Rick Galloway
Senior Vice President & Chief Financial Officer at LKQ
Thank you, Nick, and welcome to everyone joining us today.
Before I address the fourth quarter, I would like to reflect on what LKQ accomplished throughout 2023. We were optimistic about our prospects going into 2023 despite macroeconomic challenges, inflation and declining commodity prices. With our operational excellence focus and strong balance sheet, we concentrated on the things we could control, and in those areas, we were very pleased with our performance. We encountered headwinds that set back the overall profitability, but we believe many of these are transitory and will be minimal in 2024. The non-discretionary nature of the majority of our business and the resiliency of our industry allows us to perform well in almost any market environment.
Referring to the walk on Slide 4, I want to highlight the key year-over-year variances in our full year results. We reported diluted earnings per share of $3.51 and adjusted diluted earnings per share of $3.83, the latter of which was a $0.02 decrease relative to 2022. Our operational performance was a strong positive, delivering $0.27 year-over-year improvement with exceptional growth in North America, partially offset by softness in precious metal prices and difficult market conditions impacting our Specialty and Self Service segments. Europe also contributed to the improvement with solid revenue growth and productivity benefits, helping to offset the effects of the German strikes and the value-added tax matter in Italy.
We benefited by $0.10 due to the lower share count resulting from our share repurchases in 2022. We experienced year-over-year headwinds from market conditions, the most notable of which were $0.19 from the impact of metal prices as shown on Slide 28, and $0.13 in higher interest expense resulting from rate increases, excluding Uni-Select costs.
Acquisition and divestiture activities had a negative effect, including a $0.04 of dilution from the Uni-Select acquisition. Important to note, this result was $0.01 better than we anticipated in our Q4 guidance and $0.02 of reduced earnings related to the PGW divestiture in April 2022. Foreign exchange rates were favorable on average in 2023, which contributed to a $0.02 benefit. The tax provision represented a $0.06 benefit, driven mostly by favorable impacts from discrete items.
We have also included a fourth quarter EPS walk on Slide 5. The main variances are similar to the full year drivers but with income taxes representing the largest variance from 2022. The 2023 provision included favorable discrete items and a slight full year effective rate reduction, while 2022 reflected a negative provision effect from increasing our full year effective rate and unfavorable discrete items. To expand on the operating performance for the quarter, I will provide additional detail on the segment results.
Going to Slide 12, Wholesale North America continued its strong performance with the segment EBITDA margin of 16.3%. Q4 was the first full quarter with Uni-Select, and as communicated, the transaction was dilutive to the segment margin by 220 basis points. Without Uni-Select, North American margins would have been comparable to Q4 2022 and would have delivered a record full year EBITDA margin of 19.7%.
Q4 2023 benefited from some incremental sales in October and November attributed to effects of the UAW strike, and we don't expect further upside in 2024. The Uni-Select integration is progressing ahead of schedule. And with FinishMaster and LKQ locations merging, it's becoming increasingly difficult to determine a standalone Uni-Select impact. Therefore, we will not provide specific Uni-Select impacts on the North American results going forward, but we'll instead report just on synergy achievement. We expect the 2024 North American full year EBITDA margin, including Uni-Select to be around 17%.
As shown on Slide 13, Europe reported segment EBITDA margin of 8.3%, down 170 basis points from the prior year period. There were several unusual items, which had a negative effect of 110 basis points on the results. First, the strikes at our primary distribution center in Germany continued in Q4, and we estimated the lost revenue and negative effect on the segment EBITDA margin of 50 basis points. Second, we booked a non-recurring compensation charge for $6 million which impacted the margin by 40 basis points.
Finally, we recorded a reserve for a value-added tax matter, which lowered the margin by 20 basis points. The remaining margin variance is attributable to inflationary cost effects in SG&A expenses, primarily in personnel costs. Looking ahead to 2024, we project a return to a double-digit margin as we work past the strikes and the transitory effects that dropped the segment below a 10% margin in 2023.
Moving to Slide 14. Specialties EBITDA margin of 5.7% decreased 50 basis points compared to the prior year. Gross margin, which was down 290 basis points year-over-year is under pressure from increased price competition as inventory availability continues to improve for our competitors, in addition to unfavorable product mix as the lower margin lines such as auto and marine have been less affected by revenue reductions than the RV market.
I am pleased to report our SG&A expenses were favorable by 210 basis points mostly related to personnel and primarily coming from management restructuring efforts in the last 12 months to align the cost structure with revenue trends and lower benefits and insurance costs. 2023 was a tough year for Specialty. But by focusing on controllable costs, the team was able to mitigate some of the negative leverage effect on margin caused by the revenue decline. Going into 2024, this segment still faces challenging conditions, and we expect low single-digit organic revenue growth. However, we are optimistic about our ability to improve EBITDA margins by 10 basis points to 30 basis points through productivity.
As you can see on Slide 15, Self Service profitability improved sequentially to EBITDA margins of 6.0% this quarter from a loss of 0.6% in the third quarter and increased relative to the 5.2% reported in Q4 2022. Metals prices had a net negative effect on results of $6 million with lower precious metal prices representing a $13 million reduction in EBITDA and lag effects from sequential scrap steel price changes driving a $7 million improvement.
Other revenue decreased by 25% in total, contributing to a reduction in operating leverage of 620 basis points. As part of the actions taken earlier in 2023, our average car cost decreased by 6% and 18% in Q4 relative to Q3 and Q2, respectively, which provided some margin relief and contributed to the year-over-year improvement. We are pleased with the return to profitability in the fourth quarter and expect to improve our 2024 segment EBITDA in dollar terms compared to 2023.
Shifting to cash flows and the balance sheet. We produced $87 million in free cash flow during the quarter, bringing the year-to-date total to $1.0 billion. As expected, free cash flow was relatively light in the quarter as we had $96 million of interest payments including the first payment on the U.S. bonds issued in May and $125 million of capital expenditures. At $358 million of capex for the year, we exceeded our prior guidance by $58 million as we took advantage of our strong cash flow and liquidity position to make strategic purchases, some of which were pulled forward from our 2024 plan.
For the year, the cash conversion ratio is 59% conversion of EBITDA to free cash flow, in line with our targeted range of 55% to 60%. With the future headwinds related to interest expense and capital spending requirements, we are widening our cash conversion target range to 50% to 60%. While we have opportunities to drive trade working capital lower, such as with the supply chain finance program, these opportunities are not as abundant as they were years ago when we began our operational excellence journey.
The team has done terrific work to lower working capital levels over the last five years and the effects we're seeing in the strong free cash flow figures. We believe we can continue to generate free cash flow in the range of $1 billion on a recurring basis by converting earnings growth into cash flow, being efficient in our deployment of trade working capital and expanding our supply chain finance program.
As of December 31st, we had total debt of $4.3 billion with a total leverage ratio 2.3 times EBITDA. We paid down over $375 million in debt between the acquisition of Uni-Select at the beginning of August and year-end, a portion of which came from the sale proceeds related to the GSF business we divested in October. We remain committed to reducing our total leverage ratio to 2.0 times within 18 months of the Uni-Select acquisition or more specifically during Q1 2025.
Our current maturities include the EUR500 million senior notes due on April 1st. We are working on refinancing options and expect to have a refinancing in place in the near term. Our effective borrowing rate was 5.8% for the quarter as market rates remained relatively high in the U.S. and Europe. We have $1.2 billion in unhedged variable rate debt, so a 100 basis point rise in interest rates would increase annual interest expense by $12 million.
I will conclude with our thoughts on projected 2024 results as shown on Slides 6 and 7. Our guidance is based on current market conditions, recent trends and assume scrap and precious metal prices hold near December prices. On foreign exchange, our guidance includes recent European rates with balance of the year rates for the euro of $1.09, the pound sterling at $1.27 and the Canadian dollar at $0.74.
We expect organic parts and services revenue growth between 3.5% and 5.5%. Please note that we have one to two more selling days in 2024, depending on the market, with the increase coming in the second half of the year. Europe will be down a selling day in Q1 due to the timing of Easter. Our 2024 estimate includes growth associated with the expansion of aftermarket parts volume resulting from State Farm and the impact of Uni-Select, which will be included in organic parts and services revenue beginning on August 1st. 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 $0.22 or 6% at the midpoint relative to the 2023 actual figure.
Looking at Slide 6 in the presentation, you can see how we get from the 2023 actual EPS to our 2024 guidance. Operating performance is expected to generate growth of $0.22 relative to the 2023 results with growth coming from all four segments. We expect Europe and North America, including the Uni-Select contribution to generate more year-over-year growth than Specialty and Self Service. The transitory items in Europe noted in the last few quarters are expected to be a lesser impact in 2024 and thus will add $0.09 compared to 2023.
The exchange rate benefit is nominal. Commodity prices are expected to be a headwind of $0.09 as the current precious metal prices used in the guidance are below the 2023 average. Excluding the impact of Uni-Select, interest expense is projected to be a nominal impact with a higher average rate mitigated by debt paydowns.
Consistent with past practices, we have not anticipated future share repurchases beyond the call date of our guidance. We have included an effective tax rate of 26.8% in our 2024 guidance in line with the final 2023 rate. We expect to deliver approximately $1 billion of free cash flow for the year, achieving an EBITDA conversion to free cash flow in the low 50% range.
There are various puts and takes in this estimate, including higher cash payments for interest and building inventory, offset by improved earnings and increased payables. Capital spending is expected to be at the high end of our target range, again at $350 million, which includes key investments in salvage capacity and specialty distribution to support productivity and margin enhancement initiatives.
We feel good about the projected full year cash flow estimate and the conversion ratio, generating $1 billion in free cash flow provides flexibility to continue a balanced capital allocation strategy, including debt paydowns, our quarterly dividend, share repurchases and investments in high synergy tuck-in acquisitions.
In terms of quarterly phasing, we expect the earnings growth to be weighted more heavily to the back half of the year. Q1 has been affected by extreme weather conditions in certain markets and very low catalytic converter prices, which in recent weeks were running near 50% of the price in the same period of 2023. Q1 will also be affected by the timing of Easter, resulting in a loss selling day in Europe. The balance of the year will benefit from the additional selling days mentioned previously and a ramp-up of Uni-Select synergies as the year progresses.
Thanks for your time today. With that, I'll turn the call to Justin to discuss his vision and priorities for LKQ going forward.
