Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation Fourth Quarter and Full-Year 2018 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] Joe Boutross, Investor Relations. You may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to LKQ's Fourth Quarter and Full-Year 2018 Earnings Conference Call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, LKQ's 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 the 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 norm, we are planning to file our 10-K in the next few days. And with that, I am happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe, and good morning to everybody on the call. We certainly appreciate your time and attention at this early hour. This morning, I will provide some high level comments related to our operations in the fourth quarter and then Varun will dig into the segments, the related financial details, and then discuss our 2019 guidance before I come back with a few closing remarks. Taken as a whole, we made good progress in the fourth quarter with the various operational initiatives we implemented throughout 2018. We did however experienced some challenges in achieving the expectations we set forth in our previous guidance, primarily related to our European operations. Make no mistake, these challenges have not changed our focus on the four key themes we outlined in our last call. Our continued pursuit of profitable revenue growth, progress on our margin improvement plans, excellent cash conversion and the optimization of our capital allocation strategy. Now on to the quarter. As noted on Slide 5, revenue for the fourth quarter of 2018 was $3 billion, an increase of 22% over the $2.5 billion recorded in the comparable period of 2017. Parts and services organic revenue growth for the fourth quarter of 2018 was 2.5%. Net income from continuing operations attributable to LKQ's stockholders for the fourth quarter of 2018 was $40 million, a decrease of 68% year-over-year. Diluted earnings per share attributable to LKQ’s stockholders for the fourth quarter of 2018 was $0.13 a share as compared to $0.41 for the same period of 2017, a decrease of 68%. The fourth quarter 2018 results include non-cash impairment charges net of tax of $48 million related to the company's equity investment in Mekonomen and $26 million related to goodwill recorded on our 2017 acquisition of an aviation parts recycler. These impairment…

Thanks, Nick, and good morning to everyone joining us on the call. I will take you through our consolidated and segment results for the quarter, cover our current liquidity position, and provide 2019 guidance before turning it back to Nick for closing remarks. The fourth quarter results featured several solid accomplishments and some further opportunities for us to realize. On the positive side, three key points to highlight. Number one, we continue to integrate STAHLGRUBER and I am happy to report that the business is performing in line with expectations and that we are achieving the synergies projected at this stage. Two, our Specialty segment, which historically had generated its lowest segment EBITDA, margin in the fourth quarter, so an 80 basis points year-over-year improvement in this metric, largely due to effective margin management initiatives. And finally, three, operating cash flow for the fourth quarter was $190 million, which in total produce the highest annual operating cash flow in the Company's history at $711 million and free cash flow of $461 million. I am very proud of the team's dedication to working capital management, which I am confident will carry through into 2019 and beyond. On the other side of the ledger, as Nick described, we experienced some softness in revenue growth in the quarter in both North America and Europe. As previously noted, the North America segment was able to withstand the revenue softness relatively well, while in Europe the softness in revenue growth created pressure on a segment EBITDA margin. I will provide further color on this when we discuss segment performance. There is a larger spread between our GAAP and adjusted figures this quarter than we are typically accustomed to reporting. The variance is attribute to the under-performance of two specific investments, which resulted in an impairment…

Thank you, Varun for that financial overview. I believe that we are taking the necessary steps to position the Company for continued long-term success. Looking back on 2018, we crossed major milestones that our team of over 50,000 employees across the globe should be proud of, including achieving the highest annual topline revenue in the Company's history, up 22% over 2017, generating the highest annual cash flow figures in the Company's history. With operating cash flow and free cash flow up 37% them 36% respectively over 2017 levels. Closing the STAHLGRUBER acquisition the largest acquisition in the Company's history, completing the largest capital raise in the Company's history through notes with a in tenure maturities at attractively low fixed interest rates and amending our credit facility to provide more flexibility and better pricing. With that let me summarize a few of the key initiatives for 2019. First, we have built strong businesses with leading companies in our core geographies. Our focus will now shift towards operational excellence through the integration and simplification of our operating model. The management team will concentrate on leveraging the strengths of the business units for profitable revenue growth, margin improvement and cash conversion. Second, all of our businesses will be closely monitoring cost to drive-out duplicative expenses, heighten controls over discretionary spending and react quicker the changing market conditions. Third, we will invest in our future through long-term projects like the ERP implementation in Europe, a centralized European catalog system, and the multi-year development of a new NDC in the Netherlands. All these projects often don't produce an immediate benefit they are essential for positioning the business for future growth and profitability. Finally, the revamped compensation programs well help ensure the management incentives are in even tighter alignment with the key priorities of the Company and the expectations of our stockholders. In closing, I am proud of how our team of over 50,000 employees performed doing 2018 in the midst of various operating challenges in both North America and Europe. Our team never took their eye off the ball and continued to work tirelessly to create and evolve what we all believe is a unique company. Our extensive distribution networks the breadth and depth of our inventory and our industry-leading fulfillment rates position as well to deliver consistent profitable growth and drive higher levels of operating efficiencies across all segments. This focus on operational excellence should translate into continued long-term value for our shareholders. And with that operator, we are now ready to open the call for questions.

[Operator Instructions] Your first question comes from the line of Daniel Imbro of Stephens. Please go ahead. Your line is open.

Yes. Hey, good morning, guys. Thanks for taking my questions.

Good morning, Dan.

Good morning, Daniel.

I wanted to start on the European business and kind of the outlook for expenses. One clarifier and then a question. Varun, did I hear you right, where there any one-time expenses that drove that deleverage or was it just the lower sales growth of the business that drove the year-over-year decline?

Yes. So if you look at the European margins, Daniel, it was specifically the revenue softness, which caused a loss of operating leverage on that. There weren't any specific one-time is there were, some of the smaller ones, not that material. But that was really associated with some management departures that had been undertaken. But other than that nothing that would come to mind beyond that.

You next question comes from the line of Stephanie Benjamin of SunTrust. Please go ahead. Your line is open.

Hi. Thanks for the question. Good morning. My question really just goes with expectations and I know reiterated the expectations in Europe to continue to really see that margin improvement in double-digit EBITDA growth in reiteration of that. I'm just wondering, as I look to the guidance for 2019, I think expectations are for a softer topline growth kind of similar to the fourth quarter. So I'm just kind of wanting to hear the puts and takes for you to - for your expectations for margin improvement in Europe in 2019, so you don't see kind of that continued operating deleverage we saw in fourth quarter. So just kind of wanting to hear the offsets of there would be great. Thanks.

Yes. Absolutely, Stephanie. Good morning. It’s Varun Laroyia. Great question. I think, if you kind of look back into 2018 with regards to our European segment. Going back to Q1, you'll recall we had some challenges in the UK operations with our Tamworth facility. Coming out of that, obviously there was a capitalized cost to recover that central distribution center and then they're on, there was also some price discounting that was taking place. So that was kind of one piece that we don't really expect to continue into the future as we think about 2019. The other piece is, as you think about the broader European landscape. Italy, we know has been soft. And clearly there was a deleverage that ended up taking place out there. And then obviously, some other elements, we get the full-year benefit of some of the distribution centers that we had shutdown in anticipation of Tamworth coming through, and the same thing with Andrew Page also. So, as you think of some of those kinds of puts and takes, clearly there are certain elements that impacted our 2018 operational results in the European landscape. And as we think about 2019, we do believe that those elements would have stabilized and despite the lower economic activity expected across the European segment, we believe that with the active cost containment programs that are in place, we do believe that we will get better operating leverage from that segment.

Stephanie, this is Nick. As we go through the planning process each year and a very detailed budgeting process, clearly the expectations for every one of our businesses around the globe is not only to generate good organic growth, but also to improve their margins. And that is true in Europe. It's true actually in the North American and Specialty businesses as well. And I think you will find the underpinning really of the consensus that Varun walked through is an assumption and some pretty detailed plans by our operating businesses to improve margins across the board with one exception and that's the self-serve business here in the United States, which has to deal with scrap prices, and there's only so much they can do to offset the negative impact from scrap as it relates to our operating margins. But again, it's important to understand that the expectation internally is that all of our businesses on an annual basis have plans to find positive operating leverage in their business.

Your next question comes from the line of Bret Jordan of Jefferies. Please go ahead. Your line is open.

Hey. Good morning, guys.

Hey. Good morning, Bret.

Good morning, Bret.

Hey. Varun, can you give us an update on where we are from a working capital standpoint or your thoughts on leveraging working capital maybe what you could do with payables in Europe or the U.S.?

Yes, absolutely. I think, if I take your question Bret in terms of what's driving – what drove free cash flow higher in 2018 and as to what gives us the confidence going into 2019 for the free cash flow guidance, two key pieces, really to think through. One, 2018 to 2019 that clearly is the higher profitability from the focus on pursuing profitable revenue, the margin realization initiatives that we launched last year, and also the cost containment programs that are currently in place. So that's kind of just the starting point for free cash flow. The second point is just active working capital management. And if you think about the momentum that we saw in the third quarter, which we continued into the fourth quarter, really the focus has been on some very simple elements in the balance sheet. Within our cash flow statement, you can actually see this come through, the focus with collections. In 2017, it was a $56 million outflow and in 2018 it was basically flat. So we didn't invest, despite the fact that business grew significantly. We didn't really invest that much more in receivables because we were actually going and collecting the cash that was due to us. The second point is if you look at inventory, inventory did grow also on a year-over-year basis with the larger scale of business, but it was about $77 million lower than what it was in 2017, right. And then the final piece quite frankly is the opportunity that's still out there for us to go get. The single biggest piece, which kind of held us back I'd say is, on a year-over-year basis there was $122 million swing on accounts payable. It was a significant outflow, right. And so as you think about each of these key elements, and as to what we continue to focus on, simplistically there is further opportunity in any case. I think the final piece, which actually is a rapper across the entire working capital and free cash flow piece is the incentive compensation plans and these obviously have been aligned with the goals in 2019. We don't specifically call out the weightings of each of those elements, but I will share with you, it is not a token measure. It is a substantial chunk of people's incentive compensation to generate free cash flow.

Your next question comes from Chris Bottiglieri from Wolfe Research. Your line is open.

Hey, good morning, Chris.

Good morning, Chris.

Hey, good morning. I wanted to ask about – with revenue growth is slowing a little bit, also recognizing that you're going through implementing a number of projects with fixed margins. Can you help frame for us OpEx growth next? What's kind of like your run rate assumption from SG&A for organically from inflation that what's the net impact of costs saving initiatives versus investments to cut costs, just how you're thinking about that next year?

Yes. So Chris, its Varun Laroyia. With regards to cost containment efforts and also OpEx, a few things to kind of think through, firstly here in North America, a bunch of our wage inflation or the freight elements essentially get analyzed. And again, what we have seen – I've seen over the last four to five months as being not a de-acceleration or a downward trend, but basically being a flattening out of some of those expenses that are kind of coming through. So that's point number one. And clearly from the second half of the fourth quarter, we saw fuel come down, also some not enough to offset the various elements given the fact that wage pressures have kind of flown into the freight costs also. And as you think about going into 2019, the cost containment efforts specifically what headcount had, we essentially trying to make the business more resilient with the revised projections from a growth perspective, which I believe actually very pragmatic. And quite frankly, the cost structure will follow this level of pragmatism rather than building up across infrastructure, which was geared for far higher growth level as such, right. And then finally if you think about it, as Nick mentioned in his opening comments, also the overall expectation for each of our businesses is to secure a positive operating leverage. And again, with the change in the incentive compensation plans, there is margin growth both in absolute dollars, but also on a margin percentage that we expect. So again there are only so much that one can do in terms of being able to realize certain margin benefits. But clearly the cost containment and the OpEx productivity is a key lever and being able to deliver higher year-over-year margins.

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

Good morning, Craig.

Good morning, Craig.

Good morning. Thanks for taking my question. On a new compensation plan, what are the thresholds for your key performance indicators that you would need to reach in order to generate the incentive?

Yes. Craig, we don't disclose the absolute thresholds, but you can be assured that they are tied exactly into the 2019 budget, which is tied exactly into the guidance step Varun gave just a bit ago.

Your next question is from Brian Butler from Stifel. Your line is open.

Good morning. Thank you for taking my question. Could you provide a little bit more color maybe on the parts and service business down at the geographic level in Europe and U.S. kind of thoughts on how we should think about growth rates and margins – EBITDA margins for each part of that?

Sure. We don't officially provide guidance on a segment basis, but again 2% to 4% overall, I think you could probably assume that North America, we think North America on an annual basis will be somewhere in the middle of that range. We think Europe is going to be towards the lower end and specialty towards the upper end. So we're really spread across the three businesses. I think it's also important to recognize that this will vary as we roll through the four quarters of the year. It's not a nice – set of growth in Q1 and Q2 2018 had monster comps that were working against, if you recall that the organic growth in North America in Q1 2018 was in around the 7% range. So that is creating a pretty big hurdle. If you will there are a couple things that we anticipate in Q1 that will run against organic growth first, we annualize the battery contract with FCA just to refresh everyone's memory that added about 1% to our organic growth as to what we reported in 2018. So that positive increment will come off the boards if you will. It is also become a parent that as FCA was ramping their activities with us, that there was some kind of one-time benefits if you will that we got in getting the program up and running and that will not return in 2019. We're really at a steady state now with the FCA battery shipments. And so we're anticipating batteries were actually be down year-over-year in the first quarter. Also AeroVision clearly not meeting our expectations that's the business where we took the impairment charge here in Q4, our expectation is the businesses underperforming and it will also be down in the first quarter on a year-over-year basis. From a margin perspective, again, we're anticipating upticks and margins in each of our businesses with North America being muted a little bit by the significant downdraft on the scrap prices, which has noted in the deck hit us for the better part of $0.04 a share so for the year. And that will be a particularly pronounced kind of in the first quarter, I'm assuming scrap prices hang in where they are today.

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

Good morning, Ryan.

Hey, good morning, everyone.

Good morning, Ryan.

So on free cash flow conversion guidance in 2019 applies a little bit of improvement, about 70% my math is right? But I'm wondering what is your long-term target and then more importantly how long it going to take to get there?

Yes, Ryan. So I think as we kind of spoke last May at an Investor conference, I kind of laid out a chart for our investors and obviously a number of view from a sell side perspective also just in terms of the way the business had been trending. And really what I use is I try and keep it as simple as possible and take out all the noise and rate specifically focused on three key elements of working capital. So receivables plus the inventory offset by accounts payable and there's a slide in the deck that you'll see really, which I cannot highlight with regards to where we went 17 versus the kind of progress you've made in 2018. In 2018 the denominator is actually trailing 12 months performer revenue, which includes a full-year of the transactions, namely Stahlgruber. So we don't taking reported numbers, we actually taking performer numbers so you can kind of work the count and actually works against us. But that's where the focus has been. And quite frankly, I think, with the incentive compensation, peaceful, so being tied into free cash flow generation. I am quietly confident that our businesses will continue to deliver. Again, step back and look at the history of the Company, which has been very growth oriented and at this stage of our maturity curve as a company, north of $12 billion is what we kind of forecasting for total revenues in 2019. There are elements that if not growth at all costs and so just management of that piece. But there's an embedded culture and as you know culture is take time before they kind of change. So again, we put out guidance, which I think is above where the market was expecting us to be. But again, we have plans in place to be able to go deliver on it. I don't want to get ahead of ourselves in terms of what's going for 2020, 2021, 2022. I'd say its one step at a time and I'm really happy to report to successive quarters of improvement on that side. We've clearly put our money where our mouth is with regards to 2019 also in raising overall free cash flow guidance and one step at a time, but I'm confident in terms of the plans we've put in place and as to how those are currently tracking.

Your next question comes from Daniel Imbro from Stephens. Your line is open.

Yes. Thanks [indiscernible], hop back in the queue for a follow-up guys. Last quarter, Varun you updated us on your attention to unlock cash flow through increased factoring in the European business specifically at Stahlgruber. Can you provide some more color on that market or an update? And can you remind us on how you guys think about the longer-term opportunity from increasing your factoring in that market?

Yes. So Daniel I think you kind of referring to the unwind of the factoring program that we had through one of STAHLGRUBER subsidiaries. So it wasn't a case of starting up a factoring program. It was actually unwind off a factoring program, which would result in those receivables coming back to us. So that's what it was. We don't really have an active factoring program we don't want to go down that path. It really where the opportunity is as we've talked about from a European perspective, a number of the same supplier community does provide product into the North American folks out here. So again, they are well tuned in terms of what the expectations are and we do have a tremendous opportunity from a European perspective to be able to unlock that piece, whether it'd be through a vendor financing program or through an extension of peoples, the end goal is the same to be able to have our payables essentially match the days inventory on hand to a point right. And that's how the conversion would work and then obviously active management on idea so with regards to receivables. So you are right about the fact that there is an opportunity for our European business. And again it has been contemplated in the plans we've put together with that business and it also reflects the targets that are being tossed with for 2019. But again just to confirm, there was no startup off the factoring program. It was actually unwind of the factoring program for one of the STAHLGRUBER subsidiaries in the fourth quarter.

Your next question comes from the line of Chris Bottiglieri from Wolfe. Your line is open.

Hi, thanks for taking the second question. Just a question North America, so now you guys are getting a lot tougher on discounting and trying to contain the pricing, what are the CI’s you're thinking about the Caliber and Abra merger? How do you guys manage through that and kind of to what extent you've articulated something that your guidance from this will be helpful? Thank you.

A great question, obviously both Caliber and Abra are excellent organizations. They've been incredibly good customers of ours for years and years. No surprise. There are a couple of our largest customers, just due to the total number of shops that they operate. On a combined basis, they're going to be at about 1,050 shops across the country, if you will. And they've got posted plans to grow that to north of 1500 shops I think over the next three years or so. We've got a great relationship with both organizations, and we look forward to being a great partner with them as they continued to move forward in their business plans. Again we believe that we provide an excellent level of service to these organizations. That's why they are big customers of ours. We can get them the parts they need, when they need them. There's no doubt about it. They already get our largest discounts, if you will, because they're already, amongst our top three or four customers. So we don't anticipate any major changes there. To the extent that they have market overlap because you got to remember this is a very much a local business. And what happens to go on, say in Dallas, doesn't have anything to do with goes on, and say up in Boston or in Portland, Oregon, right? It's a local business. And to the extent in any given market, local market, they have overlap where we can find ways to be more efficient in servicing the combined organization. We're absolutely going to have discussions with them to see how we can make their business better and our business better. So again we have tremendous relationships at the very senior levels of both organizations. We're not anticipating any major shifts in our business as a result of the merger.

I now turn the call back over to Nick Zarcone.

So that completes our 2018 full-year earnings call. We absolutely appreciate the time and attention you've given us here this morning. We look forward to chatting with everyone in about 60 days at the end of April when we announced our first quarter results. So again, we think we ended the year, a strong some real progress on a couple of key factors, particularly, the working capital on the cash flow, which is Varun indicated will carry us into the future. And we're look forward to chatting with you again in 60 days. Thank you.

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