Good morning everyone and welcome to the LKQ Corporation's Third Quarter 2024 Earnings Call. My name is Lydia and I'll be your operator today. I will now hand you over to Joe Boutross, Vice President of Investor Relations to begin. Please go ahead.

Thank you, operator. Good morning everyone and welcome to LKQ's third quarter 2024 earnings conference call. With us today are Justin Jude, LKQ's President and Chief Executive Officer; 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 are planning to file our 10-Q in the coming days. And with that, I'm happy to turn the call over to our CEO, Justin Jude.

Thank you, Joe, and good morning to everyone joining us on the call. I want to start by saying that our thoughts and prayers are with all of those that have been affected by the Hurricanes Helene and Milton. The Southeast, in particular, is one of LKQ's strongest regions, which is a testament to our many dedicated employees and longstanding relationships with our customers in the region. We are grateful to report no fatalities among our LKQ team members, but property damage and disruptions to daily life have affected many. At LKQ, we pride ourselves on being a good corporate citizen and partnering with the communities in which we operate. In response to the hurricanes, we have earmarked funds to cover requests into our Employee Assistance Fund for financial relief and reached out to our employees for recommendations of local causes that could use our help. We also have made donations to charitable organizations involved with the disaster response efforts. I would also like to thank the LKQ team members who jumped into action to aid their colleagues and communities while there are too many individuals to name, I am truly inspired by their efforts to gather and deliver supplies to those in need and assist in the cleanup. As the region begins its recovery period, LKQ stands ready to continue to provide support. Shifting now to the quarter, last month we held an Investor Day where I laid out my management style and priorities. As a reminder, I stated that my priorities would focus on operational excellence and maximizing total shareholder return. In the third quarter, we evidenced this focus by taking action to simplify, integrate, and rationalize the business while returning value to our stakeholders. Let's start with the capital allocation and shareholder returns. At recent trading levels, we believe the best use of our capital is repurchasing our shares. We were active in the quarter, repurchasing 3 million shares for approximately $125 million. With $800 million left on our authorization and plans to remain active in the market in the coming years, I am pleased to announce our Board of Directors approved a resolution to increase the authorization amount under our share repurchase program by an additional $1 billion with an extension through October 2026. Management's recommendation to increase and extend the authorization and the Board's approval thereof is evidence of our confidence in LKQ's future and our ability to generate robust free cash flow. In August, we paid a quarterly dividend totaling $79 million and our Board approved a quarterly cash dividend of $0.30 per share to be paid in November. Moving to our operational excellence initiatives, the simplification of our portfolio and operations is a key pillar to drive better returns. As part of our portfolio review, we completed the sale of our Poland operation to Mekonomen in July and recently finalized the sale of our Bosnia business. Additionally, we have another small transaction nearing completion in the coming weeks. While this transaction is a very small component of our North American operation, the sale will eliminate a loss-making business while freeing up management's time. On the integration front, we continue to work on merging our recent acquisitions into existing LKQ operations. While most of the heavy lifting is done on Uni-Select's footprint rationalization, the teams are identifying additional efficiencies and have selected seven more locations for closure. Andy Hamilton talked about the SKU rationalization effort in Europe, and I am pleased to report the team pushed this project forward in the quarter and have now reviewed over 25 product groups representing 425,000 SKUs for more than 50% of our project scope. Also in Europe, we are working on restructuring activities to reduce costs and increase efficiencies related to our logistics network. We will have more details on these efforts in 2025. And lastly, our specialty business recently completed the combining of two warehouses near Dallas, a legacy facility, and a facility we acquired as part of a 2023 transaction into a new more efficient single location. Our commitment to lean operating culture is critically important, especially in a period when the top line is facing headwinds. In addition to the substantial cost actions we have already taken this year, all of our businesses are undertaking another review of the cost structures as part of our annual budget process. Additionally, we are conducting a benchmark study on our overhead costs to determine where we have opportunities to be more productive and cost-effective. Growth is our final operational excellence pillar, and we strive to grow organic revenue and increase operating margins. We were not wholly successful in this regard during the third quarter, as many of the economic and industry headwinds we faced in the first half of 2024 continued to have a negative impact on our results. While parts and services revenue was down roughly 4% organically on a per-day basis, there were some positives to take away. North America declined 7.5% on a per-day basis, with aftermarket down to a greater extent than salvage. Q3 extended the trend of year-over-year repairable claims decreases, with claims falling 9.5% following a 7.0% drop in the second quarter. Our collision volumes were down only 6%, showing that despite the drop in claims, we did not lose share. We believe the decrease in claims are still tied to the economic factors we discussed last quarter, such as the rising insurance premiums and the decrease in used car pricing. While we anticipated claims volumes would not rebound quickly in the second half, the Q3 decrease was higher than we projected, and it contributed to an underperformance of revenue relative to guidance. The Q3 claims figure suggests the possibility of a longer recovery period than we previously thought, and we are working through this evaluation with our strategy and operations teams as part of our 2025 budget process. Europe's revenue was flat on a per-day basis, but was an improvement from the 1.3% decrease we reported in the second quarter. Certain markets showed single-digit growth, while others declined at a similar range. Economic conditions remained challenging across most markets in Europe, notably in Germany and the U.K. Competition is also contributing to the challenging condition, as consistent with last quarter, some of the smaller players are aggressively pushing prices. The North American revenue decline of 7.5% per day was larger than what we reported in the first two quarters. The sequential change is attributable to repairable claims in Q3 and the mixed impact of incremental paint revenue in the organic calculation. We passed a one-year mark since the Uni-Select acquisition on August 1st, 2024, and as a result, the FinishMaster revenue became part of the organic calculation for part of Q3. Organic paint revenue was down by a greater percentage than the segment as a whole, resulting from softness in FinishMaster's direct sales. There was some revenue loss post-acquisition as customers re-evaluated their supplier situation, and sales reps left to join competitors. As we integrated the business and aligned our sales teams, we believe the situation has stabilized, and the team is working to win back business with LKQ's combination of superior availability and service. Specialty took a step backward in the third quarter, with organic revenue down 10% on a per-day basis, compared to 2% in the first half. Economic conditions, including higher interest rates and relatively low consumer confidence, have contributed to lower vehicle and RV sales, thus creating a significant headwind for our part sales. We expect the challenging conditions to continue through the fourth quarter. Shifting to our profitability measures, adjusted diluted earnings per share increased by 2% compared to Q3 last year, and the segment EBITDA margin improved by 30 basis points. Rick will provide further details on these numbers in his remarks. Before turning the call to Rick, I want to mention a few noteworthy items for the quarter. Hurricanes Helene and Milton have affected our operations in North America, as some of our locations and many of our customers were shut down as a result of the storms and the aftereffects. To give an idea of the impact on LKQ's operations, Helene forced four closures of nearly 25% of our locations in the Southeast, and these locations were down between one and six days. Milton forced closures of nearly 75% of our quarter locations for between one and four days. Thankfully, we didn't incur any significant property damage, so the impact will be mostly related to lost revenue. Earlier this month, dock workers on the East and Gulf Coast went on strike for three days. A tentative agreement got them back to work as negotiations continue on a final contract. We expect the strike dates to have an impact on our inventory, as each day off was estimated to require a week to catch up. We were already experiencing delays for shipments brought into the East Coast, and while we believe our current inventory levels are adequate to support the business, there could be some minor impacts to our fill rates over the coming months. We are also contingency planning in case a final contract isn't agreed to by January. Last quarter, we reported that we reached an agreement with a trade union representing a number of our employees in Germany, and we are pleased with the progress in restoring normal operating performance and branch availability improved in the quarter, rising to nearly 95%.

Thank you, Justin, and welcome to everyone joining us today. Third quarter results reflect solid overall performance, but with some variability across the business. Europe performed well in the face of challenging macroeconomic conditions, but revenue in our North America and specialty segments came in lower than expected due to factors mentioned by Justin. As discussed during the Investor Day, we were experiencing softer than anticipated revenue in North America in July and August numbers. This softness continued into September with preliminary repairable claims data indicating a larger than expected decrease in total Q3 year-over-year repairable claims. Additionally, Hurricane Helene had a small but negative impact on the final week of the quarter. These challenging economic conditions, including further declines in collision claims from Q2 to Q3, were difficult to overcome, but we are proud of all of our 48,000 employees who remained focused on delivering solid operating performance through our lean operating model. Turning now to the third quarter consolidated results. Our actions to simplify the business and align cost structures to demand levels contributed to improvement in our segment EBITDA margins by 30 basis points year-over-year. Adjusted diluted earnings per share of $0.88 was $0.02 higher than the prior year figure. Lower share counts due to our ongoing share repurchase program and lower taxes contributed to a year-over-year improvement in adjusted EPS of approximately $0.04. These were offset by roughly $0.02 of a net decline in operating results. We saw significant improvements in EBITDA in both our Europe and self-service segments. Europe posted double-digit EBITDA margins for the second straight quarter despite a challenging macroeconomic environment. Self-service benefited from their focus on improved vehicle procurement costs and productivity with some additional help from more favorable movement in scrap steel prices during the quarter. However, organic revenue declines in North America driven largely by aftermarket and paint volumes contributed to a mixed decrease and ultimately lower EBITDA for the North America segment. Difficult economic conditions in the auto and RV markets also led to a decline in organic revenue and earnings in our specialty segment. As noted in Q1, we implemented a global restructuring program focused on enhancing profitability. In Q3, we expanded the 2024 restructuring plan to simplify the business and to align with current demand including additional footprint rationalization and streamlining our logistics models. Given the persistent market demand pressures and macroeconomic challenges, we are continuing to execute on our restructuring plans in North America and Europe to reduce headcount and exit underperforming locations. As a result, we incurred $14 million in charges for the quarter. Further charges are expected in future periods for severance, lease termination costs, and other related expenses. Now for segment results. Going to Slide 8. North America posted a segment EBITDA margin of 16.1%, a 90 basis point decrease relative to last year. Last quarter, we projected the full year margin would be around 17% with the full year impact of Uni-Select dilution. The reported margin for the third quarter was below our expectations as the cost actions taken including Uni-Select synergies from integration and other restructuring efforts were not enough to offset the lower aftermarket revenue with the related mix effect on gross margins as aftermarket collision revenue has a higher margin than our other wholesale product lines. Relative to the prior year, salvage margins were also down reflecting more favorable revenue, vehicle cost trends, and commodity prices in the prior year period. Overhead expenses decreased 90 basis points in North America reflecting lower personnel costs primarily related to incentive compensation with the Uni-Select synergies and productivity initiatives largely offsetting significant inflationary pressures and the leverage effect of the organic revenue decline. With the headwinds on repairable claims and salvage margins as well as the impact from the hurricanes, we estimate North America's EBITDA margins will be in the low to mid-16s for the full year. Looking at Slide 9, Europe reported a segment EBITDA margin of 10.2%, a 90 basis point improvement over last year. Gross margin rose slightly despite the difficult economic conditions as we were able to pass along some pricing to help offset input cost increases in certain markets. Overhead expenses were favorable by 70 basis points compared to the prior year period. While productivity measures largely offset inflationary pressures, our prior year SG&A expenses included a 70 basis point charge related to a nonrecurring value-added tax audit matter in Italy. We remain focused on productivity measures to offset the ongoing inflationary pressures on overhead expenses and cost of goods sold and have expanded the 2024 restructuring plan in Europe to support these efforts. Many of these actions have been initiated and are in process, but the benefits will be more notable in the fourth quarter and heading into 2025. When we talked 90 days ago, we expected EBITDA margins in Europe to be in the mid to high 9s. With current volume expectations and the actions we've taken to address productivity, we believe EBITDA margins will fall in line with this range. On a long-term basis, we expect to deliver double-digit EBITDA margins in Europe. Moving to Slide 10, specialties EBITDA margin of 7.3% declined 130 basis points compared to the prior year, primarily driven by a decline in organic revenue and resulting leverage effect on overhead costs. Demand softness in the auto and RV product lines and competitive pricing pressures remain challenges for the business. We have been implementing changes to improve our net pricing and saw sequential quarterly improvement in gross margin in the last three quarters. Overhead expenses were roughly flat in dollar terms, but were higher as a percentage of revenue, primarily due to lower operating leverage on the organic revenue decline. We believe the full-year segment EBITDA margin will be closer to 7% given the continued organic revenue declines. Self-service generated a 7.3% segment EBITDA margin in Q3, which is an almost 800 basis point improvement from last year. In dollar terms, segment EBITDA increased by $11 million. Efforts to manage vehicle procurement costs combined with overhead cost controls and favorable movements in scrap steel prices helped drive an improvement in profitability. Shifting to cash flows and the balance sheet. We produced $341 million in free cash flow during the quarter, bringing our year-to-date total to $661 million. We invested approximately $16 million in two small tuck-in acquisitions, including one in Canada and one in Europe. In addition, we paid down approximately $35 million in outstanding debt. In the third quarter, we continued to return value to our shareholders with $125 million in share repurchases and our quarterly dividend totaling $79 million. We will also continue with our $0.30 per share quarterly dividend into 2025. At this level, the dividend payout aligns with our stated capital allocation policy and allows us to retain strategic flexibility for capital allocation. We have committed to allocating at least 50% of our free cash flow towards dividends and share repurchases, and our third quarter activity kept us on pace to deliver on this commitment. On a year-to-date basis, we have generated free cash flow of $661 million and invested $520 million for share repurchases and dividends, or almost 80% of our free cash flow. As of September 30, we had total debt of $4.4 billion with a total leverage ratio of 2.4 times EBITDA, a slight increase from the prior quarter but within a range of expectations. We remain committed to maintaining a manageable debt level and our investment grade rating. Our effective borrowing cost was 5.5% at the end of Q3, slightly down from Q2 as a result of recently lowered benchmark rates. We have $1.7 billion in variable rate debt, of which $700 million has been fixed with interest rate swaps, which effectively provides a fixed rate on over 75% of our debt. I will close with an update on our full year 2024 guidance. We expected in our prior guidance the drop in repairable claims volumes in North America would remain at the same level of year-over-year declines into the back half of the year. Given the greater-than-anticipated drop in the third quarter weighing down organic revenue, combined with lower-than-expected volumes in our specialty business and headwinds from hurricanes in the southeastern portion of the U.S., we are adjusting our full year guidance. As mentioned previously, we view the market-driven volume declines will abate, but expect them to impact us in the fourth quarter and eventually level off in 2025. While we have taken action to mitigate these effects through cost controls and margin actions, those will not be enough to offset the full year impact of the lower revenue expectations. Our guidance is based on current market conditions and recent trends and assumes that scrap and precious metal prices hold near September prices. On foreign exchange, our guidance includes rates roughly in line with the third quarter. The global tax rate edged up slightly to 27.0% due to shifts in our geographical mix of earnings. Our full year guidance metrics on Slide 12 have been updated from Q2 earnings call. We expect reported organic parts and services revenue in the range of negative 275 basis points to negative 175 basis points. At the negative 2.25% midpoint, this is a decrease of 175 basis points from the prior guidance. The continued softness in Q3 organic revenue in North America and specialty, along with the impact of the hurricanes in the U.S., drove the decision to lower the full year range. We expect the top-line headwinds in North America will linger into 2025. We are working through our budgeting process for next year and will update you on the expectations during our Q4 earnings release in February. In Europe, the top-line recovery from the difficult economic environment in several markets is slower than originally anticipated, and we expect Q4 organic growth to be similar to what we saw in Q3. As a result of these headwinds, we expect adjusted diluted EPS to be slightly lower and in the range of $3.38 to $3.52, a decrease of $0.15 from our previous midpoint. The primary driver of the decrease includes the market-driven demand dynamics in North America and specialty. While we expect to see volatility in these revenue trends, the team is focusing on addressing those items within our control, including our cost structure, and will continue to execute on productivity and restructuring initiatives, which will partially offset these revenue trends in Q4 and will further benefit us heading into 2025. The free cash flow targets at 50% to 60% annual EBITDA conversion and approximately $850 million remain unchanged from prior guidance. Diligent balance sheet and capital expenditure management will help deliver the full-year target despite the lower expected profitability while continuing to balance trade working capital needs heading into 2025. Thanks for your time. I will now turn the call back to Justin for his closing comments.

Thanks, Rick, for the financial commentary. As I close the book on my first quarter as CEO, I want to thank all of my LKQ colleagues for what they do each and every day to make LKQ an exceptional company. Things don't always go according to plan, and Q3 threw us a few curveballs, but the LKQ team immediately went to work addressing these issues. Their knowledge, resilience, and work ethic are second to none, and we will help us emerge even stronger from the challenging conditions facing our industry. I am very proud to work with this team, and I am excited about LKQ's future. I will now ask the operator to open up the line for questions.

Our first question today comes from Craig Kennison with Baird. Please go ahead. Your line is open.

Hi, good morning. Thanks for taking my question. I just wondered if you could shed more light on the issue with respect to paint and the competition that you're seeing there. What's going on in that category? Do you think it's a change in the competitive landscape or just a tactical move by your competitors?

I'd say maybe a mixture of both, Craig. This is Justin. Thanks for the question. If you remember last year, we announced the intent to acquire Uni-Select, and then it went six months. We were kind of in a quiet period. We couldn't talk to FinishMaster folks. We couldn't talk to the customers. At that time, that quiet period creates some uncertainty, and FinishMaster had lost some accounts pre-acquisition or pre-closing and leading into post-acquisition. As you know, some of those contracts get worked on six months in advance. Additionally, there was a larger MSO that had been lost by FinishMaster, and that business was being migrated away after we acquired and closed on FinishMaster. Obviously, we talked about rapidly integrating the footprint, integrating the sales teams. We kind of started off at a lost position of where we expected to be, but the teams have aligned the sales, refocused the groups collectively. Right now, we think that we're showing that we've moderated the loss and started to grow share. Really, we don't think there's anybody that can compete with us on our service and availability.

Maybe just, Justin, if you could shed light on the value proposition LKQ has with respect to having paint as part of your overall portfolio and whether that's persuasive to your customers. Thank you.

Yes. As you may know, the margin on paint is lower than typically on parts. A lot of the paint competitors that we deal with, even FinishMaster prior to LKQ acquiring them, would cut their costs from the service level to make sure that they can maintain their profits, such as delivering once a week or delivering twice a week. So now, when we've integrated the warehouses of FinishMaster into the LKQ footprint, we're delivering to our body shops two times a day in some markets, same day, every day of the week. We're able to put paint on that vehicle. So, from a service level, from an inventory depth standpoint and availability, it's hard for any of these other paint distribution businesses to compete with us on a like for like. Just because our cost structure, we already have the truck going there, once again, once a day or twice a day, with parts both used in aftermarket and then for us to add paint out of the same warehouses is just a marginal increase in cost. So, from a service level and cost to serve, it's in my opinion, it's very hard for our competition to compete with that.

Thanks, Justin.

Good morning, guys, and thanks for taking my questions as well.

Good morning, Scott.

Within North America, I'm trying to parse out what happened in aftermarket. I remember last year, you guys caught lightning in a bottle because of State Farm coming back into the market and the availability of aftermarket parts increased. Is this more a function of tough comparisons for aftermarket or is there something going on where customers are shifting their focus and preference back to salvage?

I'm going to use that line, by the way, lightning in a bottle. I like that, Scott. Yes, I would say it's really tied to the repairable claims fees. I mean, if you look at our aftermarket business, it's 100% tied to collision. And so, when you see the claims drop, that puts a lot of downward pressure on the aftermarket piece. Like any time we talked about in the last call, any time the market drops, our competitors don't necessarily, whether that's OEM or whether that's other aftermarket distributors, our competitors don't necessarily know if it's the market or if they're losing shares. So, they get a little bit more aggressive on price trying to get some shares. So, we don't chase price down, but it does create some pressure on the margin a little bit with aftermarket. But the line issue with the drop in aftermarket would be tied to the repairable claims fees.

Yes Scott, just to add on to that, just a minute. The other thing to think about is with State Farm coming up last year, and you look at that compared to the repairable claims, there was a significant difference between the downgrade in the repairable claims in the back half of last year versus where revenue was. That plus the strike that happened at the OEs last year did help our overall revenue. So, the comps, you're correct on the aftermarket piece, there are tougher comps when you're looking at what happened within the industry last year as well.

Got it. And then just last question. There were a lot of things, a lot of transitory add-ons, which impacted this quarter and probably the fourth quarter as well from the storms and strikes. Is there any way to quantify the impact from the storms for the full year or how much of your guidance coming down was because of that and the strike?

Yes. So, let me take that one, Scott. As far as the third quarter impact, it was minimal impact on the storms. There was a - Helene hit at the very end, and I talked about it just briefly, that there was a little bit of an impact on the last week of the quarter. Going into Q4, we did see, obviously, Milton hit the Southeast as well, and there was significant cleanup, and there's still significant cleanup on Helene but we're still trying to quantify. We didn't receive very much, as Justin talked about, property damage, but we are still seeing the impacts of revenue. So, part of what we're doing within our revenue and our overall EPS guidance, if you think about what we talked about Investor Day, Investor Day I talked about as being below our previous midpoint. I think when we look back to where consensus was, is below $3.50, $3.53, I think is what it was for the year. So, if you think about the only thing that's really happened since then is a little bit further decline in repairable claims than what we had expected. We were expecting about what we saw in Q2, which was around 7%, and now it's a little north of 9%. So, we're framing that out. And then, additionally, there's two hurricanes and a strike that happened. So, that's how we get, essentially, that $0.07 dropping from that roughly $3.53 consensus down to $3.45.

Got it. That's all I have. Thank you.

Thank you. Our next question comes from Brian Butler with Stifel. Your line is open.

Hi. Good morning. Thanks for taking the question.

Morning, Brian.

When you're looking at 2025 and you talk about macro pressures abating at some point, what gives you confidence? I mean what - is that this - that you will see some kind of abatement of the claims issue into 2025? And is that a second half of 2025, or is that kind of a first half? Just trying to get a sense of what you're thinking about from a perspective of timing on that.

Yes, Brian. I mean, on the repairable claims piece, as I talked about, it's really an output of how the insurance cost is affecting the consumers, whether that's in their premiums or whether that's a deductible that they may have raised, then relative to what that used car value is after that vehicle is fixed. I think we've seen, there might have been a couple increases with a couple months here and there, but we've almost seen two years of declining used car pricing. And so we kind of, and as we talk to people in the industry and outside of the industry, we kind of forecast that used car pricing at some point should moderate, hopefully in the back half of 2025, and start to show some improvement. As those used car values start to increase, it makes it more economical for consumers to repair their vehicles, whether it's from a collision or even general maintenance. And so we think overall some of that headwind of used car pricing should start subsiding, I would say, in the mid-2025 and start to show some improvements in the back half of next year.

Okay, that's helpful. And then on the free cash flow, you maintained it at $850 million for 2024. What capital spending is either being pushed out or foregone kind of to hit that $850 number? And how do we think about that, again, coming back online in 2025?

Yes, Brian, I can start off and take that. What I talked about, and I think it is important, cash is king, right? So if we look at $850 million, which is what we had all year long talking about our free cash flow, the team has done a tremendous job managing trade working capital. Trade working capital, the usage of our supply chain financing has been going up. The extension of terms. A large focus on trade working capital is the bulk of how we're able to achieve this, even with decline in overall EBITDA dollars. When you look at some of the CapEx items that we're pushing off, there's always a need for it, but we're saying, look, let's make sure that there's nothing that's going to impact our overall earnings, nothing's going to impact our growth. And so there's some of the things that you can delay for three months, six months, something like that, that we're looking at the overall returns. And keep in mind as well, when Justin came on, he looked at the hurdle rates, and he wasn't just talking about acquisitions or divestitures. He's looking at overall hurdle rates. So there's some items that just quite honestly don't pass the hurdle rate that we've got in there. And so there's been a little bit of a change of, look, if it's not going to pass the hurdle rate, there's a better use of our cash. And so that's the way to think of that. It's not delaying repairs or anything like that that would come and sort of increase the number next year because we've delayed it this year. It's more of, it just doesn't pass the hurdle rate, and it's a project that we're probably not just going to do.

Okay. Thank you.

Our next question comes from Gary Prestopino with Barrington Research. Please go ahead. Hi.

Hi, good morning, everyone. Justin, you mentioned that in Europe you reviewed 25 product categories, 425,000 SKUs, about 50% of what you want to do. Will this be completed by the end of 2024, and then you can start implementing changes that would benefit going into 2025?

Yes, Gary, we do not forecast that we're going to be completed by the end of 2024. Our expectation is, I mean, you're talking, obviously, hundreds of thousands of SKUs, and you need to understand the market dynamics of what those brands may, whether they're relevant in those markets or not, making sure that we have coverage by an application more so than coverage by a brand. We're projecting that the complete analysis will be done in early 2025, and we'll start to be able to make changes on our SKU, our stocking level of certain SKUs, and start to show some of those improvements, although small, in the back half of 2025. But it won't be done by the end of this year, but it should be done by the early Q1 - early 2025, okay.

Okay, and then just lastly, with the exit of operations in Poland and Bosnia, I mean, in Europe, do you have any other small operations that you're considering closing in these various countries, or are you basically done with all that with these smaller cats-and-dog operations?

Yes, Gary, our review of the portfolio is constant, ongoing. There are other smaller operations, both in North America and in Europe, that we're always analyzing. There may be some more on the horizon. Anytime we do investitures or something like that, my preference is just show you, don't tell you about it. So once again, our portfolio review is constant, ongoing, and we'll continue to look at that.

Our next question comes from Ryan Brinkman with JPMorgan. Please go ahead. Your line is open.

Hi, good morning. This is Jash Patwa on for Ryan Brinkman. Thanks for taking my questions. Justin, with industry headwinds weighing on top-line growth in the near term and visibility around recovery timeline seemingly low as of now in both North America and Europe, do you expect to see incremental acquisition opportunities in the market as relatively less sophisticated peers start to face the profitability front of these broader headwinds, especially given their lack of pricing discipline? Just trying to gauge if the current environment could provide a conducive environment for accelerated industry consolidation, and whether LKQ would be willing to lean incrementally into M&A if the opportunity arises. Thanks, and I have a quick follow-up.

Yes, I guess, I mean, mainly around the acquisition piece, we have definitely came out publicly and said we're not looking after any large acquisitions with the way our stock prices are now, we're heavily weighted towards share repurchase. There are acquisitions that we'll bring into the company, but these are smaller, synergistic, highly synergistic tuck-in acquisitions that bring returns in the mid-to-upper teens over a short period of time. Think of acquisitions where we may have a market that has three-step distribution. One of our customers is that wholesale distributor, and we can acquire that wholesale distributor that may be our customer and convert that market from three-step to two-step. So, there are some that are opportunities, and we've done some. We'll continue to look at those, but they're going to be small and highly synergistic.

I think just to add on to one of the things I heard you talking about was consolidation within the overall marketplace. One of the things with LKQ having so many acquisitions over the last 25 years, we're involved with a lot of the discussions, and there's not anything that we're overly concerned about or something that we're seeing that is a major change in the overall market conditions that we won't be able to combat with the footprint that we have and something we're pretty confident on. One thing, the line was a little bit shaky when you were talking. If there's anything that we missed on there, just let us know, and we can respond to that.

No, that's very helpful color, thanks for that, and I just wanted to get if you could give us an update on the Elitek diagnostics and calibration business, any color around how that business has scaled over the past couple years? How are you anticipating go-forward growth here, and how should we think about the scope and potential implications of the ongoing lawsuit with Repairify? Thanks.

Yes, on the Elitek piece, majority of our business there is mobile, where we actually have technicians going and augmenting body shops' work to make sure they can calibrate the vehicle and do technical repairs. That business was growing pretty strong for us for a while, but with the repairable claims coming down as we have, it's kind of given some extra free time to body shops, in some cases some of the MSOs, to figure out how to do it internally right now. That business is still strong, good margins for us. The growth has slowed down, but it's still growing. On the Repairify side, any once again, not much of our business is on the mobile I'm sorry, is on the remote piece, but we don't have any concerns with the IP on that case.

Great. Thank you.

And our next question comes from Bret Jordan with Jefferies. Please go ahead.

Hi, good morning, guys. On the working capital cash flow that you're seeing. Could you talk about sort of what inning you're at there and how much you'll see still available after you generate cash from working capital this year?

Yes, Bret, we've been seeing about a 10% improvement when we look at our overall trade working capital, particularly the payables as well as the supply chain financing. We're seeing that again this year. If I look at our European operations, we're up almost 12% versus year end on our supply chain financing program. I would expect we'd probably have another year or two to be able to go with those, and then it starts to weigh in. As far as the working capital goes, we're obviously making a really big push this year, especially with what's going on in the overall market dynamics, to drive free cash flow and make sure that we deliver on the free cash flow commitment that we made at the beginning of the year. And so the team's doing a tremendous job of doing that. I think we have a little bit more time to be able to enhance that going into 2025, and then it starts tapering off probably the back end of 2026.

Okay, and then I think in your prepared remarks, you talked about competition in Europe. Is that primarily GSF in the U.K., or is there other competition in other regional European markets? And could you maybe parse out dispersion in Europe? You called out Germany and U.K. as weaker. Was Benelux in Italy relatively stronger, or all in the same bucket?

I would say the worst economic ones were the U.K. and Germany, economic slowdown in the Benelux area. Going back to your comment on competition, I mean, obviously GSF is in the U.K. market, but we have competitors in every market for which we operate in. So anytime there's some of those headwinds or market dynamics, sometimes the smaller competitors react differently. But I would say every market, we have several different competitors that we compete with day in and day out.

Okay, great, thank you.

One thing, I think we're getting close to the end of the overall questions. One of the things that came in through a couple of the analysts, I just want to make sure we're there, in the effort of doing our simplification and simplifying our new document that we put out for the press release and then also for the earnings presentation, we did pull out gross margin by segment. Let me give that to you. That's something that we don't have a problem giving. I just have pulled it out of the overall document. So I know there's a couple of questions. Craig, I know you had mentioned that as well. In North America, we had 42.8%. In Q3, in Europe, we had 38.4%. In specialty, we had 26.0%. And then in self-service, we had 41.7%. So if that helps you guys with your models, I just want to make sure you have the data on the call.

And with that, it looks like we're going to wrap up the call. I want to give a huge shout out and a huge thanks to our over 50,000 employees for what they do every day. Our industry is facing challenges right now. It's not the first time. It won't be the last time. But I'm extremely proud of each and every one of our employees on how they reacted on the cost structure, how they reacted on making sure that we grew share or did not lose share. Our company, LKQ, with our size and scale and quite honestly, our winning culture, there's nobody that can beat us in the future. So huge thanks to the employees for everything that you guys do. And also huge thanks for all those that participated on the call today. We appreciate it. And we will talk to you guys on the next one.

Thank you. This concludes our call today. Thank you for your participation. You may now disconnect your line.