LKQ Corporation (LKQ) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation First Quarter 2021 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 the call over to Joe Boutross, Vice President of Investor Relations. You may begin your conference.
Joe Boutross: Thank you, operator. Good morning, everyone, and welcome to LKQ's first quarter 2021 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer.
Nick Zarcone: Thank you, Joe, and good morning to everybody on the call. This morning I will provide some high level comments related to our performance in the quarter, and then Varun will dive into the financial details, including our banner margin and free cash flow performance, as well as our improved 2021 outlook, before I come back with a few closing remarks. Wow, we've come a long way over the past 12 months. A year ago at this time, the threat of the pandemic had become a tremendous and painful reality. Immediately, our teams got into action with a key focus across the entire organization to right-size the cost structure and maximize cash flow. In order to adjust to this new paradigm, our teams had to make some very difficult decisions to protect the long-term health of our company, and in the past three quarters have proven our ability to reset the cost structure of LKQ. Our global leadership team firmly believed we would come out of the pandemic period stronger and a better organization, and our performance this past quarter absolutely confirms that belief. Let me restate our key initiatives, which continue to be central to our culture and our objectives. First, we will continue to integrate our businesses and simplify our operating model. 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 will give us the flexibility to maintain a balanced capital allocation strategy. And finally, we will continue to invest in our future. As you can see from our results, our segment teams executed on each of these initiatives in the first quarter.
Varun Laroyia: Thank you, Nick, and good morning to everyone joining us today. We entered 2021 with strong momentum coming off the two highest quarterly results in the company's history, the third and fourth quarter of 2020. This morning, I'm pleased to report that we were able to build on that momentum in the first quarter and take advantage of some tailwinds to produce yet another record quarter. As we've said repeatedly over the last year, we can't control when revenue growth will return to pre-COVID levels. However, we are able to manage our costs and have focused on right-sizing the cost structure and emphasizing efficiencies so that we can generate operating leverage when revenue growth returns. The permanent cost reductions that we enacted in 2020 continue to drive year-over-year profitability growth and encouragingly, we got an additional boost in the first quarter as we were able to support the sequential revenue growth across all our segments without adding back costs at the same rate. Our SG&A expenses as a percentage of revenue showed this operating leverage, dropping to 26.8% in the quarter or 320 basis points better than Q1 of 2020. We were also able to improve our gross margin by being disciplined on pricing to ensure that our strong inventory availability and service levels were recognized in the industry. We believe that these operational strengths are sustainable going forward and will drive our results as the recovery picks up pace, as expected in the second half of the year. We saw this transpire in the month of March as rebounding economic activity generated healthy revenue growth and cost controls limited the amount of incremental expenses which resulted in the highest monthly profitability in the company's history. I mentioned the benefits of tailwinds in the quarter and commodity prices were most certainly significant. As you can see on Slide 20, scrap steel and precious metal prices, which have been mostly favorable over the last year, provided additional benefits in the quarter. We estimate that scrap steel and precious metal prices added roughly $34 million in segment EBITDA, which will translate into about $0.08 in adjusted diluted EPS relative to the prior year. We expect that commodities will be a net benefit in the short term, although likely at a lower level than Q1 as cost continue to rise, owing to the commodity price changes and further moderate in the second half of the year. Even with the tailwinds related to commodity prices, the larger share of the year-over-year increase in adjusted diluted EPS related to pure operating performance. I'll now turn to that operating performance with our segment highlights. Starting on Slide 10, North America produced its highest segment EBITDA margin in the company's history at 19.9%. Q1 is the third consecutive quarter that we've been able to make the statement, and is truly a testament to the resilience of the business and the management teams’ swift and decisive actions during the early days of the pandemic. This segment continued to benefit from ongoing gross margin initiatives and the specific permanent cost reductions executed in 2020. Additionally, the commodity pricing benefits I mentioned are seen here, helping to drive North America margins above our long-term expectation. As seen on Slide 11, Europe reported a 9.6% segment EBITDA margin, which represented a 390 basis point improvement over last year. We remain confident in our ability to deliver on the margin goal communicated last September at our Investor Day and reaffirmed in February following fourth quarter earnings. Europe is benefiting from the revenue recovery and cost containment actions taken last year, with more anticipated on both fronts. Moving to Slide 12, as Nick described, the specialty results are truly outstanding. We are super excited about the spectacular revenue growth and we're really pleased with the way the segment team has delivered the growth without adding back significant operating costs or sacrificing gross margin. The segment EBITDA margin of 13.4% is the highest Q1 results in the segment's history by approximately 150 basis points, and reflects the leverage benefit achieved in a period of rapid growth and the discipline to pursue profitable revenue growth. We talked last year about the shift to an emphasis on operational excellence. And our first quarter results provide further evidence of this mindset taking hold. Each segment’s disciplined execution of our strategic priorities has been excellent. We are also delivering meaningful savings from our focus on the capital structure, deploying free cash flow to debt paydowns and share repurchases, generated interest expense savings and an EPS benefit from a reduced share count. We estimate that these two factors added $0.02 per share to our Q1 '21 results. Additionally, Mekonomen's solid performance and other investment income generated another $0.03 of year-over-year growth. Given the improved expectation for full year profitability, we decreased our projected effective tax rate in our outlook from 28% to 26.5%. The reduced rate relative to 30% rate used in Q1 of last year contributed approximately $0.025 of the year-over-year EPS growth. So to recap, our adjusted EPS of $0.94 is a $0.37 increase over Q1 of 2020. The commodity benefit along with the increases attributable to investments, the tax rate, our capital deployment and a slight tailwind from foreign exchange produced approximately $0.16 of that improvement. The remaining $0.21 comes from our operating performance, focusing on profitable revenue growth, enhancing gross margins and controlling our overheads. And that should be the key takeaway when considering our Q1 profitability. Now onto cash flow and liquidity. Q1 was yet another successful quarter for cash flow generation. As shown on Slide 13, we delivered 523 million in operating cash flows as we continue to benefit from the trade working capital programs we've been driving since 2018, as benefits from payables more than offset the seasonal growth in receivables. We expected inventory to be a larger outflow in Q1, though ongoing supply and delivery challenges exacerbated by ocean freight challenges have pushed the build to later in the year. Despite the lower than anticipated inventory level, our teams with the support of our vendor partners skillfully ensured that the right parts with the right places and thereby minimize stock out issues so that our class leading full rate were maintained. CapEx cash outlays were 42 million, resulting in free cash flow of $481 million. We used this cash to repay 83 million in debt and repurchased 57 million in LKQ stock. We also built our cash balance mostly in Europe in advance of the early redemption on April 1, which was the earliest possible redemption date of our €0.75 billion Euro Notes due in 2026. We used a portion of the cash on hand to fund the redemption and grew the remaining amount on our revolving credit facility. The redemption replaces the Eurobond with a coupon of three and five-eighths with credit facility borrowings approximately 250 basis points of lower cost. Do note that we had already anticipated the redemption and the resulting interest savings in our original earnings outlook provided in February. On Slide 15, you can see the further progress we have made to strengthen our liquidity position. Our net leverage ratio has decreased to 1.4x from 1.9x at the end of 2020, owing to a strong profitability and cash flow in the first quarter. We believe that we are very well positioned in our stated pursuit of an investment grade profile. We're also pleased with the positive developments on this objective, with both S&P and Moody's upgrading our credit rating in the first quarter. I will close with our updated thoughts on 2021. With the ongoing COVID uncertainties, especially concerning revenue trends, we are providing an abbreviated outlook. We are comfortable making the following statements, all of which presume that one, additional mobility restrictions beyond what are currently in place are not re-implemented or exacerbated in our major markets; two, foreign exchange rates hold near recent levels. And finally, three, scrap and precious metal prices trend lower in the second half of the year. With that on revenue, we reaffirm our belief that parts and services revenue will be higher on a full year basis in 2021 versus 2020, with the most significant growth coming in the second quarter, albeit of a low base. We anticipate that the revenue recovery will continue in the second half of the year, as vaccines are distributed more broadly and mobility restrictions decrease, but we do not currently expect to return to our 2019 annual revenue until 2022. As discussed previously, we have two fewer selling days in North America in 2021, with one already completed in Q1 and the second one in the fourth quarter, while Europe is flat with one fewer selling day in the first quarter, but made up in the second quarter with the additional day. The other piece I want to talk about was earnings per share. And with our strong first quarter performance, projected revenue growth and the ongoing benefit of our margin and operating expense programs, we expect our 2021 adjusted diluted earnings per share will be significantly above the comparable figure for 2020. We are projecting an adjusted diluted EPS range of $3.00 to $3.20 with a midpoint of $3.10. On a GAAP EPS basis, this would be $2.68 to $2.88. The $0.35 or 13% increase at the midpoint reflects the Q1 outperformance and upside in the projected results for the last nine months compared to our prior outlook. We expect to achieve this upside while covering the effects of inflationary pressures being faced across the industry related to labor costs, ocean and domestic freight expenses and higher input costs, raising inventory prices. And finally, on cash flow, we are indeed off to a terrific start on cash flow generation in Q1, which gives us the confidence to raise our minimum free cash flow expectation. We now project that free cash flow for the full year 2021 will be within the range of $850 million to $950 million, with a midpoint of $900 million. We expect inventory purchases to represent an outflow over the remainder of the year, as we replenish our inventory levels to support the anticipated growth. Essentially, it is just going to happen later in the year than we had previously anticipated. Some of the investments in inventory will be offset by continued improvements in days payables resulting from the European payables optimization program, which is producing benefits and tracking well in line with the target we've set out in September 2019, when we initially launched the 1 LKQ Europe program. So with that, thank you once again for your time this morning. And I'll now turn the call back to Nick for his closing comments.
Nick Zarcone: Thank you, Varun. As a company, we are always focused on financial performance. But we are equally focused on facing change head-on and rapidly adapting in order to continuously deliver positive results for our stockholders, employees, and most importantly, our customers. In the first quarter, our team of nearly 44,000 employees globally maintained that focus, which again allowed us to deliver positive results above expectations. I am very proud of our team and the outstanding results we posted in the first quarter of 2021. And with that operator, we are now ready to open the call to questions.
Operator: Thank you. . Your first question comes from Stephanie Benjamin of Truist. Your line is open.
Stephanie Benjamin: Hi. Good morning.
Nick Zarcone: Good morning, Stephanie.
Varun Laroyia: Good morning, Stephanie.
Stephanie Benjamin: My first question is just on, as you pointed out, both Nick and Varun, just the impact from this inflationary environment. I think you called out some levers that you can pull, including pricing. I'd love to get an update on any pricing actions that may have been implemented in the first quarter and just overall customer response, and as well as maybe hearing a little bit more on some of those other levers that you can pull just given the environment. And then I just have a quick follow up.
Nick Zarcone: Thanks, Stephanie. And the reality is, we're operating in an unusual environment. And volumes in our North American and European businesses are okay, they're not great, but they're okay. And they're still constrained relative to 2019. But as Varun indicated, we've been very disciplined on the pricing front. And there's no need to give away products at discounted prices, particularly in those cases where we're the only supplier that may have the product. So we've been very disciplined in our pricing. We have seen some creep in the cost of goods sold just because of the inflationary pressures at some of our suppliers, and we're doing our best to recover that and maintain gross margins. And we're comfortable with our approach. We have not seen significant pushback from our customers. The reality is we're not alone. The entire industry is facing the same set of conditions. On the specialty side, the growth there was largely due to volumes just going through the roof, which was terrific. And again, our specialty team is paying particular attention to be really disciplined on the pricing front.
Stephanie Benjamin: Got it. Thank you. And then just as a follow up, specifically on the salvage side of the business, have you seen -- you called out benefiting from the ability to procure OEM parts and remanufactured parts just given the OEM shortage. Have you seen any inflation in the quarter or inability to procure some of those parts at auction, just given collusion accidents are down or a higher demand for maybe other buyers? Would love just to hear how you've been able to procure those salvage parts.
Nick Zarcone: Yes. So we're really proud of our remanufacturing operations. They've done a terrific job over the last several quarters, not just in the first quarter. The salvage markets are tight. And the prices we're paying for the cars are higher today than they were a year ago or even two years ago. And part of it reflects the fact that the number of cars just going through the auctions are down just given the overall level of driving and overall level of accidents and total losses. But again, we're working hard to make sure that we keep our margins at really healthy levels. And the fact that we've got a great team on the remanufacturing side that's able to produce a product that customers are needing has really helped.
Stephanie Benjamin: Great. Thank you so much for the time.
Operator: Your next question comes from Brian Butler with Stifel. Your line is open.
Nick Zarcone: Good morning, Brian.
Brian Butler: Hi, guys. Thanks for taking my questions. Can you guys hear me?
Nick Zarcone: Yes, we hear you fine.
Brian Butler: Great. Perfect. I guess just a high level, maybe we can talk a little bit about the trends that you've seen to date on the driving side in the U.S. and Europe? And then just kind of thoughts on how that plays out and the impact it could have in the rest of 2021?
Nick Zarcone: Sure. I'll take that. It's been an interesting year. A year ago, at this time, April through June, vehicle miles traveled were down significantly in the United States and in Europe, the U.S. at a low point really in the second, third week of April 2020 being down better part of 55% or so. If you look at really from kind of mid to late June through the November timeframe, BMP in the United States was down in and around anywhere from 9% to 12% kind of week-in, week-out. So the last part of 2020 was down about 15% really from -- through Thanksgiving into the end of the year. And then more recently, though, it's picked up. And in the last few weeks, BMP in the U.S. was down, say, 5%. And I'm talking about passenger cars. Truck miles has actually been positive really since last summer, but almost our revenue relates to passenger vehicles and that's what we focus on. As I mentioned in some of my prepared remarks, the European activity in mobility, again, in the first quarter started off really slow. It did rebound. And here in April, we're still below 2019 levels. But only down kind of low -- we believe low single digits from a VMT perspective in Europe, but there are some variations country by country. So when you look at – the question behind your question I believe is when do we get back to 2019 kind of revenue levels and VMT levels, right? And we think in the United States, it's going to take us a bit longer. We think it's going to take until 2022 to get back to 2019 levels. In Europe, which is a little bit closer from a starting point perspective, we can see getting back to 2019 levels in the third or fourth quarter of this year. It all depends on how the vaccine gets rolled out and whether people truly get back on the road. And then the specialty business has been running above 2019 levels for several quarters now, so that's a little bit different.
Brian Butler: Okay. And that I guess as a follow up just to be clear, that's kind of what's built into the current -- the updated guidance that you gave? And then second would be what part of the commodity metals upside is built into, or the expectations built into the revised guidance that you gave? Thank you.
Varun Laroyia: Hi, Brian. It’s Varun out here. So yes. As part of my prepared comments, I did mention the fact that as of now we do see some moderation on the metals pricing, both scrap and precious metals in the second half of the year. And so that is the piece that has been built into the outlook at this point of time. We've talked previously also commodity prices are incredibly volatile. We’re certainly benefiting from the upswing at this point of time with the sequential rise. But again, make no mistake. There are others in the industry also that are faced with a similar set of commodity price increases. The question really is we believe our salvage teams, self service and full service, are by far the best in the industry and essentially are doing an incredible job in operationally taking advantage of the upswing of that. Clearly, we are keeping a lookout when these moderate, but as of now the outlook contemplates a second half moderation.
Brian Butler: Okay. Thank you.
Operator: Your next question comes from Scott Stember of CL King. Your line is open.
Scott Stember: Good morning, guys, and thanks for taking my questions.
Nick Zarcone: Good morning, Scott.
Scott Stember: I'm just trying to break out March a little bit better. I think you partially answered my question with commentary about reaching '19 levels again. But in March, we saw some nice increases, specialty up 61%. Could you maybe go through the three businesses and just how much of it is easy comps? If you were to flush everything out, did you see inherent improvements in March sequentially, month-over-month from the January-February timeline into March? Thanks.
Nick Zarcone: Sure. The reality is, March was a good month for us. Specialty was off the charts. We're not going to begin to imply we're going to be able to continue to grow at 60% year-over-year every month for the rest of the year. The growth rate is going to come down. But the absolute dollar should be strong. The comparison for Europe and North America, obviously, we're happy that it's up on a year-over-year basis, but it's somewhat off easy comps. But the March levels were better than the February and January levels. Again, not at the 2019 levels but they were better sequentially and that’s what gives us a little bit of confidence going forward that we will slowly creep back to those 2019 levels a little bit faster in Europe, a little bit slower in the U.S., but we’re headed in the right direction.
Scott Stember: Okay. I guess last question on supply chain, I think you touched on some of this already, but a couple of quarters ago, specialty was meaningfully impacted. It appears that you’ve been able to work through that. Can you just talk about some of the countermeasures that you have in place which are helping you get through this?
Nick Zarcone: Well, we have a lot of orders out there for inventory. We have product that’s coming into our receiving bay and shipping bays almost in the same day. We’ve got product that’s not even touching the shelves because the velocity of the business and the demand is just so significant, we’re doing the best we can. We’re working hand-in-hand with our vendor partners. The reality is, the industry as a whole, the vendors are running hard to keep pace. And we're working very closely with our vendor partners to make sure that we can get the product we need when we need it. We anticipated not just in specialty, but in all of our businesses, that we would have added more to our inventory levels in the first quarter. But the supply constraints are what they are. And we think we'll get back to slightly higher inventory levels in the second half of the year.
Scott Stember: Got it. Thanks so much.
Operator: Your next question comes from Craig Kennison of Baird. Your line is open.
Craig Kennison: Hi. Good morning. Thanks for taking my questions as well.
Nick Zarcone: Good morning, Craig.
Craig Kennison: It sounds like your competitive advantage, especially as it relates to inventory availability, has really strengthened during the pandemic. And I'm wondering to what extent you think that is sustainable? What does the competitive landscape look like? Do you think maybe you've seen any of those competitors exit permanently?
Nick Zarcone: I wouldn't say that we've seen a rash of competitors exit, Craig. But as most people know, ocean freight is a significant consideration for all industries, anybody importing products, particularly from the Far East, the lack of containers, the backlog at the ports, it all creates a bit of a bottleneck. The difference is, is we're not importing a few dozen or a few 100 containers a year in North America. We import over 16,000 containers a year. And so we use that position to our advantage. The orders to the vendors are big orders. We are a very important customer and I think we've got great relationships with our vendor partners and they're working hard to help us be successful. And if you're a smaller business, you don't have that same flexibility to have power with the vendors and/or with the shipping lines. We use our size and scale to our advantage.
Craig Kennison: Thank you. And then sort of related, but the other impact of the pandemic is really you forced yourselves to look at your operating performance and you made some tough decisions, unfortunately, in terms of headcount. As you look to add staff to meet the new resurging demand, to what extent do you need to add back staff and can you get by with a leaner footprint going forward?
Nick Zarcone: Well, we clearly leaned out the organization globally as we went through the depths of the pandemic, right. And my marching orders to all of my operating heads down the field is we need to keep that leanness going forward. Yes, we will need to bring back people and add people as revenue improves. But we're not going to bring the people back until the revenue is up and we know it's sustainable. And the goal is, this is the new cost structure, Craig. This is how we're going to operate the business going forward.
Craig Kennison: Great. Thank you.
Operator: Your next question comes from Gary Prestopino of Barrington. Your line is open.
Gary Prestopino: Hi. Good morning, everyone.
Nick Zarcone: Good morning, Gary.
Varun Laroyia: Hi, Gary.
Gary Prestopino: I got a question here that’s maybe a little bit different than what you were expecting in terms of questions for the call on the quarter’s numbers, but can you give us an idea on the mechanical side for EVs? What kind of parts demand you're seeing initially? I just want to get to that, because obviously we're going to start seeing more EVs come into the car park.
Nick Zarcone: Very little demand for electric vehicle parts, almost -- I won't say none, but almost none. And you have to keep in mind our sweet spots, Gary, is -- the aftermarket products from a collision perspective and salvage parts from a collision perspective, sweet spot being kind of 3 to 10 years – vehicles 3 to 10 years old. On the mechanical parts, the sweet spot is even older, generally kind of in that four to five to kind of 15 years. And so there's a pretty big lag between kind of when the cars come off the showroom floor and when there's real demand for the types of parts that we and others in the industry sell. So you're not going to see an impact of EV-related parts for quite some time.
Gary Prestopino: Okay. Thank you.
Operator: Your next question comes from Bret Jordan of Jefferies. Your line is open.
Bret Jordan: Hi. Good morning, guys.
Nick Zarcone: Good morning, Bret.
Varun Laroyia: Good morning.
Bret Jordan: Pretty good sequential improvement in the payables ratio. How high do you think you can get accounts payables percentage of inventory without getting to investment grade?
Varun Laroyia: So as of now, in the first quarter, as I mentioned in my prepared comments, Bret, we certainly saw the payables continue to deliver the overall payables program, deliver. It again was not only the European payables program, our North America team also did an outstanding job. But really, it was a case of not being able to get the inventory built to take place. So in Q1, while the number for the conversion is above 100% in terms of free cash flow to EBITDA, as I mentioned previously also, that is not a sustainable number. Our conversion factor on an annual basis is 55% to 60%. But again, we're really happy with how the payables program is going across the board, but clearly the largest opportunity being over in Europe. As of now, the first quarter with the lack of the inventory build, it’s basically timing. And from the second quarter onwards, we expect that inventory builds to take place to get us back into that 55% to 60% conversion ratio. With regards to what the long-term hypotheses is or what long-term plan is with regards to payables as a percentage of inventory, we clearly know for our European business there are some North American comps that we are targeting. It certainly takes time, but we're really happy with the progress our team is making.
Bret Jordan: Okay. And then a question on UK mechanical, I think you've called out a spread between your mechanical business and the collision business. I think one of your peers had called out the UK as particularly strong. Are you seeing any market share shifts on the mechanical side of that market, or is your regional softness more tied to that product mix?
Nick Zarcone: Look, Brian, it's tied to product mix. As I indicated, the collision and coatings activities in our UK operations, we're down double digits. And the environment there is not too different from the collision environment here in the United States; fewer miles travel, less collisions, all the rest, right? Our core continuing operations on the mechanical part side was up in the first quarter. The market was down. We took some share. And that's our goal is to continue to take share. And most importantly, though, in our UK business, we're highly focused on the profitability and the cash flow of the business. Because it's – it’s not how much you take in, it's how much you keep, right? And our focus is to keep as much of that revenue in the form of profits and cash flow, and we're happy with the growth of our business.
Bret Jordan: And you said you'd rationalize the footprint in the UK. Is that done now? Is your store base pretty static?
Nick Zarcone: Yes, it’s all done.
Bret Jordan: Okay, great. Thank you.
Operator: . Your next question comes from Daniel Imbro of Stephens. Your line is open.
Daniel Imbro: Hi. Good morning, guys, and congrats on a good start to the year.
Nick Zarcone: Good morning, Daniel.
Daniel Imbro: I want to start on the diagnostics piece. Could you talk a little bit more about Greenlight and maybe what they bring to the table? And then taking a step back, you mentioned in your prepared remarks there were some more diagnostics deals in the pipeline. Can you expand on what you're looking for in these targets? Is it just scale? Is it new capabilities? Kind of how that fits into the North American outlook?
Nick Zarcone: Thanks, Daniel. The acquisition was similar to the other small acquisitions we've made in the diagnostics space. Again, this is very much of a local business, not unlike the rest of our North American operations where you're really selling in the local markets. We're going to continue to do acquisitions that give us geographic coverage across the United States. Because you can't service body shops and/or mechanical shops in California with a diagnostics team that is in Texas or Colorado, it just doesn't work. And so we're going to continue to build out the footprint from a diagnostics perspective. All of our activities thus far are what we would call mobile related, where we actually have feet on the ground, people inside our customer shops, doing the calibration work and/or the diagnostic work. We're going to continue to build that out. And we're looking for other ways, quite frankly, to service our body shop and mechanical shop customers, perhaps using technology.
Daniel Imbro: That’s really helpful. And then, Varun, just one on the balance sheet. Obviously leverage is down to 1.4x and you mentioned you reduced further on April 1 with the Eurobonds. Can you talk about the usage of free cash here? Obviously, inventory will build but you're still guiding to, call it, 900 million in free cash. Do you think about the primary use of that being buyback now that leverage is comfortable, or how are you planning on deploying that capital?
Varun Laroyia: Yes, so a great question and thank you for raising it, Daniel. Yes, the first priority has been and remains to reinvest into our business. Apart from CapEx, which we are very comfortable with and what we've called out for quite some time in the 2% to 2.25% of revenue, that remains stable. In addition to that, as Nick mentioned a few minutes ago, our ability to do high synergy transactions, small tuck-in, building up critical capabilities remains the primary use in terms of priority of the free cash. As you rightly pointed out, leverage is well within our target corridor. We don't expect to see further deleveraging taking place from a debt perspective. And arguably, as profitability grows, that delevering will take place in any case, so not really looking to pay down further debt, which obviously, as you can make out, doesn't leave too many avenues left for the free cash flow with share repurchases, which obviously we resumed the program in the fourth quarter of last year would end up being the primary deployment for that capital that we're building up.
Daniel Imbro: Great. Congrats again and best of luck.
Varun Laroyia: Thank you.
Operator: There are no further questions at this time. I will now return the call to Mr. Zarcone for closing remarks.
Nick Zarcone: Well, we certainly thank you for your time and attention this morning and we look forward to providing another update in late July when we report our second quarter results. Again, in summary, we are thrilled with our first quarter. I thank all of the 44,000 people of LKQ for working so hard to bring such terrific results to bear. And we are very optimistic about the future of LKQ. And so thanks for your time, and we will chat again in three months.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
