Good morning. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the LKQ Corporation's Fourth Quarter and Full Year 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.

[Operator Instructions] Thank you. Joe Boutross, Vice President of Investor Relations, you may begin your conference..

Thank you, operator. Good morning, everyone, and welcome to LKQ's fourth quarter and full year 2022 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Rick Galloway, our 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-K in the coming 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 full year 2022, and then Rick will dive into the financial details and discuss our 2023 outlook before I come back with a few closing remarks.

This month, we are celebrating the 25th anniversary of our company's founding in February 1998. What started with a few salvage facilities in the U.S. has grown to a Fortune 300 business with operations in 28 countries and over 45,000 employees, providing a wide array of aftermarket and recycled parts used to repair, maintain and accessorize vehicles.

Our operations are leaders in their respective markets and are well positioned to continue their success in the future. Getting to this point has been the result of the dedication of our past and present teams. And I want to express my sincere appreciation for all of these efforts.

I am excited to see what this team can deliver in the future, as the LKQ team is never satisfied, never rests on its laurels and has always pushing to be the best. When LKQ was founded, ESG was not the hot topic that it is today. But ESG has always been a vital part of our strategy.

Through our recycling operations, we are enabling the circular economy in doing our part to reduce waste. I am proud of our contributions to date and I can assure you that our emphasis on sustainability will continue to be an integral part of our mission. Our success in ESG is being recognized by external parties.

On December 05, 2022, MSCI upgraded LKQ to their highest ESG rating of AAA, placing LKQ in the top 5% of all companies that they rate globally. And on January 31 of this year, LKQ was included in Sustainalytics' 2023 Top-Rated ESG Companies list.

The fourth quarter of 2022 closed a year where the resilience of our businesses shine through a myriad of uncontrollable headwinds, ranging from economic softness, inflation, supply chain disruptions, labor shortages, energy cost spikes and a war in Europe.

From an operating perspective, the fourth quarter was a very strong set of results, and I could not be more proud of our team.

The continuation of exceptional organic revenue growth and strong margins in our North American wholesale segment, when combined with solid organic revenue growth and the highest fourth quarter EBITDA margins in the history of our European segment, offset the impact of the continued headwinds experienced in our Specialty and Self Service segments.

The January revenue trends are similar to the levels generated in the fourth quarter.

While the operations were collectively right on target with the guidance that we provided back in October, the annual tax provision was higher than anticipated, which drove a full year catch up in the fourth quarter and resulted in quarterly EPS at the low end of the guidance range. Rick will provide more detail on the tax provision in a few minutes.

Now on to the strong quarterly results. Revenue for the fourth quarter of 2022 was $3 billion, a decrease of 5.8% as compared to $3.2 billion in the fourth quarter of 2021, driven by FX translation and the divestiture of PGW. Parts and services organic revenue increased 4.5% on a reported basis and 5.9% on a per day basis.

The net impact of acquisitions and divestitures decreased revenue by 3.1% and foreign exchange rates decreased revenue by 6.1%, for a total parts and services revenue decrease of 4.8%. Other revenue fell 20.1%, primarily due to weaker commodity prices relative to the same period in 2021.

Net income in the fourth quarter was $193 million as compared to $235 million for the same period in 2021. Diluted earnings per share for the fourth quarter was $0.72 as compared to $0.81 for the same period last year, a decrease of 11%.

During the quarter, we had an unfavorable $0.15 year-over-year impact related to the higher-than-anticipated tax rates. The tax rate was also higher than anticipated during our third quarter call, which generated an unfavorable $0.05 effect on adjusted diluted EPS relative to our guidance.

On an adjusted basis, net income in the fourth quarter was $209 million as compared to $254 million for the same period of 2021, a decrease of 17.5%. Adjusted diluted earnings per share in the fourth quarter was $0.78 as compared to $0.87 for the same period of last year, a decrease of 10.3%.

Net income for the full year of 2022 was $1.14 billion as compared to $1.09 billion for the same period last year. Diluted earnings per share for the full year of 2022 was $4.11 as compared to $3.66 for the same period of 2021, an increase of 12.3%. Please note that 2022 results include the gain on sale of PGW.

On an adjusted basis, net income for the full year of 2022 was $1.1 billion. That's compared to $1.2 billion for the same period of 2021, a decrease of 9.4%. Adjusted diluted earnings per share for the full year was $3.85 as compared to $3.96 for the same period of last year, a decrease of 2.8%.

Adjusted earnings exclude the gain of the PGW sale but include the impact of the higher tax rate. Now let's turn to some of the quarterly segment highlights.

As you will note from Slide 12, organic revenue for parts and services in the fourth quarter for our North American segment increased 10.3% on a reported basis and 12% on a per day basis compared to the fourth quarter of 2021.

We continue to perform well in North America especially when you consider that according to CCC, collision liability related auto claims were down [0.9%] (ph) year-over-year in the fourth quarter.

Looking back at our performance through the financial crisis, from 2008 to 2010, our North American business grew organically at an average of 7.5%, which drove the alternative part usage rate, or APU rate, above its historical annual growth rates.

As we enter 2023 and face the reality of a global recession, our alternative parts offerings clearly become more attractive during these challenging economic periods. We are also encouraged by the trend in parts per repair, which reached an all-time high in 2022.

Important to note is that our sweet spot has expanded and today stands at model years four to 15 years of age. All these items combined positions North America well for continued organic growth in 2023.

The upward trend in our aftermarket sales volumes and the ongoing improvement in our fill rates continued in the fourth quarter with fill rates reaching their highest percentage levels in 2022, and today stands at close to the pre-pandemic level of 93%.

Importantly, as the supply chain recovered and fill rates increased, the entire industry realized a 220-basis point improvement in the aftermarket percentage of APU, taking share back from the OEs as we progress throughout the year. The supply chain has stabilized and our inventory is generally where we want it to be.

The main issue we are confronting today are continued delays at some of the railheads due to congestion. As many of you know, on December 7 of last year, State Farm announced that they are rolling out expanded non-OEM collision repair parts to use in most of the United States.

We are excited the State Farm is embracing the aftermarket value proposition that the industry offers, which will ultimately benefit the end consumer. We continue to actually analyze this opportunity and we are well positioned to compete for our fair share of this opportunity and have built our inventory appropriately to do so.

Our salvage inventory is also healthy and we saw some relief on our cost per vehicle during the quarter. The salvage business had solid organic growth, largely driven by price, but as we entered December, we witnessed an upward trend in our salvage volumes. Total loss rates increased a bit in the fourth quarter, which were largely seasonal.

And as you can see, it had no impact on our organic growth. These slightly higher loss rates played a role in our ability to source the right level of inventory at auction at attractive prices. As we have stated before, fluctuations in loss rates are largely net neutral events for LKQ. Moving on to our European segment.

Europe organic revenue growth of parts and services in the quarter increased 4.6% on a reported basis and 5.8% on a per day basis, which represents the best fourth quarter per day organic revenue growth since 2016.

I'd also like to highlight that Europe's segment EBITDA margin was the highest fourth quarter level since entering the European market in 2011. On a full year basis, Europe's performance is another year of double-digit segment EBITDA margins, which is consistent with our 1 LKQ Europe initiative and strategy.

Rick will cover more margin details in his prepared remarks. Throughout the quarter, our European team was laser-focused on the cost structure, including rationalizing headcount to create a more nimble and agile team and focusing our team on a narrow and actionable list of key projects.

These projects represent the highest return opportunities that the team can execute in the near term, further cementing the long-term resiliency and market leadership of our European segment. On February 1, LKQ Europe announced that it expanded its European salvage network with the acquisition of Dutch-based Rhenoy Group.

Founded in 1991, Rhenoy is a leading supplier of remanufactured engines and recycled OEM car parts. Rhenoy operates a salvage dismantling facility in the Netherlands and remanufacturing plants in both the Netherlands and Poland. As you know, the roots of our company lie in the dismantling of salvage vehicles to recycle OEM parts.

As part of our European strategic plan, we intend to capitalize on that history and knowledge, coupled with our remanufacturing capabilities, to grow our salvage network across our European footprint. And with this tuck-in acquisition, we take one small incremental step towards that objective.

I want to congratulate our STAHLGRUBER team on their 100th anniversary and commend them for building a resilient and market-leading business that continues to demonstrate an ability to adapt to the ever-changing independent aftermarket. A century since founding brothers Otto and Willy Gruber started the business.

Today, the STAHLGRUBER business continues its history of embracing change, which positions them well to capture further opportunity as the car park shifts towards EVs and other forms of mobility. We can't wait to see the next -- what the next 100 years brings for STAHLGRUBER. Now let's move on to our Specialty segment.

During the fourth quarter, Specialty reported a decrease in organic revenue of 10.6%. Throughout 2022, Specialty was up against tough 2021 comparisons in the midst of decreased demand for certain key RV parts and a slower-than-expected recovery in U.S. light vehicle sales.

Looking at the Specialty segment on a multi-year basis, since 2019, Specialty has generated approximately a 4% compound annual growth rate for organic revenue, outperforming the industry growth of SEMA and RV-related products.

A few Specialty operational highlights would include that Specialty continued to realize the full benefits of the SeaWide synergies, which exceeded our expectations in dollars and operational execution. And Specialty won O'Reilly's 2022 [Top] (ph) Supply Line award for the third year in a row. Now onto our Self Service segment.

Organic revenue for parts and services for our Self Service segment increased 4.8% in the fourth quarter. Self Service was again challenged by commodity pricing as seen in the material decline of other revenue which impacted our expectations for the quarter. On the corporate development front, the fourth quarter was fairly quiet.

While we did not complete any material transactions during the quarter, our corporate development team is actively assessing various opportunities that exist across our operating segments.

As the global economies continue to soften, that may lead to multiple compression and we are well positioned to execute on synergistic acquisitions that fit our strategic objectives.

Outside of Q4 corporate development efforts, I am pleased to announce that this past January, we entered into a memorandum of understanding with Korea Zinc Company Limited, a world-class general non-ferrous metal smelting company.

Under the memorandum of understanding, we will work towards a potential large scale joint venture related to the recycling of lithium-ion EV batteries in the United States. This is again evidence that we will continue to strategically position the company to adapt to and seize the longer-term opportunities that exist in the ever-changing car park.

Turning to ESG. During the fourth quarter, we continued to build out our ESG program by focusing on our people efforts and various social initiatives. Here are a few worth noting.

Every colleague employed by LKQ ELIT Ukraine for at least six months received a one-time hardship payment to support pain for energy and the general increase in the cost of living owing to the Russian invasion. Our U.K.

and German operations also implemented one-time hardship payments to support our employees in those markets given the state of the overall European economy. We initiated a voluntary daily pay benefit in the United States that allows our employees to access a portion of their earned pay on demand.

The company implemented this benefit with the financial wellness of our people in mind.

And we launched our first employee inclusion group, the LKQ Veterans Network, a program that embraces our proud community of employee veterans and veteran allies who support and encourage each other to share experiences, veteran recruitment, career development, outward engagement, professional growth and retention.

In 2022, our North American salvage operations continued our leadership as the largest recycler of vehicles by processing over 753,000 vehicles, resulting in, among other things, the recycling of approximately 3.6 million gallons of fuel, 2.2 million gallons of waste oil, 2 million tires, 700,000 batteries and approximately 955,000 tons of scrap metal.

The end result of these efforts resulted in nearly 13 million recycled and repurposed parts being sold into the collision and mechanical repair shop industry that otherwise would have ended up in landfills. Let's turn to the inflationary environment, again a key item of interest for most listeners on this call.

As I discussed this time last year, we expected inflation to be a headwind throughout 2022 and that expectation became a harsh reality all year across each of our segments.

Fortunately, we are beginning to see some moderation with inflation in the U.S., and recently we witnessed the rate of inflation drop for the last three months in a row across the Eurozone. Eurozone inflation stood at approximately 8.5% in January, down from October, where it was almost 11%.

Despite this drop, many of our key operating markets continue to face high inflation rates with certain countries running in the high-single to low-double digits. In the U.S., the labor markets continue to be strained and unpredictable in the midst of higher interest rates and mounting fears of a recession.

Daily we read about high profile layoffs, yet new claims for unemployment benefits remain at a historic low. As of late, wage inflation is beginning to slow and certain areas of our business are seeing reductions in turnover.

But these reductions are not material and we are far from out of the woods, but it is validation that our retention and employee engagement programs are gaining traction. Our engagement efforts aren't simply an HR mandate. They are programs that stretch across all levels of the organization and are a key component of our culture.

Our global engagement score of 74 is significantly above the average for companies of our size. Studies have shown that employees who are engaged are 14% more productive and that companies with engaged employees are 23% more profitable than those with disengaged employees.

So, from a business perspective, positive employee engagement is critical, but importantly, it's the right thing to do for our most important asset, our people.

Lastly, before I turn the discussion over to Rick, who will run through the details of the segment results and discuss our outlook for 2023, I am pleased to announce that on February 21, our Board of Directors approved a quarterly cash dividend of $0.275 per share of common stock payable on March 30, 2023 to stockholders of record at the close of business on March 16, 2023..

headlights, taillights and bumper covers. We are projecting full year adjusted diluted EPS in the range of $3.90 to $4.20, with a midpoint of $4.05. This is an increase of $0.20 or 5% at the midpoint relative to the 2022 actual figure. Looking at Slide 7 in the presentation, you can see how we get from the 2022 actual EPS to our 2023 guidance.

Operating performance is expected to generate growth of $0.24 relative to the 2022 results, mostly related to Wholesale North America from volume growth and Europe due to margin improvement.

We do expect a continuation of challenging conditions for Specialty from softening demand for RV-related products and Self Service related to commodity prices and input cost inflation. Share count benefits are projected to add $0.10 to the full year 2023 EPS over and above the share count benefit associated with the deployment of our PGW proceeds.

Note that there are no share repurchases assumed for 2023 in this figure. This amount reflects the carryover benefit from 2022 purchases. So, we're expecting very solid improvement on the operations side in 2023, which will drive year-over-year growth despite some non-operational challenges.

The exchange rate benefit is nominal and is offset by softening in metals prices. The PGW divestiture creates a $0.02 headwind, reflecting the net reduction caused by lost profits, partly offset by the share count benefit generated from the redeployment of proceeds into share repurchases.

Interest is projected to be a significant cost increase with our weighted average borrowing rate on variable rate debt having already risen from close to 1% in 2022 to about 4% by year-end. We anticipate an additional $0.13 in interest expense in 2023 on a year-over-year basis due to higher average market rates.

We have included an effective tax rate of 26.3% in the 2023 guidance, roughly in line with the final 2022 rate. We expect to deliver approximately $975 million of free cash flow for the year, achieving 55% EBITDA conversion to free cash flow despite a few key headwinds.

As seen on Slide 8, we expect to produce incremental cash flows relative to 2022 from operations, including increased profitability and trade working capital improvements to counteract the following uses of cash.

First, as mentioned previously, we underspent on capital expenditures in 2022, including equipment delays, and expect to see an increase of approximately $78 million relative to the prior year. Second, the higher interest rates will require increased cash payments for interest expense, which we are currently projected at roughly $50 million.

Third and final, we anticipate increased tax payments of $60 million due to profitability increases and the timing of payments. Thanks for your time this morning. With that, I'll turn the call back to Nick for his closing comments..

Thank you, Rick, for that financial overview. In closing, 2022 was another banner year for our company and again validated the strength of our strategy, our business model and, most importantly, our people. Let me restate our key strategic pillars, which continue to be central to our culture and objectives as we've entered the new year.

First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive high levels of cash flow, which in turn gives us the flexibility to maintain a balanced capital allocation strategy.

And fourth, we will continue to invest in our future. With these pillars in place, coupled with our industry-leading teams, we are well positioned to both face the challenges the new year presents and to continue to deliver positive year-over-year operating results for our shareholders.

As always, I want to thank the over 45,000 people who work at LKQ for all they do to advance our business each day and for driving our mission forward regardless of the challenges. Time and time again, our teams have shown that these challenges are opportunities for growth, both for themselves and for the overall organization.

And with that operator, we are now ready to open the call for questions..

[Operator Instructions] And your first question comes from the line of Craig Kennison from Baird. Your line is open..

Okay, thanks, and good morning. I wanted to ask about your recycling business in Europe after you've acquired Rhenoy.

I mean, I know it's not large in the scheme of things, but perhaps you could just update us the recycling footprint you have today in Europe and whether the time is right to maybe make a bigger push, build something like your North American auto recycling business now in Europe?.

Yes. Good morning, Craig, and thanks for the question. So, for many years, we've had an operation in Scandinavia, in Sweden. We call it Atracco. It's been operating quite well for quite some time. It's not a huge business. But it is a nicely profitable business.

And we started in Scandinavia, and particularly Sweden, because that recycling market looks the most like the U.S. market, when you think about how the insurance companies participate in the industry and the utilization of recycled parts. And so that was our beachhead if you will. And it's proven to be a very nice investment.

Obviously, Rhenoy is our maiden voyage on to the continent. And we anticipate that there will be incremental opportunities to expand the footprint. The recycling business in Europe, generally speaking, is different than in the U.S. It is largely driven by the commodities as opposed to parts sales.

And as you know, as a distributor of parts, we're more focused on the parts side and the commodity side. And so, it's going to take some time for the European market to shift. There are some regulatory changes going on in Europe as it relates to the circular economy and utilization of green parts.

We think this is going to be a good time to slowly kind of build up our presence. We've got a boatload of intellectual capital here in the U.S. We think it's going to be a good time to extend that to the other side of the Atlantic. But it's going to be a slow process, Craig. You should not expect any major shifts over the next year or two or three.

But we think we're incredibly well positioned to expand our footprint on the recycling side in Europe. And it's all a matter of finding the right businesses to acquire, the right management teams, the right values, the right environmental practices, but we're optimistic that there'll be more tuck-ins like Rhenoy as time unfolds..

Thank you..

Your next question comes from the line of Scott Stember from ROTH MKM. Your line is open..

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

Good morning, Scott..

Can you talk about State Farm? What you're seeing? Early experiences? How fast it's ramping up? And then, also are you hearing anything about State Farm potentially expanding past the two or three SKUs that they're currently using right now?.

Yes. So, State Farm made their announcement just in December. It's not like going over to the wall and flipping the switch, right? You have a couple of decades of history of repair shops being kind of driven into [their head] (ph) that State Farm did not use aftermarket parts. And so, it's going to be a slow transition.

Our volumes of those three-part types on State Farm claims is moving up. And so, we think that it's on track for -- to hit the overall opportunity for 2023. I think we quantified that in our last call as being under $100 million. We've had one month, right, January, under our belt.

If you kind of extrapolate that out, we think that they're going to continue to push their new policy throughout the marketplace, but it can take a little bit of time to get up to kind of full speed..

Got it. And then, just a follow-up....

There is no indication at this point in time, but again, we're not -- but -- what, sort of 45 days after the announcement that they're going to extend the program to new product types. That's certainly our hope. We think that is the logical thing to do, but we thought that was the logical thing to do for the last 20 years..

Got it. Well, clearly in a better spot than we were 10 years ago. So....

Absolutely..

And just if I could just slip one last question in Europe. I don't know if you gave granularly detailed by market. But what are you seeing -- the countercyclical benefits of the aftermarket -- or the mechanical parts aftermarket starting to kick in? Maybe just give us a little color there..

Yes. So, as Rick and I both indicated, organic growth in Europe in the fourth quarter was a little bit over 5% on a per day basis, on a same day basis, which was terrific.

Every single one of our markets was up nicely and either in and around that mid-single digit range with the exception of one business, which is, we call, components business on a year-over-year basis, that was still negative, because that's the business that used to sell into Russia.

And if you recall, we shut every single element of that down the day that proven they rolled tanks over the border. And so, on a year-over-year basis, that volume has just gone. But all the geographic platforms showed really good organic growth in the fourth quarter..

Got it. Thanks, guys..

Your next question comes from the line of Bret Jordan from Jefferies. Your line is open..

Hey, good morning, guys..

Good morning, Bret..

Good morning..

You called out strength in alternative parts utilization in North America.

Is that a tailwind from OE certification programs or what they're doing in collision on the OE side driving prices up to the point where it forces more alternative parts utilization, or what do you see as the tailwind of that mix?.

Well, we believe that in the fourth quarter, the biggest part of that tailwind is that the aftermarket, including ourselves, by far the largest player, we actually had inventory to sell. As you recall, we had supply chain challenges coming out of 2021 into 2022 and our fulfillment rates, because of that, were down.

I mean, historically, we've been in this the mid-90% range. And as we indicated in prior quarters, we're down into the low to mid-80%-s, right? The fact that we actually have the inventory need to be responsive to customer demand is the primary reason the whole aftermarket industry was able to grab over 2 percentage points of share back from the OEs.

And we think that -- and we're very proud of that. Obviously, we're the largest player in the aftermarket parts space. We're charging hard to take share, not just from the OEs, but from our smaller competitors as well..

Okay, great.

And then, on the recycling of batteries in North America, the partnership you talked about, can you give us a little more detail sort of is that something that you use your existing infrastructure? And obviously, not a lot of batteries in the vehicle park yet, but where do you see that being a contributor?.

Yes, this is not a play for 2023 or even 2025, perhaps this is a 10-to-15-year play, right? And what, ultimately, we believe is it's pretty well documented that there's not enough lithium being mined to produce all these batteries that are going to go on the EVs that folks are anticipating going to be on the road.

And so, recycling the key elements out of existing EV batteries can become critical. We don't have the technology to do that. We recycle parts, but we don't know how to recycle chemical elements, right? But that's where Korea Zinc comes in.

I mean, they are truly a world-class organization when it comes to reclaiming and recycling all sorts of various non-ferrous metals. And we believe that's a combination of their ability and process technology on the one hand was our ability to source cores and batteries on the other hand is a -- it could be a great partnership.

Now, it's a memorandum of understanding, right? It's not a joint venture yet. The goals over the next couple of years to figure out and work together to develop a plan that could be profitable for both companies. But it's moving us into the next generation of mobility and we're very excited about it.

And we think Korea Zinc will be a terrific partner for us..

Great. Thank you..

[Operator Instructions] Your next question comes from the line of Brian Butler from Stifel. Your line is open..

Good morning, guys. Thank you very much for taking my questions..

Good morning, Brian..

Just on the first one on the guidance. When you think about the $975 million in cash flow, I mean, it sounds like that's kind of the minimum. And if you were to try to back up into an EBITDA number using the conversion of the 55% to 60%, that kind of puts you at $1.77 billion, kind of just under 13% margins.

Is that kind of the right way to think of the low end of EBITDA?.

Yes. So, we -- the way we're looking at it -- thanks for the question. The way we're looking at it is 55% is the minimum of where we're sort of guiding on the conversion piece of it.

So, as we're driving into this thing, the mix between what happened year-over-year in the earnings with the interest payments, the tax payments coming down and the capital expenditures, I would -- I think we've got a gap, call it, 50 plus or minus, we kind of gear right in that range. That's where I would kind of look on the free cash flow piece.

And then, backing into that, we've guided 55% to 60%. We think that's a pretty reasonable approach, where we hit the 60% in the prior year 2022, bringing that down a little bit with the CapEx expenditures in 2023 is how we end up getting to that $975 million..

Okay. But just think -- I mean, again, just kind of backing it into trying to guess on the EBITDA, I mean, as that gets to the 60%, you would expect the EBITDA to also be higher as well.

Is that a fair way to look at it?.

Yes, that's a fair way. Yes..

Okay. And then, on a follow-up question. When you think about the CapEx, the additional spend that kind of move from 2022 into 2023, I mean if you kind of even that out over the two years, you kind of were at $1 billion based on your guidance....

That's exactly....

It will be about $1 billion guidance. So....

Yes, that's exactly [indiscernible]..

Okay. Great.

Can you give a little color just kind of on what drove that? And then, maybe kind of what's the right way to think about CapEx on a longer-term basis?.

Yes. So we look at 2% of revenue, 2% to 2.25% of revenue is usually the kind of guide that we've given. We have 1.75%, I think it was 1.77%, something like that in 2022 as things pushed out, primarily trucks, equipment pushed out with the supply chain issues.

And then when you think year-over-year, we're right in that 2% range that we've been kind of guiding to. So, there may be ebbs and flows back and forth between different years, but that 2% to 2.25% is the right way to look at it..

Okay. Perfect. And then, just last one.

Is there any risk on the inventory build at Specialty, if cars kind of that market, that demand remains soft, is that something we should be watching?.

No, I don't think so. So, we have a traditional build throughout the year, and we ended up decreasing that a little bit and then driving that down toward the end of the year to end up virtually flat year-over-year on overall inventories, and it's something that we're watching very closely with the demand.

And so, nothing to be concerned about in that area..

Okay. Great. Thank you for taking my questions..

Your next question comes from the line of Daniel Imbro from Stephens. Your line is open..

Hey, good morning, everybody. Thanks for taking our questions..

Good morning, Daniel..

Nick, I want to start on the European side. I think at the end of your prepared remarks, you talked about Europe having some specific projects they're working on.

Can you provide some more color just around what those are? Is that just the growth in the collision parts? Are there other costs projects that Varun and the team are working on? Any kind of quantification as we think about potential margin impacts from those initiatives?.

The answer, Daniel, not to be snide, but the answer is yes, right? We've got a number of different projects over in Europe. Rick mentioned restructuring, the 2022 restructuring plan, that hits all of these segments, including the European segment.

It's part -- folks should think about restructuring at LKQ as part of our continuous improvement plan that every year, we're looking to find ways to optimize our business and to get excess cost or better throughput and efficiency from each of our operations.

And so, yes, there are some restructuring plans over in Europe, just like North America and Specialty. We're looking at programs to continue to drive organic revenue growth, particularly volume growth. And Varun and the team are focused on some key programs there.

They pulled in headcount a little bit, particularly at the kind of at the head office level, not just in Zug, but across the operating platforms as well, just to make sure that our administrative costs are aligned with the realities of 2023 and the economic climate.

So, it's a number of different initiatives, Daniel, none of which we're going to put a pinpoint as to what it means from a euro or dollar perspective, but it's all with the goal of continuing to drive organic revenue growth and better margins.

And as I think Rick indicated in his prepared comments, we're anticipating that the margins in Europe will....

20 basis points to 30 basis points..

Will go up by 20 basis points to 30 basis points in 2023. And that's been included in the guidance that Rick set out..

Great. That's helpful color. And then, I wanted to just circle back on the potential battery remanufacturing JV.

If you take a step back and just think about how State Farm handled the aftermarket after one accident 20 years ago, I mean, have you guys talked to the insurance companies? Do you think that they're actually going to reinsure remanufactured EV batteries? Or if there's one accident, does that become a category that insurance companies just won't touch because of the liability? Just trying to think through what the actual end market could be there.

Can insurance companies actually do that?.

Yes. So, Daniel, you need to separate the collision business from the mechanical repair business. And the EV batteries, what we're doing right now with Bumblebee and Green Bean, the two companies that we bought over the last year or so that remanufacture batteries, that has nothing to do with the collision business.

That just has to do with the failure of the batteries and the life batteries to extend the life of the vehicle, okay? The memorandum of understanding on recycling with Korea Zinc, again, has nothing to do with remanufacturing. That is truly a recycling to get to the core elements that are inside that EV.

And so, you need to keep -- there's a big difference between remanufacturing and recycling. Recycling, there's not a battery left to go back into another vehicle, right? Remanufacturing is where we truly look at the battery, we replace certain cells. That is not an insurance-driven profit.

If you have a nine-year-old EV and your battery is failing, you're not going to get reimbursed a nickel from your insurance company to go replace that battery. That's going to be an out-of-pocket expense..

Got it. So, this is more on the -- it's on the mineral extraction or kind of recycling side, the potential....

Yes..

Okay. That's helpful. Thanks, guys..

Yes..

There are no further questions at this time. Mr. Nick Zarcone, I turn the call back over to you for some final closing remarks..

Well, as always, we greatly appreciate everyone's time and attention on this call. We know it's a busy reporting period, and we appreciate you spending the hour with LKQ. Again, I couldn't be more proud of our team and the results that we posted up not only in the fourth quarter of 2022, but the full year as a whole.

We're looking forward to being back on line with you in about, I don't know, 60 days or so, in late April, when we announce our first quarter results. So, thank you for your time, and we'll be talking to you soon..

This concludes today's conference call. Thank you for your participation. You may now disconnect..