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Thank you, Operator. Good morning, everyone, and welcome to LKQ's third 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 operating highlights related to the third quarter before discussing some key metrics that are impacting the revenue trends in each of our segments. Varun will then dive into the financials with the key focus on the impact of the measures we initiated in late March 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 remarks. It's hard to believe that just six months ago, in early April, we were facing revenue declines of 40% to 45% as economies around the world went into lockdown. Today, we are enjoying a material improvement in demand, year-over-year margin improvements in each of our segments, and over $1 billion dollars of free cash flow generated in just the first nine months of this year. In light of the challenging environment, we have confronted throughout the year, our team delivered a terrific outcome in the third quarter. These results clearly highlight the true strength of LKQ. This performance was achieved in the midst of having to make mission-critical decisions to protect the business, while simultaneously maintaining the morale of our most important asset, our people. I could not be prouder of the effort of team LKQ. As noted on Slide 4, total revenue for the third quarter was $3 billion, reflecting a 3.2% decrease from the level recorded in the comparable period of 2019. Global parts and services organic revenue declined 4.5% in the third quarter, while currencies and the net impact of divestitures and acquisitions collectively accounted for a 1.1% increase. Notwithstanding the soft revenue environment, our team reached a…

Thank you, Nick and a very good morning from the LKQ offices in Chicago to everyone joining us today. I am very excited to speak with you this morning on our third quarter results. When I joined LKQ in October 2017, I saw a market-leading business with an opportunity to become even stronger by becoming disciplined and more rigorous in the application of key management principles. Since then, following a very successful consolidation phase in the company’s evolution, we shifted or focus to operational excellence with an emphasis on pursuing profitable revenue growth and generating high quality sustainable free cash flow. Our 2020 results and especially the third quarter are an indication of the success of these multi-year efforts. I want to acknowledge the work of all our teams across the business in producing a record quarter of earnings per share and over $1 billion in free cash flow through nine months while navigating a pandemic. That is truly outstanding performance. In my remarks I will cover the progress we’ve made with margin expansion and cash flow generation and a brief recap of the segment results and our thoughts about the fourth quarter. I’ll start with Slide 7, which shows the consolidated margins achieved over the last three years. You can see how prioritizing profitable revenue growth has played out in gross margin in the last couple of years. Each quarter in 2019 and 2020 has shown year-over-year improvement, except perhaps the third quarter of 2019, which was adversely impacted by 60 basis point from restructuring charges. Taking away that impact, it would have been seven consecutive quarters of year-over-year improvement. Listen, I can’t guarantee that this streak will continue uninterrupted, as we know there are positive and negative shots that can pop up, such as the effect from fluctuations…

Thank you, Varun for that detailed financial update. In closing, our performance in the quarter clearly illustrates the strength of our business, which is driven by a tremendous team that has focused on our key initiatives of driving profitable revenue growth, enhanced margins, and free cash flow. Regardless of the operating environment, and hurdles confronted, our team once again, delivered on each one of these initiatives in the quarter. No one at LKQ takes for granted how hard we work to create our market leading positions and all levels of the organization are laser focused on maintaining and growing these positions each and every day. The strength of our three reporting segments is based on our geographic, customer, and product diversity, unmatched inventory levels, and the high levels of fulfillment rates across all of our segments, which is all supported by a proud culture of putting the customer at the center of everything we do. With these key initiatives in place, and the best operating teams in the industry, we are confident that we will continue to drive long-term value for our shareholders. Operator, we are now ready to open the call to questions.

Thank you. [Operator Instructions] Our first question is from Daniel Imbro of Stephens.

Hi there, congrats on the quarter.

Hey, thanks Daniel.

Hey, thanks Daniel.

I wanted to ask one on OpEx, specifically on the personnel. I think in the slide, you mentioned personnel was down 12%, that included some portion of permanent costs, but also some portion of like lack of merit based expenses or merit based increases, which should come back eventually I would think, but what kind of timeframe do you expect that to normalize? Can you help us think about what that 12% looks like by segment, is it more concentrated in North America or Europe, any kind of color there would be helpful?

Absolutely. Daniel, good morning to you and everyone else joining us this morning, also. Yes in terms of when you look at the personnel costs, that's really the one area which is a significant portion, in fact, by far the largest key element of our operating expenses. With regards to some of the temporary cost savings that we had implemented in the second quarter, I think as we mentioned, in the third quarter those pretty much came back. So if your question is in terms of what level of the bypassed merit or the salary trends that had taken place, those are currently running on a normal basis as of now. So from that perspective, that's going to come back. But I think more importantly, what we should think about is the permanent cost reductions that we've called out exactly seven weeks ago by segment at our Virtual Investor Day on the 10th of September. North America and Europe, both of them are driving hard on that front. North America is ahead with regards to the execution of that program and we're certainly seeing the benefit come through. So all in all happy with the way we are managing our cost structure, given the extreme volatility there is out there in the market.

Our next question is from Scott Stember of CL King.

Good morning, Scott.

Good morning, Scott.

Again, thanks for taking my questions and congrats on a great quarter.

Thank you for that.

You talked about, obviously some certain caution regarding the increased infection rates throughout the world, but just trying to get a sense of what we've seen so far in October, have you seen any material difference from the trajectory of recovery in Europe, particularly in the UK, Netherlands and Germany?

So obviously, we had what we think was a pretty good third quarter across the enterprise, given where we are with miles driven and the like. Importantly, in Europe, while we were down 7/10 of a percent organic for the quarter, some of the key markets were up kind of single digits, particularly the UK, Germany and the Netherlands and September was the best month, generally of the quarter, so that was encouraging. We haven't seen a significant move in the first couple of weeks of October, either up or down, quite frankly. But, the spikes in the cases of just, they've just started and the governments are just beginning to think about what their action plans are going to be. Actually, since we've been on this call, I saw a note that France is going into pretty much of a severe lockdown now. We don’t have much business in France, so that won't have an impact on us. The key Scott is, how are the governments around the globe going to react to the current spike in positive cases and we just don’t have any clarity as to how that's going to be. But thus far we're okay.

Our next question is from Brian Butler of Stifel.

Good morning, Brian. Hello.

I just wanted to maybe go in a little bit more on the working capital. And if you could provide a little bit more color. I know, you said that it was going, you're going to give back some of that, but maybe a little bit color on fourth quarter where that comes is that a couple of hundred million dollars in inventory or anything that could help us get that fourth quarter number right?

Yes, absolutely. I think it's a great question. And as I called out in the second quarter, and then also at Investor Day last month, and then earlier this morning, the working capital conversion as of now is running significantly higher, essentially proving that the business model that LKQ operates, has the ability to generate significant amounts of free cash has been proven yet again. With regards to the fourth quarter, given as to how revenue trends are coming through, we do see ourselves investing in inventory specifically. And again, it's broad based, but largely within our specialty segments, which essentially has been constrained up to a certain point with regards to inventory availability. It is flowing at this point of time, but that clearly is the one key priority that we are pushing pretty hard on. And certainly it'll be the inventory build for a few reasons, Brian. One, we are significantly lower than where the revenue is currently trending. We do expect the balance sheet to also flex based on revenue. But as you know, revenue is really a little bit better than where the inventory levels are. We do not have any fill rate issues. We do not have any stock outs, but we certainly want to maintain our best in class and class leading fill rates and service levels. So that is something that we are not willing to compromise on. So really, from that perspective, as I called out this morning also, we will be delivering at least a minimum of $900 million of free cash flow for the full year, a year ago, it was roughly about 800 million. So that certainly makes sense with regards to a double-digit conversion. And then the final issue really is, as you think about our key selling season, it is the first and the second quarter. And so, now is the time when we need to rebuild the inventory levels for that seasonal uptick as we head into the winter. So yes, we will see some trade working capital get back and really it will be within the inventory side.

Our next question is from Craig Kennison, R.W. Baird.

Hey, good morning. Thanks for taking my question.

Good morning, Craig.

I wanted to -- hey Nick, good morning. I wanted to ask about just the pandemic here. I mean, it's been particularly hard on small businesses. I'm curious what you see as your competitive change in position here? I'm sure you've got some small competitors that are struggling, but then also you've got some customers here who are also small businesses who also may be struggling and just wondering how all of that dynamic plays out maybe in 2021 as things hopefully normalize?

Yes, I wish I had a crystal ball Craig. The reality is, is all going to depend on what the governments around the globe do, not only as it relates to controlling the pandemic vis-à-vis restrictions on mobility which obviously as we saw in the second and third quarter have a negative impact. The overall demand in our industry and that hits not only distributors like ourselves, but it also hits our customers. And also what they do from an economic stimulus perspective, the reality is we saw some of our competitors early in the pandemic shut their doors for a couple of weeks and almost as soon as the payroll protection plan money got distributed. They opened back up, but that tells you kind of how much on the line some of those smaller businesses are being able to keep the doors open. If there are significant restrictions on mobility and such a demand for repair services and related parts is down and there is no government support. Well that's going to really put the smaller business at risk. If the governments come along with another big funding if you will, to help businesses stay afloat that will obviously mitigate. What we've seen across the globe is not a rash of people going out of business, but we know for a fact like in the UK, market demand in the third quarter was down. Our organic revenue in the UK was up. So we're taking share and we believe that the larger, well capitalized businesses are doing okay in this environment, and the smaller undercapitalized businesses are going to continue to struggle. So the answer to your question Craig, it all depends on how deep the restrictions are on mobility and what kind of programs are in place, particularly for smaller businesses by the governments to keep them going.

Our next question is from Bret Jordan of Jefferies.

Hey, good morning guys.

Good morning, Bret.

Good morning.

Hey, with another quarter of accounts payable experience under your belt Varun, I guess could you give us a feeling where you think you might be able to get your payables ratio in Europe and obviously I guess your aggregate AP is like 37%, but what do think your total payables ratio could be companywide as you sort of run this program forward?

Yes listen, great question and very happy with the way the payable program is coming along in Europe. Both the formal vendor financing improved but also the ongoing discussions with our supplier community. We keep ramping that piece up. We've seen some benefit in the current physical year, but really where we expect to see a lot of those negotiations come to fruition will be in 2021. And again, it is not everything going to the formal vendor financing program in a number of cases Bret we actually have our supplier basically giving us what we're looking for from an extended event time perspective in any case. Over all things are moving in the right direction. All I'll say is there is still tremendous opportunity within our European segment. Our teams are working hard on that front. We have prioritized the top forty suppliers and those discussions have come though really strongly. There is still a large portion of the remainder of calls in Europe to actually come through. In terms of giving you an absolute number, this is a multiyear program and despite the fact I know who should be clamoring to find to get a target number that we are chasing. Listen, it is one step at a time in many ways this is the first time it has been done across the European continent in our industry and I am glad with we now have a partner that is also pushing account on that front in the two largest protagonist across the European continent. So we know we are not alone on that front. Great progress being made and we keep resetting the bar with regards to where we expect this program to end up.

Our next question is from Stephanie Benjamin of Truist.

Hi, you guys have noted, first thing analysts say, but again today that you reshuffled some of your margin improvement initiatives in Europe and delayed some by ERP but accelerated others. Is this updated strategy kind of less reliant on the top line improvement? I'm just trying to get a sense of okay you know, worst case scenario, you are -- meaningful walk down, how these initiatives can still be realized even at a tougher top line environment? Thanks.

Good morning, Stephanie and good question. The reality is, it is a combination of both, right. I mean some of the things that we're doing clearly we are going to be moving towards a shared service center, that's really not dependent on revenue flow in any given quarter. That's all about just trying to really get rid of some duplicative costs that are being incurred across the platform currently and pull them all together in a single spot. And again that's one of those items that we mentioned back on September 10, that we're pulling forward in the overall plan. Other items like procurement benefits, there is a relatively direct connection to revenue, because as revenue goes up, our procurement in our inventories need to go up to support that higher level of revenue, which means our supplier rebates and the like go up. If revenue goes down, we're buying a little bit less from the suppliers and our rebates go down. And so that's -- so some of it is not impacted by revenue and the things that are totally under our control we're trying to move forward. Other things have a connection to revenues. So it is a little bit of a mixed bag. As of now like I indicated, we are comfortable with both the magnitude and the cadence of the margin developments and forecast that we provided during the Analyst Day about 50 days ago.

[Operator Instructions] And our next question is from Daniel Imbro of Stephens.

A followup guys. Varun I wanted to touch on the call side of the equation, you mentioned in your segment discussion cost are all increasing. I think in the slide you said you increased your third party freight exposure. Can you talk about what potential offsets you have to really mitigate that risk and maybe can you compare where you are at today versus where we were at in the last freight cycle in 2017, when it was a pretty big headwind to margins for you guys, maybe just compare the two situations? Thanks.

Yes, absolutely. And yes, we are seeing an increase in freight. Freight is actually impacting both our calls. If you think about North America, aftermarket supplies coming in from Taiwan, Daniel, we have seen a spike in the spot rates for ocean freight. So that has spiked. We're still able to get our product service and no issues from inventory availability. We're actually getting it through, but yes, we have seen a spike in spot rates on that front. I think the other piece that probably, I'll point you toward is, you can see how the big freight forwarders and carriers in the United States, but also the same folks in Europe, the UPS and FedEx of this world they are essentially are also doing incredibly well and they have taken their charges up. The final one really is, we are seeing an uptick in e-commerce and online purchases. So from that perspective, there is some tightness in demand out there. The ongoing challenge of finding delivery drivers, it's no different to others within our industry or for that matter, anyone else within the distribution space, per se. And so from that perspective, what we have done from call it the first quarter 2018, where we saw this piece initially, we obviously did become more efficient with regards to the amount of product that was being shuttled around. And where it was being transported on a cross country basis, for example, to kind of keep our fill rates up. The example I gave was, from Q1 '18, where revenue was up like just under $400 million and all it really kind of got us was about $5 million of incremental segment EBITDA. We've obviously put those learning’s into place. And yes, there are certain charges that we do apply as and when those are necessitated. So we're certainly mitigating a lot of it through the learning’s of the past couple of years. But clearly, there is an uptick on that front, and our teams with regards to route optimization, our road net proliferation across the network or for that matter, the number of deliveries that end up taking place, all of that is being worked into the equation. So really happy with the way our segment teams, in fact, all three segment teams are dealing with this spike in inflated delivery costs.

[Operator Instructions] And we have no further questions. I'd like to turn the call back to Nick Zarcone for any closing remarks.

Well, thank you, everyone, for joining us on this call. Again, we believe we've reported just terrific results here in the third quarter of 2020. We are working hard to make sure that we can do everything under our control to deal with the impact of the pandemic, both obviously what's occurred thus far and what may ever lie ahead for the globe going forward. You can trust that we are going to be extremely focused on our cost structure and continuing to generate cash. On that I want to give a huge thank you to everybody on the LKQ team because it has absolutely been a huge team effort to get us where we are at today. And lastly, we started off right before this call was a piece of birthday cake for none other than Joe Boutross, whose birthday is today. So Joe, Happy Birthday to you. I know most of the folks on the call know you well, and I'm sure they send their best wishes. So we will talk again after the fourth quarter results, and we appreciate your attention. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.