LKQ
#Thanks, Rob, and good morning to everybody on the call
I am delighted to run you through the financial summary for the quarter before touching on the balance sheet and then addressing our upward-revised guidance for 2017. When taken as a whole, our financial performance in the first quarter of 2017 was excellent and slightly ahead of our expectations
We experienced solid revenue and earnings growth, headlined by the best margins our North American business has achieved in several years
My comments this morning will focus on the results from continuing operations which exclude the two months of activity for the PGW automotive glass manufacturing business which was sold on March 1, 2017, for $310 million
Consolidated revenue for the first quarter of 2017 was $2.3 billion representing a 21.9% increase over last year
That reflects a 21.7% increase in revenue from parts and services, aided by 25.9% increase in other revenue
I will provide a bit more detail on the organic growth of each business as I walk through the segment results
As noted on slide 12 of the presentation, consolidated gross margins improved 10 basis points to 39.7%
The uptick reflected significantly improved productivity in North America, offset by a decline in Europe, largely resulting from the inclusion of Rhiag which has lower gross margin structures and a decline due to our Specialty segment which has the lowest gross margin structure of all of our businesses
We gained about 10 basis points of efficiencies in our operating expenses largely due to lower facility and warehousing expense as a percent of revenue, reflecting the inclusion of Rhiag in the 2017 results as it has lower facility and warehousing expenses than our other businesses
Segment EBITDA totaled $290 million for the first quarter of 2017, reflecting the $54 million or 23% increase over the comparable quarter of 2016. As a percent of revenue, segment EBITDA was 12.4%, a 10 basis point increase over the 12.3% recorded last year
During the first quarter of 2017, we experienced a $12 million decrease in restructuring cost compared to the prior year, but a $17 million increase in depreciation and amortization, the latter of which was due largely to the Rhiag and PGW acquisitions
With that, operating income for the first quarter of 2017 was up about $50 million or almost 27% when compared to the same period last year
Interest expense increased $9.4 million due to the increased borrowings to fund the Rhiag and PGW acquisitions
Non-operating expenses improved by about $7 million over last year as the Q1 2016 results included some one-time items related to the Rhiag and PGW acquisitions
With that, pre-tax income during the first quarter of 2017 was $213 million, up $47 million or 28% compared to the first quarter of last year
Our net tax rate during the first quarter was 33.9%, up from 32.1% in 2016. The 2017 rate reflected an effective rate of 35.25% and some discrete items that reduced the reported rate, the most significant of which is the excess tax benefits associated with stock-based compensation
The effective rate of 35.25% excluding discrete items is higher than last year due to a shift in the geographic mix of our earnings
Diluted earnings per share for the first quarter was $0.45, which was up 25% compared to the $0.36 reported last year
Adjusted EPS which excludes restructuring charges, intangible asset amortization, the tax benefit associated with stock-based compensation, and other one-time unusual items, was $0.49 in the first quarter of 2017 versus $0.42 last year, reflecting a 17% improvement
Stronger scrap prices added slightly more than $0.01 to EPS in Q1 2017. And as anticipated, the translation impact of currencies had a negative impact of $0.01 a share during the quarter
As highlighted on slide 13, the competition of our revenue continues to change due to the varying growth rates of our different businesses and the impact of acquisitions
Since each of our segments has a different margin structure, this mix shift impacts the trend in consolidated margins
And with that, let's get into the details on the segments
Revenue in our North American segment during the first quarter of 2017 increased to $1.208 billion, up 11.8% over 2016. The overall growth in revenue resulted from a combination of 10.4% growth from parts and services and a 25.5% increase in other revenue, the latter of which was due primarily to higher prices received for scrap steel and other metals
The 10.4% growth in North American parts and services was the result of a combination of 1.8% organic growth plus 8.3% acquisition growth, and an additional 20 basis points of increase from the FX impact due to the strength of the Canadian dollar
There is no doubt that another very mild winter had an impact on our revenue
Rob mentioned the CCC statistic that repairable claims were up on average of only 1.1% in the U.S
during the first quarter of 2017. Indeed, 23 of the 50 states reported declines in collision and liability repairable claim volume on a year-over-year basis
Gross margins in North America during the first quarter were 44.4%, a recent high and up 180 basis points over the 42.6% reported last year
The strong results reflected the benefits of procurement initiatives in both our salvage and aftermarket operations, offset in part by the inclusion of the PGW aftermarket glass operation which, structurally, has lower margins
With respect to operating expenses in our North American segment, we lost about 50 basis points of margin compared to comparable quarter of last year
Almost all of the increase in expense as a percent of revenue was due to the inclusion of the PGW aftermarket glass operation in the North American results in 2017 and with almost $6 million of shared PGW corporate expenses for the first two months were recorded as continuing operations even though these expenses went with the glass manufacturing sold on March 1. These shared costs will no longer be incurred by the PGW aftermarket operation
In total, EBITDA for the North American segment during the first quarter was $176 million, a 20.9% increase over last year
As a percent of revenue, EBITDA for the North American segment was 14.6% in Q1 of 2017, up 110 basis points from the 13.5% reported in the first quarter of last year
Again, these are the best margins the North American segment has reported in many years
As noted, scrap prices were stronger than anticipated in the first quarter of 2017 compared to last year and added slightly more than $0.01 to Q1 EPS
Assuming prices stay at the current levels, we will not get the same level of positive impact during the rest of the year
Moving on to our European segment, total revenue in the first quarter accelerated to $821 million, up from $547 million, a 50% increase
Organic growth for parts and services in Europe during the first quarter was 8.5%, reflecting the combination of 6.8% growth at ECP and 3.4% growth at Sator
Note that the Easter holiday fell in Q1 of 2016, but Q2 of 2017. So some of the European countries picked up extra selling days in Q1 of 2017, which increased the reported organic rate
This will reverse in Q2 as there are less selling days in some of the countries in April of 2017 compared to last year
On a per day basis organic growth in Europe was approximately 3.4% in the first quarter of 2017. New branch openings at Rhiag since the acquisition contributed to the overall European organic growth rate in the first quarter of 2017. And all of Rhiag will be fully blended into the organic growth results next quarter, albeit with a few less selling days
Gross margins in Europe decreased to 37%, a 110-basis-point decline over the comparable period of 2016. While both ECP and Sator reported the highest first quarter gross margins each has achieved in several years, the inclusion of Rhiag weighed down the consolidated European margins
As mentioned in prior calls, given the three-step distribution model in Italy and Switzerland, Rhiag has a lower gross margin structure than either ECP or Sator
And the shift in the revenue mix negatively impacts the consolidated European margins
Now that we have reached the one year anniversary of the Rhiag acquisition, this mix impact will largely disappear going forward
With respect to operating expenses as a percent of revenue, we experienced a 30-basis-point improvement on a consolidated European basis
On the positive, we benefited from the inclusion of Rhiag, which structurally has lower operating expenses than our other European business, and we also benefited from improved SG&A leverage in the UK
Offsetting these items were increased facility cost related to additional branches, the new T2 national distribution center in the UK, and the inclusion of <UNK> Page, which is still losing money while we need to operate under a hold separate order issued by the Competitive Markets Authority (sic) [Competition and Markets Authority] (22:47)
European segment EBITDA totaled $79 million, a 36.9% increase over last year
Relative to the first quarter of 2016, the pound declined 13% and the euro declined 3% against the dollar
So on a constant currency basis, EBITDA growth in Europe was 47.5%, which we believe is quite robust
As a percent of revenue, European EBITDA on the first quarter was 9.6% versus 10.5% last year, a 90-basis-point decline
Approximately 70 basis points of the decline relates to the impact of <UNK> Page and the incremental cost in 2017 related to the new T2 facility
Note the CMA is still reviewing our <UNK> Page acquisition under the UK competition law
And it appears it could be moving toward a Phase 2 review for some or all of the business
That will likely extend the review time line for any portions referred into Phase 2 by an additional six to nine months
Turning to our Specialty segment, revenue in the first quarter totaled $315 million, a 6.7% increase over the comparable quarter of 2016. The organic growth rate of 6.3% reflected the continued strength of sales of truck, towing, and RV parts, offset a bit by lower levels related to performance part sales
Gross margins in our Specialty segment for the first quarter decreased 240 basis points compared to last year, largely due to lower supplier discounts, unfavorable product mix, and higher warehouse cost capitalized into inventory due to the two new distribution centers added last year
Operating expenses as a percent of revenue in Specialty were down about 230 basis points as we continue to see the leverage from integrating the acquisitions into our existing network
EBITDA for the Specialty segment was $35 million, up 6% from Q1 of 2016. And as a percent of revenue, EBITDA for the Specialty segment was flat with the prior year at 11.3%
Remember this is a highly seasonal business and the first quarter is typically pretty strong, as demonstrated by the graph in the lower right-hand corner of slide 18. Consistent with normal seasonal patterns, you should assume these margins will moderate as we move through the back half of the year
Let's move on to capital allocation
As presented on slide 19, you will note that our after tax cash flow from continuing operations during the first quarter was approximately $176 million as we experienced strong earnings and only a moderate increase in working capital
During Q1 we deployed $117 million of capital to support the continued growth of our businesses, including $41 million to fund capital expenditures and $76 million to fund acquisitions and other investments
The largest capital changes reflect the paydown of $326 million of debt, largely funded by the net proceeds derived from the sale of the PGW glass manufacturing business
At March 31, we had a little more than $3 billion of debt outstanding and approximately $265 million of cash, resulting in net debt of about $2.8 billion or approximately 2.6 times LTM EBITDA
We have more than $1.3 billion of availability on our line of credit, which together with our cash, yields total liquidity of over $1.6 billion
Finally, as noted in our press release, we have provided updates to guidance on a couple of our key financial metrics for 2017. As it relates to the organic growth for parts and services, we continue to be comfortable with the range of 4.0% to 6.0% for 2017, essentially consistent with our recent experience
Our range for adjusted earnings per share from continuing operations which excludes restructuring expenses, the after tax impact of intangible amortization, and the excess tax benefit related to stock-based compensation, was increased to a range of $1.82 to $1.92 a share, with a midpoint of $1.87, up $0.02 a share
Based on our shares outstanding, that range implied an adjusted net income of approximately $565 million to $595 million with a midpoint of $580 million
Our assumed effective tax rate before discrete items for 2017 is 35.25%
Our guidance for cash flow from operations is approximately $615 million to $645 million with a midpoint of $630 million, while the guidance for capital spending remains constant at $200 million to $225 million
Finally, page 23 sets forth the updated chart included in the Q4 call materials, which bridges the actual 2016 earnings per share from continuing operations to the midpoint of our updated 2017 guidance
You will note that with the exception of the growth in the base business, which increased by $0.02 to $0.19 a share, all the other items are on track with the levels anticipated at the time of our call back in February
And at this point, I'll turn the call back over to Rob to wrap up
Good morning
Sure, Ben
Obviously, the improvement in the North American gross margins are coming from really all parts of the business, whether that's the full-service salvage, the aftermarket parts, as well as our self-service operations and the like
The key there is the procurement
It has less to do with selling prices
It all has to do with improvements from a procurement perspective
The activity at the auctions continues to be very strong as far as product flow
We're buying good product at good prices
We're focusing on getting a few more parts off of each of those cars because, ultimately, we earn more money when we sell a part than when we send it to the crusher, if you will
Clearly, the improvements and the focus on aftermarket procurement that we put into place about 18 months ago is really helping
Again, the total productivity initiatives, which includes things beyond just cost of goods sold items was over $9 million in the quarter
We are about $9 million last year or last – in the fourth quarter of last year as well
So, we're annualizing now at about $35 million, $36 million
All of that helps
All of that helps drive down the cost of goods sold and improving the margins
Well, we are doing a little bit better than we were in the fourth quarter when we initially acquired the business
But we still have to operate under the hold separate order
And so, there's only so much, Ben, we can do as it relates to the day-to-day activities at <UNK> Page
Our goal is to keep the losses to a minimum until we can get full control of the business
Thanks, Ben
So, the North American organic of 1.8% is consistent with what we signaled during our fourth quarter call
At that point in time, we said that for the year, we were looking at 2% to 4% in North America
We anticipated that the first quarter in particular was going to be at or below the low end of the range, at 1.8%
That's exactly where we came up
The reality is January and February were tough, March was the best month of the quarter
From a growth perspective, March tends to be a stronger month, in general
So, we are cautiously optimistic with respect to what that could mean for the rest of the year
We're still comfortable with the 2% to 4% range
Again, at the low end of the range, if we just do 2.1% for the back nine months, we'll hit 2%
To get to 4% we need to be at 4.7%, on average, for the back nine months
We probably need some help from the industry trends to get us to the upper end of the range
But again, it's still – in theory, it's still within reach
At the midpoint of the range, if we do 3.4%, we'll annualize out at 3.0% for the year
So, at the end of the day, the trends – Rob talked about the 1.1% increase in repairable collision and liability claims, that's as low it has been for quite some time
The reality, I mentioned the 23 states were actually down
The states that had the largest increase included locations like Montana, North Dakota, South Dakota, Idaho
I mean, it's great that they're up significantly but there's no cars in those states
So, it didn't really help us very much
So, again, we remain cautiously optimistic that the trends will improve through the year and coming off of a relatively slow start
It's really – we anticipate that we're going to fall into our guidance from a growth perspective, that the margins will continue to be pretty strong
Again, we did a little bit better than we anticipated in Q1. Now, we also know that a penny of that was the higher scrap prices which we did not anticipate
And we don't think we will get the same uptick on scrap in the balance of the year
Again, you got to remember scrap prices in Q1 of last year were in the $92 range or somewhere thereabouts
So, it was a pretty big lift on a year-over-year basis
Again, we were anticipating scrap at $125 a ton or so coming into the year and it was a little bit better than that
So it's a combination of consistent growth, consistent with our guidance, and good margins
Sure, <UNK>
And I can assure everyone the search process has been launched
We've retained a firm
The initial feedback from prospective candidates has been incredibly positive
We've reviewed dozens of candidates on paper over the last couple weeks
We'll move into the next part of that process very shortly
I'm highly confident that finding capable candidates is not going to be the issue
The key is going to be finding somebody who fits LKQ from a cultural perspective
When you think about the attributes, clearly somebody who has public company experience would be helpful, either as a sitting CFO or as a strong number two
If we could find somebody with distribution and/or automotive experience, that would be a plus obviously
A big part of our business is overseas, so some international experience would be helpful
We do a lot of M&A work, and so somebody who has been part of that process again would be helpful
Capital markets expertise
The fact that we are going to continue to grow business quite rapidly, and we're going to need to fund that growth
And ultimately, we're looking for the best candidate with the best fit
But if we can find a diverse candidate, that would be an added plus
So you put all that into the mix
We doubt that anybody is going to fit all that perfectly
But that's kind of what's on the wish list, <UNK>
Yeah
So, <UNK>, this is Nick
The first half kind of balances it out
It really had to do with the Easter weekend in Europe, where you had the biggest impact
Easter was in I believe the last week of March or towards the last week of March in 2016. Obviously impacted Q1. Some of the European countries, it's basically a day off, both on Good Friday and on Easter Monday, the Monday after Easter
That fell into April this year
So when you look at the first half, it should basically cancel each other out
So a little bit stronger growth in Q1. It would be a little bit softer growth in Q2 on a reported basis, just because of the impact of the Easter holiday
But it should all wash out
We talked about in the Q4 call, last year was a leap year
And so there's one less day on the calendar
That really manifests itself in the U.S
Actually the way the calendar falls from a working day perspective, it doesn't pop out till the third quarter, if you will, where we're down one day
So hopefully that helps
Well, one day on a quarterly basis is about 1.5%, right? Because in the U.S
we tend to have about 63, 64 business days in a quarter
So if you take one day out, you're about 1.5%
So yes
The scrap gave us a little bit more than $0.01. A $0.01 is about $5 million of pre-tax
So, that's probably the best way to think about it
Yeah
Yeah
The trends were actually pretty similar, if you will
Again, the salvage side of business really serves both markets, right
Obviously, we sell sheet metal and the likes off of a recycled vehicle, but the most valued parts of the engine and the transmission which go into the mechanical side of the business
And again, the growth of the aftermarket and what I'll call the core collision aftermarket product, the hoods, the fenders, the lights, the bumpers and the like, was pretty comparable actually to the growth of the salvage business
And Rob is not going far
He's going to stay as a consultant with us, and I've got all sorts of ideas as to how to keep him plenty busy
Yeah
And the other thing CCC mentioned is they believe that the uptick in the total loss rates is directly tied to the age of the car part
The reality is when we're buying a car that's 9, 10, 11 years old at auction, we're not buying it for the sheet metal, we're not buying it for the hoods and the fenders, and the doors, if you will, because most of those cars aren't getting repaired anyways
We're buying it for the mechanical components, the engine and transmission, because the sweet spot there is really cars 7- to 14-years model years old
And so, the more of those cars we can buy, the better we will be to service our customers
I think that's (53:11)
Yeah
So, the best gauge we can tell you is our experience on reman engines because we have a pretty active business there
And the margins there are very consistent and very strong of gross margins relative – north of 40% range, which is consistent with our North American business
And we fully anticipate that our margins in the reman transmission business will be in that same zip code
So, as we announced last quarter, we have the 26.5% ownership position in Mekonomen are publicly held entity over in Sweden
We actually have two board members, both John Quinn and Joe Holsten, our Chairman, serve on the board of Mekonomen
We're very happy with our current position there
We believe it's a terrific company
They're working through some growth issues as well, but we're going to remain a very interested shareholder and, again, we're happy with our current position
Good morning, <UNK>
Yeah
Nobody should anticipate a significant uptick in margins, if you will, in the back half of the year
The growth will help
We have – our business is a little bit seasonal, part of the reason we put in the historical margins on a quarter-by-quarter basis for each of the businesses into our chart is so folks can take that into account, if you will
Clearly, if you just track historically, Q1 and Q2 tend to be good quarters
The third quarter tends to be a little bit softer and then we pick up again – generally, pick up a bit in Q4.
