Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Joe Boutross, Vice President of Investor Relations. You may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to LKQ's first quarter 2019 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning, as well as the accompanying slide presentation for this call. Now let me quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release 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 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 first quarter, and then Varun will dig into the segments and related financial details, before I come back with a few closing remarks. Taken as a whole, Q1 represented a solid quarter and played out pretty much as we anticipated. We made good progress with the various operational and productivity initiatives we began implementing in 2018 and the business performed in line with our expectations knowing that we faced exceptionally tough growth comparisons for North America, a challenging macroeconomic environment in Europe, and significant negative headwinds from the year-over-year impact of scrap and FX. Now on to the quarter. As noted on Slide 4, revenue for the first quarter of 2019 was $3.1 billion, a 14% increase over the $2.7 billion recorded in the comparable period of 2018. Parts and services organic growth for the first quarter of 2019 was essentially flat year-over-year on a reported basis, but when adjusting for one less selling day in the quarter, organic revenue growth for parts and services was 1.3%. Diluted earnings per share attributable to LKQ's stockholders for the first quarter of 2019 was $0.31 as compared to $0.49 for the same period of 2018. However, the first quarter of 2019 results include $52 million of noncash impairment charges net of tax composed of $40 million related to the company's equity investment in Mekonomen and a $12 million charge for net assets held-for-sale. These impairment charges reduced diluted earnings per share for the first quarter of 2019 by $0.17 a share. So on an adjusted basis, net income attributable to LKQ stockholders was $176 million,…

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 discuss our 2019 guidance before turning it back to Nick for closing remarks. As we have discussed on the past few calls, we are focused on delivering profitable growth, expanding on margins, generating free cash flow and optimizing our capital allocation strategy. The first quarter provided evidence of continued progress on these initiatives as we grew our consolidated gross margin by 30 basis points over the prior year, produced $124 million in free cash flow, paid down $60 million of debt, and as Nick mentioned, repurchase $70 million in LKQ stock while maintaining our net leverage ratio. While we're pleased with the progress on our initiatives, we still have work to do on our segment margins. And I will comment on these drivers behind the quarter-over-quarter variances in a few minutes. Diluted EPS attributable to LKQ stockholders for the first quarter was $0.31, down $0.18 relative to the comparable quarter last year, primarily related to a few impairment charges on which I will provide further details. Adjusted EPS, which excludes restructuring charges, intangible asset amortization, acquisition and divestiture related gains and losses, impairment charges and the tax benefits associated with stock-based compensation was $0.56, reflecting a 2% improvement over the comparable quarter last year. I want to highlight a few items that affected quarter-over-quarter comparability. First, scrap prices trended down in the first quarter of 2019 with a sequential decrease of 9%. Whereas the opposite was true in the first quarter of 2018 when scrap prices rose 21%, sequentially. We benefited by roughly $0.03 in the first quarter a year-ago due to the price rise of scrap compared to…

Thank you, Varun for that financial overview. And with that, let me reiterate the key initiatives discussed in February that we will continue to focus on during the balance of 2019. First, we will integrate and simplify the operating model. Our management teams will concentrate on leveraging the strengths of their respective business units for profitable revenue growth, margin improvement and cash conversion, and as discussed, work on divesting the businesses that don't represent the right long-term fit for our organization. Second, we will closely monitor costs and react quicker to changing market conditions. We believe that we can adapt to market trends and economic conditions to deliver our full-year targets. Third, we will invest in our future through projects like the European ERP implementation, which continues to move forward. And finally, we will create even tighter alignment with the key priorities of the company and the expectations of our stockholders through revised compensation programs. I am happy to report these programs and targets have been communicated throughout the organization and the teams are actively working towards achieving their respective goals. In closing, I am very proud of the momentum we’ve created with our Q1 performance and how our team of over 51,000 employees performed amid various operating challenges in both North America and Europe. Importantly, I want to recognize how our leaders across each of our segments have embraced our productivity initiatives and the metrics we have implemented as we progress through 2019 and beyond. These factors should continue to create long-term value for our stockholders. And with that, operator, we are now ready to open the call for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Michael Hoffman from Stifel. Your line is open. Michael Hoffman, your line is open. Our next question comes from the line of Stephanie Benjamin from SunTrust. Your line is open.

Hi. Good morning. I just wanted to get a little bit more color on expectations for European EBITDA margin for the remainder of the year flat for the first quarter, but what kind of are the drivers to see improvement as we move through the year? Thanks.

Stephanie, good morning. It's Varun Laroyia. How are you?

Doing well. Thank you.

So listen, in terms of -- excellent. Listen, so in terms of our European margins, while we were really pleased with the way our ECP and our U.K operations bounced back. As Nick noted in his opening comments, there was some macroeconomic softness, which obviously pull down the overall organic growth numbers. But in terms of the overall full-year number for our European business, while clearly, Q1 was a little disappointing from an operating leverage standpoint. We do know that in the remaining nine months, the team is actively working towards delivering on their targets. That is again a fair bit of the year yet to run and the team is actually proactively working through a series of different initiatives to ensure that they hit their margin targets. I think if you’re referring back to the broader 3-year program that we had called out following January 2018, so that full-year 2021 we would hit the 10 points of segment EBITDA margins, that remains unchanged. So no change to that program that we had called out for the 36 month period.

Our next question comes from the line of Bret Jordan from Jefferies. Your line is open.

Hey, good morning, guys.

Good morning, Bret.

Could you talk about the accounts payable balance? Maybe as its specifically around the European side of the business? How you’ve done as far as leveraging payables? And then sort of -- along with that as STAHLGRUBER enter the mix, could you give us some feeling for STAHLGRUBER's accretion maybe in Q1 what it added? You talked about some incremental margin and the purchasing mix, that maybe you could talk about it sort of standalone profitability?

Yes. Hey, Bret. Good morning. It's Varun. Let me answer the first part of your question and then I think Nick will pick up on the second part of your two-part question. So in terms of payables on an enterprise-wide basis, they were flat on a year-over-year basis. But you are indeed correct, in terms of being able to get a vendor financing program up and running, we've had great discussions and we continue to work towards getting it across the final finishing line. So we’re excited about that, but we do believe that really is where there is a significant amount of upside. For no other reason than it is a common set of suppliers, that also supply to the big box folks here in the U.S. So again, discussions are underway. We have great financing partners lined up also and we actually anticipate seeing some of that come through in 2019.

And Bret this is Nick. Good morning. As it relates to the STAHLGRUBER accretion, indeed that acquisition added to our earnings per share. On a direct basis, it is a few cents, as we’ve noted in other conversations, not all of the synergies related to STAHLGRUBER will [indiscernible] themselves at STAHLGRUBER, because some of the procurement, really that’s some of those [indiscernible] gets spread overall the different operating units in Europe. So we are happy with the acquisition and how its performing.

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

Good morning. Thank you for taking my question.

Good morning, Craig.

Varun, first if you could -- good morning. Varun, if you could give us the per day organic growth for each segment? I am sorry, I missed it. And then with respect to Specialty, maybe just add a little color to what happened in the first quarter and what makes you confident that business will recover as the year unfolds? Thanks.

Yes. Hey, Craig. Good morning. It's Varun. So in terms of on a per day basis for each of our reportable segments. As Nick mentioned, North America was marginally up about 10 basis points on a per day basis. Europe was up 2.1% on a per day basis and Specialty achieved organic revenue growth of 2.6% on a per day basis. The key out here really is, if you think about some of our businesses that Nick also called out and I also refer too, in terms of whether it would be our glass business where we’ve focused on margins, that’s certainly pulled us back in terms of overall per day on a -- in North America, for example. And again as Nick mentioned, if we were to pull up the glass and the airplane recycling business, as they both exhibited a negative same day growth. The largest part of our North American segment, being salvage and the aftermarket piece, essentially grew about 1.8% on a per day basis. So just wanted to kind of reiterate that’s a solid performance across each of our large business segments. And with regards to the second part of your question on Specialty, so yes, Specialty gross margins were down 160 basis points, but about a 120 basis points of that's almost three quarters of that related to and this is -- I’m going to ask folks to dive into their memory banks, but in the fourth quarter of '17 where we had a significant investment in overall inventories, you will recall apart from the hurricane buying opportunities we had, we also invested into our Specialty business. And some of those opportunistic buying conditions related to getting some pretty attractive discounts from our suppliers, those discounts essentially get capitalized and get rolled into 2018 results for the Specialty unit, which obviously boosted certain margins. But at this point of time, that obviously has flown through that balance sheet and the income statement and the team is actually working to -- continue to hit its numbers. So again, we are quietly confident about the Specialty segment being able to hit its full-year targets.

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

Yes. Hey, good morning, guys.

Good morning, Daniel.

Good morning.

I have question on North America. Obviously, growth slowed. It sounds like you’re about flat on a same day basis, but we still saw margin up year-over-year as you guys execute on your pricing and discounting program. Can you talk a little bit about how your customers are responding to those changes? I mean, are you seeing any pushback from them? And then related to that, have we seen any update on OEM pricing here domestically? Thanks.

Yes. So, again, we got a little bit of a dichotomy in the North American growth with the core business actually as Varun just said, up about 1.8% on a same day basis. So I'm feeling pretty good about that. And as I mentioned in my comments, March was a lot better than January as well. So the near-term trends are good. We are adjusting our pricing based on the inflationary conditions that we’re facing with respect to wages and rates and the like. We are being very thoughtful as to how we are doing that with our customers. It is a very competitive environment out there as you well know. And we are taking it day-by-day, and really customer by customer. All we are trying to do is have -- recover the incremental operating costs we are facing in running the business on a day in and day out basis. But given the [indiscernible] condition we have in this country and the impact that has on wages and the like. And the second half of your question? Daniel, you have a two-part question, I believe. Okay. We will go on to the next question please.

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

Thanks for taking the question. So the question is on the EBIT margin improvement x self-service. It was exceptionally like very strong, which is great to see. As you assess your non-core operations, can you talk about your self-service business? And if you consider this to be a good business and core to your offering? And holding scrap prices steady, can you talk about the margin profile and capital intensity relative to the rest of North America? Thank you.

Yes. So our self-service business in North America is clearly the most cyclical, because that’s where the largest impact that scrap pricing -- its manifest. In times where scrap is rising and we get benefit of that, that’s obviously a clear benefit to the self-service business. In times like what we’re seeing right now where scrap has come down materially since the first of the year, it's working against this. When you take it over kind of a multiyear view, the self-service business is a good performer with good double-digit margins and it adds to the overall value of the organization. More broadly, we’re very proud of the North American margin improvement that we had as we initiated 170 basis points on the top line and 120 basis points improvement at the EBITDA line. When you take out the impact of self-service, which is really the impact of the scrap on the overall segment. We think that is very good. It's -- really the first time in about five quarters that we’ve been able to post a positive year-over-year growth and EBITDA margins in North America. And we are looking forward for the team to continue that momentum as we complete the rest of the year.

And Nick just to add to the comments you mentioned, so Chris, effectively if you look at on North America segment, which had an uptick with regards to gross margins by about 90 basis points. Without the self-service business that would have been up 170 basis points, so an incremental 80 bps. And if you think of it in terms of how that flows all the way through to EBITDA margins, while we are incredibly proud of the fact that the overall segment reported a 20 basis points up. As Nick mentioned, without the self-service business, it would have been 120 basis points up. So there's 100 point delta, 100 basis point delta right there at the EBITDA level. And I think the final part of your question was about the capital intensity of our self-service business. Listen, in terms of self-service capital intensity, it's actually pretty good. It actually lowers the overall capital intensity of the business. But if you think of the business model for our self-service where we have our stores or yards, take a pick in terms of what you would like to call them. The inventory that we have on offer on the salvage side has to be fresh, right? Once people come and pick their parts out of those vehicles, if it's there for more than call it three, max four weeks, it become stale. And so that's really when it become -- it gets kind of crushed and kind of again sent to the shredders, but effectively from a capital intensity perspective that product moves pretty darn quick. So on a capital intensity adjusted basis, the returns of that business are pretty good. The only issue, as you and Nick also kind of pointed out, is the volatility associated with the broader macroeconomic scenario with regards to scrap steel prices. That really is what kind of comes through. And then from an EPS perspective on a year-over-year basis, just to kind of reiterate, the reversal on scrap and as we’ve talked about it in our guidance also that hit us for $0.04 on a year-over-year basis, Q1 '18 versus Q1 2019. So a $0.04 hit effectively on a year-over-year basis came through.

Our next question comes from the line of Ryan Merkel from William Blair. Your line is open.

Hey, guys. Two questions for me.

Good morning, Ryan.

Morning. So, first, in North America can you provide a little bit more color on the aviation and glass headwind? Is it one-off or should it continue? And then, secondly, can you comment on the competitive environment in Europe if things are the same or getting a little bit worse?

Sure. As it relates to the glass business, we’ve taken a very purposeful approach to make sure that we can drive good margins there. Clearly it had a little bit of an impact on our revenue in the first quarter, that’s probably going to linger with us as we proceed through 2019. Though, again, that’s a business again where the costs get a little bit easier as we get into the back half of the year. The aviation business, again that -- it's different from the rest of our business and that’s -- it's much fewer transaction of -- bigger dollar size per transaction, if you will. You’re not selling a used engine for $800. You’re selling used engines literally for hundreds of thousands of dollars. And so there is going to be more volatility. We are -- our expectation is in the aviation business. And again, the outlook for the year is -- the team is looking to hit their flat [ph].

And then I think, Ryan, your second part of your -- of your two-part question was competition in Europe. So let me address that also. Listen, in terms of what we've talked about previously, we know there's a general downdraft with regards to economic sentiment across Europe in any case, the fact that there have been other folks that have public companies that have reported, which may have experienced negative growth. Each of our organic numbers that we’ve kind of posted for our European business, each of our platforms actually delivered positive year-over-year organic. While it may have been anemic, they’ve all came out with positive year-over-year organic. So, from that perspective, we feel good about it. We knew going into Q1 versus a year-ago, our European business a year-ago had been impacted by some operational challenges that have been well discussed and articulated. We are really happy with the way ECP has come through. That business as a market leader has continued to deliver and without the operational stumbles, is actually delivering on the promise we had -- we know that business can deliver. So on a broader basis, listen, the competition has always been there. Do we see any more intensity? Not really, it's always been pretty darn intense in any case. So from that perspective, no major shifts that we see specifically.

Our next question comes from the line of Scott Stember from CL King. Your line is open.

Good morning.

Good morning, Scott.

Could you maybe frame out a little bit more the Europe organic sales situation. You did say that you saw that ECP was up nicely, I guess, compared to the rest of the regions. But maybe just give us an idea of how much it was up and maybe just frame that against some of the other regions? Just give us an idea of the performance in Eastern Europe. Thanks.

Yes. Scott, we don’t provide guidance on a country-by-country basis. What I can tell you is on a same day basis Europe was well north of 2% and that was pretty much in line with ECP and most -- all of the businesses that we’ve. So, no significant kind of deviation. Obviously, STAHLGRUBER is not in the organic numbers since we did it, complete that acquisition until May 31 of last year. So they won't really come into the whole, but for a month in Q2 and then really we will fully commence with the organic calculation going to get into Q3 of this year. But, again, across the board all of our platforms, if you will, think about ECP [indiscernible]. Rhiag, we are all in kind of that -- kind of low single-digit, 2% plus range that on a total basis was for the European segment. And that compare ECP last -- first quarter last year and then [indiscernible] organic. So that’s where the big [indiscernible] came on a year-over-year basis.

[Operator Instructions] Our next question comes from the line of Jason Rodgers from Great Lakes Review. Your line is open.

Yes, you mentioned, you saw a significant improvement in March from January and February. I wonder if you could put any numbers around that and perhaps talk a little bit about what you're seeing in April?

Yes, so we don't provide monthly guidance, Jason. But let's just say that March was more consistent with where we had been historically, and the January numbers were pretty soft.

Yes, and again Nick just to add to -- Jason, just to kind of confirm what we did mentioned in the opening remarks was specifically the sales intensity in our North America segment in the first quarter where January and February was slow. March has come through very strongly. Now, again, a whole host of different anecdotal information. What we do know as a fact is that there was the federal government shutdown in the month of January where 800,000 federal employees were essentially not being paid or essentially not at work, and that obviously has an amplification impact also. But again, as we talked about, we didn’t talk about margins, we specifically talked about North America sales intensity that continue to improve as we ended towards the back end of the quarter.

Yes, and as we talked about last call too, right, the first two quarters of last year in North America had pretty much modest organic. So there is going to be tough comps, right. We are at, I think 6.8%, like 7.2% in Q1 and Q2 organic of 2018. And so again, we are going to have another quarter as we head into Q2, what we have -- some pretty high comps. And then the back half of the year obviously get much easier comps on a year-over-year basis.

And we have no further questions in queue. I will turn the call back to Nick Zarcone for closing remarks.

Well, thank you everyone for listening to our first quarter call here. We do appreciate your time and attention. Again, we feel very proud of the quarter we delivered. We think it puts us in very good standing as we head into the balance of the year. Again, there's nine months to run, if you will, so there's a lot of runway ahead of us. But all in all, we’re feeling confident about 2019 and we certainly look forward to chatting with everybody in another 90 days when we report our second quarter results. Thank you very much.

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