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Edited Transcript of LKQ earnings conference call or presentation 25-Apr-19 12:00pm GMT

Q1 2019 LKQ Corp Earnings Call

CHICAGO May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of LKQ Corp earnings conference call or presentation Thursday, April 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominick P. Zarcone

LKQ Corporation - President, CEO & Director

* Joseph P. Boutross

LKQ Corporation - VP of IR

* Varun Laroyia

LKQ Corporation - Executive VP & CFO

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Conference Call Participants

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* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* Daniel Robert Imbro

Stephens Inc., Research Division - Research Analyst

* Jason Andrew Rodgers

Great Lakes Review - VP

* Ryan James Merkel

William Blair & Company L.L.C., Research Division - Research Analyst

* Scott Lewis Stember

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning. My name is Lisa, and I'll 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. (Operator Instructions) I would now like to turn the call over to Joe Boutross, Vice President of Investor Relations. You may begin your conference.

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Joseph P. Boutross, LKQ Corporation - VP of IR [2]

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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're 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.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [3]

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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, an increase of 4% as compared to the $170 million for the same period of 2018. Adjusted diluted earnings per share attributable to LKQ stockholders for the first quarter of 2019 was $0.56 as compared to $0.55 for the same period last year.

Let me briefly touch on the impairments of net assets held for sale, which Varun will cover in more detail during his remarks. As you are all aware, we have on several occasions discussed our 4 key strategic pillars, which include: growing our customer offering, expanding our geographic footprint, adapting to changing technologies and rationalizing the asset base.

With respect to the latter, I view the efforts to rationalize the business as an ongoing evaluation of our assets to ensure that we have the right combination of operations for our long-term success. As you might expect, undertaking this evaluation will, from time to time, identify businesses that no longer represent a strong fit with either our long-term strategy or financial return objectives.

After careful consideration, we reached a conclusion to sell a few of our operations in the upcoming year. While each of the subject businesses has its strengths, we don't view them as being critical to our core operations. These businesses neither individually nor collectively reflect a significant amount of revenue or EBITDA. The sale of these noncore assets will, however, help improve our overall margins and simplify our operating model.

With respect to capital allocation, during the first quarter of 2019, the company repurchased approximately 2.6 million shares of common stock at an average price per share of $26.66. Since initiating our buyback plan in late October of last year, we have repurchased 4.9 million shares, reflecting a $130 million return of capital to our shareholders.

Let's turn to the quarterly segment highlights. As you will note from Slide 7, organic revenue growth for parts and services for our North American segment declined 1.4% in the first quarter of 2019 but was up slightly when adjusting for the one less selling day. As anticipated, the PGW glass business and the airplane recycling operation exhibited negative same-day organic growth, while the largest part of our North American segment, the automotive salvage and aftermarket parts operations, exhibited same-day revenue growth of approximately 1.8%. Importantly, organic growth in North America ended on a strong note with the March organic revenue growth showing significant improvement from the levels posted in January and February.

We continue to perform well in North America, especially when you consider that according to CCC, collision and liability-related auto claims were down 2.6% year-over-year in the first quarter. We continue to believe this outperformance in our growth relative to the CCC data is due to the increase in the number of vehicles in our collision sweet spot, that being model years 3 to 10 years old, and auto insurance carriers' ongoing efforts to reduce the cost pressures associated with increased cycle time and labor due to shortage of technicians.

Despite some challenges on the top line, including facing a tough comparison from Q1 of 2018, our focus on profitable growth helped drive year-over-year margin improvements in North America with segment gross margins and EBITDA margins improving 90 basis points and 20 basis points, respectively, when compared to the first quarter of 2018. Removing the self-service business, which was impacted the most by the decline in scrap prices, gross margins and EBITDA margins for the rest of our North American segment were up 170 basis points and 120 basis points, respectively. Varun will address this in more detail, but I wanted to highlight that our margin enhancement efforts are indeed working. We also continued to grow our parts offerings with aftermarket collision SKU offerings and the total number of certified parts available growing 5.8% and 11.6%, respectively, year-over-year in the first quarter.

Moving to the other side of the Atlantic. Our European segment achieved total parts and services revenue growth of 39%, primarily driven by the acquisition of STAHLGRUBER. Organic revenue growth for parts and services in the first quarter of 2019 in Europe was 1.3% on a reported basis and 2.1% on a same-day basis, which was above our expectations, given the ongoing macroeconomic headwinds facing Europe. Importantly, each of our European platforms witnessed positive organic revenue growth for parts and services on both a reported and same-day basis in the first quarter.

Europe has seen many of its economies slowing as evidenced by lower new vehicle sales and lower or negative GDP growth. Discussions with our suppliers and other industry participants have confirmed the negative impact that poor economic growth is having on the European marketplace. Our sense is that the economic conditions have led to an initial deferral of repairs and maintenance. While a near-term headwind, we believe that core automotive maintenance can only be deferred so long and the demand will eventually rebound.

Our U.K. operation continues to make good progress despite the fact that the market continues to struggle with the uncertainty around Brexit, which continues to undergo negotiations with a new deadline of October 31. As has been widely reported in the media, Brexit is having a negative impact on overall consumer demand in the United Kingdom. With respect to the automotive parts space, most market participants are again reporting low single-digit to negative organic revenue growth rates.

Despite the softness in the market, ECP performed well by delivering meaningful improvements in both organic revenue growth for parts and services and EBITDA margins on a year-over-year basis. The team at ECP continues to make progress with the ongoing optimization of our T2 distribution facility. Yet there's still more room for an improvement, and I am confident we now have the right team in place to position and optimize the long-term performance of our U.K. business.

Additionally, ECP's collision business performed above expectations and above the European segment as a whole. We continue to believe ECP's aftermarket collision parts and paints offerings offer an attractive value proposition to U.K. auto insurance carriers as they confront profitability challenges. According to the Association of British Insurers, U.K. carriers have witnessed pressures similar to the domestic carriers with increased parts cost, vehicle complexity and increased cycle times. In 2017 and 2018, claims costs reached record highs in the U.K. Unfortunately, the positive improvements experienced at ECP were largely offset by the mix impact related to the inclusion of STAHLGRUBER in the Q1 2019 results and soft margins relative to the prior year elsewhere in Europe, particularly in Italy and Belgium.

At STAHLGRUBER, we are on track with our projected synergies. We've also begun some testing with respect to utilizing Sulzbach-Rosenberg, our state-of-the-art national distribution center in Southern Germany, to support the Rhiag operations in Central and Eastern Europe. We have also begun to expand the utilization of private-label products into STAHLGRUBER's product offering.

Finally, during Q1, we opened 2 branches in Western Europe. And in Eastern Europe, we opened 5 new branches while closing 3 underperforming locations.

Now let's move on to our Specialty segment. During the first quarter, Specialty reported total revenue growth of 0.5%, with organic revenue growth for parts and services of 1% being offset by a negative impact from currencies. Adjusting for one less selling day in the quarter, Specialty had organic revenue growth of 2.6%.

During the first quarter, our Specialty team hosted their industry-leading trade shows, including the RV expo in Nashville and the automotive-focused BIG Show in Dallas, with both events witnessing solid year-over-year increases in supplier and customer attendance as well as show orders. The expo's training and education programs continue to be a strong draw as witnessed by the largest attendance ever at the expo's RV University.

Moving on to corporate development. On April 1, after the close of the first quarter, we announced the acquisition of Elite Electronics. This transaction is directly aligned with our strategic pillars of growing our customer offering and adapting to new technologies. We have been signaling for some time now that select service offerings could be an excellent complement to our North American parts business.

Elite's mobile and on-site technical solutions are provided to automotive collision and mechanical repair facilities that are facing the rapidly expanding requirements related to vehicle diagnostics and calibration. Elite services include reflashing, programming, pre- and post-collision repair diagnostics, ADAS-related calibrations, airbag replacements, theft and vandalism repair and frame replacements. The robust service offering assists LKQ and Elite's customers in completing time-consuming and challenging repairs. Allowing Elite to handle any number of these operations improves cycle times and reduces associated repair expenses, thereby resulting in better customer experiences.

We are delighted to have the Elite team join LKQ, and we look forward to adding additional service-focused businesses to our suite of customer offerings. We will continue to complete tuck-in acquisitions. And during the first quarter, we closed on 2 small transactions in Europe.

And with that, I will now turn the discussion over to Varun, who will run through the details of the segment results and discuss our 2019 guidance.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [4]

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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 our 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, repurchased $70 million in LKQ stock while maintaining our net leverage ratio. While we are pleased with the progress on our initiatives, we still have work to do on our segment margins. And I'll comment on these drivers behind the quarter-over-quarter variances in a few minutes.

Diluted EPS attributable to LKQ's 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 a negative impact of about $0.01 in Q1 2019, resulting in a $0.04 negative swing year-over-year.

Second, the U.S. dollar was stronger in Q1 2019 relative to the prior year, which created a negative impact from translation and transaction gains and losses of almost $0.015. Taken together, scrap prices and currency impacts represented about a $0.05 headwind relative to Q1 of 2018.

As we disclosed during the fourth quarter call, the Mekonomen stock price declined significantly between the 1st -- 31st of December and February 28th. We indicated that without a recovery in the stock price by quarter end, that we would need to record a further impairment. Unfortunately, there was no rebound, and we have booked a $40 million impairment charge for the quarter in the equity earnings line of our income statement. The Mekonomen share price appears to have stabilized in recent weeks, so we're hopeful that the significant impairment charges are behind us.

As we continue to refine our capital allocation strategy and to simplify the operating model, we have undertaken a review of our businesses to identify underperforming assets. We identified several businesses that we intend to sell over the course of the next year. These units, which represent approximately $170 million in annualized revenue and a nominal amount of EBITDA, are outside of our core business and/or geographies.

Under the accounting rules, we are required to classify these assets as held for sale on our balance sheet because of our intention to sell the businesses in the near term. Additionally, we have to evaluate the recoverability of the carrying value of the assets as of quarter end. We concluded that the expected recovery would be less than the carrying value, and as a result, we recorded a $15 million impairment charge, which is excluded from our calculation of adjusted diluted EPS. Other than the impairment charge, there is no impact on the income statement presentation for these businesses, that is the revenue and expenses flow through the same lines as before the held-for-sale classification and will continue to be presented as such until the sale is completed.

Given the ongoing negotiations related to the potential transactions, we know you'll appreciate the need for confidentiality and why we are unable to provide further details currently. We'll of course provide updates on subsequent calls.

On a combined basis, the Mekonomen and the assets-held-for-sale impairment charges reduced our GAAP diluted EPS by $0.17.

Now I'll turn to Slides 11 and 12 of the presentation for a few points on the consolidated results. The consolidated gross margin percentage increased 30 basis points quarter-over-quarter to 39% with meaningful gain in both our North America and European segments. As we've discussed previously, there is a negative mix impact as the lower gross margin European segment makes up a larger percentage of the consolidated results and, hence, has a dilutive effect on the consolidated margin.

Our operating expenses as a percentage of revenue increased by 70 basis points quarter-over-quarter primarily attributable to the North America and European segments, which I will discuss a bit later. Interest expense was up $8 million or 27% compared to the first quarter 2018 due to higher average debt balances, primarily related to the STAHLGRUBER financing in April 2018.

Moving to income taxes. Our effective tax rate was 27.1% for the quarter, which is roughly in line with our full year estimates. I've already mentioned the Mekonomen impairment in the equity earnings line, but I also want to point out that the reported fourth quarter 2018 Mekonomen earnings declined relative to the prior year. Therefore, our share of their earnings, which we pick up in our first quarter reporting, was down relative to the prior year by about $2 million after tax.

Moving to the segments. While North America -- on Slide 14. Gross margin during the first quarter was 44.2% or 90 basis points higher than last year. Our aftermarket team continues to do really strong work on pricing initiatives to offset the general wage inflation and higher logistics costs prevalent in the U.S. market. While aftermarket is the primary driver of the segment improvement, we are also encouraged by progress on margin in our glass product line as a result of pricing initiatives and renegotiating underperforming contracts. There was a partial offset of our self-service operations gross margin, which decreased relative to the first quarter 2018 due to the scrap price impact that I referenced, and Nick called out the impact in his comments earlier.

Shifting to operating expenses. We saw an increase of 100 basis points compared to a year ago. The negative leverage effect resulting from quarter-over-quarter decline in revenue of $28 million drove a significant portion of the decrease. Having one fewer selling day in Q1 of 2019 increased the expense as a percentage of revenue [and] fixed costs, such as facility rental expenses and administrative personnel salaries. Additionally, the decline in other revenue, primarily related to lower scrap prices, created a negative leverage effect as higher scrap revenue doesn't require additional overhead costs, such as commissions and delivery costs. That said, this segment did incur higher expenses in rent related to expansions and renewals, employee benefit costs due to enhancements implemented across the U.S. business last April and vehicle insurance costs.

In total, segment EBITDA for North America during the first quarter 2019 was $177 million, down $1 million compared to a year ago, and as a percentage of revenue was up 20 basis points from the prior year quarter. Sequential changes in scrap prices had an unfavorable impact of $4 million for the quarter compared to a positive impact of $13 million in Q1 2018, creating a $17 million year-over-year negative swing. On the surface, a 20 basis point improvement in segment EBITDA may not sound very impressive. But when you factor in the gross margin increase and the scrap price and leverage headwinds, the North America team took a solid step towards achieving its margin goals.

Moving to our European segment on Slide 16. Gross margin in Europe was 36.8% in Q1, a 90 basis point increase over the comparable period of 2018. Our centralized procurement yielded a 50 basis point improvement from supplier rebate programs as we continued to benefit from the synergies created with the STAHLGRUBER acquisition. Our U.K. operations contributed a 30 basis point increase with lower distribution costs. You'll recall that we had some challenges in our T2 facility in early 2018, which produced an incremental operating cost that didn't repeat this year.

With respect to operating expenses, we experienced a 60 basis point increase on a consolidated European basis versus the comparable quarter from a year ago. Relative low sales growth, partially attributable to fewer selling days in the quarter, had a negative impact on operating leverage given the segment's relatively high fixed cost base, especially with regards to personnel. Partially offsetting, we had a 40 basis point decrease primarily due to freight and also facility rental expenses. European segment EBITDA totaled $105 million, a 39% increase over last year.

As shown on Slide 17, relative to the first quarter of a year ago, both the sterling and the euro weakened by 6% and 8%, respectively, against the dollar, causing almost a $0.015 negative effect from translation and transaction gain and losses on adjusted EPS in the quarter.

Segment EBITDA as a percentage of revenue was 7.3% for Q1 2019, flat compared to the same period last year. Compared to a year ago, we made progress towards integrating STAHLGRUBER and putting T2 back on track. However, with challenging economic conditions and fewer selling days negatively affecting revenue in Q1, we are working actively to manage operating leverage.

Turning to our Specialty segment on Slide 18. The gross margin percentage declined 160 basis points in Q1 relative to the comparable period a year ago. Of this amount, 120 basis points related to higher net product costs as our supplier discounts were lower than realized in the prior year. We benefited from higher discounts in the fourth quarter of 2017 that carried over into our first quarter 2018 gross margin. The balance related primarily to increased customer incentives due to higher volumes with certain customers.

Operating expenses improved 50 basis points relative to the prior year, with reductions in personnel and advertising more than offsetting higher facility expenses related to warehouse expansion projects that went live after the first quarter of 2018. While these projects generated an increase in year-over-year expenses, we believe that the investments were necessary to support the segment's growth and profitability objectives and that the short-term margin effect will be mitigated as the warehouses are optimized.

Segment EBITDA for Specialty was $38 million, down about 10% from Q1 of 2018. And as a percentage of revenue, EBITDA margin was down 120 basis points to 10.7%. Our Specialty business has produced solid results in recent years, and we believe that our Specialty team will be able to make up the shortfall and produce growth in both EBITDA dollars and margin percentage for the full year.

Let's move on to capital allocation and the balance sheet. As presented on Slide 19, you will note that our operating cash flow for the first quarter was $177 million, 22% higher than Q1 a year ago. With the change to our compensation plan, our teams are focused on driving working capital improvements, though I do need to call out that there will be some ups and downs as we move throughout the year based on seasonality and timing of certain transactions. For example, in our STAHLGRUBER operation, customer rebates get paid in the month of March, which triggered a large outflow in receivables for the quarter that wasn't present a year ago. On the other hand, we were able to reduce inventory by $72 million, and that resulted as a cash inflow for the quarter.

CapEx for the quarter was $53 million, resulting in free cash flow for the quarter of $124 million, an almost 50% improvement relative to a year ago. In addition to share repurchases of $70 million in the first quarter, we paid down $60 million of debt. Our strong cash flow generation allows us to delever while, at the same time, returning capital to our shareholders.

On January 1, 2019, the long-awaited lease accounting standard, ASC 842, went into effect. And you can see a large impact on our balance sheet. We added about $1.3 billion in assets and a similar amount in liabilities related to operating leases that were off balance sheet under the prior accounting rules. There was no material impact on our income statement due to the new accounting standard, and our net leverage ratio covenant under the credit facility was unaffected.

Moving to Slide 21. As of the 31st of March, we had $316 million of cash, resulting in net debt of about $3.9 billion or about 2.9x last 12-month EBITDA.

Now I would like to provide an update on our annual guidance. Please note that the guidance assumes that scrap prices and foreign exchange rates hold at current levels. Additionally, the guidance continues to assume no material disruptions associated with the United Kingdom's potential exit from the European Union.

As Nick noted earlier, the first quarter came in line with our expectations. North America, excluding self-service, performed well, and we expect the Specialty margin decline to be short lived. While we see challenges with European economic conditions holding for the remainder of the year, we believe that the business is resilient and that the management team will adapt appropriately to meet the targets. Therefore, we are leaving our 2019 full year guidance unchanged, with the exception of our full year forecasted U.S. GAAP income, owing to the first quarter activity.

Let me run you through the guidance figures quickly. Organic parts and services revenue growth remains at 2% to the 4% corridor. Diluted EPS on a GAAP basis is updated to a range of $1.87 to $2, accounting for the Q1 activity primarily related to the noncash impairment charges I referenced earlier. Adjusted diluted EPS remains unchanged for the year. The range remains at $2.34 to $2.46. Cash flows from operations continues to reflect a range of $775 million to $850 million, and capital spending is unchanged at a range of $250 million to $300 million.

In summary, the first quarter was a solid start to the year, and we remain optimistic about our prospects for the balance of the year.

Now I'll turn the call back to Nick for closing remarks.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [5]

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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 strength 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'll 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 have created with our Q1 performance and how our team of over 51,000 employees performed amidst 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Michael Hoffman from Stifel.

Our next question comes from the line of Stephanie Benjamin from SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]

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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?

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [3]

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Stephanie, it's Varun Laroyia. 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, but as Nick noted in his opening comments, there was some macroeconomic softness, which obviously pulled 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 9 months, the team is actively working towards delivering on their targets. There 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 Nick called out for the 36-month period.

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Operator [4]

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

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [5]

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Could you talk about the accounts payable balance, maybe 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 has entered 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 its sort of standalone profitability.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [6]

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Bret, 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 2-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.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [7]

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And Bret, this is Nick. As it relates to the STAHLGRUBER accretion, indeed, that acquisition added to our earnings per share. On what I'll call a direct basis, it was -- it's a few cents. (inaudible) As we've noted in other conversations, not all the synergies related to STAHLGRUBER will manifest themselves at STAHLGRUBER because some of the procurement -- really, some of those benefits get spread over all the different operating units in Europe. So we're happy with the acquisition and how it's performing.

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Operator [8]

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

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [9]

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Varun, first, if you -- Varun, if you could give us the per-day organic growth for each segment. I'm 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.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [10]

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Yes. Craig, it's Varun, yes. So in terms of a 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 referred to, in terms of whether it be our glass business where we focus on margins, that 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 out the glass and the airplane recycling business, as they both exhibited a negative same-day growth, the largest part of our North American segment, the salvage and the aftermarket piece, essentially grew about 1.8% on a per-day basis. So just wanted to reiterate, that's a solid performance across each of our large business segments.

With regards to your second question on Specialty, see, our Specialty gross margins were down 160 basis points, but about 120 basis points of that, so almost ¾ 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'll 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 has actually (inaudible) to continue to hit its numbers. So again, we are quietly confident about the Specialty segment being able to hit its full year targets.

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Operator [11]

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

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [12]

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I have a question on North America. Obviously, growth slowed. It sounds like to about flat on a same-day basis, but we still saw margins 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?

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [13]

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Yes. So again, we got a little bit of a dichotomy in the North American growth with the core business actually, as Varun discussed, 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're adjusting our pricing based on the inflationary conditions that we're facing with respect to wages and freight and the like. We're being very thoughtful as to how we're 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're trying to do is have -- recover the incremental operating costs we're facing in running the business on a day-in and day-out basis, like given the beyond full employment condition we have in this country and the impact that's having on wages and the like.

And the second half of your question? Daniel, you had a 2-part question I believe. Okay. We'll go on to the next question, please.

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Operator [14]

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

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [15]

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So the question is on the EBIT margin improvement. Ex self-service, it was exceptionally like very strong, which is great to see. As you assess your noncore 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?

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [16]

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Yes. So our self-service business in North America is clearly the most cyclical because that's where the largest impact in scrap pricing is manifest. In times where scrap is rising and you get the benefit of that, that's obviously a clear benefit to the self-serve 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 us. 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 are very proud of the North American margin improvement that we have, as we indicated, 170 basis points on the top line and 120 basis point 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 the -- really, the first time in about 5 quarters that we've been able to post a positive year-over-year growth in EBITDA margins in North America, and we're looking forward for the -- to continue that momentum as we complete the rest of the year.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [17]

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And Nick, just to add to the comments you've mentioned. So Chris, effectively, if you look at our North America segment, which had an uptick with regards to gross margins by about 90 basis points, without the self-service business, that would've 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're 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've been 120 basis points up. So there's a 100 point delta, 100 basis point delta right there at the EBITDA level.

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 your pick in terms of what you'd 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, 3, max 4 weeks, it becomes stale. And so that's really when it become -- it gets kind of crushed and kind of gets 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 their business are pretty good. The only issue as you -- Nick also kind of pointed out is the volatility associated with the broader microeconomic 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 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.

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Operator [18]

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

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [19]

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Two questions for me. 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?

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [20]

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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 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 comps get a little bit easier as we get into the back half of the year.

The aviation business, again, the -- it's different from the rest of our business in that it's much fewer transactions 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's going to be more volatility [or -- our expectation is], in the aviation business. And again, the outlook for the year is [-- the aim is looking to] (inaudible) flat.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [21]

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And then I think, Ryan, your second part of your 2-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 have 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're 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.

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Operator [22]

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

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [23]

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Can 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.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [24]

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Yes, Scott. We don't provide guidance on a country-by-country basis. But 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 have, so no significant kind of deviation. Obviously, STAHLGRUBER is not in the organic numbers since we didn't complete that acquisition until May 31st of last year. So they won't really come in to the fold but for a month in Q2 and then really, will fully come into the organic calculation when we get into Q3 of this year.

But again, across the board, all of our platforms, if you will, think about ECP, except for Rhiag, were 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 compares to ECP last -- first quarter of last year at a negative organic. So that's where the big -- the [max uptick] came on a year-over-year basis.

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Operator [25]

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(Operator Instructions) Our next question comes from the line of Jason Rodgers from Great Lakes Review.

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Jason Andrew Rodgers, Great Lakes Review - VP [26]

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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.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [27]

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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.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [28]

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Yes. And again, maybe just to add, too. Jason, just to kind of confirm, what we did mention in the opening remarks was specifically the sales intensity in our North America segment in the first quarter. Where January and February were 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 a 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 continued to improve as we [ended] towards the back end of the quarter.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [29]

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Yes. And as we talked about last call too, right, the first 2 quarters of last year in North America had pretty much modest organic. So there's going to be tough comps, right? We're at, I think, 6.8%, like 7.2% in Q1 and Q2 organic of 2018. And so again, we're going to have another quarter as we head into Q2 where we have some pretty high comps. And then the back half of the year obviously gets much easier comps on a year-over-year basis.

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Operator [30]

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

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [31]

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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 is 9 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.

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Operator [32]

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