LKQ Corporation

to one question and one follow-up i'll now hand you over to joe buttress to begin please go ahead thank you operator good morning everyone and welcome to lkq's fourth quarter and full year 2024 earnings conference call with us today are justin jude lkq's president chief executive officer and rick galloway our senior vice president 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 same 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 10-K in the coming days. And with that, I'm happy to turn the call over to our CEO, Justin Hughes.

Thank you, Joe, and good morning to everyone joining us on the call. As many of you know, I took the CEO position after Nick's retirement in July of last year, and it has been and continues to be an honor to lead the LKQ team and to maintain a culture rooted in humility. Our team leads by influence, not authority and ego. We take action, embrace change, confront failure head on, and always strive to make the right decisions for the company, our employees, our communities, and our shareholders. In 2024, we faced tough challenges. Despite financial setbacks, our team surpassed expectations in navigating the most difficult market dynamics I've seen in 30 years in the automotive industry. For that, I couldn't be prouder of our team members and the incredible culture we built. Before I address the fourth quarter, I would like to reflect on what LKQ accomplished in 2024. With our commitment to operational excellence and a sound balance sheet, we focused on the things we could control, and in those areas, we were very pleased with our performance. With our goal of returning cash to shareholders, we delivered 678 million of capital with 360 million in share repurchase and 318 million coming from dividends. And our ongoing strategy to simplify the portfolio led to divesting five businesses, primarily in Europe, which represented 153 million of trailing 12-month revenue with little to no margin. Moody's and Fitch reiterated our stable and positive outlook in 2024. board of directors continued their active and ongoing board refreshment to ensure we have the right mix of skills and experiences to provide effective oversight and guidance of the company's strategy our new board members have extensive experience in business strategy and operations further enhancing the depth knowledge and skill sets necessary to drive long-term value for our shareholders the integration muscle of north america team was again validated in 2024 with the consolidation of Finish Master into the LKQ network by closing 129 of their 151 locations. Not only did the North American team deliver the integration faster than expected, but with a higher level of synergies than originally planned. We finalized our mega yard expansion project in Crystal River, Florida, and in December we began operating on this expanded acreage. We also purchased land and began the construction of two mega yards, one in Illinois and one in Washington. We expect these new yards to open in 2026. These mega yard expansions will allow us to further our growth on recycled parts while driving more productivity. Our European segment made several key leadership changes to support a more agile focus on change management. We developed a more consistent culture across our global footprint and combining the intellectual capital of our two non-discretionary segments, North America and Europe. This shared expertise will give us many benefits such as our overall procurement, remanufacturing product development, hard parts growth in North America, opportunities that will come from electrification, and a multitude of financial benefits, including vendor financing and a lower cost of capital. I will now shift to the quarter. Let's start with capital allocation. At recent trading levels, we believe repurchasing our shares is a good use of our capital. We were active in the quarter, repurchasing roughly 2 million shares for about $80 million. the end of the quarter we had approximately 1.7 billion remaining on our repurchase authorization the board declared a quarterly cash dividend of 30 cents per share in october that was paid in november totaling 78 million on february 18th the board declared a quarterly cash dividend of 30 cents per share payable in march of 2025. moving to our segments the north american revenue decline of 8.5 percent per day was larger than what we reported in the first three quarters of 2024 But when you back out the non-recurring benefit of the UAW strikes in 2023 and the storm impacts across the U.S. in Q4, the North American decline in collision parts revenue was roughly 4% compared to a repairable claims decreasing almost 6% in a quarter. The revenue decline, it was another period of outperformance for North American operations on a relative basis. That said, we are seeing some positive trends as we enter 2025. including favorable inclement weather and ongoing dynamics in the auto insurance market that combined could benefit our North American collision business. The average cost of auto insurance in the US increased over 20% in 2024, more than any other category of household expenses. We expect insurance costs to moderate in 2025, and historically this will lead to insurance carriers looking to take costs out of their network And the value proposition of our alternative parts offering is one area they can quickly flex, which would be a favorable trend for APU. Moving on to Europe, our organic revenue declined 20 bps on a per day basis for the quarter, which was essentially flat to Q3. Certain markets showed single digit growth, while others declined in a similar range. I am particularly pleased with the organic growth in Germany, which has moved past the labor issues from 2023 and early 2024 and reported healthy sequential and year-over-year growth. Competition is again contributing to the challenging conditions in certain markets, consistent with the last quarter, as some of the smaller players aggressively push price. Rick will cover the majority of margin-related details, but I wanted to highlight Europe's segment EBITDA at 10.1% in the quarter. This performance is the highest Q4 segment EBITDA margin achieved in Europe. The third straight quarter with a double-digit margin in the full year was the highest level of segment EBITDA dollars on record. With leadership aligned with our margin objectives, we are confident in our ability to deliver sustainable annual double-digit EBITDA margins in Europe. Tremendous performance and progress by the Europe team despite a challenging operating environment. Related to our SKU rationalization initiative in Europe, I am pleased to report that we hit our expectations of reviewing 50% of our product brands by year end 2024. And we plan to complete the review of an additional 30% by year end of 2025, with completion by the end of 2026. We started with roughly 750,000 stocking SKUs across Europe in scope for this project. By the end of 2024, we had decreased our stocking of over 30,000 SKUs, and we expect to decrease another 40,000 more in 2025, ultimately hitting our goal of stocking 600,000 SKUs by the end of 2027. This project will bring benefits on the procurement side, payables, and more importantly, simplify our operations to allow for a more pan-European distribution network. As we will keep pushing for additional private label penetration, as we recognize that the European vehicle park will continue to age and this has been further accelerated post the pandemic with a combination of supply chain constraints and the transition of EV being slower than anticipated. We currently have 22% penetration of private label parts with a long-term initiative to grow that number to 30% given the gross margin benefits that come from private label. With this in mind, we do believe there are growth and margin enhancement opportunities in our category management portfolio And the increase in our private label offering is already included in our targeted 600,000 stocking SKU number. We plan to update you on our progress with these SKU targets on a quarterly basis. Specialty posted organic revenue down 7.3% on a per day basis, but was a sequential improvement from Q3. The RV Industry Association believes the RV market is poised for growth in 2025 with dealer inventories at higher levels, ongoing strong consumer interest in RV ownership and interest rates that are expected to ease. Additionally, total US light vehicle sales increased 7.1% in Q4 with pickups and SUVs, the most important category for us, at 14.8% and 4.9% respectively. So not out of the woods, we are starting to see some positive signs in our specialty segment as we entered 2025. Lastly, on tariffs, The tariff news is extremely fluid with the current administration, validated by the quick shift of halting the Mexico and Canada tariffs less than 48 hours after they were implemented. Our team is actively monitoring the various announcements and a potential impact on our business. As the tariff situation stabilizes and things unfold, we will keep the investment community apprised accordingly. As mentioned in the past, wholesale North America procures virtually zero inventory from China, with most coming from Taiwan. And as you know, our salvage product is all domestic. Specialty is the only segment with exposure to China, approximately 15%, and their spend is highly diversified with some products being procured here in the U.S. I'll now turn the call over to Rick for a review of the financials in our 2025 guidance.

Thank you, Justin, and welcome to everyone joining us today. Before I dive into specifics on the fourth quarter, I would also like to cover some of our accomplishments throughout 2024. Despite the macroeconomic challenges, as Justin mentioned, we continued to focus on those things within our control. We accelerated the integration of Finish Master, completing that exercise in the first quarter and helping us to increase annualized uniselect synergies by the end of 2026 to $65 million. We initiated the 2024 restructuring plan with the objectives of exiting businesses and markets that do not align with our strategic objectives and executing on opportunities to streamline operations and our logistics models. In Europe, that resulted in exiting certain operations and increasing the efficiency of our logistics footprint, resulting in a reduction in facilities and overhead costs. In North America, we focused on aligning our cost structure with demand by rationalizing overhead costs to most efficiently serve our customer base. While these actions were challenging, they were necessary to tackle and align with the strategic imperatives We discussed at investor day, including simplification of the business portfolio, improving our lean operating model globally and increasing our margins in order to maximize total shareholder returns. We are confident the actions we have taken will drive our success in 2025 and beyond. Now onto the fourth quarter. Overall Q4 results exceeded our expectations and guidance. Europe's performance was a highlight. as the segment delivered a record fourth quarter EBITDA dollars and percentage, despite challenging macroeconomic conditions. Self-service performed in line with expectations, with another quarter of year-over-year improvement in EBITDA dollars and percentage. North America improved its EBITDA margin by 50 basis points due to a one-time legal settlement, despite revenue losses from a brief cyber incident in Canada. Specialty's results remained under pressure with soft demand. Turning now to the fourth quarter consolidated results. Despite challenges in North American specialty and the stronger US dollar affecting Europe, our fourth quarter performance exceeded expectations due to strong European results and some favorable non-recurring items. For the full year, we reported diluted earnings per share of $2.62 and adjusted diluting earnings per share of $3.48. the latter of which was toward the higher end of the guidance range we discussed back in October, but a decrease of 35 cents per share compared to 2023. The 35 cent per share decline in adjusted EPS was primarily influenced by a combined 30 cent per share impact from interest and taxes, with an additional 13 cent decrease attributed to commodity prices and foreign exchange rates. Despite the macroeconomic challenges and significant inflationary pressures, on overhead and cost of goods sold. Our efforts in simplification and strategic capital allocation have resulted in a positive contribution of 8¢ for the full year. For the fourth quarter, we reported diluted EPS of 60¢ and adjusted diluted EPS of 80¢, a 4¢ decrease from the prior year figure. As you may recall, our Q4 2023 results included some favorable one-time discrete tax items which were not repeated in Q4 this year, resulting in a 9 cent year-over-year decrease from taxes. In addition, lower FX rates and unfavorable metals price movements contributed to a further 2 cent decline. On the positive side, lower share counts due to our ongoing share repurchase program improved adjusted EPS by approximately 3 cents. The remaining 4 cents year-over-year improvement reflected the strong performance by Europe and net favorable non-recurring items in North America. Now for segment results. Going to slide seven. North America posted a segment EBITDA margin of 16.8%, a 50 basis point increase relative to last year. For the full year, we reported a segment EBITDA margin of 16.6%, slightly above the expectations we discussed last quarter, due to a favorable non-recurring legal settlement that was partially offset by our Canadian cyber incident. The decline in organic revenue, especially within our aftermarket business due to reduced repairable claim counts, adversely impacted margins during the quarter. This also included a related mixed effect on gross margins, as aftermarket collision revenue typically yields higher margins compared to our other wholesale lines. Salvage margins were also down in the quarter, reflecting unfavorable movement in revenue, vehicle cost trends, and commodity prices in 2024. On the other hand, overhead expenses improved 270 basis points in North America, reflecting favorability from the one-time legal settlement and lower personnel costs, primarily related to lower incentive compensation. The uniselect synergies and productivity initiatives largely offset significant inflationary pressures and the leverage effect of the organic revenue decline. While we expect headwinds on repairable claims and salvage margins to continue in 2025 due to the factors I've mentioned, particularly in the first half of the year, We estimate that the North America's EBITDA margins will be in the low 16s, consistent with 2024 after adjusting for the non-recurring items. Looking at slide 8, Europe reported a segment EBITDA margin of 10.1%, a 180 basis point improvement over last year, and its third quarter in a row with double-digit EBITDA margins. The year-over-year improvement consists of 110 basis points related to non-recurring charges in the prior year, while the remaining 70 basis points relates to the ongoing efforts to simplify the operations and portfolio, as well as productivity efforts that more than offset inflationary pressures. As I stated on our last call, we expected EBITDA margins in Europe for the full year to be in the mid to high nines, which is where we landed. From where we stand today and the actions we've taken to address productivity, we believe we can build upon our recent gains and expect to deliver improvements, with EBITDA margins expected to be double digits in 2025. Moving to slide 9. Specialties EBITDA margin of 4.1%, 160 basis points below the prior year, primarily driven by a decline in organic revenue and resulting leverage effect on overhead costs. Demand softness in the light vehicle and RV product lines and competitive pricing pressures remain challenges for the business. For the full year, segment EBITDA margins were 6.8%, below our expectations but largely related to the revenue softness. Early signs indicate some of our markets have stabilized. However, a rapid rebound in 2025 is unlikely due to inconsistent recovery. Thus, we expect segment EBITDA margins to improve to around 7% to 8% for the full year 2025. Self-service generated an 8.3% segment EBITDA margin in Q4, which is a 230 basis point improvement from last year. In dollar terms, segment EBITDA increased by $4 million. Disciplined vehicle procurement combined with overhead cost controls overcame unfavorable movements in scrap steel prices and helped to drive the third consecutive quarterly improvement in year-over-year profitability. Shifting to cash flows on the balance sheet. We produced $149 million in free cash flow during the quarter, bringing our year-to-date total to $810 million. Though slightly below our expectations, we invested in North American inventory, anticipating possible Q1 port strikes and tariffs. We remain dedicated to delivering value to our shareholders, allocating over $150 million through $80 million in share repurchases and $78 million in dividends. As presented during our investor day, we committed to allocating at least 50% of our free cash flow towards returning value to our shareholders. We are pleased to announce that we exceeded this commitment in 2024. As you can see on slide 10, for the full year, we deployed $678 million for share repurchases and dividends, representing over 80% of our free cash flow. We also invested approximately $3 million in two tuck-in acquisitions in the fourth quarter both in North America, including one in Canada and one in the US. For the year, we spent approximately $50 million on acquiring 10 highly accretive tuck-in businesses. We paid down approximately $62 million in outstanding debt in the quarter. As of December 31st, we had total debt of $4.2 billion with a total leverage ratio of 2.3 times EBITDA. and improvement from the prior quarter. We remain committed to maintaining a manageable debt level in our investment grade rating. As of December 31, 2024, our current maturities were $38 million, but we have a $500 million term loan coming due in Q1, 2026. As normal practice, we actively manage our capital structure, and we are currently evaluating our options to determine the optimal solution to address our pending 2026 term loan maturity. Our effective interest rate was 5.3% at the end of Q4, slightly down from Q3 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 variable interest rate swaps, which effectively provides a fixed rate on over 75% of our debt. I will close with our thoughts on 2025 guidance as shown on slide 11. Our guidance is based on current market conditions Recent trends and assumed scrap and precious metal prices hold near fourth quarter prices and no material impact from tariffs. On foreign exchange, our guidance includes recent rates, including the euro at $1.04, the pound sterling at $1.25, and the Canadian dollar at $0.70. The global tax rate is at 27.0%, which is comparable to our 2024 rate. We expect organic parts and services revenue growth between 0% and 2%. Please note we have one less selling day in 2025. In North America, we expect revenue to be roughly flat on a per day basis, given we don't expect an immediate rebound in repairable claims and won't realize the full benefit of some of the favorable trends Justin mentioned until later in the year. We believe Europe is poised to perform a bit better than they did from a revenue perspective in 2025, despite the ongoing challenging macroeconomic backdrop across the continent. For specialty, We expect low single digits for organic revenue growth given the macroeconomic indicators we are seeing. As a result of our revenue growth expectations, we are estimating adjusted diluted EPS to be in the range of $3.40 to $3.70. As you can see on slide 12, our EPS guidance anticipates headwinds from lower foreign exchange rates, depreciation and amortization, as well as the one-time items discussed earlier. partially offset by benefits from metals prices, interest, and taxes. We are focusing our efforts on those items we can control and anticipate more than offsetting the net negative impact of those items through improved operating results, which reflect the carryover benefit from the simplification and productivity measures we took in 2024 and the continued benefits from our disciplined focus on capital allocation. Free cash flow is expected to be in the range of $750 to $900 million. We will continue to balance our trade working capital and capital expenditure needs to fund our strategic growth objectives for 2025 and beyond. Thanks for your time. I will now turn the call back to Justin for his closing comments.