LKQ : Transcript (opens in new window)

Formatted Report

29-Apr-2021

LKQ Corp. (LKQ)

Q1 2021 Earnings Call

	Total Pages: 19
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LKQ Corp. (LKQ)	Formatted Report
Q1 2021 Earnings Call	29-Apr-2021

CORPORATE PARTICIPANTS

Joseph P. Boutross	Varun Laroyia
Vice President-Investor Relations	Chief Financial Officer & Executive Vice President
Dominick P. Zarcone
President, Chief Executive Officer & Director

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OTHER PARTICIPANTS

Stephanie Benjamin	Gary Frank Prestopino
Truist Securities, Inc.	Barrington Research Associates, Inc.
Brian Joseph Butler	Bret Jordan
Stifel, Nicolaus & Co., Inc.	Jefferies LLC
Scott L. Stember	Daniel Imbro
C.L. King & Associates, Inc.	Stephens, Inc.

Craig R. Kennison

Robert W. Baird & Co., Inc.

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MANAGEMENT DISCUSSION SECTION

Joseph P. Boutross

Vice President-Investor Relations

GAAP AND NON-GAAPFINANCIAL MEASURES...........................................................................................................................

• 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

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Dominick P. Zarcone

President, Chief Executive Officer & Director

BUSINESS HIGHLIGHTS ..............................................................................................................................................................................................

Opening Remarks

• 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, including our banner margin and FCF performance, as well as our improved 2021 outlook before I come back with a few closing remarks
• Wow, we've come a long way over the past 12 months
• A year ago at this time, the threat of the pandemic had become a tremendous and painful reality

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LKQ Corp. (LKQ)	Formatted Report
Q1 2021 Earnings Call	29-Apr-2021

• Immediately our teams got into action with a key focus on across the entire organization to right-size the cost structure and maximize cash flow

Cost Structure

• In order to adjust to this new paradigm our teams had to make some very difficult decisions to protect the long term health of our company, and in the past three quarters have proven that our ability to reset the cost structure of LKQ
• Our global leadership team firmly believed we would come out of the pandemic period stronger and a better organization and our performance this past quarter absolutely confirms that belief

Key Initiatives

• Let me restate our key initiatives, which continue to be central to our culture and our objectives o First, we will continue to integrate our businesses and simplify our operating model
  o Second, we will continue to focus on profitable revenue growth and sustainable margin expansion o Third, we will continue to drive high levels of cash flow, which in turn, will give us the flexibility to
  maintain a balanced capital allocation strategy
  o And finally, we will continue to invest in our future
• As you can see from our results, our segment teams executed on each of these initiatives in Q1

Operating Initiatives

• Alongside these operating initiatives, the continued build-out of a comprehensive ESG program is a key focus for the organization
• As promised during our last earnings call, on April 6 we released our Inaugural Corporate Sustainability Report
  o This report validates our long-term commitment to enhancing our ESG practices and will serve as a guidepost for the further embedding of ESG principles throughout our global operations

CSR Report

• Slide 16 of today's earnings deck provides a brief one page overview of the CSR report
• If you have not already done so, I would highly encourage you to visit our website and download a copy of the full CSR.
• Now on to the quarter
• Revenue for Q1 was $3.17B, an increase of 5.7% as compared to $3B in Q1 2020
• Parts and services organic revenue in Q1 2021 increased 0.6% on a reported basis and 2.2% on a per day basis
  o While the net impact of acquisitions and divestitures decreased revenue by 0.6% and foreign exchange rates increased revenue by 4.2%
• Total parts and services revenue increased 4.2% in the quarter

Organic Revenue Growth

• The organic revenue growth for the quarter reflects the annualization of the initial pandemic impact last March
• Through February, organic parts and services revenue was 4.4% lower on a per day basis

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LKQ Corp. (LKQ)	Formatted Report
Q1 2021 Earnings Call	29-Apr-2021

• In March, organic parts and services revenue grew by 15.7% on a per day basis, recognizing we were coming off a lower comparable period
• Other revenue grew 27% in Q1 2021, driven by higher scrap steel and precious metal prices

1. While consolidated revenue is still running below pre-COVID levels, net income for Q1 was $266mm as compared to $146mm last year, an increase of 83% y-over-y

Diluted EPS

• Diluted EPS for Q1 was $0.88, an increase of 83%
• On an adjusted basis, net income in Q1 was $286mm, a 62% increase y-over-y, while adjusted diluted EPS was $0.94, a 65% increase

EBITDA Margin

• Each of our segments achieved EBITDA margins, well ahead of our expectations due to excellent execution, a continued focus on our cost structure, and with respect to North America, tailwinds from scrap and precious metals pricing
• When taken collectively, these strong performances allowed LKQ to record record consolidated segment EBITDA margins of 14.2% in Q1
  o This was a 350 basis point increase relative to Q1 last year

Revenue Trends

• Let's turn to some of the quarterly segment highlights
• Slide 5 sets forth the monthly revenue trends for the quarter and as you can see, all segments were positive in March on a per-day basis
• Obviously, during the tail end of February and the entire month of March, we were working from an easier comp, but we also benefited as mobility began to gain ground in certain markets
  o Additionally, the penetration rate of the vaccine in the United States is encouraging and as these trends gain ground in other key markets, we should begin to see a loosening of the stay-at-home mandates, and we would expect a gradual improvement in vehicle miles traveled or VMT

US Department of Energy

• According to the US Department of Energy, at the end of the second week of April, fuel consumption was 71% above the prior year and just 3% below that same week of 2019
• According to the Apple Mobility Index, the trend in driving trips in our European markets was down early in the year relative to the third and fourth quarter levels of 2020, but as we progressed through Q1, the index rebounded, and by the third week of April, the index had increased 33% from the first week of January
• So there are clearly some green shoots of momentum in VMT around the globe, albeit, we're still below pre-COVID levels

North America

• Turning to North America, from slide 6, you will note that organic revenue for parts and services for our North American segment declined 8.4% in the quarter on a reported basis and 7.0% on a per day basis
• While still down on a y-over-y basis, it is an improvement relative to Q4 of last year

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LKQ Corp. (LKQ)	Formatted Report
Q1 2021 Earnings Call	29-Apr-2021

• We continue to outpace the market in North America, especially when you consider that industry data suggests that collision and liability-related repairable auto claims declined approximately 14% in Q1 2021 compared to the prior period

Market Share Gains

• Relative to the competitive landscape, we are confident that we are gaining market share from small salvage and aftermarket operators that are typically capital constrained and facing lower inventory levels due to product availability and cost inflation
• Our strong balance sheet gives us the ability to continue to invest in our North American business, including inventory replenishment, and also in various technologies and programs to further enhance the efficiency of our operations and the service experience for our customers
• With capital constraints, many smaller competitors lack the flexibility to stay relevant and competitive

North American Operations

• During Q1 our North American operations benefited from the disruption to the OE component supply chain, which impacted the OE's ability to build major mechanical inventory
• This lack of major mechanical inventory for the OEs, combined with our robust levels of recycled and remanufactured engines and transmission products, provided the opportunity for our North American business to gain share in the quarter

Salvage Operations

• Our salvage operations have been extremely judicious in their procurement efforts and selling more parts from the vehicles we procure, enabling us to have stronger fulfillment rates than the industry average
• In North America during Q1 we continued our environmental stewardship efforts by processing 190,000 vehicles, resulting in among other things, the recycling of 900,000 gallons of fuel, 491,000 gallons of waste oil, 482,000 tires and 176,000 batteries
• During Q1 we also processed approximately 282,000 tons of scrap steel

European Segment

• Moving on to our European segment, organic revenue for parts and services in Q1 increased 30BPS
• As the largest pure play distributor of aftermarket automotive parts in Europe, this is a solid start to 2021, even in the face of continuing COVID lockdowns in several regions of Europe

REGIONAL OPERATIONS

• Our regional operations experienced varying revenue performance in the quarter with positive y-over-y performance in Germany, Benelux, and Eastern Europe, with some softness in the UK, and Italy continuing to drag on the overall performance of this segment
• Specific to the UK, in addition to our two-step distribution business of mechanical service parts, we operate a few other businesses, including our collision parts and coatings businesses, which registered materially lower growth than our two-step mechanical parts distribution business in Q1

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