Rick Galloway
Senior Vice President and Chief Financial Officer at LKQ
Thank you, Justin, and welcome to everyone joining us today. When we released our full year guidance in February, we expected Q1 earnings to be challenged by the impact of weather conditions in January, very low catalytic converter prices and year-over-year decrease in selling days due to the timing of Easter. The actual results reflect lower than forecasted revenue, mostly due to a reduction in North America aftermarket product volumes, which were predominantly related to a significant decrease in the number of repairable claims.
On a consolidated basis, gross margin fell short of target as pricing did not fully cover input cost increases. Overhead expense actions were taken and others are currently in-process, but the benefits will be seen in the balance of the year rather than Q1. Despite the Q1 results, we remain committed to our full year earnings guidance. We have nine months to make-up the shortfall and the core strengths of the business are still there. We are digging deep on the operational excellence principles that drove our growth and margin expansion over the last five years and are taking decisive actions. As Justin described, each of the segment teams have detailed action plans in place to deliver the full year numbers.
Turning now to the first quarter consolidated results. Adjusted diluted earnings per share of $0.82 were $0.22 lower than the prior year figure. Operating results were the largest individual factor with a $0.12 reduction, mostly related to North America. This figure includes the anticipated Uni-Select headwind as the integration efforts were ongoing. We expect the Uni-Select impact to flip to accretion going forward in 2024 as the synergies Justin mentioned are realized. Movements in commodity prices, primarily precious metals, contributed a $0.06 year-over-year decrease. Other items, including investment performance and taxes drove a $0.04 decrease.
Now for segment results. Going to Slide 9. North America posted segment EBITDA margin of 16.3%, a 420 basis point decrease relative to last year. During the last call, we projected the full year margin would be around 17% for the full year impact of the Uni-Select dilution. The reported margin was below the full year expectation due to leverage impact from the lower revenue in Q1. Relative to the prior year, in addition to the communicated anticipated Uni-Select dilution effect on gross margin, salvage margins were down reflecting unfavorable revenue and vehicle cost trends compared to the prior year period and lower catalytic converter prices in Q1 2024. Overhead expenses partially offset the gross margin reduction with lower costs for freight, charitable contributions and incentive compensation. Q1 2023 also included a non-recurring benefit from an eminent domain settlement that created a year-over-year negative variance. North America is executing action plans to recover the profitability miss in Q1, and we expect the full year EBITDA margin to be around 17%.
Looking at Slide 10. Europe reported a segment EBITDA margin of 8.7%, down 100 basis points from last year. Gross margin, excluding restructuring costs improved by 60 basis points, but was offset by higher overhead costs, including personnel costs tied to wage inflation in markets such as Germany, the UK and the Benelux region. While we have grown gross margin, we have not covered the overhead cost increases and we have work to do on pricing and productivity to mitigate the cost inflation. We still expect to achieve double-digit margins in Europe for the full year.Moving to Slide 11. Specialties EBITDA margin of 6.4% declined 150 basis points compared to the prior year, driven by a 170 basis point decrease in gross margin. Competitive pricing pressure remains a challenge for the business and we are evaluating options and implementing changes to improve our net pricing. We believe the full year Specialty EBITDA margin will be flat to a slight increase as we work through the lingering gross margin pressures.
As you can see on Slide 12, Self Service generated an 11.7% EBITDA margin in Q1 2024 compared to 13.2% last year. In dollar terms, segment EBITDA decreased by $6 million. The impact from commodities represented a $16 million headwind. However, the efforts to manage vehicle costs helped mitigate a portion of the commodities impact and overhead cost controls produced a year-over-year benefit. We have not seen double-digit segment EBITDA margin in percentage or dollar terms since Q1 2023. So we are pleased to reach this level again this past quarter. We implemented a global restructuring program in the first quarter focused on enhancing profitability. The largest portion of the activity will come from the European segment and as Justin mentioned, will include exiting certain businesses or markets which do not align to our strategic objectives. Initially, this includes exiting businesses in Slovenia and Bosnia, which are relatively small with under $40 million in combined annual revenue and evaluations of other markets are ongoing. We recorded $27 million in charges in the quarter, including $17 million in asset impairments and $8 million in inventory write-downs. Other charges are expected in future periods for severance, lease termination costs and other shutdown related expenses.
Shifting to cash flows and the balance sheet. We produced $187 million of free cash flow during the quarter, and we remain on track for a full year estimate of approximately $1 billion. As of March 31, we had a total debt of $4.3 billion with a total leverage ratio of 2.3 times EBITDA, and we remain committed to reducing our total leverage ratio below 2.0 times.
In March, we successfully completed a EUR750 million bond offering with a seven year maturity and a fixed 4.125% interest rate. The offering was completed to pay-off the existing EUR500 million bonds that were scheduled to mature on April 1, 2024. We upsized the offering by EUR250 million in response to very strong demand from fixed income investors, reflecting LKQ's strong credit profile and solid cash flows. The additional proceeds were utilized to pay-down a portion of our euro revolver debt. The larger offering allows us to lock-in capital at an attractive rate for an extended period and diversify our maturity profile. The bonds are publicly tradable and listed on NASDAQ. We do not have significant debt maturity until January 2026.
Our effective borrowing rate was 6.0% for the quarter, an increase of 20 basis points relative to Q4 2023. We have $1.7 billion in variable rate debt, of which $700 million has been fixed with interest rate swaps at 4.6% and 4.2% over the next one to two years, respectively. In the first quarter, we repurchased roughly 600,000 shares for $30 million and paid a quarterly dividend totaling $81 million, further validating that as we reduce our debt levels, we are migrating to a more balanced capital allocation strategy.
I will conclude with our current thoughts on projected 2024 results. Our guidance is based on current market conditions and recent trends and assumes that scrap and precious metal prices hold near March prices and the Ukraine-Russia conflict continues without further escalation or major additional impact on the European economy and miles driven. On foreign exchange, our guidance includes rates in-line with the first quarter. The global tax-rate remains unchanged at 26.8%. Our full year guidance metrics on Slide 4 remain mostly unchanged from the Q4 earnings call. We expect reported organic parts and service revenue in the range of 2.5% to 4.5%, which is a 100 basis point decrease in the range. The softness in Q1 organic growth drove the decision to lower the full year range. We believe that mild winter weather conditions were a major contributing factor to the revenue softness and will have some carryover effects into Q2, but otherwise will be a temporary headwind relative to repairable claims. However, if repairable claims in North America do not rebound to a more normalized level, we would expect to be closer to the low end of the full year range. We are closely monitoring monthly claims data and the team is ready to take decisive cost actions if claims remain depressed.
We still expect adjusted diluted EPS in the range of $3.90 to $4.20, with the revenue volatility, there is heightened risk to the profitability estimate. But we are confident in the action plans being implemented in all segments to address controllable factors such as our cost structure to keep us inside the previously issued range. The free cash flow expectation of $1 billion and 50% to 60% annual EBITDA conversion remain in place. Improved profitability over the balance of the year and diligent balance sheet management should support achievement of the full year target. Thanks for your time this morning.
But before I turn the call back to Nick for his closing comments, on behalf of our LKQ team globally, I'd like to thank Nick for his leadership, vision and integrity during his tenure as our CEO. Nick, you left a tremendous mark on LKQ and have positioned us well for the next chapter of our evolution. We wish you and the growing Zarcone family all the best.
