LKQ Corporation (NASDAQ:LKQ) Q4 2022 Earnings Call Transcript
LKQ Corporation (NASDAQ:LKQ) Q4 2022 Earnings Call Transcript February 23, 2023
Operator: 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. Thank you. 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 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.
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 (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 (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.
Photo by Obi - @pixel7propix on Unsplash
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.
Rick Galloway: Thank you, Nick, and good morning to everyone joining us today. Before I go into details of the fourth quarter, I'd like to reflect on what LKQ accomplished in the last year. We entered 2022 with a strong position based on the success of our operational excellence initiatives and solid balance sheet after reporting the highest profitability in the company's history in 2021. We expected there to be headwinds in 2022 from the areas Nick mentioned. As you can see on the bridge, on Slide 5, these headwinds did set us back, but the LKQ team drove operational improvements to produce roughly $0.40 of operating increases relative to 2021. We also sustained the positive momentum around cash flow generation, with free cash flow of just over $1 billion in 2022, and healthy conversion ratio of 60% of EBITDA.
Our work on free cash flow in recent years supported some noteworthy accomplishments in the last year: LKQ achieved investment-grade ratings from all three major rating agencies; returned $284 million to shareholders through quarterly dividends and increased the quarterly amount by 10% in October; repurchased roughly 20 million shares of LKQ stock for just over $1 billion, which combined with the carryover benefit from 2021 purchases added $0.23 of EPS compared to 2021; and all while maintaining a net leverage ratio at less than 1.5 times EBITDA. In early January 2023, we replaced our prior credit facility, which included a $3.15 billion revolver, with a new unsecured facility, including a $500 million term loan and $2.0 billion revolver. Our confidence in the balance sheet and ability to generate robust cash flow factored into the decision to reduce the size of the facility.
We were pleased to complete this new facility ahead of the prior facility becoming current and lock-in funding over the next five years at a competitive rate structure. Generating these successful outcomes despite challenging conditions is a credit to the entire LKQ team and I want to thank all of them for their contributions. Now turning to the fourth quarter results, starting with segment performance. Going to Slide 14, Wholesale North America continued its strong performance, posting a record fourth quarter segment EBITDA margin of 18.5%, a 330 basis point improvement over last year. We saw gross margin improvement of 150 basis points, driven by favorable mix and the sale of the lower margin PGW business as well as pricing and productivity initiatives.
Overhead expenses were favorable by 180 basis points, primarily related to non-recurring expenses incurred in 2021. Strong organic revenue growth aided by the rebound and aftermarket parts volume offset inflationary cost increases and benefited operating leverage. As mentioned in prior quarters, we believe there will likely be some moderation in segment EBITDA margin in upcoming quarters as the benefits of the 2022 price increases fall away with the resultant EBITDA margin expected to be in the high 17%-s, low 18% range for 2023. Europe also delivered its highest-ever fourth quarter margin at 10.0%, up 110 basis points from the prior year period. As seen on Slide 15, gross margin improved by 10 basis points as we worked to offset inflation with pricing and procurement initiatives.
Overhead expenses decreased by 70 basis points with an emphasis on cost structure and improved leverage due to the 5.8% per day organic revenue growth. Inflation related to personnel, freight and fuel costs remains a critical concern across the European markets. The team is actively addressing the pressures through productivity initiatives. Europe produced a segment EBITDA margin 10.2% for the full year, the second consecutive year of double-digit margins. I want to commend the Europe team for achieving this result despite the onset of the war on the Ukraine and significant macroeconomic headwinds. And we are optimistic about incremental margin expansion of 20 basis points to 30 basis points in 2023. Moving to Slide 16. Specialty's EBITDA margin of 6.2% declined 130 basis points compared to the prior year, coming from a decrease in overhead expense leverage, driven by an organic revenue decline of 9.1% per day as they anniversary a tough comp from the prior year when the business delivered a 6% organic revenue growth in the fourth quarter on top of the 17% growth in Q4 2020.
Inflationary pressures also pushed overhead expenses as a percentage of revenue higher, including personnel, freight and fuel expenses. The overhead expense increase were partially offset by lower incentive compensation and benefits from operating expense synergies, largely generated from the SeaWide acquisition. As you can see on Slide 17, Self Service profitability improved sequentially from the low point in Q3, but remained on the low end of our historical range of 5.2% for the fourth quarter and below our expectations. Metals prices continued to have a negative effect on results with unfavorable lag effect and reduced operating leverage caused by the lower metals revenue dollars. When we broke out Self Service as a separate segment in Q1 2022, we highlighted that this business would have cycles, mostly driven by commodity price volatility.
We are working through a down cycle now and the team is focused on buying the right quantity of cars at the best price to drive margin dollars higher. With the uncontrollable commodity dynamic in this business, we will emphasize generating margin dollars and free cash flow rather than targeting a specific margin percentage. Now on to the consolidated results. We reported diluted earnings per share of $0.72 and adjusted diluted earnings per share of $0.78, which was a $0.09 reduction relative to Q4 last year. As previously mentioned, our operational performance showed year-over-year improvement and was in line with our expectations. However, this solid operational performance was more than offset by unfavorable year-over-year effects of $0.04 from volatility in metals prices and $0.03 from the foreign currency exchange effects caused by the stronger dollar.
Additionally, we had a negative effect of $0.03 from higher interest rates as benchmark rates were markedly higher in Q4 2022. As Nick mentioned, taxes were the most significant unfavorable variance for the quarter, reflecting a $0.15 year-over-year impact and a $0.05 negative variance relative to the guidance provided back in October. As a reminder, in the fourth quarter last year, we recognized almost $0.10 in tax provision benefits from discrete items and the reduction in our full year effective rate. We experienced the opposite effect in Q4 2022, as we recorded a negative provision effect of approximately $0.05 from increasing our full year effective rate and unfavorable discrete items. The effective rate increase primarily related to this shifts -- to shifts in the geographic distribution of income.
We mitigated about $0.07 of the decline with our lower share count, resulting from our share repurchase program. During the fourth quarter, we incurred $11 million in restructuring expenses, the majority of which relate to a new program we kicked off late in the year. We initiated the 2022 global restructuring program and recognition of the ongoing macroeconomic concerns heading into 2023. All of the segments have submitted plans to improve operational efficiencies by streamlining functions, closing underperforming locations and halting non-essential projects. The total cost of the 2022 program are estimated to be in the range of $30 million to $40 million to be incurred over the next few years. Projected cost savings of $20 million related to the program are included in our 2023 guidance, and we expect annual run rate benefits of approximately $30 million by 2025.
Shifting to cash flows and the balance sheet. We produced $166 million in free cash flow during the quarter, bringing the year-to-date total to $1.28 billion, the third consecutive year we have exceeded $1 billion. With the supply chain issues abating, we made good progress in rebuilding our inventory levels in Wholesale North America and Europe. As shown on Slide 35, we increased our inventory values in these segments. Though note that the dollar increase doesn't directly equate to a quantity change given the higher input costs. We are comfortable with our current inventory holdings and are pleased with improvements in aftermarket fill rates. We will continue to evaluate our inventory holdings and may increase our balances in 2023, but not to the extent seen in 2022.
The supply chain finance program contributed to an increase in days payable outstanding in Europe in 2022. With the signing of the new credit facility, certain restrictions around the program were eliminated and we view further program expansion to be an opportunity in the next few years. For the year, the cash conversion is 60% conversion of the EBITDA to free cash flow, in line with our targeted range of 55% to 60% We finished at the high end of the range in our guidance, partially due to the lower-than-projected capital expenditures. For the year, capital expenditures were 1.7% of revenue, which is below our targeted 2.0% to 2.25% range. We have experienced delays in receiving capital assets, such as trucks, as a result of supply chain delays.
As a result, some of our 2022 orders will be delivered in 2023 and reflected in capital expenditures in the 2023 financials. As of December 31, we had total debt of $2.7 billion with a total leverage ratio of 1.5 times EBITDA, which is comfortably inside our target range of below 2 times. Please note that going forward, I will reference total leverage statistics rather than net leverage as the new credit facility changed the metric to total leverage. Our effective borrowing rate rose to 4% for the quarter due to the market rate hikes in the U.S. and Europe. We have $1.8 billion in variable rate debt, so 100 basis point rise in interest rates would increase annual interest expense by $18 million. In the fourth quarter, we repurchased 3 million shares for $152 million and paid a quarterly dividend totaling $74 million.
I will conclude our thoughts on projected 2023 results as shown on Slide 6 through 8. Our guidance is based on current market conditions and recent trends and assumes that scrap and precious metals prices hold near December prices and the Ukraine Russia conflict continues without further escalation or major additional impact on European economy and miles driven. On foreign exchange, our guidance includes recent European rates with balance of the year rates for the euro of $1.08 and the pound sterling at $1.22. We expect organic parts and service revenue growth of between 6% and 8%. Please note that we have one fewer selling day in 2023 and have included associated with the expansion of aftermarket parts volume resulting from State Farm writing claims on CAPA certified parts in three product lines: 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.
Nick Zarcone: 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.
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