Thank you for joining LKQ Corporate’s First Quarter 2020 Earnings Conference Call. I would now like to turn the call over to your host, Joe Boutros, LKQ’s Vice President of Investor Relations.

Thank you, operator. Good morning, everyone, and welcome to LKQ’s first quarter 2020 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’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 first quarter, discuss the revenue headwinds we are facing in each of our segments related to the COVID-19 pandemic, provide an overview of the actions we are taking during this very challenging time, and finally describe some of the fallouts our industry is experiencing. Varun will dive into the financials with a key focus on the leverage we are pulling across the entire organization to right size the cost structure and maximize cash flow. He will also discuss our liquidity and the strength of our balance sheet before I come back with a few closing comments. Clearly a lot has changed in the last 60 days as we face this humanitarian tragedy. Our hearts go out to all those impacted by the virus both at LKQ and the population at large. The global effort to combat the virus would not be possible without those on the frontline; doctors, nurses, first responders, and all those putting themselves at risk to serve their communities and the communities where LKQ operates across the globe. For that, I extend a big thank you and offer sincere appreciation from the LKQ family to those individuals for their heroic services. Taken as a whole, we got off to a great start in 2020 and are pleased with our first quarter results. In order to understand the first quarter activity, one needs to separate the pre-COVID-19 pandemic period of January and February from the month of March. Through February, each of our segments were in line or ahead of our revenue and profit expectations. The efforts by governments around the world have flattened the infection curve and slow the spread of…

Thanks, Nick, and good morning to everyone joining us on the call. What difference 60 days can make? We ended February feeling really good about the start of the year and our prospects for 2020, and now we are working through a global pandemic that has impacted lives and economies in ways that have not been seen in generations. In these unusual circumstances, I will deviate from the usual commentary and focus on forward-looking matters as opposed to our latest quarterly results. Nick has already commented on the revenue trends. So I will handle the cost actions. We have taken as well as our liquidity position. However, to start, I am going to briefly discuss the financial highlights from our first quarter. North America reported segment EBITDA margin of 16.4%, a 280 basis point improvement relative to the prior year. The improvement is driven by gross margin expansion, while a portion of the benefit is attributable to the several ongoing margin initiatives, increased revenue from precious metals and better pricing realized sequentially on scrap metal represented the largest incremental growth driver. Continuing a trend discussed on last quarter’s call, precious metals prices surged to record levels in early 2020 providing significant upside in both our wholesale and self service businesses. In April trading, we’ve seen moderating prices of precious metals going to lower new car sales and do not expect the same level of upside in the near term. Overall gross margins and wholesale operations and self service increased by 210 and 90 basis points respectively, with a further 20 basis point improvement for the mix effect resulting from the disposal of our aviation business in the third quarter of 2019. Europe segment EBITDA margin of 5.7% represented a 160 basis points decrease relative to 2019. Do note that this…

Thank you, Varun. In closing, it is clear that our focus on profitable growth, enhanced margin and better free cash flow generation positioned as well as we entered this unexpected turn of events. Our teams have been agile and have done a fantastic job of tackling the cost structure, which is no easy task, especially when confronting the human element of these actions in a culture that is rooted in pride and comradery. Our teams have embraced the idea that not all progress is measured by ground gained, but sometimes progress is measured by losses avoided. And for that, I am tremendously proud and thankful of everyone’s efforts to confront these very difficult times. What I know is one of the pandemic is in the rear view mirror and the economies around the world settle into the new normal, whatever that may be. There will still be more than 275 million vehicles in the United States and over 305 million vehicles in Europe. The average age of these cars will increase and the resulting heightened demand for alternative repair parts and accessories will be serviced by a slightly smaller number of competitors. There inlays the opportunity for LKQ. That is why I have been coaching our leadership teams to focus both on getting this through the near term headwinds and to also keep one eye open for the longer term opportunities to gain market share and create more efficient operating models. I’m confident that I’ll take you will not just survive the pandemic but will thrive in the post-pandemic economy. In my communication with a broader employee base, I have indicated we will get through this together and we’ll come out a stronger, wiser and better positioned organization that continues to be LKQ proud. Operator, we are now ready to open the call for questions.

[Operator Instructions] Our first question comes from Stephanie Benjamin with SunTrust.

Hi, good morning. I really appreciate all the extra color that you guys provided, particularly as you broke out, just the performance kind of through the first half of the quarter or more than that and then kind of how it deteriorated in March, including the CCC numbers? I was hoping maybe you could provide a little bit of color. I mean, it was such a strong outperformance versus the industry during those periods, whether it was the January through February and then also in March, so maybe you could provide some color on what you believe was driving that outperformance versus the overall just kind of volume numbers from the CCC numbers? I think that would be helpful. Thanks.

I’ll take a shot at that that, Stephanie. Well, we offer to the North American collision repair industry, it is an ability to provide best-in-class service, and that goes to items like delivery times, the number of deliveries, on-time deliveries, the depth and breadth of our inventory, which – what we have nobody else can match. And we believe that we have always outperformed the marketplace because we offer a different value proposition as in most of our smaller competitors. And particularly when things started to slowdown and a number of businesses were really having to pull-in quickly, our capital base allows us to continue to provide what we believe as world class customer service, and over time that wins. But make no doubt, we always believe that the depth and breadth of our inventory is perhaps our biggest competitive advantage in the North American marketplace and the ability to get those parts to our customers on a reliable basis and on a very quick basis separates us from many in the industry.

Got it. Well, for the sake of time, I’ll pass it on from there. Thank you.

Your next question comes from Bret Jordan with Jefferies.

Good morning, guys. On the North American gross margin, you called out metal scraps and precious metals driving a big chunk. Could you tell us how many basis points you picked up on metals just so we can get a normal margin run rate?

Yes. Bret, it’s Varun here. Great question. Essentially, within our overall salvage operations, we do not break out precious metals on a car by car or an automotive -- on a unit-by-unit basis. What we do know is precious metals alone had close to a $50 million uptick in revenue on a year-over-year basis. As you think about it from that perspective, you can kind of do the math in terms of how much of that can actually flow through. There is a cost associated with getting to the precious metals that are found within the salvage vehicles. But again, as I said previously also, in the last quarter earnings numbers, our operating teams have just done a phenomenal job in positioning themselves to be able to extract and take advantage of what’s happening in the precious market -- in the precious metals market. So again, happy with the way they’ve performed in kind of essentially making their own destiny from that perspective.

Yes. And at some point in time, the cost of the vehicle goes up or falls, based on the value of those metals. And what we’ve seen, as Varun indicated in his prepared comments, is those values have come back down. Not all the way back to where they were at the beginning of the year, but they have come back in.

Okay. Thank you.

Your next question is from the line of Michael Hoffman with Stifel.

Thank you. Good morning. I hope everybody in your family, friends, and colleagues are safe and healthy. Trying to take all of this great data, and the first pass quickly trying to adjust the model on the fly, you’ll still be profitable in 1Q and 2Q, but it’s going to be paper thin. Is that the right way to think about it?

Yes. Michael, it’s Varun here. It all depends in terms of how the trend continues. As I – as Nick mentioned in his comments also, the first half of April was a continuation of March, which was down almost like 40% to 45%. In the last 10 to 12 days, we’ve seen a nice little uptick, but having said that, it is still down on a year-over-year basis. It all depends in terms of what the outlook is for the month of May and June. We also do know that in the month of April, here in the United States for example, with the folks that we’ve put on furlough, we essentially have allowed our folks to be able to run down their PTO balances. Essentially, we are paying them, which we believe will get exhausted by the end of April. In addition, we have continued health benefits for a certain period. This is not the time to be pulling the rug from people’s – from under people’s feet given what’s happening out in the broader macroeconomic situation in any case. So April, we know from a profitability perspective, we’ll be challenged, but it all depends in terms of how May and June comes through. What we have said is that we have suspended guidance. And again, as and when numbers begin to come through for April month end and again, as we go through the quarter, we will update the markets. We do have a series of virtual NDRs and investor calls setup for later in the quarter. But again, at this point of time, we are not in the position to say, as to where Q2 will be coming through. It all depends in terms of how the next 60 days play out.

Okay. All right, I’ll cycle back and ask the next question. Thanks.

[Operator Instructions] Our next question comes from Craig Kennison with Baird.

Good morning. Thanks for taking my questions and the thorough slides and review. You had mentioned competitive disruption. I guess to the extent your competitors are struggling and you are able to take share. Can you serve that opportunity through your existing operations or would you need to expand branches or acquire businesses in some geographies to cover that potential opportunity?

Craig, great question. No, we’re convinced that we have the footprint we need in most every market in which we operate to service more customers and with more volume. And actually, I think both Varun and I put in our formal remarks, we’re actually going to be consolidating some of the branch that work across the globe to gain further efficiencies. As these volumes have come in, we will – there is opportunity to get to even a more efficient footprint and we believe even though some of that is going to be on a permanent basis, that we will still be able to fulfill and even heightened the demand that will ultimately come out of this.

And Craig, I’ll just going to add one more to what a data point to what Nick mentioned. In terms of the hypothesis that this will end up potentially being a gain share for LKQ, I understand it’s still early days, but across each of our three operating segments, we are seeing customers that we haven’t seen in quite some time. And I’m talking of a few years. So both in North America and in Europe, and then also in our specialty unit, we are seeing activity from customers that we haven’t seen for some time. And again, data is hard to come by in certain markets, but even where markets are down, what we are picking up from a market intel is that, we are outperforming our competitors in those specific markets. So back to your hypothesis, it is playing out now. And then to the additional point whether we need to expand our footprint, no, we believe our footprint is adequate. And in fact, we actually have an opportunity to essentially fine tune our geographic footprint through this period.

That’s helpful. Thank you.

Your next question comes from Gary Prestopino with Barrington Research.

Good morning. Just a quick question here, in terms of your customer base on the repair side, I mean, is it more or less the 80%-20% rule that, you’re doing 80% of the business with the 20% largest percent across both North America and Europe?

No, it’s not quite that way Gary. The customer base is incredibly fragmented. I mean, there is – in the United States, for example, somewhere between 35,000 and 40,000 collision repair shops, in Europe, there’s literally hundreds of thousands of mechanical service and repair shops. So there are bigger entities there. We got the MSOs on the collision repair site in North America. You got some large chains over in Europe. But no, it’s not 80%-20%. So this is an industry, our customer base is an industry that’s represented by an incredibly fragmented group of competitors.

So is there any worries on a short term basis at least, with some of these smaller players coming – falling out of bed here, just closing shop, like you were talking about some of the competitive situation of other suppliers in Europe that are declaring bankruptcies?

Absolutely. Whenever you have a severe economic contraction, small enterprises, this mom-and-pop enterprises, oftentimes, just don’t have the capital to endure. We actually have sponsored and promoted some educational sessions for our North American customer base to get some tapped into how to best utilize the government programs that are in place to fund small and medium-sized businesses, and so we ran and sponsored seminars that our body shop customers could dial into to understand how to navigate the loan program, for an example, because we want them see profitable segment business.

Okay. Thanks a lot.

We have a follow-up from Bret Jordan with Jefferies.

Good morning, again guys. You talked about, I guess Service King having shot a number of their branches. I think they also delayed a bond payment recently as well. Do you have any exposure either to them or any other major collision chains which you have to worry about as far as getting paid back at accounts receivable?

Hey Bret, it’s Varun here. So let me take that question. Listen, as we closed out the first quarter of 2020, I will share with you, and again, this is the appropriate time to share it with everyone is the company has never been in a better position in terms of managing our past due receivables. Again, these things don’t happen by accident. We started the program, probably, in the better part of almost two years ago, because there was a massive opportunity in terms of the way our customer receivables were being managed. So again, as we closed out, we were in a very fortunate position, thanks to the phenomenal work of all our field operators, both in North America, but also in Europe. To your specific question about one of our larger customers, we enjoy a great relationship with them. And yes, we also heard about the news, but I’m happy to report that as of the end of the first quarter, we were current with them across their receivables balance. And then with regards to, call it other customers and stuff, listen, this is an evolving situation as of now. Nick mentioned the fact that we have a fairly fragmented customer base. The good news is several of our smaller customers do have the ability to drop on the payment protection – the paycheck protection plan. And we, certainly, are encouraging them to apply through the SBA side of things, in any case. But other than that, happy in terms of how we remain close to our customers. And again, we are confident on their ability to, again, gain share through this period. But again, no specific issues with receivable hits as such.

Okay. Thank you.

Your next question is going to be a follow-up from Michael Hoffman with Stifel.

Hi. So circling back, I think to get the point of clarity, if I could, on an early question. You shared $15 million of incremental sales in the quarter for metals, did I hear that correctly? So they gave you 100% credit for that? Because it is all price. Forget that you had cost. I pulled that out of the 2011 on the EBITDA. You still are 15% margins. Is that – am I doing something wrong? Just want to understand.

No, Michael. The math is appropriate except for the fact that precious metals was close to $50 million up on a year-over-year basis.

$50 million, okay.

Yes, absolutely. So I think that’s the piece to kind of think about. The second point is what we are currently seeing in April trading of precious metals, they have come off their record highs that we experienced earlier in the first quarter. So again, we do not anticipate that set of gains to be on an ongoing basis. The other piece to think about is, as we always talked about on the salvage side, scrap metal prices, while they were down on a year-over-year basis, it’s more kind of the sequential pricing, which matters to us. And sequentially, scrap metal was up about 23%. So that also helped the overall North America margin. So that’s how you should think about this. But again, precious metal was by far the biggest piece. But as I said, we don’t anticipate that upside to continue at least not in the near-term.

But directionally, it’s correct Michael. Even without the impact of the metals, our margins would have been up.

Right. Okay. That’s – I was trying to get at that. And then back to the $80 million to $90 million. Is there a way to think about how that plays out between the two major regions as far as where it comes – where you can get savings? And then how much – if you learn to be leaner, how much of it do you get to keep permanently? I mean I get you can’t keep a whole $1 billion, but how much do you think you might keep?

Well, half – as Varun indicated about half of the $80 million to 90 million is with people-related. And those adjustments have been made in each of the three segments: North America, Specialty and Europe. We have more people in Europe to start with. So you should assume that the majority of the 17,000 person adjustment came out of Europe, North America next and Specialty, obviously, being the smallest. All of our operating heads are working under the orders and the assumption that when we get back to 100% of revenue volume, whenever that is, that we should be able to service that without adding back all 17,000 people. That there has to be some embedded productivity gains coming out of that process. We don’t have at this point in time, the magic answer is to whether that’s adding back 99% of our people or 95% of the people or 90% of the people. But we do anticipate that we will gain productivity from a human capital perspective. And the same with some of the other operating costs. Again, there are things we’re going to have to add back, but importantly as Varun indicated, we kind of do it kind of in arrears, is we’re going to make sure that revenue is there and sustainable and then add some back, and it will be gradual process as we walk back up with the hope that when we get to the – when we get back to 100%, we will not have added back 100% of the operating expense.

And Michael to your specific question of how much of it is between the two geographies. It’s roughly half and half, so the $80 million to 90 million, roughly half in Europe and the other half here in North America. And then with regards to the key categories, just to reiterate, personnel costs is by far the single largest line item in our overall OpEx. And so that clearly is the bulk of it. But in addition to that, we do know that there are certain variable expenses such as the spend that we have on routes and deliveries and fuel. And we certainly are picking up that variability also as revenues have come in. So just to kind of give you that additional color for the sake of comprehensiveness.

Okay. And since we’re repeating or turning the thing, could I ask one more, just if I could, for the benefit of everybody. The world recovers. We get – we start to [indiscernible] again whenever it is, but it recovers. Do we get back to old revenue number in the U.S. from a collision standpoint? I get why we would in Europe on maintenance, if you’re driving your car, you got to do the maintenance. How do I get back to the old revenue number? I felt like I’m going to have a whole bunch more above average accidents.

Ultimately, once the miles driven gets back to kind of pre-COVID levels and people are kind of back into their normal routines, the accident rates will – from a frequency perspective will move back, we believe to where they were, pre-virus, right? Once the roads and the highways are full of cars and other vehicles and that’s really what’s the key, Michael, is the number of accidents because that’s what drives repair volumes and ultimately what drives the demand for the repair parts that we supplied to the body shops. Yes. So we’re comfortable that in time, assuming miles driven gets back that the frequency will be return, and that will be a strong driver of our revenue. The $64 question is when does that all occur, right? There’s anecdotal data out there now it’s from China, so it’s a very different economy. But what the Chinese have reported is that about 2.5 to three months after them hitting peak from a virus infection perspective, miles driven in individual vehicles was at 80% of pre-crisis levels. Contrast that to their public transportation volumes, which were only back to 40% of pre-crisis levels. So folks, at least in China, we clearly view their personal vehicle as being a safer mode of transportation than jumping on public transport. And that’s a good sign, right. What I suggest is that the same could happen here in the U.S. But just because – either on a federal basis or on a state basis, some of the restrictions get lifted, nobody should assume that miles driven is going to snap back to pre-virus levels. I mean, I sit here in the state of Texas and our Governor on Tuesday, indicated that he was going to open up – start to open up the Texas economy this coming Friday. And that’s great because there’s all sorts of businesses that have been shut down. On the same day, one of the local news stations did a survey of 3,500 residents of Austin and 86% of them said, it was too much, too soon. So even though some of the restrictions may be lifted, it remains to be seen as to whether residents around the world are going to have the courage to actually venture out immediately and get back into their normal routines. We think it’s going to be a much more of a gradual return.

Our next question is from the line of Daniel Imbro with Stephens, Inc.

Hey, good morning, Daniel.

Thanks for squeezing me in. I think I dropped off for a second. So sorry if you touched on this, but Varun wanted to touch back on Europe in the 1Q. Something that stood out is just the gross margin leverage, just like pretty soft sales there. We talked a lot about North America and the metals pricing, but can you shed some more light on what drove that gross margin improvement in Europe? And then how you think about the sustainability of those drivers, obviously as near-term demand trends are pressured.

Yes. I think Daniel, it’s far out here, just for the sake of everyone understanding, I think your question was there was a 40 basis point improvement in gross margin across our European segment and the sustainability of that. So yes, very happy with the way that has come through. The level of discipline that our teams have been putting out in Europe in the pursuit of profitable revenue growth and accretive margins that has continued to kind of come through. In the past where we may have been kind of chasing the last time down the rabbit hole. That discipline that the team has picked up has been tremendous. And in these circumstances, chasing, chasing any and all revenue could become a fool’s errand and so essentially the teams have been focusing on only pursuing profitable revenue. In addition to that, as you know, we’ve been doing well from a centralized procurement perspective and those benefits have also accrued. But just think about the fact that, we’ve just been very disciplined from a pricing perspective. And that was something that was much needed over in Europe in addition to everything that the team has been doing from a centralized procurement perspective.

Got it. That’s really helpful.

We’re going to need to bring the call to a close. So just one last question and then we’ll wrap up. We’re a bit over. Did you have one last question, Daniel?

Nick, I think we’re all done. We’re not showing anyone on the screen. So I think we’re all good to close off. So back to you.

Okay, great. We greatly appreciate your time and attention here this morning. We’ve obviously shared a fair amount of information that normally we would not provide. But we thought it was important to provide additional clarity and transparency in this great time of uncertainty. So now we do appreciate you participating in our call. And we’ll be back together again in about 90 days with our second quarter results. Thanks everyone.

Ladies and gentlemen, thank you for participating. You may disconnect at this time.