Dominick Zarcone
President and Chief Executive Officer at LKQ
Thank you, Joe. Good morning to everybody on the call, and thank you for joining us. This morning, I will provide some high-level comments related to our performance in the quarter, and then Rick will dive into the financial details and provide an overview of our updated guidance before I come back with a few closing remarks.
The third quarter of 2023 represented some mixed results, which collectively fell short of our expectations. Wholesale North America continued to outperform, all while working on the integration of the Uni-Select acquisition. However, we experienced some unusual transitory events that, in aggregate, affected the short-term performance of our European operations. We also had continued pressure on commodities, which impacted self-service, along with less-than-expected demand for our specialty products.
The LKU culture is one that takes accountability for results and is humble enough to understand that this quarter's results fell short of both our expectations and the expectations of many of you on the call. Make no mistake, the shift to our operational excellence strategy implemented in 2019 has not changed. Structurally, our business model and financial outlook are sound, and we continue to be very optimistic about the future of LKQ.
One quarter does not define the resiliency of our business model, the uniqueness of our global enterprise, or the long-term opportunities that lie ahead for LKQ. The perpetual challenging macroeconomic conditions are not unique to LKQ, and they will continue to persist, but the LKQ team will move forward.
On the positive side, we continue to experience strong organic revenue growth in our North American and European businesses, achieving same-day growth of 5.8% and 6.2% respectively. North America achieved excellent EBITDA margins, which were ahead of expectations, and our free cash flow was excellent, particularly in North America and Europe.
On the downside, during the quarter, we faced a few unusual and transitory headwinds. In late September, our Italian subsidiary, Rhiag, completed a negotiation with the Italian tax authorities on the remediation of a value-added tax violation that was committed by certain of our third-party suppliers dating back to 2017. These suppliers are no longer in business, and thus Rhiag agreed to remit the disputed amounts to the Italian revenue agency to remedy any damage caused by the VAT violations of the former suppliers.
Additionally, our German operation was hit with periodic strikes at our large distribution center, which reduced our ability to fully replenish the branch network with inventory on a daily basis. Negotiations with the works council are ongoing, but there have been additional strikes in October, which will affect our Q4 results. It's important to note that resolving the matter is not fully in our control, as the labor contract involves multiple employers in southern Germany that must agree on terms through the Employers Association.
These two items alone reduced our European organic growth by approximately 160 basis points and reduced segment EBITDA margins by 110 basis points. While we are disappointed with these two transitory items, our long-term view of the growth and margin potential of our European business has not changed.
Related to commodities, pricing pressure continued in the third quarter, with scrap and precious metal down sequentially 14% and 23% respectively, decreasing both margins and earnings per share. For context, in Q3, catalytic converter prices fell below $100 for the first time since early 2019 versus the third quarter of last year when they averaged $197. This difficult commodity environment again had a particularly negative impact on the profitability of our Self Service segment. Rick will provide a deeper dive into the EPS and segment margin details in the quarter when he discusses our updated guidance.
The quarter included many other highlights worth noting. The company generated robust free cash flow, and we are on target to again reach $1 billion for 2023. On August 1st, we announced the completion of the Uni-Select acquisition, a bespoke and highly synergistic opportunity that will add positive long-term shareholder value and further widen the competitive moat around our North American business. Yesterday, we completed the sale of GSF Car Parts to Epiris, a private equity firm based in the UK. The proceeds from the sale will be used for debt repayments.
And finally, our Board has declared a 9% increase in our quarterly cash dividend from $0.275 to $0.30 per share of common stock. This increase reflects the Board's ongoing confidence in our ability to continue to generate solid free cash flow and drive long-term value for our shareholders.
Now, on to the third quarter 2023 results and year-over-year comparisons. Revenue for the third quarter of 2023 was $3.6 billion, an increase of 15%. Parts and services organic revenue increased 3% on a reported basis and 4.3% on a per day basis. Diluted earnings per share was $0.77 as compared to $0.95 for the same period last year, a decrease of 18.9%. While adjusted diluted earnings per share was $0.86 compared to $0.97 for the same period of 2022, a decrease of 11.3%.
Let's turn to some of the quarterly segment highlights. As you will note from Slide 8, organic revenue for parts and services for North America increased 4.1% on a reported basis and 5.8% on a per day basis. We continue to perform well in North America, especially when you consider that non-comprehensive-related auto claims were down 4.3% year-over-year in the third quarter.
Similar to the first half of the year, the growth in North America was a combination of price and volume improvements with the organic growth in our aftermarket collision products predominantly being volume-related. These nice volume increases were driven by our disciplined procurement efforts that allowed us to achieve the proper levels of inventory and the ability to stabilize and maintain our industry-leading fulfillment rates of over 93%, which helped us grow the business.
The strong volume was also attributable to State Farm expanding their usage of aftermarket headlights, tail lights, and bumpers beginning earlier this year. Further on State Farm, during our last call, I mentioned that State Farm launched another pilot program in California and Arizona for the use of a full range of aftermarket collision parts, including sheet metal products like fenders, hoods, and trunk lids, and other items like side mirrors and grills.
Today, I am pleased to share that on October 16th, State Farm announced that they are rolling out the use of these parts nationally to collision repair shops, which are part of their DRP program. We expect the incremental lift from this expansion at a full run rate will reflect a $20 million to $30 million annual benefit in revenues once fully ramped up.
With respect to the UAW strikes, we believe that a continuation of the strikes will create incremental demand for our aftermarket and, to a lesser extent, our recycled collision parts. Because the strike started in late September, there was no impact on our third quarter results, but we are starting to see an incremental per day volume uptick across all product lines, with some lines that have historically been sourced primarily from the OEs expanding at a faster rate. Obviously, we don't know how long this demand benefit will last, so we have not adjusted guidance for the UAW strike.
North America EBITDA margins exceeded our expectations for the quarter, and we are on track to achieve the greater than 19% full year target we have previously discussed, excluding the anticipated dilution of Uni-Select.
Let's move to our European segment. Europe's organic revenue for parts and services in the quarter increased 5.1% on a reported basis and 6.2% on a per day basis. While the market remains competitive, the business is performing well by increasing the organic growth rate in the quarter, mostly driven by volume. During the third quarter, we saw solid organic growth in all of our regions, despite the impact of the strikes in Germany, with regional same day organic growth ranging from approximately 4.7% on the low end to 16.3% on the high end, and a total same day growth rate of 6.2%. Excluding the impact of the strike, the same day growth rate was just shy of 8%, which is outstanding.
The diversity of our European platform is also highlighted by the dispersion in EBITDA margins, with key lines of business and markets posting margins in the low teens, while certain smaller markets delivering mid-single-digit performance. While the labor situation will weigh on our margins in Q4, we remain confident in the long-term margin potential of our European operations.
Now let's move on to our Specialty segment, which continues to face a soft demand environment. During the third quarter, Specialty reported a decrease in organic revenue of 6.1% on a reported basis and 4.6% on a per day basis, which again was below our expectations. As in the past, there were major differences in the demand for various part types. With the RV OEM warranty products and truck and off-road products up 3% and 2% respectively during the quarter, while RV accessories and towing-related products were off double-digits on a year-over-year basis.
The RV portion of our specialty business was impacted by the wholesale shipment and retail unit sales of RVs, which were down 45% and 17% year-to-date through August respectively. Though still down, the Specialty revenue decline in the third quarter was less significant than in the first half of the year. Still, we don't see a natural near-term catalyst for demand to bounce back, and we anticipate tough comparisons into the start of 2024.
Now on to the Self Service segment. Organic revenue for parts and services for our Self Service segment increased 5.1% in the third quarter. Self Service was again confronted by the decreasing metals pricing I mentioned earlier, particularly with respect to catalytic converters, which are linked to precious metal prices. Operationally, the Self Service team also had challenges with their ability to source vehicles at the appropriate cost. Simply put, car costs have not declined in lockstep with commodity prices, creating significant margin pressures and pushing Self Service into a loss position for the third quarter.
We have already taken action with our buying practices and have installed an operational leader to drive standardization and process improvements across our Self Service buying group. The leadership team has also taken actions to reduce overhead costs and the early returns have been positive. We expect this business to be marginally profitable in Q4.
As reported, we closed on the Uni-Select acquisition on August 1st. The integration activities and synergies are on target and, in some cases, ahead of schedule. This past week, we completed the first wave of FinishMaster facility optimizations with 10 locations being folded into an existing LKQ aftermarket warehouse location and two other FinishMaster locations being merged. From here, we will begin to see an acceleration of our footprint optimization.
Our salesforce and operations teams dedicated to the paint-related products market have been fully aligned, and we've built out a synergy tracking team with various tools and metrics to assure we hit the targets we established when we announced the transaction back in February. Now that we've owned the business for a few months, we see a slight shift in the FinishMaster business with MSOs representing a slightly larger share of activity. As you know, the MSOs are some of our largest customers on the parts side of the business.
The Bumper to Bumper business in Canada is actively working with our European team to assess and take advantage of the procurement leverage that exists between their respective businesses. We have completed two tuck-in acquisitions in Canada that Uni-Select had in the hopper and we have another small transaction that will close shortly. We are excited about the growth opportunities in Canada and believe we have a great team to execute the plan. Overall, I am confident in our North America team managing the Uni-Select integration and that they will deliver the same strong results as they've had with their operational excellence efforts over the last three years.
Let me now turn the discussion over to Rick who will run you through the details of the segment results and discuss our updated outlook for 2023.
