LKQ
#Thank you, Joe, and good morning to everybody on the call
I am delighted to share the results for our most recent quarter with you
I will begin with a few high-level financial metrics before providing an update on our operating segments and discussing a few of the macro trends we witnessed during the quarter
I will then turn the call over to <UNK> <UNK>, who will provide some segment-level financial detail, and then I will come back to comment on our updated guidance and make a few final remarks before taking your questions
All-in-all, we believe Q2 was a strong quarter for our company and we are pleased with the results
As noted on slide 3, consolidated revenue was $2.458 billion, a 6.7% increase over the $2.3 billion recorded in the second quarter of last year
Total revenue growth from parts and services was 6.4%
Importantly, organic growth in parts and services was 3.8% on a reported basis
After taking into account the fewer selling days in Europe related to the timing of the Easter holiday, organic growth was a solid 4.9% on a same-day basis
It's nice to see the organic growth begin to pick up from the levels we experienced in the first quarter
Income from continuing operations for the second quarter of 2017 was $151 million, an increase of 9.5% over the comparable quarter of last year, resulting in diluted earnings per share from continuing operations of $0.49 as compared to $0.45 for the comparable period of 2016. On an adjusted basis, diluted earnings per share from continuing operations was $0.53 compared to $0.52 for the same period last year
Let's turn to the operating highlights
As you'll note from slide 6, parts and services revenue for our North American segment grew 5.5% in the second quarter of 2016 compared to the comparable quarter of 2016. Organic revenue growth for parts and services in North America was 2.8%
This reflect a nice uptick from the 1.8% recorded in the first quarter and a touch above our expectations coming into the quarter
There is no doubt that the mild winter weather patterns, which hit us particularly hard in the winter months, carried over into the spring as our body shop customers have limited backlog of work coming into the second quarter
As witnessed for several quarters now, we continue to grow our parts and services revenue faster than the market as a whole
According to CCC, collision and liability related auto claims on a national basis were up only 1.7% in the second quarter of 2017, following a 1.1% increase in the first quarter
So, our growth of 2.8% in Q2 reflects a 110 basis point outperformance, and gives us confidence that we continue to do the right things to serve our customers
Importantly, the growth in our core collision product continues to be stronger than the North American average as whole
We also had an excellent quarter in terms of the sale of salvage mechanical parts, and the PGW aftermarket glass business, which we owed for a full year as of April 21, 2017, was a solid contributor to the overall North American organic growth rate during the remainder of the quarter
The total loss rates continue to increase, reaching 19% at the end of the second quarter
CCC believes this increase is the result of the mix effect and hangover of an older vehicle fleet and a slight uptick in the vehicles one- to three-years old being deemed a total loss
It's important to note that cars in both these age groups are not representative of our collision sweet spot of 3 to 10 years
So despite this slight uptick in the total loss rate, we don't believe that it had a material impact to our current business
Additionally, according to the U.S
Department of Transportation, miles driven in the United States were up 1.2% on a nationwide basis in April
But miles driven in the Northeast and South Gulf regions were only up 0.3% and 0.6%, respectively
So clearly, we are, again, witnessing significant regional differences in some of our key markets where miles driven are trending below the national average
During the second quarter, the impact of acquisitions added 2.9% to parts and services growth in North America, with most of that reflecting a few weeks of revenues related to the acquisition of the PGW aftermarket glass business
We lost about 20 basis points of growth due to currencies, primarily related to the Canadian dollar
We purchased 77,000 vehicles for dismantling at our full-service wholesale operations, a 6.9% increase over the comparable quarter of the prior year
The auctions continue to be healthy and we have access to the vehicles, we believe, we need to continue the growth of our recycling operations
For our North American aftermarket business, we have been expanding both our total collision SKU offerings as well as the total number of certified parts available, each growing 9.1% and 17.6%, respectively, year-over-year in the quarter
In our self-service business, we acquired $141,000 lower-cost self-service and crush-only vehicles, reflecting a 2.2% increase over the second quarter of last year
Our self-serve team has proactively managed the fluctuations in the scrap market by quickly adjusting the cost of goods sold relative to the current market conditions and having an operating culture focused on cost management
Overall, I'm happy with our operating performance of the North American business
During the quarter, gross margins improved 40 basis points compared to the prior year, in part due to enhanced productivity of our salvage operations, wherein the revenue per car increased at a faster rate than the car cost, reflecting refinements to buying algorithms and an emphasis on inventorying more parts per car and also holding the cars a bit longer
I'm particularly happy with the ongoing benefits we are experiencing with our productivity initiatives
Although you won't see the same year-over-year improvement in margins because the major benefits from the procurement initiative were first realized about a year ago, we continue to benefit from the ongoing savings which are estimated to be about $9 million on a quarterly basis compared to the base 2015 levels
With respect to Roadnet, for the month ended June 2017, we were operating at a 97% usage level across our fleet with year-over-year increases of 60% in terms of miles dispatched, 28% for stops dispatched, and 34% for routes dispatched
I'm particularly pleased that we have reduced our missed service windows by 53%, which today stands at less than 1%, another validation of our continued commitment of stellar delivery service to our customers
Lastly, we integrated three PGW branches into an existing LKQ facility during the first quarter, added another in Q2, and have completed two more early in Q3. We have an additional seven-branch consolidation scheduled for the remainder of the year, which will bring the total consolidations to 13 for 2017, and this will help the cost structure on a going forward basis
Moving to the other side of the Atlantic, our European segment achieved total revenue growth of 7.9%
Importantly, organic revenue for parts and services witnessed growth of 4.1% on a reported basis and 7.1% on a same-day basis
Remember, we lost up to two selling days in many European countries due to the Easter holiday falling in Q2 this year compared to the first quarter of last year
Now that Rhiag has reached its anniversary date and it was included in the results of operations for the full quarter, both this year and last year, we are going to report the growth on a segment basis only, just like North America, as opposed to on a business-by-business basis
What I can tell you is that on a same-day basis, the organic growth of ECP and Sator were above 5%, while Rhiag was in double digits, which we believe are terrific results for all of the entities
Acquisitions added an additional 10% revenue growth in Europe during the second quarter of 2017, but the weaker currencies, when compared to the 2016 rates, resulted in a 6.2% decline, largely due to the significant year-over-year decline in the pound sterling
The UK team performed extremely well in light of a challenging macroeconomic environment
The stagnant wage growth in the UK, when combined with currency-induced inflation resulting from the Brexit referendum has created a challenging operating environment for our UK business
Despite those challenges, our team remains focused on driving market share and continuously creating a great service experience for our customers
In particular, our collision offering in the UK provides insurance carriers an attractive value proposition as they face the same dynamics as domestic carriers with increased repair cost and pressure on cycle time
Our Netherlands operation recorded some of the highest same-day growth since we bought the business and is reflective of the ongoing integration of the tuck-in acquisitions we've completed over the past few years
And the double-digit same-day revenue growth at Rhiag is a result of better-than-expected performance in Italy, and a growing, yet very old car park in Eastern Europe, which creates excellent demand for the types of parts we distribute
During Q2, we opened up a total of 13 new branches in Europe, including one new location in the UK and 12 new locations in Eastern Europe
Over the past 12 months, we have opened 47 new branches in Europe, including seven in the UK and 40 in Eastern Europe
With respect to Tamworth the warehouse, our T2 project, I am pleased to report that ECP is still on plan with the implementation process and is almost finished with system testing
Product stocking at T2 started the last week of June
And this past Tuesday, we had the very first shipments out of the facility to just a couple of our branch locations
We continue to believe we'll be fully operational at T2 by the end of the year and the project remains on time and on budget
With respect to Andrew Page, as anticipated during our call last quarter, the UK Competition and Markets Authority, or CMA, has initiated a Phase 2 investigation of our acquisition of this company
We anticipate this review will be completed by year-end
We remain optimistic and believe that the evidence supports that our acquisition of Andrew Page will not lead to any material lessening of competition
But the end decision rests with the CMA and we could be required to divest some or all of the business
While the CMA investigation is ongoing, we have been required to operate under what is called a hold separate order, which means we are not able to integrate the companies, and ECP and Andrew Page must continue to operate as competitors in the marketplace
As a result, we are very limited as to what we can do to improve the business as we cannot eliminate any of the duplicative expense
We know there are solid synergies and customer benefits available if we can put the companies together, but until we get the requisite clearance, our hands are tied and Andrew Page will continue to be unprofitable
The overall outlook for our European segment and its strategy remain favorable in terms of our ability to grow both organically and through acquisition
According to statistics included in the European Automobile Manufacturers' report, we currently operate in countries representing about 50% of the European car park, including operations in four of the five fastest-growing car parks
So, we have plenty of runway to grow
And finally, our Specialty segment continued to perform very well, achieving organic revenue growth of about 5.9% during the second quarter of 2017. Truck and SUV sales, which benefit our Specialty segment, remains very healthy
Additionally, the performance of our Specialty segment was aided by the strength in the RV market, which is benefiting from increased consumer confidence, the retiring of America's workforce, attractive financing options and lower fuel prices
According to RV industry statistics, in 2016, total RV unit sales reached an all-time high, and related accessories represent key product categories for our Specialty segment
To help support the growth of this segment, we are in the process of adding a new 450,000 square foot Specialty Parts Distribution Center in California that is expected to come online in the second quarter of 2018. Our corporate development activities have continued in earnest as evidenced by our acquisition of seven businesses during the second quarter
Most of these were smaller companies with a combined annualized revenue of about $68 million
These include a salvage operation in Pennsylvania, a transmission rebuilder in Atlanta to augment the greenfield capacity we are bringing on in Oklahoma City; three small aftermarket distributors acquired by ECP, including another distributor in the Republic of Ireland; one small aftermarket distributor in Italy, and another small automotive paint business in Sweden
In addition, on July 3, the first business day of the third quarter, Sator closed on the acquisition of four aftermarket distribution businesses in Belgium that will help to solidify our competitive position in that market
And on July 10, Sator acquired a small garage management software company
So, the pace of activity continues to be brisk
We will continue to look for opportunities to grow the breadth and depth of our customer offerings through the addition of successful, well-managed businesses to our family of companies around the globe, and the pipeline of potential transactions is robust
And now, I will turn the discussion over to <UNK> <UNK>, who will run through the details of the segment results
Thanks, <UNK>
With respect to our guidance for 2017, we've made some updates based on where we are sitting at the halfway mark of the year
Organic growth for parts and services has been narrowed to 4% at the low end and 5.25% on the high end, reflective of the fact that we're sitting at 4.1% for the first six months
Likewise, we have narrowed the range for our adjusted diluted earnings per share from $1.84 at the low end to $1.92 on the high end, increasing the midpoint to $1.88 per share
The corresponding adjusted income from continuing operations is $570 million to $595 million, while cash flow from operations has been revised up to $620 million to $650 million
Capital spending has remained constant at the $200 million to $225 million range
The updated guidance reflects an effective tax rate of 35.15% and exchange rates in the back half of the year of $1.30 for the pound sterling, $1.15 for the euro and scrap at $150 per ton
As it relates to our effort to bring on a new Chief Financial Officer, the response to our search process was terrific and we have had the opportunity to meet with some incredibly talented professionals over the past few months
Whittling down the talent has been hard, but we are in the final phase of the process, and I expect we will have a final decision in the near future
In summary, Q2 was a solid all-around quarter accentuated by an uptick in organic growth across all of our segments
The overall results reflect the collective efforts of our more than 40,000 employees around the globe, who are working hard to serve our customers each and every day
I would like to thank each of them for their dedication
Finally, I would like to thank Rob Wagman for his efforts during his 19 years at LKQ
As you know, Rob stepped down on June 1, and is now serving as Executive Advisor with a focus on corporate development activities
Rob's contributions during his tenure were countless, and I look forward to his continued insights as we move forward
And operator, we are now ready to open the call for questions
Question-and-Answer Session
Good morning, Jamie
Sure
So, a couple of questions you got built in there, Jamie
But all-in-all, we are expecting that the car park and the age of the car park will be a gentle tailwind as we move forward
In our standard information that we provide the investment community, our standard investor relations deck, we include a slide, as you know, that is what we call our collision sweet spot of 3 to 10 years
And for the first time in many years, the number of cars that fall into that age bracket in 2017 is actually ticking up a little bit
Now, it's not significant, so we don't anticipate any major movements here in 2017, but at least it's movement in the right direction, I believe, from about 101 million units to 103 million units
Then we get another more substantial uptick in 2018 and 2019. So, there is no doubt that we've sold the better part of 52 million vehicles in this country over the – new vehicles over the last three years, as those vehicles begin to come in to our 3- to 10-year sweet spot, there will be more cars that will need the types of parts that we sell
We do the best we can to track the vintage of parts that we're selling
We haven't seen a material shift, if you will, thus far
But again, we do believe that as the number of cars in a sweet spot grow that that will be a gentle tailwind to our business
So, with respect to the European organic, again, the business there is differently because we are adding branches, they get closer to the customer base
You have to remember that in the European business, we need to be within 30 to 60 minutes of delivery time between our branches and the customers in order to fulfill their expectations
Part of the way we do that is to add new branch operations to get close to the customer base
That's how we grow actually our market share, if you will
So, some of the growth in Europe comes from, what I'll call, the organic growth of the more mature branches
Some of the growth comes from having just more dots on the map, right
And so Rhiag – and this is all same day, to make it simple and take the calendar out of the mix, right? Rhiag was just north of 10%, on a same-day organic basis
About 55% to 60% of that was the contributions for what we would call the more mature stores
And then the balance of it was the impact of those 40 new branches that we've added in Eastern Europe over the last 12 months
If you move back to the ECP, where organic growth was just shy of 6% on a same-day basis, about 85% of that came from the stores that we've had for more than a year and about 0.9% of growth came from those seven new stores that we added over the last 12 months
The car park in Europe, it's aging a little bit as well, but it's – you've got a couple different car parks in Europe right
You have Eastern Europe where the average age of a car is still 9.5, maybe 9.6 years old and then you've got Eastern Europe where the average age of car is over 14.5 years old
So there's some very different dynamics based on the geography
But the car park is continuing to grow
It's growing faster in Eastern Europe than it is in Western Europe
That's said, in 2016, the number of auto registrations in the UK hit an all-time high
So, there is a good backdrop for our businesses as we continue to move forward
So, it's 5.6% to 6%
Actually, no real shift, <UNK>, in our, kind of, if you want to think, product line revenue or growth
I mean, the reality is the core collision product, think about Keystone (41:43) in a box, if you will, the core aftermarket product grew higher than the 2.8% total
Our salvage mechanical parts, engines, transmissions and some of the other big mechanical pieces, right, they were above the 2.8% as well
Again, as has been the case now for several quarters, we do have some product lines that are soft
We talked about this in the past
Aluminum wheels, paint, cooling continue to be soft
But again, there has been no major shift in kind of the relative contribution of salvage versus aftermarket or mechanical versus collision
Yeah
And again, the fact that our organic was at 2.8% and total repairable claims are only up 1.7%, that gives us confidence that we are continuing to, at a minimum, hold our own and likely gaining share
Absolutely
Yeah
Well, so last year, in 2016, Andrew Page hit us for about $0.02 a share
As we've indicated this year, we think it's going to hit us for $0.03 a share
It's going to take some time
Once we get our – the ability to truly mange Andrew Page, it's not going to be an overnight flip, but ultimately we will be able to rationalize the way we believe all those losses and ultimately get it into a profitable situation
And so, yeah, I'd call, $0.02 to $0.03 of incremental value potentially next year
Correct
Now, we anticipate we're going to be able to get it into profitability
But again, that doesn't happen overnight, <UNK>
So, the key is going to be, we're – we continue to be optimistic, we continue to feel strongly in our perspectives
At the end of the day, it's how many of the branches that we've acquired are we going to be able to keep
Probably not, because the competitors on the street corner are still the same competitors on the street corner
They're just owned by somebody else
So, just as we did in the Netherlands, where we brought some of the larger distributors that we were selling to, we brought some of our larger customers, the flip from three-step to two-step, that's really what the acquisition of the four businesses in Belgium were all about
They have a good market share and that will allow us basically to get to the last mile for the garage which is what – we were missing that
Well, again, nothing happens quite that fast, <UNK>
But over the next year, just like over the last year, as we've integrated the Netherlands tuck-in acquisitions, over a year, you begin to move it a little bit and, ultimately, it'll look like the one big seamless enterprise in Belgium
So, again, we haven't bumped up against the big French companies in acquisitions kind of head-to-head, so I can't comment directly as to whether they're being rational or not
They're good companies, they're solid companies, they've got good capital structures, right
Whether they decide to sell is going to be up to their private equity owners
With respect to some of the other countries, Germany, Spain, if you will, we believe that given our presence in the marketplace, we will have an opportunity to at least look at those businesses if and when they come to market
And we think that with our base of operations, we have as much, if not more, ability to create synergies than anyone else in Europe
But we have to wait
Again, we can't force somebody to come to market
No problem
Good morning, <UNK>
So, the collision business, relative to the ECP is still relatively small, right? It's running somewhere on the order of £50 million, £60 million
But it's growing nicely
Collision in the UK, I think, was up about 10% in Q2 over Q2 of last year
So, still outperformance from a growth perspective
The key there is, ultimately, the insurance companies in Europe are no different than the insurance companies in the U.S
And they've got the same pressure to try and get claims costs down
And part of the way they do that is through parts, and part of the way they do that is through cycle time
I mean, we have, as you know, ongoing pilots and programs with 18 of the larger insurance companies over in the UK, and a couple of them have told us that, as a result of our ability to get them parts and get them parts quickly, they're seeing their cycle times begin to move down
So, we think that, ultimately, that bodes well for our ability to create an ever meaningful business in collision parts over – not just in the UK where we are today, but ultimately to bring that on to Continent as well
We don't disclose that, <UNK>
But if you backed into kind of what Coast was almost exclusively RV, and Stag was exclusively RV
So, you're – probably a little bit north of a third
We don't comment on any particular customer and the like, because of agreements that we have with some of our customers, at all
But the reality is, is we're always looking to expand our distribution of parts
I think there is a lot of folks in the marketplace who recognize the power that we have as being the largest distributor of collision-related parts in North America and that there is opportunities for them to leverage our distribution background
We are
No new news
Well, thank you, <UNK>
<UNK>, this is Nick
As we've stated now going back to the mid 2015, right, we are incurring costs at T2 even though – well, at least up until last Tuesday hadn't shipped a single product out of the facility because we've been paying rent and we're paying utilities, we're staffing up with labor and the like
And in the meantime, we're keeping the other two facilities that will ultimately get shut down, they're running full bore
So we're still paying the rents and the utilities and the labor and everything else there
Ultimately, once we know that T2 is operating exactly as it needs to be and there is little to no risk of any fulfillment issues as it relates to keeping our 200 plus branches stock full on a daily basis, we will shut down two of other facilities
And so, we will save the rent and the labor and the like
We quantified that the impact of T2 was $0.03 last year, another $0.02 this year, so $0.05 in total
We won't begin to rationalize the other two facilities until 2018. So, we won't get the entire nickel back next year, but we will get, we believe, some good portion of that back
And then by 2019, there should be the rest of the positive benefits
Probably, we can go both ways
I mean if you think about what we've done with Rhiag, okay, we bought a really big business, and yet we've added more than 40 additional branches, which is a program that we brought to the table more than what they were doing on their own
I always believe that it's not just what you buy that's important, but what you do with what you buy, that's really important, and the ability to add branches is critical
We can go into some of those other locations and try and greenfield, if you will, and just add branches
Part of it is, though – creating a presence is hard and that would be a long road
So, it'd probably be a combination, <UNK>, of both acquired entities to get a base and then to continue to build the branch network, which we can do on our own once we have a base
Yeah
So, if you take a look at – we narrowed the range based on where we are
The reality is, at the low end of the range, at 4%, if North American organic isn't around where it was in Q2, that will cover us for the low-end
At the high end, North American organic would probably need to move close to 4% in the back half of the year
So, longer looking, we would anticipate that North American organic, obviously, would continue to move up, particularly if we get any sort of normal winter weather pattern in 2018.
Good morning, Ben
Let's talk on a same-day basis, because that takes the calendar out of the mix
On a same-day basis, we think that Q2 kind of serves as a baseline
We're cognizant of the fact that as we move though the back half of the year, we get slightly easier comps, because as you recall, the organic growth comps in the back half last year were still coming in
So, I would say, a baseline that's slightly moving north in the back half of the year from a North American organic perspective
Yeah
So, the Northeast and the kind of the Midwest, which are kind of key winter states, continue to be a little bit behind the curve on a relative basis to the overall LKQ footprint as a central region, and the West continue to be a bit stronger
Again, people got to remember, this is a big country
And what happens in the Northeast could be completely different than what's going on in the Southwest, right
And from a cadence perspective, we don't disclose results, Ben, as you know, but we're comfortable with where we're headed into Q3.
If the opportunity arises, we're ready to go today
The reality is, is we're going to pay off or continue to pay down our debt, because we generate a lot of cash
And it's not a question of waiting to do an acquisition to get our – because we want to get our leverage down, it's really waiting for those acquisitions to come to market
We don't control the timing there
Good morning, <UNK>
Yeah
So, the reality is we're trying to continue to grow and optimize all of our businesses, whether it's on the salvage side or on the aftermarket side
Again, the core products on the collision space are actually performing quite well
As <UNK> indicated in his comments, the margins – gross margins in aftermarket were down just a tad
And part of that, quite frankly, has to do with – bigger customers get bigger discounts, and as the MSOs continue to get larger and larger and create a bigger piece of the pie, that's actually good for us, because they use a lot of the parts that we sell
On the operating side, again, we're trying to do the best we can to optimize our overall cost and whether it's things like the procurement initiatives, which were largely through Roadnet, which is – as I indicated in my comments, we think will continue to add benefits
Again Roadnet, it's not salvage versus aftermarket, it's our total parts, North America, but we will be able to get leverage there
Yeah, the ECP question, <UNK>, is really going to depend on where we end up with Andrew Page and how many of those 106 branches that we've acquired we'll be able to keep, because assuming if we are able to keep most, all those, the need then to add incremental branches to be able to get closer to the customers goes down a bit
In Eastern Europe, where we've added those (1:02:55) branches over the last 12 months, we are in the early days there
That's a market where the car park is growing, the age of the cars is really old and so we sell – the demand for the types of parts we sell is really high
The organic growth there, we think, is going to be good for years to come and there's the ability to add, call it, 10 to 12 branches a quarter for a long time
Could you ask that again?
Well, thank you, everyone, for joining us on the call
We do appreciate the time that you spent with us
Hopefully, this was helpful to everybody, and we look forward to chatting again in about 90 days
Have a great day
