Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Third Quarter 2022 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. I would now like to turn my conference over to Joe Boutross, Vice President of Investor Relations for LKQ Corporation. Please go ahead.

Thank you, operator. Good morning everyone, and welcome to LKQ's third quarter, 2022 earnings conference call. With us today are Dominick Zarcone, LKQ's President and Chief Executive Officer; Varun Laroyia, Chief Executive Officer of LKQ Europe; and Rick Galloway, Senior Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.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, hopes, intentions or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. And as normal, we're planning to file our 10-Q in the coming days. And with that, I am happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe. Good morning to everybody. And thank you for joining us on the call to discuss our third quarter results. Last month we announced a couple of important leadership changes, including Varun Laroyia moving from the CFO chair to become the CEO of our European operations; and Rick Galloway succeeding Varun. Since that move happened with just a few weeks left in the quarter, after I provide some high level comments, Varun and Rick will tag team on the financial details and the updated guidance for 2022. I will then provide some closing comments before opening the call to your questions. Once again, LKQ recorded strong operating results notwithstanding a very difficult macro environment. The pandemic is still creating challenges. The labor market remains tight and the supply chain is less than optimal, though finally starting to show some signs of improvement. The war continues in Europe, and economies around the globe are showing signs of softness as many governments try to curb their runaway inflation created by the monetary stimulus utilized to support economies during the early days of the pandemic. But the biggest current headwind is in the foreign exchange market. With the U.S. dollar reaching levels we haven't seen in over 20 years. While we can hedge much of our transactional exposure with about 46% of our revenue being sourced from our European segment, we cannot hedge the translation exposure. To put things into perspective, the euro and pound sterling fell approximately 7% relative to the dollar during Q3 and have fallen about 15% since the start of 2022. The volatility in exchange rates on a year-over-year basis had a material impact on our reported results during the quarter, reducing revenue by $228 million and adjusted EPS by about $0.07 a share during the third quarter. I believe when you focus on our local currency results, you will agree that our company is performing extremely well and we are quite pleased to achieve our EPS goals in light of the ongoing and challenging environment. The leadership changes announced in mid-September are moving forward in a seamless manner and clearly demonstrate the depth and breadth of our talent. As discussed in each of the past three investor day events, talent management has been a key priority for LKQ and the benefits of that focus shine through at times like this. Overall, it was a strong quarterly result and we continue to be optimistic about the future. Our decision to increase the dividend reflects the confidence that we have in our business. Now onto the quarter. Revenue for the third quarter of 2022 was $3.1 billion, a decrease of about 5.9% as compared to $3.3 billion in the third quarter of 2021. On a constant currency basis, third quarter revenue grew about 1% to a little over $3.3 billion. Parts and services organic revenue increased 4.8%, while the net impact of acquisitions and divestitures decreased revenue by 2.3% and the foreign exchange rates decreased revenue by 7.4% for a total parts and services revenue decrease of 5%. Other revenue fell 17.4% due to changes in commodity prices relative to the same period in 2021. Net income for the quarter was $261 million as compared to $284 million for the same period in 2021. Diluted earnings per share for the quarter was $0.95 compared to $0.96 for the same period of 2021, a decrease of 1%. On an adjusted basis, net income for the quarter was $266 million as compared to $300 million for the same period of 2021, a decrease of 11.4%. Adjusted diluted earnings per share for the quarter was $0.97 as compared to $1.02 for the same period of 2021, a decrease of 4.9%. Importantly, please note that FX volatility and lower metals prices collectively created a $0.16 per share headwind in the third quarter of 2022 when compared to the 2021 results. Now let's turn to the quarterly segment highlights. In North America, organic revenue for parts and services of our North American segment increased 10.9% in the quarter on a year-over-year basis, which exceeded our expectations. The impact of divestitures primarily PTW reduced revenue by 10.6% in the quarter. This organic growth performance is outstanding when you consider that the industry data suggests that collision liability related to auto claims were up only 2%. Also, North America delivered these results in the midst of decreasing miles driven, which is largely due to the increase in fuel prices. According to the U.S. Department of Transportation, miles driven decreased 3.3% in July and was up only seven tenths to 1% in August. That said, the long-term trends for North America continue to be very favorable. Continued technician shortages will benefit our diagnostics business as shops look to outsource their diagnostic repairs. Total loss rates are trending down into the high teens, parts per claim has reached over 12 parts per vehicle, a 20% increase from the third quarter of 2018, and office occupancy is filling nearly a three-year high, which ultimately leads to more congestion in claims frequency. During the quarter, we were encouraged by the upward trend in our aftermarket volumes. During the quarter, we experienced some relief in the aftermarket supply chain relative to Q2, which translated into an increase in our fill rates. The biggest challenge exists on the domestic side of the supply chain, including the rail carriers and truckers, all of which are out of our control. In talking with several third-party experts, they generally expect these domestic challenges will continue into the first half of 2023. The spot market pricing for containers used in ocean freight has softened measurably, and our team is laser-focused on active rate reductions from our contracted carriers. Now onto our Self Service segment. Organic revenue for parts and services for our Self Service segment increased 7.2% for a third quarter. The softness in commodity prices resulted in a decline in other revenue of 24.8%. The soft metal prices also had a significant impact on segment EBITDA margins on a year-over-year basis. This was anticipated given the lag effect that Varun touched on during our second quarter call. Moving on to our European segment, organic revenue for parts and services in the third quarter increased 4.8% on a reported basis and 5.8% on a per day basis. Acquisitions added one half of 1% growth in the quarter, while the exchange rates resulted in a 14.7% decline on a year-over-year basis. I am quite pleased with the organic growth, albeit mostly driven by price in an environment facing high inflation, continued supply chain hurdles and an energy crisis in Europe. All of our European regional platforms recorded strong local currency organic revenue gains with some being in the low double digits. The only decline on a year-over-year basis related to the sale of product to Russian-based jobbers, which, as previously mentioned, we completely stopped back in February when the war commenced. Now let's move on to our Specialty segment. Organic parts and services revenue for Specialty declined 9.1% in the quarter, a sequential improvement from Q2, but still down and below our expectations. You may recall this segment reported 14% organic growth in Q3 of last year, so on a two-year stack, the annual revenue growth is still positive. The impact of acquisitions had a 6.6% positive impact on revenue growth in Specialty, while as a predominantly U.S. business, the exchange rates had a negligible impact. During the quarter, certain product groups such as towing that have some exposure to new unit volume again underperformed in the quarter as the new RV unit sales have decreased year-to-date by over 23% through August. As a reminder, the majority of our RV parts are replacement parts that are not tied to new unit volume but are largely related to the size of the RV part, which is still running at record levels. Also, some of the softness in SEMA-related products in the quarter was due to a year-over-year decrease in light truck and SUV vehicle sales in the United States, an important vehicle category for our specialty offerings. Total U.S. light vehicle sales were flat year-over-year. Importantly, I would like to congratulate our Specialty team for receiving the RV Industry Association Award as the 2022 Distributor of the Year. This is the second year in a row for this recognition, further validating that our people are truly our greatest asset. Let's move on to initial Q4 revenue trends. Revenue for our North America wholesale operations has gotten off to a solid start, largely driven by the improvement in aftermarket fill rates. Though we don't anticipate, we will continue to run at these very high levels, particularly as we lap the pricing movements initiated last year. Our European segment is also witnessing a good start, with growth rates continuing at Q3 levels. Specialty revenue is also trending similar to the Q3 performance and it will have easier comps in the fourth quarter compared to the rest of this year. From my corporate development perspective, in the recent quarter, we divested our Florida shredder. As part of this transaction, we entered into a supply agreement to which our Florida self-service yards will sell or offer to sell its crust vehicles to the new acquirer. We also divested our equity interest in a small subsidiary of Stahlgruber. Neither of these divestitures are material. Our employees sit at the center of our ESG efforts. We are in the process of working through our second employee engagement survey. We just completed surveying all of our North American employees and we are in process in Europe. We have a lot of data to analyze, but the North American team had a 93% participation rate. Our independent advisor has mentioned this is extremely high for these types of activities and is generally indicative of a high level of engagement across the workforce. I look forward to showing more on this topic once the process is complete. And I will now turn the discussion over to Varun and Rick.

Thank you, Nick. And good morning to everyone joining us today. I am honored to take on the position of CFO of LKQ, and I look forward to driving our financial and strategic initiatives to lead the company to even greater success. As part of the North American leadership team, I was heavily involved in rolling out and executing the operational excellence initiatives that have spurred significant improvement in profitability and cash flows over the last few years. Now as CFO, I will continue to drive the organization's focus on profitable revenue growth, delivering strong margins and free cash flow generation from this new vantage point. Especially as we face the macroeconomic headwinds, Nick mentioned, it will be critical to lean in on productivity and efficiency. I look forward to partnering with the segment teams to continue to drive this forward. Turning now to the consolidated results, we reported diluted earnings per share of $0.95 and adjusted diluted earnings per share of $0.97, which was a $0.05 reduction relative to Q3 last year. Our operational performance showed year-over-year improvement and was in line with our expectations. However, this solid operational performance was more than offset by unfavorable effects of $0.09 from volatility in metals prices and $0.07 from foreign currency exchange effects caused by the stronger dollar. Additionally, we had negative effects of $0.06 in total from one, divesting the PGW business in Q2; two, higher interest rates; and three, a 20 basis point increase in the effective tax rate to 25.5%. We mitigated about $0.07 of the decline with the lower share count resulting from our share repurchase program. Shifting to segment performance. Much of the operational improvement in the quarter came from the wholesale North American segment. The segment EBITDA margin of 19.4% is a record for the third quarter. We saw strong growth margin improvement of 190 basis points with a little over half from pricing and productivity initiatives and the remainder from the mix with the sale of the low margin PGW business. Overhead expenses were favored by 20 basis points primarily related to non-recurring expenses from Q3 2021. We're very pleased with the way wholesale is performing and while we believe wholesale will continue to generate strong margins, there will likely be moderation in upcoming quarters as we move towards the long-term expectation we presented at Investor Day earlier this year. On the Q2 call in July, we noted that self-service would face difficult conditions in Q3 and as expected, self-service had a tough quarter with roughly breakeven segment EBITDA and a 2.6% margin. With scrap metals prices falling, we experienced a negative lag effect as we turn cars purchased in the second quarter when metals prices were higher at lower scrap prices. We have a slide in the presentation to depict this effect. Looking at the slide, you can see the delta between the average scrap metals price in Q2 of $279, which influenced the amount we paid for the cars purchased and the current quarter average of $198, which drove the amount we received when scrapping the Q2 cars we purchased. We wanted to provide this depiction to help provide more clarity on the lag effect but caution there isn't a perfect correlation between scrap steel prices and car costs as other market conditions will impact the purchase price of the cars. The reduction in prices along with lower volume processed in Q3 produces the decrease in gross margin and the negative leverage effect on overhead costs. We expect improved sequential profitability in Q4 as we cycle through most of the higher cost Q2 purchases by the end of September. I'll turn the call to Varun to cover the other segments as well as cash flows and the balance sheet.

Thank you, Rick. Appreciate that introduction and the overview of the North America wholesale and self-service segments performance. Let's move to the earnings deck. Europe delivered an 11.3% EBITDA margin for the quarter, down 20 basis points from the prior year period. Gross margin improved by 10 basis points as we worked to offset inflation with procurement initiatives and pricing. Overhead and other expenses increased by 30 basis points with inflation weighing primarily on personnel, freight, and fuel costs. The segment's solid third-quarter performance reinforces our expectation that we will deliver a double-digit margin for the fuller despite the macroeconomic headwinds around general inflation, energy costs, and the Russia/Ukraine conflict. While I have been in my new role as CEO of the European segment for a little over a month, I have gotten an opportunity to get an on-the-ground view of our operations and the management team. I am even more impressed by the strength of our frontline businesses, and despite the darkening macroeconomic clouds with judicious and decisive prioritization, I am confident that we can achieve our long-term operational and financial targets. Moving on to Specialty, the EBITDA margin of 10.8% declined 30 basis points compared to the prior year coming from a decrease in overhead expense leverage driven by an organic revenue decline of 9.1% as they anniversary a tough comp from the prior year when the business delivered a nearly 14% organic revenue growth rate in the third quarter. Inflationary pressures also pushed overhead expenses as a percentage of revenue higher, including personnel, freight, and fuel expenses. The overhead expense increases were partially offset by a 70 basis point benefit from lower incentive compensation and 80 basis points of benefits from operating expense synergies largely generated from the SeaWide acquisition of a year ago. Shifting to cash flows and the balance sheet. We produced a healthy $224 million in free cash flow during the quarter, bringing the year-to-date total to $862 million. We have made good progress in rebuilding our inventory levels in wholesale North America and in Europe. As shown in the presentation, we increased our inventory values in these segments. Please note that the dollar increase doesn't directly equate to a quantity change given the higher input costs. Using North America aftermarket as an example, with higher per-unit costs, by inventory balance in dollar terms is close to Q4 of 2019, while the total available quantity on hand is down approximately 20%. We still have some work to do to optimize inventory at hand, especially going into the busier winter season, so we expect further fine-tuning of inventory levels over the balance of the year. Through September, the cash conversion ratio is 64%, a conversion of EBITDA to free cash flow just above our target range of 55% to 60%. There continue to be timing elements that will reverse over the course of the year. For example, the third-quarter inventory build will result in higher outflows for payables in the fourth quarter, and we are confident in our ability to generate sustainable free cash flow in line with our expectations. As of September 30th, we had net debt of $2.2 billion with a net leverage ratio of 1.3 times EBITDA which is comfortably inside our target range of being below 2 times. Our effective borrowing rate rose to 3% for the quarter, and with the effective rate heights in the U.S. and Europe, we are $1.6 billion in variable rate debt, so a 100 basis point rise in interest rates would increase annual interest expense by approximately $16 million. As you can imagine, we are evaluating our fixed versus floating rate mix as part of a larger review of our capital structure and credit facility, which matures in approximately 15 months. Most of our transactions are conducted in the home entities' functional currency, for example, buying inventory for our U.S. locations in U.S. dollars or European entities borrowing funds in local currency to create a natural operating hedge. As a result, our currency exposure is weighted to the translation of foreign currency-denominated results into U.S. dollars rather than transaction gains and losses where we have transaction exposures, we hedge through forward contracts. We are comfortable with our current approach to managing foreign exchange risk, though we are monitoring market conditions to determine if a change in strategy is required. With a strong free cash flow and the proceeds from the PGW Glass sale earlier this year, we have been able to return a significant amount of capital to our shareholders in 2022. We repurchased over 17 million shares for $891 million through September, including almost 7 million shares for $343 million in the third quarter. Additionally, we paid quarterly dividends totaling $210 million year-to-date. We had approximately $260 million available on the previous board share repurchase authorization as of September 30th, and we have remained active in the market in October with a further $119 million purchase through last Friday. Earlier this week, our board authorized a $1 billion increase to our share repurchase program for a total authorization of $3.5 billion and extended the term through October of 2025. We are pleased to have this program expansion to be able to continue to use share repurchases as part of our balanced capital allocation strategy. As our earnings release of this morning indicated, the board also approved a quarterly cash dividend of $0.275 per share, which will be paid on December 1st to stockholders of record as of November 17th. This reflects a 10% increase in the quarterly dividend. Before I turn the call back to Rick, I would like to take a moment to thank LKQ's leadership team, our global finance organization, and all our dedicated employees across the organization. It has truly been a great privilege to serve as your CFO over these last five years. Over that time, the company has achieved tremendous things with significant growth, profitability, free cash flow, building a rock-solid fortress-like balance sheet and generating robust shareholder returns. I truly appreciate everyone's efforts to reach this point and I feel honored to have been a part of the team during this pivotal period. Now we need to leverage our strengths to become even more successful. I leave the finance organization in Rick's capable hands and I look forward to working with him in my new role. With that, Rick, back to you.

Thanks Varun. I'm also looking forward to working with you in this new capacity. I will conclude with our updated thoughts on projected 2022 results shown on Slide 6. Our guidance is based on current conditions and recent trends and assumes that scrap and precious metals prices hold near September prices and the Ukraine/Russia conflict continues without further escalation or major additional impact on the European economy and miles driven. On foreign exchange, our guidance includes recent European rates with the balance of the year rates for the Euro of $0.97 and the pound sterling at $1.11 versus $1.02 and $1.20 in the previous guidance, effectively a 5% and 7.5% decline. We narrowed the organic parts and service growth rate range to 4.75% to 5.75% with the midpoint up slightly from our year-to-date growth at 5.1%. Please note that we have one fewer selling day in Q4 this year. We are projecting full year adjusted diluted EPS in the range of $3.85 to $3.95 with a midpoint of $3.90. We have narrowed the range as we are three quarters through the year and lowered the midpoint of our prior guidance by $0.05. To understand why we reduced the midpoint, please refer to Slide 7 in the presentation which bridges our prior and current guidance figures. Operating performance remains solid and represents upside of $0.02 relative to our prior guidance. The frontline businesses continue their resilience in difficult conditions. Capital allocation is also a benefit of $0.03 relative to our prior guidance, primarily related to higher repurchase volume. Note that we are including share repurchases through the week ended October 21st in our guidance. That's the good news generally tied to the areas under our control. Then there are the negatives, which are primarily external factors. Declining metals prices are projected to have a negative $0.04 effect. Headwinds from the weakening FX rates mentioned earlier contribute a $0.03 reduction relative to prior guidance and unless the trend reverses, this will be a negative factor in 2023. Taxes and interest drive another $0.03 negative effect, including the rate changes previously noted. FX rates and metal prices can move significantly over time. We may have further upside or downside if the actual figures play out differently than we assume in our guidance. We expect to deliver approximately $1 billion of free cash flow for the year achieving free cash flow conversion in line with our expectations for the business. Translation of foreign currency-denominated cash flows will have a negative effect given the lower euro and pound sterling rates used in our latest estimates. But we are still anticipating 55% to 60% EBITDA conversion to free cash flow adjusted for the PGW gain. Thanks for your time this morning. With that, I'll turn the call to Nick for his closing comments.

Thank you, Rick and Varun for that financial overview. Let me restate our key initiatives which are central to our culture and our objectives. First, to integrate our businesses and simplify our operating model. Second, to focus on profitable revenue growth and sustainable margin expansion. Third, to drive high levels of cash flow, which in turn give us the flexibility to maintain our balanced capital allocation strategy; and fourth, as always to continue to invest in our future. As you can see from our results, we are committed to driving these metrics forward regardless of the operating environment. Our teams across all of our segments are executing on their operational targets and they have done a tremendous job during these unpredictable and unique times. With respect to the items we can't control, such as FX rates, the supply chain, and labor market constraints, we don't have a crystal ball, but it appears we will be confronting these uncontrollable items as we enter 2023. That said, I am confident our operational excellence efforts can navigate and effectively manage most any challenge. Why? Simply stated, we have the best teams in each of our segments and industry, and their track record over the last three years speaks for itself and for that, I offer a tremendous thank you to our team members across the globe that make it happen each and every day. They define what it means to be LKQ proud. And with that operator, we are now ready to open the call for questions.

The first questions will come from Daniel Imbro with Stephens Inc. Please proceed.

Yes. Hey, good morning guys. Thanks for taking our questions and congrats on the quarter.

Good morning, Daniel.

Rick, I wanted to start on something you said around kind of North American margins. I think the comment you made was you expected them to moderate going forward maybe 4Q into next year. Can you just provide more detail on what the drivers of that outlook are? Is it a change in underlying core margin due to maybe wage or other cost pressure or kind of what was driving that comment around moderation going forward?

Yes. Thanks Daniel for your question. Good – it's a good question. The margins we had in Q3 obviously very favorable record that we had and so very pleased with what the team's done. One of the things that we've seen over the last call it 12 months or so is the competitive market and the ability of us to be able to pass through some pricing and do it pretty effectively early on. So there's a couple of things that are happening. One of the things that we'll see is the increase in our overall product cost inflation that we would expect. And going back to what we've seen and what we told you guys in Q2 is the long-term view for us is probably somewhere in the low-to-mid-17 is where we would expect that to be. With the inflationary increases that we keep seeing, the ability to pass on that cost to our customers will be a little more challenged as we come into 2023. I would think that it would be a slow move – a little bit slower move to those numbers that we've said on the long-term piece though.

I don't know if you want to add anything on that.

No, that's good.

Your next question is from the line of Michael Hoffman with Stifel. Please go ahead.

Hi, thank you. So I do have two. So this one's a little out of the left field, it's geopolitical, so I'm curious about your views on looking forward, it appears the EU energy crisis has peaked a bit. We're at full capacity on natural gas supplies. Maybe there's a little relief, so I'm curious about that and then the other part of that same question. The China leadership not changes, but continuity, what's the Plan B if China decides it's going to embargo shipping out of Taiwan and what's Plan B related to that? And then I have a question about 2023 after that?

Okay. Michael, this is Nick. Thanks for your question. As you know, and as everyone knows, the entire aftermarket collision parts industry moved to Taiwan decades ago. There are no material production capacity outside of Taiwan. It just doesn't exist. There are no plants sitting in Mexico or Vietnam or India sitting idle waiting for the Taiwanese machine to get shut down, right? It doesn't exist. Now we pay very close attention, obviously to geopolitical events and we're not overly concerned about the scenario that you laid out where China would effectively shut down the Taiwanese economy because they wouldn't pick out auto parts specifically and the reality is, if they were to shut down the economy and shut down kind of shipments out of Taiwan, auto parts is the least of everyone's concern. 65% of all semiconductor production and 90% of all advanced chip production comes out of Taiwan. So if China were to embargo export shipments, you would not be able to buy iPhones or new cars or metal equipment or anything that has a chip in it. And we think that the Chinese leadership is very smart; they certainly don't want to cook the golden goose that Taiwan represents in the form of a really strong economy. Our sense, in talking with outside advisors, is that it'd be more likely that China would move kind of to a Hong Kong model first where they would seek to have significant influence over the territory, but not just totally shut down their economy.

Okay. And then the second follow-up question, I realize you're still in budget process for 2023, but there are some knowns sitting here today where your interest rates move to taxes, FX, freight, what are those pieces of the waterfall, what is the net plus or minus of those relative to the new midpoint? And then clearly you have a positive view about their structural growth still. So I'm just trying to understand headwinds?

Yes. So on the 2023 outlook you are absolutely correct. We're in the middle of our budget process and we have yet to see any submissions from the field. We don't have a consolidated view at this time. What I can tell you however is that nothing has changed materially from what we presented back at the Analyst Day and the Investor Day this past June 1st in Nashville. So on the revenue front, we will likely shake out at a consolidated per day growth rate similar to 2023 or similar to 2022. But we'd probably get there with a slightly different mix as indicated in my prepared comments. We do not anticipate that the recent double-digit organic growth in North America wholesale business will be sustainable. It's just, it's too high. Europe should post similar organic growth next year as we are doing this year, which is in the mid-single digits. We do anticipate that specialty will return to positive revenue growth, likely in the low- to mid-single digits and self-service, assuming scrap prices stay where they are, can sustain low- to mid-single-digit growth as well for their parts and services business. All that obviously is based on what we talked about in Nashville and that is market growth being in the low-single digits, a bit of share gain, which we always are trying to achieve each and every year in each of our businesses, and some boost from inflation. As Rick indicated, 2023 will have one pure selling day than 2022 which clips you for a few basis points of growth, 40 basis points to be exact. And so hopefully that gives you a sense of local currency revenue trends, but the strong dollars that we've had this year that's going to carry over assuming rates stay about where they are next year. And so Michael, when you and everyone else on the call are building your models, you should probably bake in the exchange rates over the last few weeks, which is about $0.97 for the Euro and $1.11 for the sterling because at those levels, just to put it in perspective, that's like a $450 million headwind from a U.S. dollar perspective after taking into account the translation impact to the currencies. Now, in terms of margins, as we just indicated in answering Daniel's questions long-term, we believe that our North American wholesale business can sustain margins in that low- to mid-17% range. We don't expect to go from where we are today down to 17% next year. We think it's going to be a more gradual decline. In Europe, we are absolutely committed to achieving consistent double-digit EBITDA margins. The one LKQ year program is still underway. We would expect to see some minor margin improvements with specialty, particularly if we can get some modest revenue growth and the self-service margins, assuming no significant changes in scrap prices, should get back to kind of mid-teens. On free cash flow, again, 55% to 60% of EBITDA we believe is the right target. Interest costs will be higher due to the impact of the higher rates on our floating rate line of credit balances. As Varun indicated, that was about $1.6 billion as of September 30th. At current interest rates, that would be about a $28 million headwind, which is about $0.07 a share. Now obviously, earnings per share will benefit from the 17 million shares that we repurchased thus far in 2022. So we've got a lot of work ahead of us on the budgeting front. But hopefully that gives you enough to get into the right zip code when building your models for next year.

Your next question is from the line of Ali Faghri with Guggenheim Partners. Please go ahead.

Good morning and thanks for taking my question and Varun and Rick congrats again on the new roles.

Thank you, Ali.

So my question is on used car pricing, obviously we're seeing used car prices come down real time right now. Maybe you can remind us what the impact is of lower used car prices on your business?

Yes. Simply lower used car prices generally translate into lower cost of the vehicles – of the total loss vehicles at the salvage auctions because as prices come down, the competition at the auctions includes rebuilders and if used car prices come down, what they can pay for their feedstock, if you will, that total loss vehicle has to come down as well, if they're going to maintain their margins. And so it's not a dollar-for-dollar reduction, if you will, but we would expect that as used car prices settled down a little bit, that the price that we have to pay for the cars at auction will also come in a bit.

Your next question is from the line of Craig Kennison with Baird. Please go ahead.

Hey, good morning. Thank you for taking my questions as well and congratulations to the whole team. Varun, I wanted to start with you and ask about your priorities for Europe and maybe frame them in the context of the LKQ 1 strategy. Where do you see an opportunity to double down on some of these initiatives and where might you dial back your priorities in order to focus on what you see as the highest priority?

Well, good morning, Craig and thank you for the kind wishes. Super excited both Rick and myself, but I think it really is yet another testament to the work that we as a management team have done from a talent development perspective that all the dominoes that kind of went through were all fulfilled internally with internal talent. With regards to the European business, now that I've been on the ground for a little over a month, I kid you not. I am so excited about the opportunities we have out there, both internal and external, and I kind of frame it up from a market perspective. If you think about the limited new car inventory, think about elevated used car prices. Think about the aging carpark. These are all supportive of a healthy demand in the aftermarket. So that's just kind of framing the piece and despite the fact that VMT is under pressure given the energy prices over in Europe, listen, people are still doing hybrid working. So as you think about the go-forward run rate with regards to more people coming from a day into the office a week to two days, moving now towards companies trying to push for three days a week, and then from there on VMT will recover and hopefully at some point in time once the geopolitical crises also tend to calm down a little bit more specifically the Ukraine/Russia conflict that's ongoing. I am bullish about the future. So that's it in terms of framing that entire piece. With regards to my specific priorities, very simple: the first one is we grow the business and we will grow the business faster than the market. Organic growth will be the key focus though we always have the opportunity to look into highly accretive and selective acquisitions. So number one, grow the business. The second one is be decisive about prioritization and then just flawlessly execute. We have so much opportunity across Europe that arguably on the flip side of it is we have too much opportunity. And so really the key piece that I have shared with my management team is making the fundamentals – building the fundamentals, which essentially as a distribution business is the right part at the right place and at the right price, and then we will deliver flawlessly, right? We are here to promote affordable mobility and that really is what we do. There is no one else that has the kind of distribution footprint, the scale, and the ability to invest through cycles, our advanced logistics distribution centers like in Tamworth, in Berkel, coupled with an aging carpark. I am super excited. This is before I get into some of the internal programs such as back office and private label. Those continue to remain opportunities for us. So, number one, grow the business faster than the market. Second, be decisive about prioritization and flawlessly execute. And the final one is developing talent. We have a tremendous management team out there. Super, super I've kind of put them up against absolutely anybody. But again, our ability to develop talent further as we continue to execute on the various opportunities out there. To your question about the one LKQ Europe program, if you actually pull out the presentation that Nick and myself had presented on the 10th of September 2019, there were four fundamental building blocks. One was procurement, the second one was private label, a third was revenue optimization, and then the fourth one was essentially the ERP. Those are the key priorities and that is really where we are doubling down. I feel super excited about where we are, but clearly there is more work to be done and just making sure that we don't get distracted by the various, I'd say peripheral opportunities and really double down on what we had committed to doing. So that really is where we are and as I said, yes, the macroeconomic clouds are darkening, but in terms of our ability to execute through those, given the sectoral tailwinds, very, very excited.

Good morning, and I echo my compliments as well to everybody in management. Thanks for taking my question.

Thank you, Scott.

You guys talked about Europe seeing some areas that are growing in low doubles. Could you just maybe parse out which areas in Europe did better? And with regard to, I guess, what you're seeing right now, are you seeing any signs that the countercyclical benefits of the mechanical aftermarket are starting to kick in?

Hi, Scott, it's Varun. Let me answer your question. Listen, in terms of the elevated gas prices, those are something that's something that we certainly tracking. We don't get regular VMT data like we get here in the United States, but there are other metrics, other KPIs that essentially kind of I give you the same result, whether it be congestion indices, whether it be fuel consumption, diesel, petrol, things along those lines. So that is something that I am keenly watching along with my team. And yes, there are certain pressures from that perspective. But having said that pricing, the higher input cost that's coming through is being priced through across the entire market, right. And that's kind of moving into mid-to-high single digits, and that is coming through. You can see that through the gross margin side of things also. So with regards to, is there any deferral taking place at this point in time, we really haven't seen any deferral other than the fact that service mechanically you need to – if you're driving and even if you're not driving once a year, you need to get your oil and oil filter changed, for example. So from that perspective, the countercyclical nature of what we do over in Europe is actually very, very resilient. And that really is what we are excited about. Pricing is sticking through at this point in time, and I know given how we operate our businesses, service reliability, having access to inventory, having a pristine balance sheet that supports us, my sense is there will be more stress in the broader market. But the larger ones will continue to power their way through because we are seeing some fairly rational behavior taking place across the market. I think on a go-forward basis, something to watch out for is inflation. Okay. And that certainly while it's kind of gone through the cog side of it and that has stuck, my sense is that certainly will be coming through on the labor side. I think based on CPI numbers that we're seeing out of the various European markets, that certainly is a key focus area for my team and myself, and really driving the productivity side of things where, again, we have a tremendous opportunity as with the three advanced logistics distribution centers that we've already set up essentially to futureproof our business. But again, lots more to do out there. And again, it won't be plain sailing for everybody, but really this is when market leaders, thoughtful leadership teams really rise to the top.

Your next questions from the line of Scott Stember with MKM Partners. Please go ahead.

Hey good morning all. Quick question on the recycled side. I mean, we could be looking at an unprecedented decline in used car prices for the next year or two. How does that impact what you're buying at auction? And then I guess the other question I would have there is do you see – do the prices of the parts as the cars come down on the recycled side, do they come down concurrently with the decline in car prices?

I'll take that and then I will invite Rick to provide any commentary that he may have. The reality is as prices come down, as I indicated, the cost of what we have to pay at auction tends to come down as well. Again, it's not dollar for dollar, but there is a correlation there. The reality is that doesn't make us buy more vehicles or not. We buy the vehicles that we need to have the inventory that we believe is required to fulfill customer demand. Okay? We don't bid on every car that comes to the auction and we bid on the vehicles based on the parts demand that we see and the need to have the inventory. And so that's not going to change. We're going to stay very focused on utilizing our models, our AI, and the like to buy the vehicles that we need to drive the best margin. Just buying a total loss vehicle because it's for sale. If those vehicles are going to sit on their warehouse shelf for the next year or two there is no utility to us doing that. And so we focus on buying what we need. And if the car prices come down, that is great. We do not adjust pricing of the parts based on the cost of the car because again, we price relative to where the OEs have their prices, we need to maintain that value proposition for the insurance companies to continue to have them push the utilization of alternative parts. And so our ability to price up in some parts based on what the OEs are doing, but just because the price comes down doesn't mean we’ll automatically lower the price of the parts that we sell. But Rick, anything else?

No, I think it was spot on.

Okay. Thank you. And then lastly, Varun, you mentioned something about, or somebody did, what's the impact of a 100 basis point increase in interest rates on your interest expense?

Yes, no, I'm the one who mentioned that Gary. Essentially at the end of September, we had about $1.6 billion of variable rate debt on the revolver. So every 100 basis points will essentially be $16 million of higher interest expense. That was simple math. So total debt was about $2.4 billion. We had cash in hand for about $270 million and net debt of $2.2 billion, which as you know, we've got two euro bonds for half a billion and two hundred fifty million. So, the only change on that really would be on the variable rate debt.

Your next questions from the line of Michael Hoffman with Stifel. Please go ahead.

Thanks for letting me do the follow-up. When do we see, or maybe you answered it by saying there would be a gradual decline back to normal margins in U.S., the benefit of freight coming through on the inventory that is a margin plus.

Yes, I appreciate the question. So, we've been seeing obviously the spike that we saw earlier in the year, late last year, earlier this year. And so you would start seeing the relative decline over Q4 going into Q1 as it sort of normalizes with a lot of offsetting items. Right? So, there are the other inflationary increases that we're keeping a keen eye on along with product cost increases that are somewhat flowing through that inventory level as well. So, the other thing to keep in mind is that as the spot market was rapidly going up due to our size and scale, we were able to get a lot of contracted rates. And so some of the increase that we saw would have been mitigated against competition.

Yes. So, another way of thinking about that, Michael, is as the spot pricing escalated from what was $2,500 for a 40-foot container back in 2019 to as high as $20,000 in parts of 2021 and early 2022. Because so much of our volume came on contracted rates, we were hurt less than our smaller competitors when the spot markets soared and we're going to benefit less as the spot market comes back in. That will all roll through our inventory and then ultimately into the cost of goods sold.

And this does conclude the Q&A portion of today's call. I will now turn the call back over to Nick for any closing remarks.

Well, obviously as always, we really thank you for your time and attention. We understand there is a lot of things going on today in the markets. We certainly look forward to providing another update in late February of 2023 when we report our fourth quarter and full year 2022 results. At that point, we will establish our full year 2023 guidance. So again, we appreciate your time and attention as always. And thanks for your interest in LKQ.

This does conclude LKQ Corporation’s third quarter 2022 earnings conference call. We thank you for your participation. You may now disconnect.