Good morning. My name is Carol. And I'll be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Third 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'd 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 third 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're planning to file our 10-Q in the next few days. And with that, I'm happy to turn the call over to our CEO, 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 third quarter and then Varun will dive into the segments and related financial details before I come back with a few closing remarks. We believe Q3 was a strong quarter for our company and we are very pleased with the results despite facing some ongoing macroeconomic headwinds particularly in Europe. Each of our three segments showed important improvements in their respective operating metrics, particularly with respect to EBITDA margins which on a consolidated basis, showed a year-over-year improvement for the first time in several quarters. That gives us confidence that our disciplined approach to the market and keen focus on enhancing margins will continue to create positive outcomes. During the quarter, we repurchased 3.9 million shares of our stock for a total of $101 million, reflecting an average price of about $26 a share. Since we implemented the share repurchase program last October, our total repurchases have aggregated 13.2 million shares for a total of $352 million or an average price of approximately $26.66 a share. I am pleased to report that this week our Board approved an additional $500 million to the repurchase plan and extended the time period to October 2022. With that, we have almost $650 million of capacity under the amended plan. As noted on Slide 5, revenue for the third quarter was $3.15 billion, and eight-tenths of 1% increase over the $3.12 billion recorded in the comparable period of 2018. Parts and services organic growth for the third quarter increased 2.3% on a reported basis, and when adjusting for one more selling day in each of our operating segments, the increase in organic revenue growth for parts and services was…

Thanks, Nick, and good morning to everyone joining us on the call. Overall, we are pleased with our third quarter performance, especially related to improvement in segment EBITDA margin, and strong free cash flow generation. These are exciting times for us as the field teams have embraced our key financial priorities of profitable revenue growth, margin expansion and free cash flow generation. The results speak for themselves. Seeing the positive momentum carrying through the third quarter enhances our confidence about LKQ's strategic priorities and our ability to deliver on them. Before diving into the results, let's start with the key financial highlights. Operating cash flows in the third quarter were $327 million, the second highest quarterly amount in the company's history, trailing only the most recent previous quarter, that being the second quarter of 2019. Our segment teams are doing a tremendous job managing trade working capital to deliver strong operating cash flows. After two historically high quarters of cash flow generation, we do expect to see a softer fourth quarter in terms of operating cash flows. I'll cover the full year outlook in the guidance discussion. Free cash flow for the quarter totaled $262 million or $126 million higher than the same period in 2018 and $800 million on a September year-to-date basis. While the absolute number of free cash flow is important, we are also actively analyzing the efficiency of our cash flows and what level of our earnings we can convert to cash on a sustainable basis. Looking at slide number 25, you can see a positive trend in the free cash flow to EBITDA conversion ratio this year on the programs we put in place in the second half of 2018. This year's growth trajectory is well above our initial expectations. And while that ratio will…

Thank you, Varun for that 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 and as we begin our 2020 budgeting process. 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 higher levels of cash flow, which in turn, give us the flexibility to maintain a balanced capital allocation strategy. And fourth, we will continue to invest in our future. And as you can see from our third quarter results, these programs and targets are gaining momentum throughout the organization. And our teams are diligently working towards achieving their respective goals. We have well thought out plans, are focused on crisp execution, and we are achieving positive results. I want to thank our over 51,000 team members who daily endeavor to overcome the short-term variables that are out of our control by tackling opportunities to drive organic sales, aggressively pursue market share gains, implement operational efficiencies to enhance the productivity and profitability of our organization, and to provide industry-leading customer service. We believe that when combined, these factors will create long-term value for our stockholders. And with that operator, we are now ready to open the call for questions.

[Operator Instructions]. Our first question this morning comes from Craig Kennison from Baird. Please go ahead.

Hey, good morning. Thank you for taking my question. And apologies for the background noise. Varun, the cash flow is such an impressive piece of the story right now. And I'm curious, to the extent you're drawing down inventory on a per location basis, if you will, have you seen any impact on fulfillment rates or have you been able to sustain those fulfillment rates?

Craig, hey, good morning. It's Varun here. I think it's a great question. And as I said in some of the upfront remarks, the teams have just been doing a phenomenal job on the trade working capital program. Just for the quick memory jogger, trade working capital comprises inventory tables offset by trade receivables. And as we said, we were in a overbought position in several locations as we have optimized our overall distribution, including the level of inventory that we were holding in several sites. We have certainly seen a reduction. The other piece to note is, as we've always talked about, as revenue becomes a little bit softer -- and again, this is in line with the pursuit of profitable revenue, so the quality of revenue, inventories will also get readjusted. And that really is what's happening. To your specific question with regards to are we seeing any stock out scenarios or any drop in fulfillment rates? Absolutely not. This will be done very, very carefully in terms of where we were holding excess inventory, inventory that was not moving for example. And to kind of give you one specific example, you would have noted that we took a COGS restructuring for our Andrew Page operations in the United Kingdom. Again, as part of the branch and brand rationalization, there was inventory that frankly did not fit with the future plans for that business. And that's really how it's taking place. But no, we're seeing no drop off in any fulfillment rates.

Our next question comes from Bret Jordan from Jeffries. Please go ahead.

Hey, could you talk about the impact from this Fiat Chrysler battery distribution shift? I mean, I guess what was it? What would be the revenue comparison with it exiting the business? What's the margin benefit? I think those were sort of profitable sales. And then what's the timing on it? Does it impact the fourth quarter or is that 2020 shift?

Thanks, Brett. We started the FCA agreement in January of 2018. As we ran through last year, clearly the impact on organic growth was about 1% in a positive fashion. So that's basically what we're going to be giving up over the next 12 months. It will start a bit here in Q4. It won't be a full impact, probably 70 to 80 basis points of pressure on organic. And then we'll -- obviously the full revenue give back, if you will, will occur in 2020. But again, the reason for not renewing that contract is it wasn't meeting our internal kind of hurdles as it relates to margins and returns. And I think the folks at FCA appreciated that. So it was a amicable kind of separation, if you will. As I indicated in my prepared remarks, while it will have an impact on our organic growth, the impact on earnings will be nominal. And so margins will be going up by getting rid of that low margin business.

Our next question comes from Stephanie Benjamin from SunTrust. Please go ahead.

I wanted to touch on what you're seeing in the North America aftermarket business. I think you pointed to salvage really outperforming but you were seeing some acceleration on the aftermarket side as we moved throughout the quarter. Is that more function of just seeing some easier comps or how should we kind of think about the performance of really the strength in the salvage and then what's going on in the aftermarket? Thanks.

Sure. On the salvage side, obviously we have a leading position. We've been able to buy cars, total losses at a reasonable price. And so our margins in that business are strong and we believe they will continue to be strong. On the aftermarket side of the business, again, the growth early in the quarter was a little bit slower. We showed progress during the quarter. The early returns here in October look very good as it relates to aftermarket product. We think some of it, again, has to do with the pitch towards higher APU by the insurance companies and obviously aftermarket products are a largest share of the alternative marketplace. We've seen a little bit of positive movement out of the folks down in Bloomington at State Farm. Nothing to write home about, but again, the movement in the positive direction, if you will. And then actually the GM strike has helped us a little bit as well. So there's a number of things that are kind of gentle tailwinds in the aftermarket business, and we're anticipating that they will continue in Q4.

Our next question comes from Michael Hoffman from Stifel. Please go ahead.

Hi, thank you very much for questions. Happy Diwali, Varun.

Last weekend.

Yes, it was. Cash flow from operations, is that, one of its best percent of revenues ever. Where can that go and how do I think about that progressing into next year?

Great question, Michael and really appreciate the kind wishes for Diwali also. It is a big event in the Hindu calendar. And again for those of you that celebrate Halloween and my family celebrates all of it, Happy Halloween to everyone, we’re certainly enjoying great LKQ weather here in Chicago, needless to say. Yes, and with regards to cash flow generation, this is something that we've talked to the markets for quite some time. This is a case of operating our businesses with a tremendous amount of focus. Again, as I kind of said in some of my upfront comments, the pace at which our field teams have taken over this initiative has been phenomenal. We are thrilled about it, and it really gives us various options. If you think about it the way we have deployed the capital over the last year, last four quarters, it's been a balanced capital allocation strategy. Not only have we bought back $352 million worth of LKQ stock, in addition to that last 12 months, we've paid down close to $426 million on our debt that we've been carrying also. In addition to that, as we think about going into 2020, there will be the seasonal uptick with regards to revenue. And so, we are seeing at this point of time certain buying opportunities in all three of our segments, North America wholesale, Europe and also specialty, and we will judiciously deploy that cash. And with regards to the share repurchase program, given the success of that program, as we announced earlier this morning, the Board has re-upped for further $500 million. So at this point of time, we have close to $650 million of capacity. And then again the debt pay down will continue. We don't talk about corp dev transactions in any case, but we have made a commitment that there were no large platform transactions that were in the pipeline and it really will be kind of going back towards our debt pay down, share repurchases and things along those lines. I think the one piece that I'm not sure very many people have noticed that at the high end of our operating cash flows in the upgraded guidance, we’re calling out $1 billion of operating cash flows in the current fiscal year. And we think that is tremendous. It doesn't happen overnight. And again, just really a massive thanks to our field teams for really getting back in terms of the focus on this initiative. As we think going forward, various options to move forward in terms of how we deploy the cash. There are plenty of alternatives and I'm happy to report that there are a number of very exciting opportunities of what we can do. We will certainly give further guidance when we give guidance for 2020 in terms of more robustness in terms of how we plan to deploy that capital. But as of now, we do have several levers that we could deploy that cash.

And Michael, one of the things going forward that has had almost no impact thus far is the vendor financing program, as Varun indicated in his prepared remarks, that will really begin to kick in next fiscal year. And so that will be in an incremental lever that we will have on a going forward basis.

Our next question comes from Daniel Imbro from Stephens. Please go ahead.

I wanted to follow up on the revenue rationalization. You guys have done a great job kind of rationalizing unprofitable business in both the U.S. and Europe. You mentioned the FCA contract, but how far along are we in that process? Is there still further business that you think you can rationalize in Europe and then same question for the U.S. as well?

Yes, so in the U.S., we think we're largely done. Again, we spent a lot of time last year, early this year really focusing on profitable revenue growth and margins, gross margins in our North American business. Clearly, the FCA contract didn't fit within that, those parameters. So again, we decided to exit. In Europe it’s less of a product line review and more of a kind of a country-by-country review. I mean part of the reason for exiting Bulgaria was, it was an incredibly low margin opportunity. We still have some other businesses that are being held for sale in Europe and they are lower margin businesses as well. We continue to monitor and will continue to monitor both on a product line basis and kind of a legal entity basis to find opportunities we’re looking forward. It's just -- those activities or businesses just are not going to return on the level of margins and return on capital that we believe our shareholders desire. And we will continue to be aggressive in kind of pruning opportunities, but there's no one big material item out there, Daniel. It's kind of pruning some smaller businesses and/or lines of business.

[Operator Instructions]. Our next question comes from the line of Chris Bottiglieri from Wolfe Research. Please go ahead.

So yes, first off a great job on the free cash flow and North America margins really impressive. I did want to focus on Europe with that said. Relative to the guidance that you gave on 9/10, just wanted to get a sense where it looks like kind of a steep implied ramp in Q4, did something change at all at the margin when you gave that guidance or was this always meant to be Q4 weighted? And then -- nothing that’s out of the way. And then this is a related thought. I don't speak Dutch, but it seems like you've made some branding efforts in the Netherlands and Belgium with rebranding Fource. I was hoping you can kind of comment on what you're doing there and kind of what that means for the overall portfolio. If you see a broader rebranding taking place? Thank you.

Yes, so I'll start and Varun can fill in. The results for the third quarter for Europe were exactly in line with our expectations when we set forth the guidance back on September 10th. And yes, we anticipate that Q4 will be a decent quarter for us in Europe. And so there's no change if you will in the kind of the quarterly progression from what we anticipated back on September 10th. As it relates to your comment in the Netherlands and Fource, the reality is, while we refer to Sator as the broader organization in the Benelux region, and that's the name of the holding company, our go-to-market brand has always been Fource. And that's been the case for many, many years. I think what you may have seen is, some programs where that -- kind of has bubbled up to the surface. But there's no change there. That's always been our trade name in the Benelux region.

Our next question comes from Ryan Merkel from William Blair. Please go ahead.

I want to follow-up on EBITDA for Europe in the fourth quarter if I could. I'm just curious, do you think you can expand margins year-over-year or is the macro still too much to overcome?

Ryan, it’s Varun. Yes, we do believe we can expand it. I’ll give you a couple of data points to think through. First of all from the investor discussion we had seven weeks ago, on the 10th of September with regards to Europe, we were very careful in terms how we were putting forward the cadence of the margin progression, not only for 2019 but the next few years also. Nothing has changed on that front, even including the macroeconomic piece, it has been playing out exactly the way we thought it to be. You will probably recall in the second quarter we had called out a restructuring plan. And the restructuring plan essentially was to contemplate across all three of our reporting segments, optimizing the infrastructure costs, given the macroeconomic outlook with regards to revenue, we know that there was a certain level of revenue that we needed, given the relatively high fixed costs nature of the European business. And with regards to that, we have been taking action. And you would have noted in addition to the $17 million of COGS restructuring we took another $9 million was taken in the third quarter. We will see some of those benefits come through also. So overall, it was planned along those lines, and we do fundamentally believe that our European business will be within the range of the 7.8 to be 8.3 that we had called out seven weeks ago, so nothing has changed from that perspective.

And on a year-to-date basis, we're at 7.8 in Europe, so the fourth quarter does not need to be hard if you will to hit the guidance that we set forth on September 10.

[Operator Instructions]. We have no one in queue at this time. I'll turn the call over to you.

Okay. Thank you, operator. Well to everybody on the other ends of the call, we greatly appreciate your time and attention. We understand this is a very busy reporting season and we appreciate you spending this past hour with us. Again, we look forward to chatting with everybody again in late February, as we announce our 2019 year-end results, which I believe is going to be on February 20. And we're looking forward to a good conversation then as well. So thank you and we'll talk to you soon.

This concludes today's conference. Thank you for your participation. You may now disconnect.