Good morning. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Second Quarter 2019 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. [Operator Instructions] I would now like to turn the call over to Joe Boutross, Vice President of Investor Relations. You may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to LKQ's second quarter 2019 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive 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-Q in the next few days. And with that, I am happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe, and good morning to everybody on the call. We certainly appreciate your time and attention at this early hour. This morning, I will provide some high level comments related to our performance in the second quarter, and then Varun will dive into the segments and related financial details, before I come back with a few closing remarks. When taken as a whole the second quarter of 2019 played out largely as we anticipated when we announced our first quarter results 90 days ago. There were both some clear positive movements and some disappointments, but we are encouraged by the overall result. On the plus side our North American segment experienced a significant uptick in both gross margin and EBITDA margin, which gives us confidence that our disciplined approach to the market and keen focus on controlling our cost are creating positive outcomes. Also our global focus on trade working capital management lead to significant cash generation, which was well ahead of our 2019 expectations. While there were some positive items related to the timing and we will give a bit back as we move through the remainder of the year, we are ahead of our initial plan from a free cash flow perspective for the first six months and we believe we will remain so for the balance of year. On the plus side, we knew we had very difficult year-over-year revenue growth comparisons with respect to both our North American and European segments, but the organic revenue growth came in below our tempered expectations. Additionally, there was one less working day in Europe in the second quarter of this year compared to last. So it's important to focus on the same day result, there is no doubt that the soft macroeconomic conditions across Europe are weighing…

Thanks, Nick, and good morning to everyone joining us on the call. Overall, we feel that the second quarter was a qualified success, providing some positive developments in our North America segment and also free cash flow generation, while also offering a few areas for improvement. Before diving into the results. Let's start with the key financial highlights. Operating cash flows in the second quarter were $461 million, the highest quarterly amount in the Company's history by a factor of more than two times. Free cash flow from the quarter totaled $413 million dollars, or $282 million higher than the same period in 2018. We have talked about the past few calls about our emphasis on cash flow generation. And I want to thank our teams across all three segments for their efforts to deliver substantial year-over-year growth. We are raising a full-year guidance for free cash flow, more details a little later. The strong cash flows enabled us to buy 4.4 million units of LKQ stock for approximately $120 million in the quarter. Additionally, we also paid down debt by $220 million in the quarter and in the six months through June 30th, have paid down $281 million. Returning cash to our shareholders, while reducing our net leverage ratio speaks to the strength of our business to generate strong consistent cash flows. Our North America segment was able to withstand some revenue softness to process highest segment EBITDA margin percentage since the second quarter of 2017. I want to commend the North American management team for taking a proactive approach to protecting margins to offset inflationary pressures, and proactively working to optimize its cost structure. Our European specialty segments also face soft revenue and we are taking actions in both segments to advance our stated strategic objectives and address…

Thank you, Varun for that excellent financial overview. In closing I would like to review a few of the key initiatives discussed on previous calls that will continue to be points of focus during the balance of 2019. First, we will integrate and simplify our operating model. Second we will continue to focus on profitable revenue growth to create sustainable margin expansion. Third, we will drive better levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy and fourth, we will continue to invest in our future. As you can see from the second quarter results these programs and targets are gaining momentum throughout the organization and the teams are actively working towards achieving the respective goal. I am proud of the momentum we have created with our second quarter performance and how our team of over 51,000 employees performed a various market challenges in both North America and Europe. Importantly, I want to recognize our leaders across each of our segments have embraced our productivity initiatives and the performance and compensation metrics, we have implemented as we progress through 2019 and beyond. I am confident these factors will create long-term value for our stockholders. I look forward to having you joining our European discussion in September and we will announce final details as we get closer to that call. And with that operator, we are now ready to open the call for questions.

Certainly. [Operator instructions] Daniel Imbro with Stephens Inc. Your line is now open.

Yes, thanks. Good morning guys, thanks for taking my questions.

Good morning Daniel.

Good morning.

Wanted to think about the European margin actually Varun starting with the gross margin-line. I think you said gross margin were flat year-over-year despite a 50 bip tailwind from procurement and we left some of the issues from Q2 last year, but if you could just kind walk through some of the puts and takes of what is going on in that line and then as comparison get more difficult in the back half, how you guys are expecting that gross margin on the trend in Europe. Thanks.

Yes. Absolutely Daniel and good morning and thank you for calling at the hour. Yes. If you think about our European gross margin it was flat and deep, so you actually read that correct. You really think about it in terms of while we did get the centralized procurement benefits with the organic decline coming through there is pressure on margins, right. And so, as you think about other competitors also out there, the one area where they go through to be able to kind of sustain the revenue side is on the margin peace of it. So margin did come under some pressure as a result of that. Nothing more, nothing less, we have always had those competitors are there. But clearly with a falling market as such, that is really where folks end up in trying to give value to their customers. So there were some pressure from that perspective. I think if you step back and think about it, while the headline number would suggest that the European segment EBITDA margins declined by call it 90 basis points a year-over-year. Put this entire piece into context, as you think about the fact that a year ago, Europe delivered at 8.3%, organic growth number. This year, the reported number is negative 4.3. That is 12.5 percentage points swing. And as you think about the fixed cost structure, largely you know a more so in the European Space. That is the kind of deleverage that ends up coming through. And even if we were to be able to hold flat, for example, rather than negative 4.3, if it were flat, and you were to run the math, the SG&A or the OpEx expenses would actually declined by 100 basis points with all other things being similar. So think about the deleverage that takes place in a market that is shrinking. And it doesn't just show up in the gross margin-line, it actually shows up in multiple lines, in terms of not being able to get the operating leverage.

Craig Kennison with Baird. Your line is open.

Hey , I'm sure there will be more questions on Europe. But I wanted to shift to North America and the collision business. How do you explain that soft collision trend? And to what extent is the total loss rate which appears to be climbing, resulting in fewer repairs and really just fewer opportunities for LKQ?

Good morning, Craig. This is Nick. Thanks for your question. We have a very deep and ongoing relationship with CCC. We get a lot of data from them on a on a quarterly basis. And when we sat with them a couple weeks ago, we asked them point blank, their perspective as to the decline in repairable cranes in particular, because that is really what drives our business. In general, they indicated that the winter of 2019 was a bit milder than 2018 and that has an impact of reducing collision volume, if you will. And there is no doubt that on April 1 beginning of the second quarter, right, the collision repair shops have less backlog, if you will, in 2019 than they did on April 1st of 2018. You are absolutely right. Total loss rates have continued to nudge their way upward just a bit. And on the margin that takes a few cars out of the repair shops and put some into the salvage auctions, which is not a bad thing for us, because we have more cars to purchase. Total loss rates for the June 2018 to May 2019 time period was 19.3% that compares to 18.7% for the June 2017 to May 2018 time period so up just about a half a percentage point or so. Miles driven, has really started to flatten out from May 2018 April 2019 up only [six tenths] (Ph) of 1% compared to the May 17 to April 18 time period and most of those miles there increase is in fleets as opposed to personal miles. What I would call the accident-prone portion of the population think about our teenagers out there and then maybe some of the very elderly, they are not in the fleet segment and so that they believe and we believe it’s having perhaps a slight impact as well. So the good news on a longer-term basis is that the number of cars in the sweet spot is up and APU continues to shift upward very slowly, but it does shift up a bit and we believe quite frankly that account for the positive spread between our organic growth and actually the negative repairable claims growth. And lastly obviously we were measuring against a 7% comp of Q2 last year and those comps will get a little bit easier in Q3 in a much easier in Q4.

Michael Hoffman with Stifel. Your line is now open.

Hi, I’m going to change gear completely and talk about cash. Looking at the revised guidance, my thinking about the second half correctly, if I take the midpoint of the net income in the free cash flow. It would suggest you do about 300 million in net income helps about 180 million of DNA and then setting that some of the other things in the cash flow statements unchanged other than working capital. That is the comment you made Varun, is there is about 140 million or 150 million walked back of working capital in the second half and that puts you at the midpoint of the cash flow from ops.

Yes Michael. So yes, good morning this is Varun actually. And yes I think the mechanic to fuel utilizing in your model from free cash flow or an OCF prospective are appropriate and I think if you also kind of look back into it, you just take 2017 and 2018 two prior years. We typically do have an outflow on create working capital in the second half verses the first half. So in terms of different ways to look at it, clearly with the slide frame of 20 million, 25 million at the midpoint for adjusted net income, don’t also forget that with the restructuring program that we called that also takes us back. So I would not say the usage on a working perspectives is about 140, 150 I think just take into account the lower earning plus also the restructuring that we called out that will be utilizing cash and then just in terms of the first half, second quarter use of free working capital. Overall the mechanics that you are thinking of are appropriate and hence both Nick and I referenced that there will be certain timing associated with payments. But we do expect there to be certain opportunities for us to be able to invest more on the inventory side, just given the state of the market on a broader basis. If not us, that is seen some on a softer revenues, it’s happening to competitors and we are certainly seeing it from some of the suppliers specifically over in Europe in terms of what they have been calling out. But thank you for the question, we are very pleased with the way cash is been coming through the business and really happy with the momentum that we picked up from the second half of last year and that is carried into 2019. We believe there is more to come.

Stephanie Benjamin with SunTrust. Your line is open.

Hi, good morning.

Good morning.

I was hoping if you could talk a little bit about just the headwinds we are seeing from the aviation, and glass businesses. And when you would - start wrapping those. I understand it's just kind of a comp because they are small businesses where small base, but you can see some nice swings quarter-to-quarter. So just first, just when we should expect to comp some of that going forward. And then additionally, if you could just walk through in a little bit more detail, just what is driving the kind of significant margin improvement in North America, whether it's pricing, just cost control, just as any - a little bit more color on how we can think about that going forward would be helpful. Thank you so much.

Okay, great. Well I will start. Clearly, we indicated in past calls, as it relates to our glass business, that when we bought the business, we inherited some less than profitable contracts. And so we have moved away from some of that revenue intentionally. That is all part of the idea of focusing on really profitable revenue growth. That comes with a decline in revenue on an organic basis, if you will. And sometimes you need to be willing to walk away from business. And that is what we have done there, if you will. That project and some of those contracts really started at the beginning of this year. So by the time we get into the late Q4, and first quarter, next year we will have fully anniversary that project. The aviation business, again, you need to keep in mind, which is also by the way, a negative drag on organic growth in both the first and second quarter. That is a business that is very, very lumpy. The average ticket sale there is not necessarily a few hundred dollars for our part, but we are talking tens of thousands, if not hundreds of thousand dollars for parts. So timing on a quarter-to-quarter basis can have big impacts. Again, our expectation would be - it's going to be tough sliding there for the rest of the year.

Stephanie this is kind of at the result. I think on your second part, the question about North America margin improvement, it’s actually is very, very tightly linked with what Nick started off by saying our focus on profitable revenue. Listen, we have talked about this in the past. Also, there are a number of businesses, there is a lot of revenue that is potentially available. And in the past, the company has taken advantage of it. But has been kind of looked into the market pressures, and really in terms of what is the contribution margin for that additional dollar of revenue, whether it be certain customers, whether it be certain product lines. We have consciously walked away from some of that. How should we say, lower margin or EBITDA free revenue. And yes, we did anticipate the organic growth numbers coming in as a result. And I think the way we would suggest is, Nick mentioned this in his overall comments. If we look at our core automotive parts and services business, which essentially is full service - and also aftermarket business, that business still grew about 70 basis points year-over-year, despite some tough comps from a year ago. So from that perspective, we are very happy in terms of where the focus by the team has been. So think about that specific piece, is this being conscious about the revenue that we go chase because there is cost associated with picking up the parts in the warehouse, delivering them in certain cases having to pay for the returns and so just being very conscious in terms of the revenue that we chose.

Bret Jordan with Jefferies. Your line is open.

Hey, good morning guys.

Good morning Bret.

Good Morning.

I will go back to Europe. Your peer in the space was commenting about some sequential - improvement around whether driven demand, I guess could if you talk about what you are seeing their sort of - if you are handicapping how much is economic and how much is weather and on the prior question just to add in, are we talking about the Fiat Chrysler battery distribution business as profit with sales.

So as it relates to Europe as a whole, your question I think really relates to what are we seeing here early in the third quarter and you know we have got basically three weeks worth of data which is not enough to former trend. Some of our operations are seeing a slight uptick on the revenue side, but again it's three weeks and we are headed into the big holiday season that being the vacation season over in Europe and so we are not going to - we are not working under the assumption if there is going to be significant uptakes in revenue growth in the back half of the year. We think its though slating, the reality is we talk to our competitors, we talk to our customers, the garages and obviously our suppliers and everyone is I think working under the assumption that these industry conditions are going to with us for a while. If they turn we think we will be a huge beneficiary of that, but we think it prudent to work on the - assumption that it’s going to be - these business conditions are going to be with us for the balance of year. On the your question as to the battery business. Again, we started that in 2018 as a new programs, so we fully anniversaried that we are continuing to distribute batteries on behalf of the FCA organization that being in the Mopar batteries to their dealers across the United States that is a good relationship and a good contract for us.

Chris Bottiglieri with Wolfe Research. Your line is open.

Hi, thanks for taking the question.

Good morning.

Hey, good morning. Really so we call in September, but I am a patient as our most investors, so want to cut it by layer what you have already told us and trying to think through what we do know already today. So as I understand it, there will be non-GAAP restructuring costs that you have laid out and then there is currently already a 30 basis point headwind from integration systems and that will not be non GAAP. You would expect 30 basis points to accelerate moving forward as you get further on those projects. And top of that as you go to the planning process there will be more potential cost to recognize these savings. So I guess the question is will those additional cost be non GAAP or those be just the headwind or earnings and how should we begin to think about 2020? I would think this would cause a decrease to European margins and free cash flow, but wanted to kind get anything you do know today would be helpful?

Chris, It's Varun out here. So yes, you are right and just for the broader attendees on the call also Nick did mention that in the second week of September we will provide an update on the various European initiatives that we talked about at the Investor Day last May. So there will be a full, deep dive associated with the various initiatives and really as to how we see the overall three plus year program that we talked about a little over a year. Your specific question with regards to restructuring, yes. But again, I do want to clarify the $25 million to $30 million of restructuring that we have triggered already. And you would have seen that in the second quarter numbers also. We have actually started that activity so it’s not as if you are starting it now. It actually impacts each of our three reportable segments, not only Europe. The other piece that I would like to call out is, with regards to the broader European optimization and integration program, the restructuring that we have currently talked about is not the entirety of that piece. So yes, if you play the tape forward, there will be a costs associated with integration. And really, the point is to kind of give the market some foreshadowing language with regards to transformation costs, right. There will be a cost associated with being able to integrate those businesses. And we will provide an update of that also in the September timeframe. And again, I think it just is helpful for the investment community to understand, business as usual versus costs associated with taking the business to the next level, and essentially digging the mood that much deeper around what we expect to be best-in-class businesses in any case. So there will be some costs associated with being able to make those investments, but also to get some of the cost structure that is currently embedded out there. But again, more on that when we get to the September review.

Ryan Merkel with William Blair. Your line is open.

Hey, thanks for filling in.

Good morning.

Good morning, Ryan.

Good morning. So I have two questions on Europe. So first what percent Europe segment sales, which you defined is more discretionary in nature. And the reason I asked them is trying to get a better understanding of the cyclicality that we might see if the Europe macro stay soft. And then secondly, on the Europe optimization plan, what is the main scope of work for the consultants that you hired? And the reason I ask that is because you are already restructuring and I presume you have already looked at divesting assets. Maybe just a little more clarity there would be helpful.

Yes, so I will start with the second half of that question, Ryan. It's important to keep in mind that the restructuring activities and what I call the optimization project, they are linked, but they are separate. Restructuring initiatives are all about kind of right sizing our business for the current market conditions. And that involves a consolidation of facilities and the elimination of lower margin activities at a local level as Varun described. The optimization project in Europe is really a longer term focus. And really, the intent is to gain efficiencies by morphing the European Organization and operating structure from what today is a fairly independent country based model to a slightly more integrated model that leverages a higher level of centralized resources. To be clear, in Europe we sell into local markets and our focus on customer service needs to remain to be a very activity, so nothing is going to change their, but there are many activities where we can create a better customer experience across the European platform and become more efficient by utilizing a more centralized structure, particularly when you think about things like procurement, category management, logistics IT and alike. Getting from here to there is no easy task and it’s not going to happen overnight, it’s going to happen over several years, but we believe and some of the initial work with our outside consultants have clearly documented that there could be significant benefits of doing this and that is why we are headed down the path. There are costs to get there, things like a new ERP program which is going to get kicked off - which was kicked off back in October is going to roll out over the next four to five years. We need to create a central…

This ends the time allotted for the Q&A session. I would now like to turn the call back over to Dominick Zarcone for final remarks.

Well we certainly appreciate your time and attention this morning. As I indicated earlier, we are encouraged about the progress that we have made in many regards, particularly the margin structure in North America, the cash flow numbers, which were terrific. We have a lot of work to do in Europe to understand that and we look forward to sharing with you in mid-September, kind of the update on those activities. So again, I appreciate your time and attention and we will talk to you in September. Thank you.

Thank you for attending today's conference. You may now disconnect. Have a good day.