S172 Statement | LKQ UK and IE

LKQ

S172 Statement

S172 compliance statement

In accordance with section 172 of the Companies Act 2006, the directors of the company have acted in the way they consider, in good faith, and would most likely promote the success of the company for the benefit of its members as a whole. In doing so they have regard to the factors noted below:

The likely long-term consequences of any key business decisions
The interests of the company’s employees.
The need to foster the company’s business relationships with suppliers, customers and others.
The impact of the company’s operations on the wider community and environment
The desirability of the company to maintain a reputation for high standards of business conduct.

Principal business decisions

In line with the Regulations and FRC guidance, and in accordance with the approach taken during the financial year under review, having considered the company’s principal risks and uncertainties as detailed in the Strategic Report, the company made the following principal decisions during the year ended 31 December 2023:

to facilitate a cash loan to a fellow group undertaking amounting to £70m during the year. In making their decisions, the board considered the company’s strong Trade Working Capital position, the amount of its distributable reserves, as well as its cash position. Consideration was given to the company's actual and contingent liabilities, and the ability of the company to be able to pay its debts as they fell due. The company is therefore committed to maintaining an appropriate balance between maintaining healthy cash reserves whilst also supporting the continued success of the LKQ business and its shareholders.
To increase their investment in Commercial Parts UK Holdco Limited. In making their decision, the board took great care in ensuring their investment in this group would promote and allow for the achievement of the company’s long-term strategy. The company’s strategy and business model are designed to have a long-term, beneficial impact on the company’s success by ensuring the continued success of the LKQ business through the sale of automotive parts to the UK automotive sector. The investment reinforces this strategy as Digraph Transport Supplies Limited operates as a motor factor to the commercial vehicle sector, thus strengthening the company’s position in this sector. The investment also allows the company to align business models by improving trading relationships with suppliers through better business terms and providing a better service to its customers. Consideration was once again given to the impact on the company’s Trade Working Capital, cash position and committed liabilities before making a final decision.

Governance

LKQ Corporation is a NASDAQ listed entity regulated by the US Securities and Exchange Commission and subject to the US securities laws and listing regulations including Sarbanes-Oxley. As a wholly owned subsidiary of LKQ Corporation, the board is required to report and administer LKQ Group (UK) Limited in line with the requirements of LKQ Corporation as well as the laws of England and Wales. For information on LKQ Corporation please see https://www.lkqcorp.com.

Stakeholder engagement

By taking the time to understand the various stakeholders, the directors of LKQ Group (UK) Limited can ensure the various interests are factored into boardroom discussions along with the potential impact of decisions on each stakeholder group and their needs and concerns. All the committees that report to the board are chaired by a senior member of the executive team and the members of the committees represent a broad diversity of the business.

The following summarises the key stakeholder groups of LKQ Group (UK) Limited and how the company and board engages with them:

Stakeholder engagement (continued)

a) The interest of the company's employees

The board understands the importance and benefit of having a broad range of skills, experiences, perspectives, and backgrounds in our teams and continuously strives to attract, engage and retain a diverse range of talented people. People and talent development is high on the agenda for the Board. Each year the company conducts a colleague engagement survey where every colleague is encouraged to participate and acts as a springboard to delivering improvements throughout the organisation. Colleagues experience a bi-annual colleague review process, training and development, prospects, fair pay and benefits to help develop their careers. The board regularly communicates to its employees through regular town hall updates video streaming, presentations, internal emails and newsletters. There are regular presentations, open to all colleagues, at which the senior leadership team inform and update employees on the company’s performance, plans and outlook. Employees are encouraged to ask questions about the company's plans and performance. The Health Safety and Environment committee reports upon any incidents, near misses and initiatives to further protect and enhance the working conditions of our colleagues.

b) The need to foster the company's business relationships with suppliers

The company regularly holds meetings and reviews with suppliers. It has a supplier on-boarding process in place to check compliance, corporate social responsibility, and credit checks with KPIs and service level agreements for key suppliers. Supplier management is done with dedicated indirect and direct procurement professionals. The board understands the importance of the company's supply chain in delivering its long-term plans. Any material ethical or compliance related issue would be identified by the Audit, Risk and Compliance committee or the product committee for discussion. The company regularly engages with suppliers and any significant supply issues or concerns are brought to the attention of the relevant board member. All suppliers are signatories to the Company Code of Conduct that set out an agreed set of minimum standards for quality and ethics that the company expects of its supply chain partners.

c) The need to foster the company's business relationships with customers

The company ensures that customers have access to its product range and that availability, pricing and service delivery are all of the highest standard.

The board regularly reviews updates on customer engagement, external and internally conducted feedback surveys as well as any significant concerns or issues which are escalated from the Customer Services team. Board members receive regular dashboard reports identifying the timeliness of deliveries, stock availability and the performance of the Customer Services team. Board members also visit and call customers as well as visiting branches and logistics facilities to ensure they are familiar with all operational issues. New concepts, reward programmes and initiatives are discussed and approved at board level. The board, through its various sub-committees, considers any areas of risk or concern in terms of Health & Safety, environmental or exploitation issues which may arise. The company sets terms and conditions, policies and procedures detailing its trading arrangements. LKQ Group (UK) Limited has dedicated account managers as well as the Customer Services team for trade, consumer and web customers.

d) The need to foster the company's business relationships with owner stakeholders

The company engages through regular meetings, calls and site visits with LKQ board and management at global and European levels. LKQ Group (UK) Limited must satisfy and comply with the governance requirements of LKQ Corporation and report to its board and sub-committees. There is comprehensive analysis of monthly, quarterly and annual reporting of results and performance which ensures all areas of the business are being monitored and reviewed. The company’s risk and compliance function together with the equivalent LKQ group teams looks at the key risks facing both the company and the wider automotive industry. Engagement with industry bodies and close alignment with customers and suppliers ensures the company is familiar with key areas of change within the industry. This includes, in addition to the new MVBEO mentioned above, the active lobbying of government departments and agencies, such as the Department for Transport (DfT) and Driver and Vehicle Standards Agency (DVSA), on the regulatory environment in which the aftermarket must operate. In 2023, this included helping to successfully block proposed changes to the date at which a vehicle’s first MOT is due from 3 to 4 years, as well as the frequency of MOT tests moving from every 12 to months to 24 months, which would have had a major impact on work volumes in the aftermarket.

Stakeholder engagement (continued)

e) The impact of the company's operations on the community and environment in the report.

The company’s sustainability approach is aligned to that of its parent company, LKQ Corporation. The three-pillar sustainability strategy includes profitably delivering sustainable outcomes, people-led performance and strong governance and ethical practices.

To ensure it meets the UK Government target of net zero emissions by 2050, and the company’s commitment to reduce its carbon emissions globally by 30% by 2030 relative to revenue, it is introducing carbon reduction strategies across key areas of the business, primarily related to distribution and property as these offer the greatest opportunity for reducing carbon emissions.

In 2023 the company started to purchase renewable electricity, which is significantly helping reduce carbon emissions.

lights along with motion sensor light switches which have been installed throughout most of the locations it operates in to reduce energy use. In addition, PV panels are currently being installed onto the roof of its central distribution centre in Tamworth.

Furthermore, the company aims to support the communities in which it operates in and where its employees live to make a positive impact to their social and economic development. It supports employees to engage in activities that support their local community through charity fundraising activities and its local community fund supporting over 130 local causes and charities in 2023.

On a national level, it is actively involved with the charity Ben, which supports mental health and wellbeing within the Automotive industry in the United Kingdom.

The company is also actively involved in the automotive industry’s wider efforts to improve equity and diversity, particularly in areas such as gender representation. It launched two major initiatives in 2023 including 25 x 25 – its commitment to achieve a 25 per cent female representation in its workforce by 2025 – and PAVE (People Adding Value Everywhere), a diversity and inclusivity taskforce.

f) The desirability of the company maintaining a reputation for high standards of business conduct

Central functions including Finance, Audit, Communications, Health & Safety, Facilities, Legal, Operations and People teams review and maintain the policies of LKQ Group (UK) Limited in relation to all the legislative and governance requirements for the company to operate responsibly. These include compliance with regulations; worker pay and conditions; waste and environment; gender pay; consumer protection; legal trading; health and safety; privacy and GDPR; and the treatment of suppliers.

g) The likely consequences of any decisions in the long-term

The board approves a budget and a strategic plan annually, against which it and LKQ Corporation monitors both operational and financial performance. The board has agreed a set of performance indicators and reviews the company’s forecast funding and liquidity requirements against these. In approving the strategy, the directors also consider external factors including the UK and wider economic and market conditions.

Brexit impact

The United Kingdom’s withdrawal from the European Union (also known as Brexit) became effective on 31 January 2020. While a Trade and Cooperation Agreement exists between the U.K. and European Union, we have and continue to observe shipment delays, particularly with respect to the products we supply to our business in the Republic of Ireland. The long-term extent and impact of these issues remains unclear at this point, which could have adverse impacts on our business.

Climate-Related Financial Disclosures

Non-financial and sustainability information statement

Effective for financial years commencing on or after 6 April 2022, Climate-Related Financial Disclosures have been introduced under the Companies Act in the UK as part of the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022. As part of the requirements, as well as Relevant Public Interest Entities and UK registered companies with securities admitted to AIM, other UK companies with more than 500 employees and £500m turnover are also required to make certain Climate-Related Financial Disclosures. The company meets the above threshold for reporting during the financial year ended 31 December 2023 and has set out relevant Climate-Related Financial Disclosures to comply with the new requirement as detailed below.

While the company believes it has limited direct and material climate-related risks, it notes that its parent company, LKQ Corporation (LKQ), is currently completing a substantial qualitative and quantitative climate-related risk analysis in 2024 in accordance with the Task Force on Climate-related Financial Disclosures (TCFD).

Governance

LKQ’s Board of Directors (the Board) has ultimate oversight of the global climate-related risks and is responsible for reviewing and providing guidance on the company’s climate change-related programs and policies as part of its wider sustainability oversight. Sustainability is a subject discussed at least annually by the Board.

Global

LKQ operationalizes Sustainability throughout the organization with accountability and oversight at the Board and management levels. LKQ has a global Sustainability function as well as local sustainability teams throughout the business. LKQ has a VP Sustainability who reports directly to the Senior Vice President and Chief Financial Officer.

The Board’s Compensation and Human Capital Committee provides oversight on the company’s programs and policies relating to community involvement, culture, and human capital, including diversity, equity and inclusion, workforce health, safety and engagement, and leadership development and effectiveness. The Governance/Nominating Committee of the Board has responsibility for overseeing the company’s other Sustainability initiatives.

In addition, the VP Sustainability updates LKQ’s Risk Management Committee and Sustainability Advisory Committee quarterly.

Company level

At the company level (LKQ Group (UK) Limited), the CEO and CFO of the UK Board of Directors (UK Board) are responsible for overseeing the climate-related risks and opportunities, and for supporting climate-related initiatives to help achieve global climate-related goals, as detailed in LKQ’s 2023 Sustainability Report.

The CEO and CFO are advised by both the LKQ global Sustainability function and UK & Ireland Sustainability committee and supported by the company’s Executive Leadership Team, which is an internal management group comprised of cross functional leaders. The Executive Leadership Team is responsible for supporting primary decision-making for the implementation of climate-related regulations. The Directors of the company retain overall responsibility in reviewing and actioning climate-related matters.

The company’s progress is reported to LKQ’s Sustainability Advisory Committee every three months. This Committee provides the central governance mechanism, overseeing climate-related matters – strategy, targets and progress. The UK and Ireland committee meets every two months on sustainability related topics and progress for this segment and reports updates to the UK and Ireland Board and Executive Leadership team.

Risk Management

LKQ centrally manages and mitigates risks to the business and financial performance, including climate change and other environmental risks. Risk management topics are reviewed and discussed on a regular basis among leadership teams across the entire organization, and consideration of such risks is part of LKQ’s operating and investment decision-making process, in all aspects of the business. Risk management is reported on a regular basis to the Chief Executive Officer and the Board.

LKQ’s global Sustainability team, alongside the Executive Leadership Team and Sustainability Committee with the support of specialists, works to identify climate-related risks and opportunities that may have a material financial impact on LKQ. LKQ identifies risks through workshops with the business, which includes reviewing and analysing the potential impact of a variety of physical and transitional climate-related risks on financial performance, business operations and the corporate strategy.

LKQ is currently completing a substantial qualitative and quantitative climate-related risk analysis in accordance with TCFD (climate-related scenario analysis) and will publish the results of this analysis in accordance with relevant regulations. This analysis will be completed at a global level on a periodic basis.

Strategy

The climate-related scenario analysis being performed by LKQ is identifying impacts to LKQ’s operations over three distinct timeframes: short-term, medium-term and long-term, as detailed below.

To ensure the company’s resilience to the climate-related risks identified by LKQ, the Executive Leadership Team with the support of the LKQ Sustainability Committee is developing strategic initiatives in order to manage or mitigate such risks.

Modelling the financial impact of climate-related risks and opportunities is inherently complex, as it includes significant judgements and estimates given the uncertainty regarding their impacts. As part of its qualitative and quantitative climate-related scenario analysis, LKQ is also identifying climate-related opportunities, such as recycling and circular economy activities.

Where appropriate, climate-related risks and opportunities are considered in the longer-term strategy of the company.

Climate Risk Assessment

The substantial qualitative and quantitative climate-related scenario analysis being completed by LKQ in accordance with TCFD includes consideration of its UK business as well as all of its significant businesses globally. LKQ has defined time frame ranges to align with the European Union (EU) Corporate Sustainability Reporting Directive (CSRD). These time frame ranges are included in the following table:

The impact of climate-related risks and opportunities is defined by estimating the likelihood and financial impact on business operations, strategy and financial performance where feasible. At a minimum, qualitative measures as defined in the risk assessment matrix are taken into consideration.

In the substantial qualitative and quantitative climate-related scenario analysis being completed by LKQ, both physical and transition risks are being considered.

Climate Risk Assessment (continued)

Physical climate risks for 50 locations across the globe that represent North America, the UK, Europe and key suppliers have been identified for analysis. Physical climate risk has been defined as exposure to acute and chronic natural hazards may result in damage to LKQ facilities, operational / supply chain disruptions, displacement of employees, and/ or asset loss. The physical climate risks being evaluated include wind, flood, precipitation, convective storm, heat, cold, wildfire, and drought. LKQ understands that physical climate risks may have financial implications for LKQ, such as direct damage to assets and indirect impacts from supply chain disruption. LKQ has not determined if physical climate risks are material to the group at the time of publishing this report.

LKQ has also evaluated its transition risks which refer to risks that result from the global transition to a lower carbon economy. A lower carbon economy is one which includes more extensive policy, legal, technology and market changes to address mitigation and adaptation requirements related to climate change. The transition risks and opportunities reviewed and selected by LKQ to be evaluated include carbon pricing, vehicles in operation (VIO) volume/mix, product and vehicle regulations, and circular economy market opportunities.

A summary of the principal climate-related risks and opportunities we believe to be relevant to the company, the time periods by reference to which they are considered and a description of the actual and potential impacts of the principal climate-related risks and opportunities on the business model and strategy of the company is shown below.

The company recognises that the above principal climate-related risks and opportunities present themselves in both a low-carbon and high-carbon future. Management believes that the company is likely to be resilient to both a lower carbon and higher carbon economy but recognises that the impacts are likely to be higher in a lower carbon economy. The Directors consider the risks are being satisfactorily managed or mitigated through actions being developed by LKQ combined with strategic initiatives led by the Executive Leadership Team of the company alongside the LKQ Sustainability Advisory Committee including inter alia ensuring there are appropriate processes in place for managing the material climate-related risks and opportunities stated above.

Sustainability pillars, targets and key performance indicators (KPIs)

In its 2023 Sustainability Report, LKQ Corporation highlighted three sustainability pillars. These pillars are:

Profitably delivering sustainable outcomes
People-led performance
Strong governance and ethical practices

The specific group targets in relation to carbon emissions are as follows:

By 2030 to reduce global scope 1 and scope 2 emissions by 30% compared to the 2021 baseline relative to revenues
By 2050 to achieve net zero emissions across its operations.

Progress on these targets, as disclosed in the 2023 Sustainability Report, are as follows:

2030 target - The Scope 1 and 2 emissions in 2023 are 22.3mt CO2 equivalent (CO2 e)/$m -11.8% vs 2021 (2022: 26.2mt CO2 e/$m +3.8% vs 2021).
2050 target - We expect to achieve net zero emissions (Scope 1 and 2) by 2050.

The KPI used by LKQ is metric tonnes of CO2 equivalent (tCO2e) emitted per million dollars of revenue globally, whilst the KPI used by the company is included below.

Company Actions taken to achieve sustainability targets and their impact on the community and environment

The company’s UK sustainability approach is aligned to that of its parent company.

In 2023 the company has continued to purchase renewable electricity, which has significantly helped to reduce Scope 2 carbon emissions.

In addition to this, the company is introducing EV vehicles wherever possible by exploring alternative solutions for last mile deliveries and changing many of its HGV fleet to alternative low-carbon fuel solutions, for example CNG. It has introduced over 100 electric vehicles and 40 CNG vehicles in 2023 and has plans to further increase these numbers over the coming years in line with its 2030 targets.

Across its building and facilities, the company is committed to minimising the waste throughout its operations and is making investments to make buildings as energy efficient as possible through, for example, the introduction of LED lights along with motion sensor light switches which have been installed throughout most of the locations it operates in to reduce energy use. In addition, PV panels are currently being installed onto the roof of its central distribution centre in Tamworth.

Furthermore, the company aims to support the communities in which it operates and where its employees live to make a positive impact on their social and economic development.

It supports employees to engage in activities that support their local community through charity fund raising activities and its local community fund supporting over 130 local causes and charities in 2023.

On a national level, it is actively involved with the charity Ben, which supports mental health and wellbeing within the Automotive industry in the United Kingdom.

Streamlined Energy and Carbon Reporting

Greenhouse gas emissions, energy consumption and energy efficiency action

The company's greenhouse gas emissions and energy consumption for the year were 25,457 tonnes CO2e (2022: 23,340 tonnes CO2e) as analysed below.

The 2022 figures were restated as a result of a re-calculation process completed in 2023 with the aim to enhance the accuracy and completeness of data. These figures represent our LKQ Euro Car Parts and LKQ Bodyshop trading brands. The 2023 figure now contains includes data for all the subsidiaries of LKQ Group (UK) Limited including our LKQ Leisure & Marine brand following the hive up.

In 2023 the company has continued to purchase renewable electricity, which is significantly reducing Scope 2 carbon emissions.

Intensity Measurement

The chosen intensity measurement ratio is the total gross emissions in metric tonnes CO2e per employee, a recommended ration for LKQ Group (UK) Limited’s sector. The intensity measurement was 2.75 tonnes (2022: 2.53 TCO2e) per employee based upon 25,457 (2022: 23,340) tCO2e and 9,257 (2022: 9,195) employees.

Measures taken to improve energy efficiency

At LKQ Group (UK) Limited, sustainability is a key topic for the business, particularly in monitoring and improving our impact on the environment. An overview of measures taken by the company to improve our energy efficiency are set out on page 12.

Going concern

The company has recorded an operating profit for each month to date in 2024 and the current expectation is that trading will continue to be strong for the remainder of the year.

The board has concluded, based on the current trading results, the forecast for the remainder of 2024, the healthy cash position, the budgeted profits and positive cash generation for 2025 and analysis performed thereon, that the company has adequate resources to continue in operation for at least 12 months from the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

The strategic report was approved by the board and signed on its behalf by

Kevan Wooden

Chief Executive Officer - LKQ UK and Ireland

Date: 30 September 2024