Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation 4th Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Please limit questions to one question and one follow-up. I would now like to turn the call over to Joe Boutrous, Vice President of Investor Relations. You may begin your conference.
Thank you, operator. Good morning, everyone, and welcome to LKQ's Q1 2021 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer and Varun Laroyia, Executive Vice President and Chief Financial Officer. Please refer to the LKQ website atlkqcorp.com for our earnings release issued this morning, as well as the accompanying slide presentation for this call. Now let me quickly cover the safe harbor.
Some of the statements that we make today may be considered forward looking. These include statements regarding our expectations, beliefs, to the call today's call. Thank you, everyone.
Thank you, everyone. Thank you, everyone.
Thank you, everyone. Thank you,
everyone.
We assume no obligation to update any forward looking statements. For more information, please refer to the risk factors discussed to our Form 10 ks and subsequent reports filed with the SEC. During this call, we will present both GAAP and non GAAP to 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 ks, which we filed with the SEC earlier today.
And as normal, We are planning to file our 10 Q in the next few days. And with that, I am happy to turn the call over to our CEO, Nick Zarcone.
Thank you, Joe, and good morning to everybody on the call. 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 free cash flow performance, as well as our improved to the Q1 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. Immediately, Our teams got into action with a key focus across the entire organization to right size the cost structure and maximize cash flow.
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 to the Q1. Let me restate our key initiatives, which continue to be central to our culture and our objectives. First, we will continue to integrate our businesses and simplify our operating model. 2nd, we will continue to focus on profitable revenue growth and sustainable margin expansion. 3rd, We will continue to drive high levels of cash flow, which in turn will give us the flexibility to maintain a balanced to our shareholders.
And finally, we will continue to invest in our future. As you can see from our results, our to our segment teams executed on each of these initiatives in the Q1. Alongside the evaporating 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. This report validates our long term commitment to enhancing our ESG practices and will serve as a guidepost for the further embedding to our ESG principles throughout our global operations.
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 the Q1 was $3,170,000,000 an increase of 5.7% as compared to $3,000,000,000 in the first to the Q1 of 2020. Parts and services organic revenue in the Q1 of 2021 increased 6 10ths of 1% on a reported basis and 2.2% on a per day basis.
While the net impact of acquisitions and divestitures Decreased revenue by 0.6 percent and foreign exchange rates increased revenue by 4.2%. Total parts and services revenue increased 4.2% in the quarter. 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. In March, organic parts and services revenue grew by 15.7% on a per day basis, recognizing we were coming off to a lower comparable period.
Other revenue grew 27% in the Q1 of 2021, driven by to higher scrap steel and precious metal prices. While consolidated revenue is still running below pre COVID levels, Net income for the Q1 was $266,000,000 as compared to $146,000,000 last year, an increase of 83% year over year. Diluted earnings per share for Q1 was $0.88 an increase of 83%. On an adjusted basis, net income in the Q1 was $286,000,000 to a 62% increase year over year, while adjusted diluted earnings per share was $0.94 a 65% increase. Each of our segments achieved EBITDA margins well ahead of our expectations due to excellent execution, a continued focus on our cost to the company's strong performance 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 the 1st quarter. This was a 3 50 basis point increase relative to the Q1 of last year. 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. Additionally, the penetration rate of the vaccine in the United to the U. S. 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. According to the U.
S. Department of Energy, At the end of the 2nd week of April, fuel consumption was 71% above the prior year and just 3% below that same week of to 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 3rd Q4 levels of 2020. But as we progressed through Q1, the index rebounded and by the 3rd week of April, the index had increased 33% from the 1st week of January. So there are clearly some green shoots of momentum in BMT around the globe, albeit we're still below pre COVID levels.
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 year over year basis, it is an improvement relative to Q4 of last year. 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 the Q1 of 2021 compared to the prior period. 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 to the 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 in the service experience for our customers. With capital constraints, many smaller competitors lack the flexibility to stay relevant and competitive. During the Q1, our North American operations benefited from the disruption to the OE component supply chain, which impacted to the OEs' 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. 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 the 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, to 491,000 gallons of waste oil, 482,000 tires and 176,000 batteries. During the Q1, we also processed approximately 282,000 tons of scrap steel. Moving on to our European segment. Organic revenue for parts and services in the Q1 increased 30 basis points as the largest pure play distributor of aftermarket automotive to parts in Europe. This is a solid start to 2021, even in the face of continuing COVID lockdowns in several regions of Europe.
Our regional operations experienced very end revenue performance in the quarter with positive year over year performance in Germany, Benelux in Eastern Europe with some softness in the UK and Italy continuing to drag on the overall performance of this segment. Specific to the U. K, in addition to our 2 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 that our 2 South Mechanical Parts Distribution business in the Q1. Importantly, with our corporate wide focus on profitable revenue, We spent the past year rationalizing the footprint of our UK business, which eliminated over 40 unprofitable branches, resulting in a small negative impact on revenue, but a significant improvement in EBITDA margins. Revenue growth from our ongoing mechanical to the operator.
Service parts operations was positive in the quarter, while our data indicates the overall U. K. Market was down on a year over year basis. In total, we are delighted with the performance of our U. K.
Operations. Other items of note in Europe include The fact that we continue to add talent and expect the organizational design elements of the One LKQ Europe program will be largely completed by the end of Q2. The 4th Central Distribution Center project remains right on track. To our ERP implementation at Reag Italy also remains on track for a Q2 go live, which will make it the 1st large platform company on our new European ERP system. And we continue to expand our payables optimization initiatives, which includes the vendor financing program.
Lastly, on Europe, and consistent with our ESG programs, we recently launched an electric delivery vehicle trial for our UK and Republic of Ireland operations. The pilot will run for about 6 months and will take into account the charging point infrastructure to identify branches with vans whose typical mileage is suited to the range and capability of an electric vehicle. LKQ is also considering pilot projects with fuel cell powered heavy trucks once those vehicles and filling stations become available. Now let's move on to our Specialty segment, which absolutely knocked the cover off the ball during the Q1 by reporting organic revenue growth up 30.9%. This represents the highest quarterly organic revenue growth since we bought this business in 2014, with Q4 of last year being the 2nd highest quarter.
The primary factor driving this tremendous performance is the ongoing demand for RVs in RV Parts. The RV Industry Association's February 2021 survey of manufacturers determined that total RV shipments Increased 30%, making it the best February RV unit shipment total on record. This is good for LKQ on a longer term basis as a larger RV park should lead to more RV part sales in the future. Also driving the specialty performance was the demand for light truck parts we offer, which during the Q1 increased 17% year over year with strong demand for products installed on Jeeps and pickup trucks. We believe that the 3rd round of stimulus checks benefited our specialty business in the quarter.
Across all of our segments, and like many others in vehicle parts distribution, we are witnessing some supply chain disruptions, which have led to incremental cost in freight, labor and cost of goods sold. Related to ocean freight, the container capacity constraints that we first experienced last fall continues to be a challenge. Our supply chain teams across to the globe are in constant communication with our suppliers, working to procure the products we need to maintain and grow our market share in each of our segments. Importantly, we have witnessed minimal impact to our fulfillment and customer service levels and believe the inventory challenges are subsiding. As it relates to inflationary risks, we remain cautious near term, but as we progress through the year, We are expecting a continuing pandemic recovery, which should benefit each of our operating segments.
Again, we expect to see continued inflation related to freight, labor and cost of goods sold. That said, as witnessed throughout to the Q1 of this year, we have a number of levers that we can pull to help offset these inflationary risks, including price. From a corporate development perspective, in the Q1, we acquired a diagnostics business that provides various mobile diagnostic and programming services to professional collision and mechanical repair shops in Nebraska. By year end, to the pipeline. Finally, I previously noted several senior level additions to the European team in the quarter, which will lead our efforts in the areas of strategy, sales, logistics and supply chain, product pricing and e commerce.
LKQ Europe is viewed by candidates as being a unique and extremely well positioned enterprise with an exciting future, and we've been able to attract great talent from across the European automotive industry and digital channels. At the corporate level, during the Q1, we brought on a new Senior Vice President of Human Resources to the executive team. Genevieve brings a wealth of experience in managing a large hourly based workforce and she has on point experience in building programs focused on employee engagement and diversity and inclusion, key elements of our ESG initiatives. And I will now turn the discussion over to Varon, who will run through the details of a strong Q1 financial performance. Thank you, Nick, and
good morning to everyone joining us today. We entered 2021 with strong momentum coming of the 2 highest quarterly results in the company's history, the 3rd Q4 of 2020. This morning, I'm pleased to report that we were able to build on that momentum in the Q1 and take advantage of some tailwinds to produce yet another record quarter. As we've said repeatedly over the last year, we can't control when revenue growth will return to pre COVID levels. However, we are able to manage our costs and have focused on rightsizing the cost structure and emphasizing efficiencies so that we can generate operating leverage when revenue growth returns.
The permanent cost reductions that we enacted in 2020 to continue to drive year over year profitability growth and encouragingly we got an additional boost in the Q1 as we were able to support the sequential revenue growth across all our segments without adding back costs at the same rate. Our SG and A expenses as a percentage of revenue showed this operating leverage, dropping to 26.8% in the quarter or to 3.20 basis points better than Q1 of 2020. We were also able to improve our gross margin by being disciplined on pricing to ensure that our strong inventory availability and service levels were recognized in the industry. We believe that these operational strengths are sustainable going forward and will drive our results as the recovery picks up pace as expected in the second half of the year. We saw this transpire in the month of March as rebounding economic activity Generated healthy revenue growth and cost controls limited the amount of incremental expenses, which resulted in the highest to the company's history.
I mentioned the benefit of tailwinds in the quarter and commodity prices were most to the operator. As you can see on Slide 20, scrap steel and precious metal prices, which have been mostly favorable over the last year, who provided additional benefits in the quarter. We estimate that scrap steel and precious metal prices added roughly to $34,000,000 in segment EBITDA, which will translate into about $0.08 in adjusted diluted EPS relative to the prior year. We expect that commodities will be a net benefit in the short term, although likely at a lower level in Q1 as car costs continue to rise owing to the commodity price changes and further moderate in the second half of the year. Even with the tailwinds related to commodity prices, the largest share of the year over year increase to the Q1 of 2019.
I'll now turn to that operating performance with our segment highlights. Starting on Slide 10, North America produced its highest segment EBITDA margin in the company's history at 19.9%. Q1 is the 3rd consecutive quarter that we've been able to make the statement and is truly a testament to the resilience of the business and the management team's swift and decisive actions during the early days of the pandemic. The segment continued to benefit from ongoing gross margin initiatives and the specific permanent cost reductions executed in 2020. Additionally, the commodity pricing benefits I mentioned are seen here, helping to drive the North America margins above our long term to
the next question.
As seen on Slide 11, Europe reported a 9.6% segment EBITDA margin, which represented a 3.90 basis point improvement over last year. We remain confident in our ability to deliver on the margin goal to the Q4 of 2018. We also completed last September at our Investor Day and reaffirmed in February following Q4 earnings. Europe is benefiting from the revenue recovery and cost containment actions taken last year with more anticipated on both fronts. Moving to Slide 12, as Nick described, the Specialty results are truly outstanding.
We are super excited about the spectacular revenue growth and we're really pleased with the way the segment team has delivered the growth without adding back significant operating costs or sacrificing gross margin. The segment EBITDA margin of 13.4% is the highest to Q1 results in the segment's history by approximately 150 basis points and reflect the leverage benefit achieved in a period of rapid growth and the discipline to pursue profitable revenue growth. We talked last year about the shift to an emphasis on operational to the Q1 results provide further evidence of this mindset taking hold. Each segment's disciplined execution of our strategic to the operator. We are also delivering meaningful savings from our focus on the capital structure, deploying free cash flow to debt pay downs and share repurchases generated interest expense savings and an EPS benefit from a reduced share count.
We estimate that these two factors added $0.02 per share to our Q1 'twenty one results. Additionally, Mekonomen's
to the company.
Sonnet performance and other investment income generated another $0.03 of year over year growth. Given the improved expectation for full year profitability, we decreased our projected effective tax rate in our outlook from 28% to 26.5%. The reduced rate relative to 30% rate used in Q1 of last year contributed approximately $0.025 of the year over year EPS growth. So to recap, Our adjusted EPS of $0.94 is a $0.37 increase over Q1 of 2020. The commodity benefit along with the increases attributable to investments, the tax rate, to our capital deployment and a slight tailwind from foreign exchange produced approximately $0.16 of that improvement.
The remaining $0.21 comes from our operating performance, focusing on profitable revenue growth, enhancing gross margins and controlling our overheads, and that should be the key takeaway when considering our Q1 profitability. To the operator. Now on to cash flow and liquidity. Q1 was yet another successful quarter for
to cash flow generation.
As shown on Slide 13, we delivered $523,000,000 in operating cash flows as we continue to benefit from the trade working capital programs we've been driving since 2018 as benefits from payables more than offset the seasonal growth in receivables. We expected inventory to be a larger outflow in Q1, The ongoing supplier delivery challenges exacerbated by ocean freight challenges have pushed the build to later in the year. Despite the lower than anticipated inventory level, our teams with the support of our vendor partners to ensure that the right parts went to right places and thereby minimize stock out issues so that our class leading fill rate were maintained. To our Investor Relations team. CapEx cash outlays were $42,000,000 resulting in free cash flow of $481,000,000 We used this cash to repay $83,000,000 in debt and repurchase $57,000,000 in LKQ stock.
We also built our cash balance mostly in Europe in advance of the early redemption on April 1, which will be the earliest possible redemption date of our €0.75 billion euro notes due in 2026. We used a portion of the cash on hand to fund the redemption and drew the remaining amount on our revolving credit facility. The redemption replaces the Eurobond with a coupon of 3.5eight with credit facility borrowings approximately 250 basis to the Q1 of 2019. Do note that we had already anticipated the redemption and the resulting interest to the financial results of our earnings outlook provided in February. On Slide 15, you can see the further
to the progress we have made
to strengthen our liquidity position. Our net leverage ratio has decreased to 1.4 times from 1.9 at the end of 2020, into our strong profitability and cash flows in the Q1. We believe that we are very well positioned in our stated pursuit to the next question and answer session. We are also pleased with the positive developments on this objective with both S and P and Moody's upgrading our credit rating in the Q1. I will close with our updated thoughts on 2021.
With the ongoing COVID uncertainties, especially to the company's earnings release. We are providing an abbreviated outlook. We are comfortable making the following statements, all of which assume that 1, additional mobility restrictions beyond what are currently in place to call near recent levels. And finally, 3, scrap and precious metal prices trend lower in the second half of the year. With that, on revenue, we reaffirm our belief that parts and services revenue will be higher on a full year basis in 2021 versus 2020 with the most significant growth coming in the second quarter, albeit off a low base.
We anticipate that the revenue recovery will continue in the second half of the year as vaccines are distributed more broadly to the operator and mobility restrictions decrease, but we do not currently expect to return to our 2019 to the Q1 of 2019. As discussed previously, we'll have 2 fewer selling days in North America in to the Q1, but made up in the Q2 with the additional day. The other piece I want to talk about was earnings per share and with our strong first quarter performance, to projected revenue growth and the ongoing benefit of our margin and operating expense programs, we expect our 2021 adjusted diluted earnings per share will be significantly above the comparable figure for 2020. We are projecting an adjusted diluted EPS range of $3 to $3.20 with a midpoint of $3.10 On a GAAP EPS basis, this would be 2.68 to $2.88 The $0.35 or 13% increase at the midpoint reflects the Q1 outperformance to an upside in the projected results for the last 9 months compared to our prior outlook. We expect to achieve this upside while covering the effects of inflationary pressures being faced across the industry related to labor costs, to Ocean and domestic freight expenses and higher input costs raising inventory prices.
And finally, on cash flow, we are indeed off to a terrific start on cash flow generation in Q1, which gives us to raise our minimum free cash flow expectation. We now project that free cash flow for the full year 2021 will be within the range of $850,000,000 to $950,000,000 with a midpoint of $900,000,000 We expect inventory purchases to represent an outflow over the remainder of the year as we replenish our inventory levels to support the anticipated to the growth. Essentially, it is just going to happen later in the year than we had previously anticipated. Some of the investment in inventory will be offset by continued improvements in days payables, resulting from the European payables optimization program, which is producing benefits and tracking well in line with the target we had set out in September of 2019 when we initially launched the 1 LKQ Europe program. So with that, thank you once again for your time this morning.
And I'll now turn the call back to Nick for his closing comments. Thank you, Varun. As a
company, we are always focused on financial performance, to the operator. But we are equally focused on facing change head on and rapidly adapting in order to continuously to deliver positive results for our stockholders, employees and most importantly, our customers. In the Q1, our team of nearly 44,000 employees globally maintained that focus, which again allowed us to deliver positive results above expectations. I am very proud of our team and the outstanding results we posted in the Q1 of to 2021. And with that operator, we are now ready to open the call to questions.
Thank you. Stephanie Benjamin of Truist. Your line is open.
Hi, good morning.
Good morning, Stephanie.
My first question is just on, as you pointed out, both Nick and Varun, just the impact on this inflationary environment. I You called out some levers that you can pull including pricing. I'd love to get an update on any pricing actions that may have been implemented in the first Quarter and just overall customer response and as well as maybe hearing a little bit more on some of those other levels that you can pull just given this to the environment. And then I just have a quick follow-up.
Thanks, Stephanie. And the reality is We're operating in an unusual environment and volumes in our North and then European businesses are okay. They're not great, but they're okay. And they're still constrained relative to 2019. But as Varun indicated, we've been very disciplined on the pricing front and there's no need to give away product at discounted prices, particularly in those cases where we're the only supplier that may have the product.
So we've been very disciplined in our pricing. We have seen some creep in the cost of goods sold just because of the inflationary pressures at some of our suppliers, And we're doing our best to recover that and maintain gross margins. And We're comfortable with our approach. We have not seen significant pushback from our customers. The reality is we're not alone.
I mean, the entire industry is facing the same set of conditions. On the specialty side, the growth there was largely due to volumes just going through the And again, our specialty team is paying particular attention to be really disciplined on the pricing front.
Got it. Thank you. And then just as a follow-up, just as I said on the salvage side of the business, have you You called out benefiting from the ability to procure OEM parts and remanufactured parts just given the OEM shortage. Have you seen any inflation in the quarter or inability to procure some of those parts at to questions. Just given collision actions are down or higher demand for maybe other buyers, would love just to hear how you've been able to procure those salvage parts.
Yes. So we're really proud of our remanufacturing operations. They've done a terrific job over the last several quarters, not just in the Q1. The salvage markets are tight and the prices we're paying for the cars who are higher today than they were a year ago or even 2 years ago. And part of it reflects the fact that the number of cars just going through the auctions are down just given the overall level of driving and overall level of accidents and total losses.
But again, we're working hard to make sure that we keep our margins at really healthy levels. And the fact that we've got A great team on the remanufacturing side that's able to produce product that the customers are needing has really helped.
Great. Thank you so much for the time.
Your next question comes from Brian Butler of Stifel. Your line is open.
Hey, good morning, Brian.
Good morning. Thanks for taking my questions.
You guys hear me?
Yes, we are fine.
Great, perfect.
I guess just at a high level, maybe
we could talk a little bit about the trends that you've seen to date on the driving side in the U. S. And Europe. And then just kind of thoughts on how that plays out and the impact it could have in the rest of 2021.
Sure. I'll take that. It's been an interesting year. A year ago at this time, April through June, vehicle miles traveled were down significantly in the United States and in Europe. The U.
S. At a low point, really in the second, 3rd week of April 2020 being down better part of 55% or If you look at really from kind of mid to late June through the November timeframe, BMT in the United States was down in and around anywhere from 9% to 12% kind of week in, week out. The last part of 2020, it was down about 15%, really from and through Thanksgiving into the end of the year. And then more recently, though, it's picked up. And in the last Few weeks, BNP in the U.
S. Is down, say, 5%. And I'm talking about passenger cars. Truck miles It has actually been positive really since last summer, but almost our revenue relates to passenger vehicles and that's what we focus on. As I mentioned in some of my prepared remarks, the European Activity in Mobility, again, in the Q1 started off really slow.
It did rebound. And here in April, we're still below 2019 levels, but only down kind of low, We believe low single digits from a VMT perspective in Europe, but there are some variations country by country. So when you look at the question behind your question, I believe, is when do we get back to 2019 kind of revenue levels and BMT levels, right? And we think in the United States, it's going to take us a bit longer. We think it's going to take until 2022 to get back to 2019 levels in Europe, which is a little bit closer from a starting point perspective.
We can see getting back to 2019 levels in the 3rd or Q4 of this year. It all depends on how the vaccine gets rolled out and whether people truly get back on the road. And then the specialty business has been running above 2019 levels for several quarters now and so that's a little bit different.
Okay. And then I guess as a follow-up, just to be clear, that's kind of what built into the current the updated guidance that you gave. And then second would be, what part of the commodity metals upside It's built into or the expectations built into the revised guidance that you gave. Thank you.
Hey, Brian, it's Varun Naut here. To yes, as part of my prepared comments, I did mention the fact that as of now, we do see some moderation on the metals pricing, both to the company's credit card and precious metals in the second half of the year. And so that is the piece that has been built into the outlook at this point of time. We've talked previously also commodity prices are incredibly volatile. We're certainly benefiting from the up With a similar set of commodity price increases, the question really is we believe our salvage teams, Self-service and full service are by far the best in the industry and essentially are doing an incredible job in operationally taking advantage of the upswing out there.
Clearly, we are keeping a lookout on when these moderate, but as of now, the outlook to contemplate a second half moderation.
Okay. Thank you.
Your next question comes from Scott Stember of CL King. Your line is open.
Good morning, guys, and thanks for taking my questions.
Good morning, Scott. I'm just trying to break out March a
little bit better. I think you've partially answered my question with commentary about reaching 2019 levels again. But in March, we saw some nice increases, specialty up 61%.
Can you maybe go through the 3 businesses
and just how much of any DD comps If you were to flush everything out, did you see inherent improvements in March sequentially month over month from the January, February timeline into March. Thanks.
Sure. The reality is March was a good month for us, especially was off the charge. We're not going to begin to imply we're going to be able to continue to grow at 60% year over year every month for the rest of the year. The growth rate is going to come down, but The absolute dollar should be strong. The comparison for Europe and North America, We're happy that it's off on a year over year basis, but it's somewhat off easy comps, but the March levels were better than the February and January levels.
Again, not back to 2019 levels, but they were better sequentially. And that's That's what gives us a little bit of confidence going forward that we will slowly creep back to those 2019 levels, a little bit faster in Europe, a little bit slower in the U. S, but we're headed in the right direction.
Okay. And just last question on
supply chain. I think you touched on some
of this early, but a couple of quarters ago, specialty was meaningfully impacted. It appears that You've been able to work through that. Just could
you just talk about some
of the countermeasures that you have
in place, which are helping you get through this?
Well, we have a lot of orders out there for inventory. We have product that's coming into our receiving day and head out of our shipping days, almost in the same day, we've got product that's not even touching the shelves because the velocity of the business and the demand is just so significant. To. We're doing the best we can. We're working hand in hand with our vendor partners.
The reality is the industry as a whole, the vendors who are running hard to keep pace, and we're working very closely with our vendor partners to make sure that we can get the product to the operator. We anticipated, not just in specialty, but in all of our businesses, that we would have added more to our inventory levels in the Q1, but the supply constraints are what they are. And We think we'll get back to slightly higher inventory levels by in the second half of the year.
Got it. Thanks so much.
Your next question comes from Craig Kennison of Baird. Your line is open.
Hey, good morning. Thanks for taking my questions as well. Good morning, Brian. Good morning. It sounds like your competitive advantage, especially as it relates to inventory availability, Has really strengthened during the pandemic.
And I'm wondering to what extent you think that is sustainable? What does the competitive landscape look like? Do you think you've seen any of those competitors exit permanently?
I wouldn't say that we've seen a rash of competitors exit, Craig. But as most people know, ocean freights is a significant consideration for all industries, anybody importing product, Particularly from the Far East, the lack of containers, the backlog at the ports, I mean, it all creates a bit of a bottleneck. The difference is we're not importing a few dozen or a few 100 containers a year. In North America, we import over 16,000 containers a year. And so we use that to our that position to our advantage.
The orders from the to the vendors are big orders.
We are very important customer.
And I think we've got great relationships with our vendor partners and they're working hard to help us be successful. And if you're a smaller business, you don't have that same flexibility to have power with the vendors and or with the shipping lines, and We use our size and scale to our advantage.
Thank you. And then sort of related, but The other impact of the pandemic is really you forced yourselves to look at your operating Performance and make some tough decisions unfortunately in terms of headcount. As you look to add staff to meet the new resurging demand. To what extent do you need to add back staff and can you get by with
to the question globally as we went through the depths of the pandemic, right. And my marching orders to all of my Operating heads out in the field is we need to keep that leanness going forward. Yes, we will need to bring back people and add people as revenue improves, But we're not going to bring the people back until the revenue is up and we know it's sustainable. And the goal is this is the new cost structure, Craig. This is how we're going to operate the business going forward.
Great. Thank you.
Your next question comes from Gary Prestopino of Barrington. Your line is open.
Hey, good morning, everyone. Good morning, Gary. Gary. Got a question here that may be a
little bit different than what you were expecting in terms of questions for the call on the quarter's numbers. But can you give us to an idea of on the mechanical side for EVs, what kind of parts demand you're seeing initially. I just want
to get to that because obviously we're going
to start seeing more EVs come into the car park. So
Very little demand for electric vehicle parts, almost I won't say none, but almost none. And you have to keep in mind, to our sweet spots, Gary, is the aftermarket products from a collision to the salvage parts from a collision perspective, sweet spot being kind of 3 to 10 years vehicle, 3 to 10 years old. On the mechanical parts. The sweet spot is even older, generally kind of in that 4 to 5 to kind of 15 years. And so there's a pretty big lag between kind of when the cars come off the showroom floor and when there's a real demand for the types of parts that we and others in the industry sell.
So you're not going to see an impact of EV related parts for quite some time.
Okay. Thank you.
Your next question comes from Bret Jordan of Jefferies. Your line is open.
Hey, good morning guys.
Good morning, Bret. Good morning.
Pretty good to sequential improvement in the payables ratio. How high do you think you can get accounts payable as a percentage of inventory without to getting to investment grade.
So as of now, in the Q1, as I mentioned in my prepared comments, Brett, We certainly saw the payables continue to deliver the overall payables program deliver. It again was not Only the European payables program, our North America team also did an outstanding job. But really to the case of Not being able to get the inventory built to take place. So in Q1, while the number for the conversion Is above 100% in terms of free cash flow to EBITDA. As I mentioned previously, also that is not a sustainable number.
Our conversion factor on an annual basis is the 55% to 60%. But again, really happy with how the payables program is going across the board, but clearly the largest opportunity being over in Europe. As of now, to the Q1 with the lack of the inventory build, it's basically timing. And from the Q2 onwards, we expect that inventory build to take place to get us back into that 55% to 60% conversion ratio. With regards to what the long term hypothesis is or what long term plan is with regards to payables as a percentage of inventory.
We clearly know for our European business, there are some North American comps that we are targeting. It Certainly takes time, but really happy with the progress that team is making.
Okay. And then a question on U. K. Mechanical. I think you called out A spread between your mechanical business and the collision business.
I think one of your peers had called out the U. K. Is particularly strong. Are you seeing any market share shifts on the mechanical side of that market? Or is your regional softness more tied to the product mix?
Brad, it's tied to product mix, as I indicated. I mean, the collision and coatings activities in our UK operations were down double digits, and the environment there is not too different from the to the next question. Our core Continuing operations on the mechanical parts side was up in the Q1. The market was down. We took some share.
And that's our goal is to continue to take share. And most importantly though in our U. K. Business, We're highly focused on the profitability and the cash flow of the business, because It's not how much you take in, it's how much you keep, right? And our focus is to keep as much of that revenue in the form of profits and cash flow, and We're happy with the growth of our business.
And you said you'd rationalize the
footprint in the U. K. Is that done now? Is your store base pretty static? Yes,
it's all done.
Okay, great. Thank you.
Your next question comes from Daniel Imbro to Stephens. Your line is open.
Hey, good morning, guys, and congrats on the start to the year.
Good morning, Daniel.
I want to start on the diagnostics piece. Could you talk a little bit more about Greenlight and maybe what they bring to the table? And then taking a step back, you mentioned in your prepared remarks there were some more diagnostics deals in the pipeline. Can you expand on what you're looking for in these targets? Is it just
Thanks, Daniel. The acquisition was similar to the other small acquisitions we've made in the diagnostic space. Again, this is very much of a local business, not unlike to the rest of our North American operations where you're really selling into local markets. We're going to continue to do to acquisitions that give us geographic coverage across the United States, because You can't service body shops and or mechanical shops in California with a diagnostics team that is in Texas to the operator for Colorado, which doesn't work. And so we are going to continue to build out the footprint from a diagnostics perspective.
All of our activities thus far are what we would call mobile related, where we actually have feet on the ground, people inside to our shops doing the calibration work and or the diagnostic work. We're going to continue to build that out and we're looking for other ways, quite frankly to service our body shop and mechanical shop customers perhaps using technology.
Awesome. It's really helpful. And then Varun, just one on the balance sheet. Obviously, leverage is down to 1.4x and you mentioned you reduced further on April 1 with the Eurobonds. Can you talk about the uses of free cash from here?
Obviously, inventory will build, but you're still guiding to call it $900,000,000,000 of free cash. Do you think about the primary use of that being buybacks now that leverage is comfortable or how are you planning on deploying that capital?
Yes. So a great question and thank you for raising it, Daniel. Yes, the first priority has been and remains to reinvest into our business. Apart from CapEx, which we are very comfortable with and what we've called out for quite some time in the 2% to 2.25 to the Q1 of 2019. In addition to that, as Nick mentioned a few minutes ago, Our ability to do high synergy transactions, small tuck ins, building up critical capabilities Remains the primary use in terms of priority of the free cash.
As you rightly pointed out, leverage is well within our target corridor. We don't expect to see further deleveraging taking place from a debt perspective. And arguably as profitability grows, the delevering will take place in any case. So not really looking to pay down further debt, which obviously as you can make out, doesn't leave to many avenues left for the free cash flow with share repurchases, which obviously we resumed the program in the 4th
Great. Congrats again and best of luck.
Thank you.
There are no further questions at this time. I will now return the call to Mr. Tony for closing remarks.
Well, we certainly thank you for your time and attention this morning, and we look forward to providing another to the Q2 results. Again, in summary, we are thrilled with our Q1. I thank all of the 44,000 people of LKQ for working so hard to bring such terrific results to bear. And we are very optimistic about the future of LKQ. And so thanks for your time and we will chat again in 3 months.
This concludes today's conference call. Thank you for your participation. You may now