Release Date: April 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Q & A Highlights
Q: Nick, all the best to you. It's been a pleasure working with you.
A: (Dominick P. Zarcone - LKQ Corporation - President, CEO & Director) Thanks, Craig.
Q: My question goes to your comments around insurance prices. I'm just curious if you could walk through how higher and really significantly higher insurance prices impact your business overall.
A: (Justin L. Jude - LKQ Corporation - Executive VP & COO) Yes. And just talking to different folks in the industry, when we saw the insurance increasing 20% to 22% year-over-year, we saw deductibles increasing, and so in some cases, it caused folks not to necessarily repair their car. We still think the majority of our issue that we saw in Q1 from comparable claims was weather, but there's a lot of other commentary that we heard from other folks such as used car pricing, which saw huge decreases and huge increases in insurance rates. So we still think the primary driver for the repairable claims being down is weather. But anything, when we see huge swings like that with used car pricing or once again, insurance rates, it has some effect on us.
Q: Could you maybe just unpack a little bit more on this decline in the gross margin in North America?
A: (Rick Galloway - LKQ Corporation - Senior VP & CFO) Yes, Gary, fair question. So when we talked about it in the closing of Q4 for the guidance for this year, we said we'd be around 17% for the year with the dilution on Uni-Select. The product offering that we have for the various products that we sell for Uni-Select, the paint products and the hard parts side of the business, makes a different margin profile. Including the base business that we had before makes a similar margin as far as that paint side of the business goes. So with the increase in revenues, that's one component. We thought we'd be down around 17% for the year. We still think we'll be at around 17% for the year. The major contributing factor for being below 17% for Q1 is primarily related to leverage. With the volume decline that we saw, significant volume on the repairable claims, we said about 8% on repairable claims and our overall volumes down a little over 3%, that's mostly a leverage component. And as we said, the team has really put some strong efforts in to work on the integration, consolidation of various Uni-Select integrations, 65 different facilities that we consolidated. So some of that extra cost, a little duplicate costs that will go away as we go into the rest of the year. And that's where we have that confidence of bouncing back and getting back to that 17% number that we've been talking about.
Q: Can we talk about Europe for a second? How did the individual regions perform? Just trying to get a sense if there was any regional weakness or if anything stood out on the positive side.
A: (Rick Galloway - LKQ Corporation - Senior VP & CFO) So let me just go high level, and then I'll turn it over to you, Justin. I know you've been spending a lot of time out there. So Scott, I appreciate the question. If you think year-over-year, the biggest impact that we had on overall EBITDA margins is really the inflationary impact of wages. So that happened throughout the year, but primarily starting in Q2. So it will sort of calendarize as we start getting into Q2. There's roughly 200 basis points down that you have on overall wage inflationary increase. What the team has been able to do was improve on pricing and productivity initiatives to claw back roughly half of that. And so we're on a trajectory that we're pretty pleased with. Of course, we'd always like to have a little bit more. But the overall margins that we had, the 8.7% in Q1 reflects that really low year-over-year impact on the wage increases. And Justin, I don't know if you want to talk a little bit more about the various different regions. (Justin L. Jude - LKQ Corporation - Executive VP & COO) Yes. And Scott, like some of the markets such as the Benelux area or even in Germany, we're seeing mid-teen increases in labor rates and it's a market issue. That happens immediately. The team has been actively working on pushing price out, but we're very also conscious to make sure we don't impact the market and start to lose market share. And so we'll continue to push pricing through Q2 to cover that up. We do typically pass it on. We are a humble distributor, as you may have heard Nick say before, but we just saw immediate increases in labor rates, and it's just taken us some time to pass those prices through to cover that.
Q: On the North American business, I guess, to take a little deeper dive, I think you call out weather, but I guess historically, I think 2017 was a warmer winter, and I don't recall as much impact. So could you maybe bucket the negative from the Panama Canal issue, maybe the positive from State Farm having gotten into the space year-over-year? And then if you could give us any color on alternative parts penetration, is there any negative shift there?
A: (Justin L. Jude - LKQ Corporation - Executive VP & COO) Yes. Once again, overall, I mean, from the stats that we can see externally, we think it's mostly contributed to weather. I'm not sure I don't have the facts in front of me from 2017. Other things that we hear that caused some of the repairable claims being down, I mentioned such as skyrocketing insurance rates, plunges and used car pricing. We did see an uptick in APU driven by -- I think a lot, primarily by State Farm. Anytime when the carriers are looking to save money, they're going after recycled parts or aftermarket parts. And so on a year-over-year basis, Q1 to Q1, we did see an uptick of roughly 200 -- I can't remember the exact number, but 260 bps improvement in APU. So market share gain on the APU side.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
