Good morning. My name is Julie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Fourth Quarter and Full Year 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 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 fourth quarter and full year 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, as well as the 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 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 quarter and then Varun will dive into the financial details and 2020 guidance before I come back with a few closing remarks. Q4 was a strong quarter for our company, and we are very pleased with the results. As we mentioned at the outset of 2019, we were focused on a few key initiatives, and I am proud to say our segment teams have embraced and executed on each. There is more opportunity ahead, and we will continue to work hard to move the company forward. Let me reiterate the key initiatives, which continue to be central to our culture and objectives as we've entered 2020. First, we will continue to integrate our businesses and simplify our operating model. For example, in 2019, we launched our 1 LKQ Europe program and provided a clear road map to drive the business to double-digit EBITDA margins. Additionally, in 2019, we divested our airplane recycling business and merged auto Kelly Bulgaria with a competitor, thereby removing a couple of low-margin non-core businesses from our lineup and freeing up management time. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. In 2019, we were able to grow margins despite facing low revenue growth and macro headwinds in Europe, with our teams doing an exceptional job of addressing costs with their productivity efforts. North America, in particular, witnessed year-over-year improvement in segment EBITDA margins of 100 basis points in 2019. Third, we will continue to drive higher levels of cash flow which, in turn, will give us the flexibility to maintain a balanced capital allocation strategy. In 2019, we generated record cash flow from operations…

Thank you, Nick, and good morning to everyone joining us on the call. Overall, we are pleased with our fourth quarter and full year performance, as it relates to progress in our key financial priorities of profitable revenue growth, margin expansion and free cash flow generation. Resetting the team's focus to these priorities, while implementing large-scale changes to our compensation plans was a formidable task, and we are incredibly pleased with how quickly the organization adapted to these progressive changes to deliver solid results in 2019. With North America in a strong position and the 1 LKQ Europe program picking up momentum, we are excited about our prospects for 2020 and beyond. Before diving into the results, let's start with the key financial highlights. The consolidated segment EBITDA margin for Q4 improved 80 basis points relative to the prior year. This was led by the North America segment, which not only generated the highest fourth quarter margin in the previous 5 years, but the highest by 120 basis points. Europe and Specialty were roughly flat, although Europe faced a 30 basis point headwind from transformation expenses. Q4 was a relatively low revenue growth quarter, so the ability to maintain or grow margins speaks to the improved resilience of the business. The restructuring programs we implemented earlier in the year have certainly helped in this regard and helped kick start the focus on costs and productivity. As we guided last quarter, after a couple of historically high quarters of cash flow generation, the expected moderation of operating cash flows occurred in the fourth quarter. That said, we were still able to add approximately $100 million in operating cash flows for the quarter to finish the year well over $1 billion, a record high for the company. We are cautiously optimistic going…

Thank you, Varun for that financial overview. In closing, 2019 turned out to be a solid year of our company. Our North American operations extended its record of improving operating margins. The European team designed and began the implementation of 1 LKQ Europe, a multi year program that we believe will lead to enhanced levels of productivity and profitability. The specially team broadened its industry leading efforts in supporting the warranty programs of the RV OEMs and was diligent in honing its cost structure. And all the businesses made significant progress on what counts most, generating cash. Indeed, over $1 billion of cash from operations which we used in equal measure to reduce our leverage and repurchase our shares. None of this progress would have been possible without the collective efforts of the 51,000 people I am proud to call my colleagues and co-workers. To the men and women of LKQ I offer my sincere thanks and appreciation for all you did to both serve our customers and work in the best interest of our shareholders. And with that operator, we are now ready to open the call for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Daniel Imbro with Stephens Inc. Please go ahead.

Yeah. Hey, good morning, guys. Thanks for taking the question.

Good morning, Daniel.

Good morning.

Wondering on the North American gross margins, obviously really strong in the fourth quarter, you noted some of the tailwinds more transitory, record metal prices, GM strike, but things that the freight backdrop do seem to be getting better heading into 2020. So can you help us think about the gross margin trajectory for the company as we head into 2020 as we weigh those put and takes?

Absolutely, Daniel, and good morning to you, but also to everyone else joining us on the call this morning. I know it's fairly early, specifically out on the west coast. Listen with regards to North America as Nick and I mentioned earlier, we’re really happy with the way our North America business has continued to perform and execute against its margin enhancement initiatives. You'll recall, we started this entire program way back in 2018. And ready for the third quarter of ‘18 onwards, we slowly but surely continued to execute and move the needle up. The fourth quarter of 2019, as I was very clear about was it was significantly better than even our expectations. Clearly the GM strike was not planned. It was not in the budget, for example, but the agility and the nimbleness of our aftermarket team to be able to capitalize on that opportunity gives us a great amount of satisfaction that we have the right operators at the helm. In addition to that, if you think of it from a salvage perspective, that's another business of us that has really continued to perform very strongly across North America, across the entire year. And then with the record high, precious metal prices coming through, yet again, our salvage business both on the full service but also on self service, they essentially changed certain processes in terms of being able to harvest those precious metals. Again, capitalizing and the agility coming through of being able to capitalize on that opportunity. And that really is key for us. As we move forward into 2020, we are certainly not banking on those record high prices of precious metals continuing, as you know, the GM strike has ended. And so yes, the overall 14 points of segment EBITDA margin is significantly richer than what we would expect to be the usual cadence associated with that. If you were to try and bracket in terms of what the precious metals and say the GM strike benefited in the quarter, I probably give you roughly about 120 basis points of that - the uptick that we had, you know, we certainly – a large part of it was due to precious metals, but also due to the GM strikes. So if you kind of think of it year-over-year, the 180 basis points move up, I'd say about 120 of that 180 was related to precious metals and also GM strike. So think about from that perspective, the business without those two elements probably would have still been up at least 60 bps, you know, on a year-over-year basis. So again, continuing to execute on its margin enhancement initiatives. So just want to put that piece in terms of the 14 points is not the new normal. So please do not include that into your 2020 model going forward. There were some elements in the market that we were able to capitalize on.

Thanks.

Your next question comes from a line of Stephanie Benjamin with SunTrust. Please go ahead.

Hi, good morning, I wanted to touch a little bit on some of the weakness that you’ve been seeing really last couple quarters in Italy – Italy and Germany, also announced some new leadership changes there as well. So maybe if you could kind of discuss what's driving some of the - the slow down, you know, is it macro, a little bit more company specific transitional issues, and, you know, just kind of some of the plans in place where we might expect to see some improvement there and some timing would be helpful? Thank you.

Good morning, Stephanie. This is Nick. The macro economic conditions in Italy, I think is no surprise to anybody. It's very poor. The country has been in recession now for several quarters and that is absolutely flowing through the overall market dynamics. We are seeing and all of our competitors as we talked to people at trade shows and just in the business in general, there's been a downdraft in overall activity. That said, we did believe that we needed a leadership change. And so we have brought somebody on board from the outside to head up the Italian operation. Actually, it's an individual that worked with Arnd Franz at Molly [ph] and he worked under Arnd for about a dozen years. We're very confident in his abilities and believe that we will be able to, you know, move that business forward as we migrate through 2020. The German marketplace obviously a big market, again, experienced some overall softness The leadership change there is not necessarily related to the performance of the Stahlgruber business, which overall was good during 2019, but more of a recognition that we needed a single leader within the Stahlgruber business there. The structure when we acquired the business was there three kind of leaders who shared responsibilities, and we just needed a single head of that business. And so we made that change early this year. You know, we're not expecting the budget, if you will. This is not assuming that there's going to be a market uptick in either the Italian or the German markets that we do anticipate that we will be able to get better organic growth in both those countries and than we did in 2019.

Great. Thank you for the color. I'll leave it at that.

Okay, great.

Your next question comes from line of Craig Kennison with Baird. Please go ahead.

Good morning. And thank you for taking my questions.

Good morning, Craig.

Yeah. Good morning. We do appreciate the comprehensive slide deck in 7 a.m. call. So thank you for that. Just want to touch on this Specialty business, you've got so much good news. But there was unexpected weakness in that category. Guess I want to understand should we expect weakness for at least the next three quarters as you kind of anniversary the impact of a relationship that - that has exited? And then two, what gives you confidence that there's that - that change is not part of a broader trend where you could get disintermediated more broadly? Thank you.

Sure, Craig. Yeah. Built into the plan is an assumption that the Specialty business is going to be relatively flat during 2020. Maybe even down just a touch based on as you indicated, the need to anniversary some of these changes. We highlighted kind of two key customers, one of which is the result of an acquisition, where one of our customers was the acquired entity and the acquirer or always went through act. And so when they - when they bought our customer, they just put their volume through their direct distribution system. We don't think - we think that's a one-off. The other entity has a very unique market position with an incredible brand name. And they had the ability to take some, not all their value, but some of their volume back internally. And again, we think it's unique related to their brand identity as opposed to anything else. So we're not - we don't see it as an ongoing - as a ongoing trend.

Thank you.

No problem.

Your next question comes from line of Michael Hoffman with Stifel. Please go ahead.

Thank you very much. Nick, Varun and Joe. On the cash flow, if I follow the math of what's in the guidance, make an assumption about D&A. So the midpoint of net income 695 gets a 324 D&A approximately, I'm at 10, 15 [ph] on cash flow from ops. So that says you're going to get another positive incremental, not as great as 2019 I get it. But working capital still helping, are we looking at that correctly?

Yeah, I think. Michael, good morning. Its Varun out here. Listen, you kind of followed us, you know, from a cash perspective for the past few years and stuff. And all I can say is thank you yet again to a broader colleagues across all of LKQ for just a tremendous result coming on from a cash perspective. To kind of give you a little bit more and kind of get to your specific answer in any case, you know, when we put in place working capital metrics, and really what we call internally for our field folks is trade working capital, this is inventory, plus the receivables offset by payables, the underlying quality and I think you can kind of work the math out through the public tables that we've put out there in any cases. The company has made progress on all three fronts. It wasn't just a case of pushing up tables. It wasn't just a case of throttling back or being more judicious on the inventory. We picked up days inventory on hand in terms of lower on these inventory on hand. We push DPO [ph] up a little bit. And we've also gotten some DSO down, albeit very little, because we haven't changed any terms on our customers. All we really focused on is collecting past due receivables, right. But the sheer scale at which our business has been able to deliver on this is, as I said, I'm just tremendously pleased with that. And so if you think of it from a EBITDA conversion level to OCF, yeah, I mean, that's a high percentage versus where we've historically been. In 2018 we moved up. In 2019 we moved up significantly. And to kind of give you a rough math, just on trade working capital,…

Thank you.

Your next question comes from a line of Bret Jordan with Jefferies. Please go ahead.

Good morning, guys.

Good morning.

On the working capital conversation Varun, can you give us an update as to where we are on payables? I guess specifically on the European side of the business? I think your accounts payable were a little bit higher than they were in the prior year. But you know, clearly versus the O'Reilly's of the world much lower. So, I guess what's the thought there?

Yeah. So I'll give you - I'll give you two key points out that Bret. Number one, as I said in my previous response, we made progress both - actually across all three elements of trade working capitals, so day's inventory on hand has come down. DPO has moved up and then DSO is marginally down by about a day. But DPO is up by about four days for the entire enterprise. Now think of it from that perspective and as we think of the cash conversion cycle, we picked up the better part of seven to eight days in terms of where we were even say a year ago, right. So great progress on that front, and from two years ago that much more. Specifically to your question about how is the European payables program coming along. Listen it is coming along right at expectations. There were two key elements that I talked about. The end outcome really is to ensure that we have better payment terms across our European business. No different to say some of the big box folks enjoy out here in the North America business. Clearly they've been at it for the better part of a decade and a half, almost kind of two decades. We were just kind of getting started a year ago and really where we've come through is, we focus on the largest markets with regards to the vendor financing program and really there's two kind of alternatives for our suppliers. The end result being we need better payment terms. And a number of our suppliers have either signed up to the vendor financing program, which is great news. And there are others who say listen, if you're kind of go through that entire process of getting invoices, going through an EDI link, connecting to financial situation, it's too complicated, we will give you the terms that you're looking for. The end result is we are seeing you know, with contracts that are essentially kicking in for 2020, we are seeing that payment terms being extended in line with what our expectations are and then to kind of close the loop for you, if you kind of go back to the September 10th 1 LKQ Europe call that we had, we were very specific in terms of what level of cash we anticipated generating, which is about $200 million, by the end of 2021 we are right on track. We’re very confident that 2020 will play out exactly the way we planned. The team has made tremendous progress out there and yeah, happy with how things are progressing.

Thank you.

Your next question comes from the line of Chris Bottiglieri with Wolfe Research. Please go ahead.

Nice, she got it. Quick question on Europe margin targets, you guys gave the analyst day back in September, it kind of gave some annual targets for the next couple of years. Obviously, macro remains really challenging. You've added some leadership changes, just kind of curious what your latest thinking is, those are still the right targets and kind of like what you've learned as you delve deeper to those plans? Thank you.

Good morning, Chris. As we indicated in our prepared remarks, the 1 LKQ Europe program is on track and on plan. The expectation is that - kind the guidance, if you will, that we provided on September 10, related to the margin accretion over the next couple years, that those ranges are still valid. As Varun indicated in his comments, 2020 getting to the top, top end of the range is going to be a bit of a stretch. But within the range, we are comfortable. And so really, there's been no change. I mean, it's, it's only been, you know, the better part of a little bit more than a quarter that we're into the program. We're affecting the changes that we believe were necessary to get us to the promised land, if you will. We are making progress. You know, there are going to be some things that are not going to go according to plan, and they're going to be some other things that actually do better than, than we expect. And so we're taking it on a quarter-by-quarter basis, but by enlarge we are comfortable with the guidance provided back in September.

Thank you.

Your next question comes from the line of Scott Stember with C.L. King. Please go ahead.

Good morning. And thanks for taking my questions.

Good morning, Scott.

Just going back to Specialty, you outlined the issues that happened in the quarter. We expect that to continue, I guess, at least for the next couple of quarters. But you then said that you would expect organic sales to be flat. So I'm assuming you're expecting some of these like the additional RV OEM warranty program that some of the positive developments at SEMA. So maybe just talk about how that will progress to actually offset which seems to be a pretty sizable losses in sales that you had this past year. Thanks.

Yeah. So you know, during 2019 the Speciality group started supplying the OE manufacturers actually they're dealing that work with warranty parts, because we can do it for efficiently than the OEs can do themselves. Again, that was a slow ramp. But now we're at the point where we have every major OE manufacturer in the barn if you will, where we are the leading and the supplier of their, of their warranty parts. And so we will get a positive benefit of that through 2020, as each of those programs ramp up and anniversary. We've got some other key elements, we’ve talked about Warn, which is our Winch, business, with several new programs that we think are going to provide positive benefits. And then you know, the historical legacy of the Specialty group, which is the kind of the automotive accessories, you know, that businesses is doing okay. And so we do believe that there's going to be some gives and some takes, which is taken as a whole will largely offset each other.

Got it. Thank you.

No problem.

Thank you.

There no further question at this time, I will turn the call back over to the presenters for closing remarks.

Well as always we greatly appreciate your time and attention. We know that this reporting season is incredibly busy for all of you and the time you spent with us is greatly appreciated. We are looking forward to a very good and productive 2020. We will come back together in about 60 days to report our first quarter results. And again, I just want to reiterate to all the men and women of LKQ, we really appreciate everything they have done and will continue to do to make our company perform well and serve our customers and our shareholders. So with that, we bring the call to a close. And thank you for your time and attention today.

This concludes today's conference call. You may now disconnect.