Welcome to LKQ Corporation's Third Quarter 2017 Earnings Conference Call. I'll now turn the call over to Joe Boutross, LKQ's Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to LKQ's third quarter 2017 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 and Michael Clark, Vice President of Finance and Controller. Please refer to the LKQ website at lkqcorp.com. For our earnings release issued this morning as well as the accompanying slide deck 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. And with that, I'm happy to turn the call over to Nick Zarcone.

Thank you, Joe, and good morning to everybody on the call. I am delighted to share the results of our most recent quarter with you. But before I jump into the review, I would like to introduce Varun Laroyia, our new Executive Vice President and Chief Financial Officer. As many of you read from our press release in September. Prior to joining to LKQ on October 1, Varun was the Chief Financial Officer of CBRE's Global Workplace Solutions Business. A multi-billion full service real estate outsourcing firm with approximately 40,000 employees in over 50 countries. So from a size, scale and level of complexity it was quite similar to LKQ. Prior to joining CBRE in 2015, Varun spent close to 10 years at Johnson Controls in a variety of senior financial positions around the globe. And prior to that, he held diverse financial positions both overseas and in the US, at Gateway Computers, General Electric and KPMG. In short, Varun brings significant global financial and operational expertise to LKQ will be an outstanding addition to LKQ's unique people culture and I'm thrilled to have him on the team. Now onto the quarter; all in all we believe this was a strong quarter for our company and we're very pleased with the results. As noted on Slide 4, consolidated revenue was $2,466 million and 11.7% increase over the $2.2 billion recorded in the third quarter of last year. Total revenue growth from parts and services was 11.4%. Importantly, organic growth in parts and services was 3.2% on a reported basis and after taken into account the impact of one pure selling day in 2017 compared to 2016. Global organic growth was a solid 4.7% on a per day basis. Very few companies in our sector are generating organic growth at this…

That's great. Thanks Nick and good morning to everyone joining us on the call. I'm delighted to be part of the LKQ leadership team and I look forward to sharing our financial results with you for many quarters to come. Over the past few weeks, I had an opportunity to meet with several investors and key stakeholders such as our banking partners, equity analysts, insurance companies and others. In variably, the discussion moved to why I decided to join LKQ? Listen, while a major career change is never simple, it really came down to a few key items. First, I believe the growth potential of LKQ is significant both organic and through acquisitions. It's not very often that one gets an opportunity to join a company that is a clear leader in its core categories and key markets around the globe and a very significant potential to growth further through acquisition, both the customer offering and geographic footprint. Second, the stage at which LKQ is currently fits well into my skill set of having built and operated multi-billion businesses in a variety of sectors and geographies. This affords me the unique opportunity to help build the company into a substantially larger and an even more progressive enterprise in the foreseeable future. And finally, the cultural fit, this aspect was incredibly important for both the company and me. I truly appreciate the transparent culture, the core values and the unwavering integrity of LKQ. Personally, I thrive in such scenarios as it is core to who I am as a person. Each of these elements taken together created an opportunity that I simply couldn't pass out. And now onto the results, Nick touched on a few of the key financial stats. I will take you through the more detailed review of the…

Thank you, Varun and good morning to everyone on the call. I'll take a few minutes to address our three segments. Particularly as it relates to some of the margin dynamics. Going to Slide 16, gross margins in North America during the third quarter were 43.6% up 20 basis points over the 43.4% reported last year. The strong results reflected the benefits of procurements initiatives in our salvage operations and increased margins in our self-service due to rising scraps deals and other metals pricing. Partially offset by reductions in our aftermarket business due to higher customer discounts and input cost. With respect to operating expenses in our North American segment. We improved operating margin by approximately 10 basis points compared to last year. We saw a benefit of about 40 basis points from eliminating shared PGW corporate cost after the sale of the OEM business in March 2017. Outside of this benefit, overhead expenses were up 30 basis points which related to various individually insignificant items mostly in distribution cost. In total segment EBITDA for North America during the third quarter of 2017 was $153 million, a 9.2% increase over last year. As a percentage of revenue, segment EBITDA was 12.9% in Q3, 2017 up 40 basis points from 12.5% reported last year. While the margin was down sequentially in Q3, we've typically experienced the seasonal dip in the third quarter and as Nick noted 12.9% is on the high end of the range of what we've seen in the third quarter in North America over the last five years. Looking in Slide 18, scrap prices were up 37% over last year and moved about 8% higher in Q3 relative to Q2. The benefit from scrap reflects a sequential movement in pricing as car cost will generally follow scrap prices…

Thank you both for that financial overview. With respect to our guidance for 2017, we have made some minor tweaks based on where we're sitting nine months through the year. Organic growth of parts and services has narrowed a bit to 4.0% on the low end, to 4.5% on the high end reflective of the fact that we're at 3.8% for the first nine months. Likewise, we have narrowed the range for our adjusted diluted earnings per share to a $1.86 on the low end and $1.92 at the high end increasing the midpoint to a $1.89 per share. The corresponding adjusted income from continuing operations is $575 million on the low end to $595 million on the high end. Cash flow from operations has been revised to a range of $600 million to $625 million and capital spending has been revised down to a range of $175 million to $200 million. The updated guidance reflects an effective tax rate of 34.75% exchange rates in the fourth quarter of $1.30 for the pound and a $1.18 for the Euro and scrap at approximately $160 per ton. In summary, Q3 was a solid all round quarter. These terrific results reflect the collective efforts of our more than 40,000 employees around the globe who are working hard to serve our customers each and every day. I would like to thank each and every one of them for their dedication and for being LKQ proud. Operator, we're now ready to open the call for questions.

[Operator Instructions] Your first question comes from the line of Ryan Merkel of William Blair. Your line is open.

So, first question from me. Anything to call out for the slightly slower daily organic growth in Europe and specialty. And then sort of second to that, are you expecting that growth to stabilize in the fourth quarter or pick up a little bit.

[Technical difficulty] really happy with the growth rate per day basis, [technical difficulty] on a going forward basis.

Okay and then just secondly and the line was kind of coming in and out my phone, I didn't catch all of that answer, but second question ahead was North America gross margin it's sort of trended down since the first quarter. I know it's still up year-to-date but anything going on there and should we assume stable at 43.6% from here.

[Technical difficulty] North America [technical difficulty] to the business look on the chart on [technical difficulty] pattern will likely continue but broadly speaking staying in this range is a good assumption.

Great, thank you very much.

Your next question comes from the line of Samik Chatterjee of JPMorgan. Your line is open.

Nick, I just wanted to check I know you stopped giving sort of the organic growth numbers for the European business by the three business groups like Rhiag, Sator and ECP, but is there anything you can sort of give in terms of directional ball park numbers about how they're tracking, how they track this quarter.

If you - the Rhiag business again because that's where all the Eastern European operations are centered right, have the highest organic growth of the three companies, if you will. ECP, good numbers and kind of net bid single-digit level. Sator was a little bit lower than the exceptional performance they had in Q2, but all in all we're happy with the growth rate.

Got it. And a couple of housekeeping questions, I saw the cash flow from operations came down slightly what led for the guidance for the full year that came down, what led to that? And when I look at the 2017 EPS guide, the only change from the 2Q seems to be the equity method investment sort of block of $0.02 so what's driving that?

Yes, so on the operating cash flow, we plan to enhance investment in inventory as we continue to grow our businesses, so we brought OCF down by about $25 million, likewise the capital spending is running a little bit light, so we brought that in at $25 million, so if you want to think about free cash flow the estimate for free cash flow basically stayed the same. Your other question was?

On the change in the 2017 guidance, the change in the midpoint of the guidance seems to be driven by contribution from equity method investment.

That relates to [indiscernible].

Okay and that wasn't expected back in 2Q?

We did not explicitly call that out in Q2, you're correct.

Okay, so just a final question for you and how's the acquisition of the aftermarket business of Dover this week, which you mentioned on the call. If I understand correctly, do they have manufacturing operations, and do you intend to keep the manufacturing operations as well?

So, you're talking about Warn Industries which we purchased or are going to purchase. We've not yet closed from Dover Corporation. Yes, they have manufacturing operations and yes, we're going to and to keep those manufacturing operations. The specialty leadership team has had kind of vertical integration as part of their strategy for quite some time, this is the first opportunity to bring something to fruition, we're only going to do it in very select circumstances cases where there is market leader with a strong brand that we can control a business that operates in a large market with good growth opportunities. What Warn represented was an undisputed market leader. They've got about $140 million of revenue which is about 10% market share of slightly more than a $1 billion market. They've got an incredible brand identity. Vehicle owners ask for the Warn product by name, very good margins to this business, Samik. Circa 20% so from a margin perspective it will be accretive to both the specialty margins and our consolidated margins. We believe that just going to be an opportunity for ancillary revenue flow because in many cases you cannot put their product on a factory issued bumper, so we think it's going to be an opportunity for ourselves few more bumpers and importantly it's going be a bit accretive to the 2018 EPS. So, this case we're able to acquire only the aftermarket business. Dover actually retained their OE business, so this was a much simpler transaction then say the PGW situation. Again, at the end of the day, we think it's a great opportunity, it fits well into our product set, it's got our brand that we can control, and we like being in charge of the distribution. And from a size perspective it's about 1% of our consolidated revenue. So just keeping in perspective.

Your next question comes from the line of Craig Kennison of Baird. Your line is open.

So, you've seen maybe an increase in competition in Europe, we've seen a North American distributor enter the French market. I'm wondering if you see that as validation of your strategy or whether you might see that as a strategic threat to some of the other things you want to do in Europe.

Good morning, Craig. Yes, as everyone probably knows, several weeks ago. GPC which had a NAPA brand here in the US announced their maiden voyage in the Europe, by buying Alliance. Which is a large enterprise headquartered in France, significant operations in France, a bit in Germany and then significant operations at UK as well. We believe Europe is an outstanding marketplace, we've been asked quarter after quarter for the last several years, why aren't all the other US companies in Europe and we could not answer that question. We're just happy that we' were the first mover and have the largest market share in [indiscernible]. So, we think yes, Craig it really goes to show that our strategy in Europe is indeed a good and effective strategy. Look Alliance is a very good competitor in the markets in which they participate, we don't see any material changes. Due to ownership by GPC, they're a very good company, they're very good operator and they're very disciplined and at the end of the day we think that's just fine.

And then real quick, could you just comment on the revenue margin and strategic implications of your RV systems management business and your Netherlands management system.

Yes, those just so you know those are two very, very small businesses. Okay, but let's take the Netherlands business, right. We sell parts to largely the independent mechanical repair shops. Those folks are very good at fixing cars. Their shops that maybe have six [indiscernible] and eight mechanics. What they're not good at is actually having a CRM system where they can stay in touch with their customers, blast out emails, promotions for oil changes or break jobs or whatever the case maybe. What this company does is to provide that kind of - of that capability for that independent garage owner, by us providing that software to our customers it will help them grow their business and our clearer goal is to use that incremental service in helping our customers to get a bigger piece of their wallet, when it comes to parch purchases and alike. Again, in the RV side, again it's providing an incremental service to our RV dealers. What we intend to do is use that to help drive a higher level of revenue, get a bigger share of the dealers' wallet when it comes to type of parts that we sell.

[Operator Instructions] your next question comes from the line of Bret Jordon from Jefferies. Your line is open.

Could you talk a little bit about the impact on cost of goods from what you're going to see on the salvage auction coming out of the hurricanes, something 300,000 cars, freshwater damage, a lot of truck and SUV mix? Maybe the magnitude of the benefit and the timing.

Yes, so the best way to track that is, our experience coming out of Sandy back in 2012, the reality is, there's going to be a lot of good salvage coming to market. We can't buy it all, we can't dramatically up our purchase of cars because we need to have a place to put the cars. You can't put 40 acres of cars in a 30 acre salvage yard. And that's true with us, that's true with everybody. So, we think, these cars come to market we're going to be able to buy a high quality car and an average revenue per vehicle will be a bit higher because it's not like the front end is gone or the back end is gone, right. The reality is, more parts are going to be available for sale. And we think we can get some good pricing again it's supply and demand Bret, right. And with a flood of cars coming to the market at the end of the day that should help a bit. There's not going to be massive changes, massive gains from the cost of goods sold perspective, but on the margin over the next several quarters there should be a little bit of benefit flowing to all the recyclers if you will, ourselves included just from the incremental volumes coming to the market.

Okay and then a question on alternatives parts penetration, you talked about other claims rates being down four tenths, a 1% yet pretty strong organic growth. Do you have a feeling for what the AI penetration might be now?

Our sense is, is it's probably nudging up slowly. The 4% per day in North America actually our salvage and what I would call our core aftermarket product and I think about the Keystone product in the box in glass where all nicely above the 4%. Obviously, we're still continuing to feel a little bit of softness and a little bit of negative comparisons and things like paint, cooling and wheels. And then our smaller businesses like our heavy duty truck business and reman business, we're kind of in the low single-digit. So again, we think that based on our experience we can't speak for the rest of the industry, but based on our experience APU is probably nudging up a little bit like here in 2017.

Okay and did you give an ECP comp number, the store is open 12 months or longer for just ECP?

No, again. We're moving towards reporting European on a segment basis, given that we're now operating and in 15 different countries, we've significantly added to our presence and places like Belgium and Ireland and Poland and alike and but again the positive trends continue.

Your next question comes from the line of Ben Bienvenu of Stephens. Your line is open.

I want to ask Nick you gave some sense of magnitude of the Warn acquisition, can you help us think about what other product categories you could bolt-on in either the specialty business or North American business that you're not currently in today.

Well again on the specialty side, we're distributor at heart. There are other really strong brands in that specialty space if they came for sale and if they had those characteristics that I described, large markets, leading market shares, the ability to add and growing to adjacencies we could add. I can't give you a specific product type, Ben at the moment because it will be really any of the product types that we sell out of our specialty business and as you know, I think last year we sold 275,000 different SKUs including parts from 800 different vendors. But it would have to be a leading brand that really made a difference.

Fair enough. And then pivoting to Europe. Andrew Page continues to be an incremental drag on the results, can you talk about some of the key factors driving the OpEx headwinds. I recognized that you're not able to integrate the business today, but it looks like there is a light at the end of the tunnel potentially in the event of potentially gaining regulatory approval. Can you give us the sense of the critical path for synergy capture?

If you think about Andrew Page, they're losing money, their revenue under prior ownership hit a decrease because they weren't investing in the business, they were not investing in inventory. But they still had a national distribution center that they had to cover the cost on, they still have the corporate office that they have to cover the cost on, and that's why they're losing money. I mean those overhead cost relative to their revenue rate are just too high. Ultimately with T2, we don't need their national distribution center. Okay and while we need some of the people in their corporate office, we don't need the total duplication and so those where the real opportunities are. Michael, you mentioned I think in your call the impact of Andrew Page on margins for Europe.

Yes, it was 70 basis points on the operating expenses set on the European segment.

Yes so 70 basis points on Europe overall just from Andrew Page, which means if we get it to be breakeven, we pick up 70 basis points in Europe. And we're going to get its profitability. But it's going to take some time as I mentioned in my comments. The integration is measured in weeks or months, it's measured in quarters.

Your next question comes from the line of James Albertine from Consumer Edge. Your line is open.

So, wanted to just, as maybe a follow-on to that previous question, that was more focused on Andrew Page and I think we can sort of see the light at the end of the tunnel. Ben mentioned but the pressures that you noted I think it was 60 basis points of margin pressures in the Benelux. Little less clear to us at least what the path forward for correcting that. Can you maybe shed some more light or dig in a little bit deeper there as to what needs to happen and how long that will take?

Yes, certainly so this is Varun Laroyia. Let me climb on to that one, to give you a more complete picture about the European OpEx headwinds. So apart from the T2 and the Andrew Page piece that Nick just mentioned, the other one was in the third quarter as we called out, we acquired some businesses in the Sator business again going from a three step to a two-step distribution, methodology. Now with those set of acquisition, there is a slightly different higher cost structure, but essentially that gets offset by a higher gross margin profile for these businesses. So that's one aspect you kind of take into account, just in terms of what took place in the third quarter with the Sator acquisition, the BCC entities and also call systems in the Netherlands, that's point number one. The other one to think through is, as we kind of move forward and we begin to integrate those recently acquired businesses into the continental mainland platform. We do expect there to be further synergies, so as you think about a single ERP versus running a multitude of those, that certainly gives us the benefits also, so apart from the Andrew Page and the T2 piece that was mentioned previously this was the other aspect that I'm hoping you get a little bit more insight into it.

And similar with Andrew Page, we're talking about weeks and months, not quarters here in terms of the moving to a single ERP and transitioning kind of to the broader European platform.

Yes, so listen as you would have noted, I spent quite sometime over in Europe and had done similar acquisition integration listen as much as I would love to say it's matter of weeks and months, swapping out ERPs and changing out whole scale systems takes a little bit longer than that. We certainly have started the work on that front, optimistically I'm looking at the back end of 2018 into 2019 to be able to kind of simplify some of those recently acquired businesses. So, it has a slightly on the tail, but again we have a great game plan, we've got a great leadership team out there and they've got their initiatives laid out pretty well in terms of how they're going to tackle this.

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

This is Brian Butler for Michael. Just one question on the Warn acquisition, now that you've kind of stepped into that vertical integration and become somewhat of competitor to some of your distribution partners, have you had any push back or feedback from those product providers?

We have not, although it was just announced on Monday, so of this week so it's only four days ago. The reality - this is a product that the vehicle owners demand by brand. And I think the other distributors who are selling the product are still going to want to sell the Warn product because of the brand identity it's a very good product for everybody in the distribution of specialty product.

And how about the products that you guys sell through your own partners? I mean is there I guess any pressure then to possible of those partners either not selling through you anymore but going someplace else because you're now a direct competitor.

No, we don't anticipate any significant change there.

Your next question comes from the line of David Stratton of Great Lakes Review. Your line is open.

When we look at the planned automatic transmission repair business scheduled to start in 4Q, how is that coming along? Are there any updates that you can give us in regard to that?

Yes, you're talking about our announcement a couple quarters ago of greenfield being a reman transmission business in Oklahoma city and the update from our leadership team just on the last few days, is they anticipate the first transmissions will be coming off the reman line in the first or second week of November, so we're pretty much right on track. Now it's going to start slow, but build from there over the next several years.

Great and then, when we talk about the impact of the hurricanes, you mentioned pretty thoroughly the impact on salvage. Will there be any to scrap steel prices that you anticipate going forward, where there might be a lower scrap price in the future?

We don't anticipate any significant moves. Obviously, all those total loss vehicles are sooner or later once we and the other recyclers are done with them, I'm going to head to the metals processors to get recycled and like. So, there will be some incremental volume, but when you think about the total amount of steel is recycled in this country and used around the globe, we don't see any material pressure. Our average scrap prices last week were right in the $160 a ton range, which is down a little bit from maybe a month ago, but not materially.

[Operator Instructions] There are no further questions in the queue at this time. I'll turn the call back over to the presenters.

So, we thank everyone for participating on this third quarter call. We do know that this is a very busy time for all you and we appreciate your time and attention. Again, we think, we had a great third quarter, we're looking forward to a good fourth quarter and we'll talk to you at the end of February with our year end results. Thank you everyone.

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