellence remained at the forefront of our efforts as we look to drive organic revenue growth, productivity, and excellent free cash flow. I am proud to say that the LKQ team delivered. Here are some of the 2023 accomplishments worth noting. LKQ delivered strong full-year organic revenue growth for parts and services of 4.7% on a reported basis and 5.1% on a per day basis. In February, we announced the highly synergistic Uniselect acquisition and closed the transaction on August 1st. We used our pre-cash flow to begin paying down debt as we strive to reduce our total leverage ratio to 2.0 times. were well on our way with net debt pay downs of over $375 million since the transaction closing and the total leverage ratio at year end was just 2.3 times. We returned about $300 million of cash to our shareholders through dividends and increased the quarterly amount by 9% in October. We also continued our share repurchase program with a $38 million outlay during the year of which $30 million was completed in fourth quarter. And finally, we sustained a positive momentum in terms of cash flow generation with free cash flow of approximately $1 billion in 2023. This represents the fourth consecutive year at or above $1 billion. And the 2023 results reflect a solid conversion ratio of 59% of adjusted EBITDA. Now on to the quarterly results. Revenue for the fourth quarter of 2023 was $3.5 billion, an increase of 16.6% as compared to $3 billion for the fourth quarter of 2022. Parts and services organic revenue increased 2.8% on a reported basis and 3.4% on a per day basis. Foreign exchange rates increased revenue by 2.7%, And the net impact of acquisitions and divestitures increased revenue by 13.1% year over year for a total parts and services revenue increase of 18.7%. Other revenue fell 16.4%, primarily due to weaker precious metal prices relative to the same period in 2022. Let's turn to some of the quarterly segment highlights. organic revenue for parts and services for our North America segment increased 5.3% compared to the fourth quarter of 2022. We continue to perform well in North America, especially when you consider that, according to CCC, collision and liability-related auto claims were down 7.9% year over year. We believe that significant outperformance is due to several factors, including an industry-wide increase in alternative part usage or apu which was in part driven by the continued progress of the state farm rollout the remaining positive impact of the uaw strikes and lastly lkq continuing to take market share the upward trend in our aftermarket volumes and the ongoing improvement in our order fill rates continued with fill rates reaching close to 95% in the fourth quarter, the highest level in 2023. As the supply chain recovered and fill rates increased, APU trended in our favor, particularly when looking at vehicles in our sweet spot. While total APU was about 36% in 2023, when looking at vehicles four to six old, it was approximately 40%, and for vehicles more than seven years old, it was 51.6%. Both results represent meaningful increases over the 2022 levels. The aging car park will increase demand for the types of parts we sell into the collision repair industry. The salvage business had solid organic growth, largely driven by volume. Total loss rates increased a bit in 2023, to 20.8%, but as you can see, it had no impact on our organic growth. Importantly, the increase in total loss rates is largely being driven by vehicles 10 years and older, which is a population of vehicles at the very tail end of our sweet spot. For perspective, today the average model year of a vehicle being repaired in a collision bay is a 2017 model. with the total loss rate for that cohort of vehicles being just 18.4% in 2023. That further supports our thesis that total loss rates will not materially impact our growth. Industry experts believe the total loss rate will edge down a bit in 2024. As we have always stated, fluctuations in total loss rates are largely net neutral events for LKQ. During the quarter, we realized a slight revenue uplift from the UAW strikes, which has now leveled off and no further benefit is expected. Moving to our European segment, Europe organic revenue for parts and services in the quarter increased 3.9% on a reported basis and 5.1% on a per day basis. All the regions produced solid organic growth in the quarter. with a particularly strong performance in the Benelux and Eastern European markets, as well as with our private label and salvage product lines. During the fourth quarter, our operations in Germany were again impacted by employee strikes at our large distribution center in Bavaria, while the ongoing discussions and negotiations between the Works Council and Employers Association continued. Throughout this process, our European team has worked diligently to mitigate the day-to-day impact of the strikes, and their efforts have begun to offset some of the challenges that have impacted our German operations. Although the strikes continue, we have been able to temporarily add some short-term capacity to operate our business and service our customers. Additionally, to foster a resolution, we recently initiated an incremental and unique approach and proposed terms of an LKQ only offer to the Works Council. We have also committed those terms to our employees and are cautiously optimistic that we are making positive progress towards a resolution. Rick will provide you with the financial impact shortly. Now let's move on to our specialty segment. During the fourth quarter, specialty reported a decrease in organic revenue of 7% which was under our expectations. Specialty again confronted headwinds specific to RV and towing products. Within the RV space, RV wholesale shipments of new units from the OEs to the dealers ended 2023 on a positive note with an increase of 8.1% in December. This was the second consecutive month of year-over-year growth. Full year shipments, however, were down 36.5%. The general sense in the industry is that the RV headwinds have bottomed out, but we are not yet out of the woods as the dealers are still reluctant to fully restock accessories until they see the demand for new units increase. Truck accessories were also under some pressure in the quarter due to the drop in new vehicle production specific to the pickup and Jeep categories. while marine and off-road product lines generated positive growth. Now to our self-service segment. Organic revenue for parts and services for our self-service segment decreased 5.6% in the fourth quarter. Self-service was again challenged by soft commodity pricing as seen in the other revenue decline, which impacted our expectations. The soft precious metal prices have continued into 2024 And in the short term, we expect little relief from commodities as we have modeled accordingly. Briefly on the Red Sea crisis, as far as we can predict, there will be minimal impact on parts availability in our key segments. In Europe, our procurement team is seeing some disruption with the shipping lines having to divert their vessels via the Cape of Good Hope around South Africa, increasing lead times and freight costs. The freight cost is expected to soften once the Chinese New Year, four weeks from mid-January, ends. As one would expect, if the crisis persists, then we will potentially witness an increase in freight costs. Our supply chain team is taking precautionary measures by adding additional orders to address the extra lead times, especially with our private label product. Lastly, on October 25th of 2023, as I mentioned on the last earnings call, we completed the divestment of GSF Car Parts, formerly owned by Uniselect. Since the GSF Car Parts business was held separately and never integrated into our business, we classified the business as discontinued operations upon acquisition. Before I turn over to Rick, who will run through the details of the segment results and discuss our outlook for 2024, I am pleased to announce that on February 20th, 2024, our board of directors approved a quarterly cash dividend of 30 cents per share of common stock that will be payable on March 28th, 2024 to shareholders of record at the close of business on March 14th, 2024.