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Edited Transcript of LKQ earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q3 2019 LKQ Corp Earnings Call

CHICAGO Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of LKQ Corp earnings conference call or presentation Thursday, October 31, 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 - MD

* 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

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Ryan James Merkel

William Blair & Company L.L.C., Research Division - 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 Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation's Third 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 Third 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'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. This morning, I will provide some high-level comments related to our performance in the third quarter and then Varun will dive into the segments and related financial details before I come back with a few closing remarks.

We believe Q3 was a strong quarter for our company and we are very pleased with the results despite facing some ongoing macroeconomic headwinds, particularly in Europe. Each of our 3 segments showed important improvements in their respective operating metrics, particularly with respect to EBITDA margins, which on a consolidated basis showed a year-over-year improvement for the first time in several quarters. That gives us confidence that our disciplined approach to the market and keen focus on enhancing margins will continue to create positive outcomes.

During the quarter, we repurchased 3.9 million shares of our stock for a total of $101 million, reflecting an average price of about $26 a share. Since we implemented the share repurchase program last October, our total repurchases have aggregated 13.2 million shares for a total of $352 million, or an average price of approximately $26.66 a share. I am pleased to report that this week, our Board approved an additional $500 million to the repurchase plan and extended the time period to October 2022. With that, we have almost $650 million of capacity under the amended plan.

As noted on Slide 5, revenue for the third quarter was $3.15 billion, an 0.8% increase over the $3.12 billion recorded in the comparable period of 2018.

Parts and services organic growth for the third quarter increased 2.3% on a reported basis. And when adjusting for 1 more selling day in each of our operating segments, the increase in organic revenue growth for parts and services was positive 0.9%. Acquisitions added 0.8% of growth, while currencies had a negative impact of 2.3%.

Net income was $152 million compared to the $134 million for the same period in 2018, an increase of 13% year-over-year. Diluted earnings per share for the third quarter was $0.49 a share as compared to $0.42 for the same period of 2018, an increase of 17% year-over-year. On an adjusted basis, net income was $189 million, an increase of 6% as compared to the $177 million for the same period last year. Adjusted diluted earnings per share for the third quarter was $0.61 as compared to $0.56 for the same period of 2018, a 9% increase. We are pleased with the level of EPS growth considering the marginal uptick in revenue. Now let's turn to the quarterly segment highlights.

As you'll note from Slide 7, organic revenue growth for parts and services in our North American segment was 2.9% in the quarter, a nice sequential uptick from Q2 and against a tough Q3 comp year-over-year. When adjusting for 1 more selling day in the quarter, North American organic revenue growth increased 1.4%, which was also a sequential uptick from Q2.

We continue to perform well in North America, especially when you consider that collision and liability related auto claims, increased just 0.5% in the quarter. Encouragingly, the CCC data represents the first quarterly year-over-year increase in repairable claims since the third quarter of 2018. The uptick in frequency is related to an increase in miles driven, more severe and frequent weather in certain markets and the ongoing increase in distracted driving.

Consistent with the year-to-date results, during the third quarter, the growth in recycled products was higher than that for aftermarket, though the aftermarket line showed improving trends as we move through the quarter. Again, our North Americas team's focus on profitable growth drove excellent year-over-year margin improvements.

Segment gross margins were 44.2% and EBITDA margins were 12.8%, reflecting improvements of 100 basis points and 60 basis points, respectively when compared to the third quarter of 2018. These are among the best third quarter margins our North American team has achieved in 5 years. Furthermore, when removing the self-service business, which experienced the greatest downward impact on margins from the continued steep decline in scrap prices, gross margins and EBITDA margins for the rest of our North American segment were up 120 basis points and 80 basis points, respectively. These strong margins are evidence that our focus on profitable revenue is working.

As just mentioned, scrap metal pricing tumbled during the quarter and placed pressure on Q3 results. As Varun will discuss, this will, unfortunately, set an even higher hurdle with respect to our fourth quarter results.

We also continued to grow our parts offerings with aftermarket collision SKU offerings and the total number of certified parts available growing 5% and 10.3%, respectively, year-over-year in the third quarter.

As evidenced that we continue to take share, during the quarter, our team successfully negotiated a new 3-year contract with a top tier customer. Under this new agreement, LKQ will be the primary provider of alternative replacement parts for this customer across the United States with incentives to grow their annual volume with us. Additionally, during the quarter, the team launched a regional pilot program with a top 5 insurance carrier to be their preferred supplier for all recycled parts. As part of this program, we are highlighted within CCC's estimating platform to show our parts first in the search function and are specifically designated as the approved supplier for this carrier. While we don't anticipate this pilot program to have a material impact on our results, if eventually rolled out on a national basis, it could provide an uptick to our salvage volumes.

Lastly, on North America. During the quarter, our glass business, PGW, and FCA Mopar, mutually agreed to end the agreement related to the distribution of batteries to the FCA dealer network. Similar to rationalizing our asset base, we are continuously looking at our product portfolio to assure we are focusing on profitable revenue. While ending this agreement will negatively impact our organic revenue growth in Q4 and throughout 2020, it will have a nominal impact on earnings in both periods and will improve the future operating margins of our PGW business.

Moving to our European segment. Organic revenue growth for parts and services in the third quarter increased 2.1% on a reported basis and 0.7% on a same-day basis. Acquisitions added 1.3% of revenue growth to the European results, while the strong dollar resulted in a negative impact of 4.6%. As noted by other public companies with European exposure, the soft economic backdrop continues to create an industry headwind. That said, our performance on a relative basis appears to be strong, which gives us confidence that we are gaining share.

While we don't disclose country-by-country detail, on a same-day basis, we witnessed positive organic revenue growth for each of the markets in which we operate, except for Germany, which was essentially flat, and Italy, which was down. The Italian market continues to face significant macroeconomic headwinds.

Across the continent, we expect trade disputes with the U.S. along with Brexit-related uncertainty to continue to weigh on the European economies. With respect to Brexit, as most of you know, on October 28, European leaders agreed in principle to extend the Brexit deadline until January 31, 2020. We continue to closely monitor the Brexit situation to ensure our U.K. business is positioned accordingly with appropriate inventory levels.

As most of you on the call are aware, on September 10, we provided the investment community with an overview of our European strategy. The call focused on our transformation into a sleeker, more agile organization, which internally we refer to as 1 LKQ Europe. As I stated on the September call, going forward, we will begin to operate more as a single business as opposed to a collection of independent businesses. Today, we are, by a wide margin, the largest most profitable distributor of automotive parts in Europe with metrics that are unparalleled in the industry with respect to the number of countries and customers served, the number of locations operated, SKUs offered and total revenue generated. Our goal now is to optimize all aspects of 1 LKQ Europe.

Importantly, during Q3, we experienced a 90 basis point sequential improvement in EBITDA margins compared to only 20 basis points of sequential growth in 2018. The margin improvement is entirely consistent with the expectations we set forth during our call last month. And as Varun will discuss, the improvement is after covering approximately 10 basis points of transformation expenses.

As Europe has become a larger portion of our global revenue and as part of our Board's ongoing Director refreshment process. On October 3, we announced the addition of Patrick Berard to our Board of Directors. As CEO of Rexel Group, Patrick has a successful track record of leading global B2B distribution networks. His operational knowledge and experience of the European markets will provide tremendous value to the Board and the organization as we continue to execute our 1 LKQ Europe strategy. And we welcome his addition to our Board. Alongside Robert Hanser, who joined our Board in 2016, Patrick represents the second addition to the Board with extensive experience in the European markets and distribution. Now let's move on to our Specialty segment.

During Q3, organic revenue growth for parts and services for our Specialty segment increased 1.5% on a reported basis and was generally flat when adjusting for 1 more selling day as we continue to face unfavorable market conditions in Canada. On the plus side, the rollout of our RV OEM warranty programs continues to yield positive results and were well received at the RV Open House Event in Elkhart, Indiana in September. Additionally, the team finalized a designated supplier agreement to be the aftermarket parts and services provider to Cap-IT Genuine Truck Ware stores.

Moving on to Corporate Development. The third quarter was quiet with no acquisitions closing during Q3. On the first day of Q4, we closed on the acquisition of another diagnostics and calibration business in North America. This represents our second transaction in the services sector and is consistent with our strategy to become a leader in the diagnostics and calibration market.

During the third quarter, our development team continued to make solid progress with our assets held-for-sale efforts, an ongoing rationalization of our asset base and the divestiture of noncore businesses. On August 8, we announced the divestiture of our recycled aviation parts business, AeroVision International. Additionally, on October 1, we announced that we merged our subsidiary, Auto Kelly Bulgaria with Elit Kar, creating one of Bulgaria's leading distributors of automotive spare parts. LKQ now owns a 20% equity interest in the combined business.

Finally, during Q3, we continued our efforts in rationalizing our branch network in Europe by closing 6 underperforming branches in Western Europe and 2 in Eastern Europe.

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

Overall we are pleased with our third quarter performance, especially related to improvements in segment EBITDA margin and strong free cash flow generation. These are exciting times for us as the field teams have embraced our key financial priorities of profitable revenue growth, margin expansion and free cash flow generation. The results speak for themselves. Seeing the positive momentum carrying through the third quarter enhances our confidence about LKQ's strategic priorities and our ability to deliver on them. Before diving into the results, let's start with the key financial highlights.

Operating cash flows in the third quarter were $327 million, the second-highest quarterly amount in the company's history, trailing only the most recent previous quarter, that being the second quarter of 2019. Our segment teams are doing a tremendous job managing trade working capital to deliver strong operating cash flows. After 2 historically high quarters of cash flow generation, we do expect to see a softer fourth quarter in terms of operating cash flows. I'll cover the full year outlook in the guidance discussion.

Free cash flow for the quarter totaled $262 million or $126 million higher than the same period in 2018, and $800 million on a September year-to-date basis. While the absolute number of free cash flow is important, we are also actively analyzing the efficiency of our cash flows and what level of our earnings we can convert to cash on a sustainable basis.

Looking at Slide #25, you can see a positive trend in the free cash flow to EBITDA conversion ratio this year on the programs we put in place in the second half of 2018. This year's growth trajectory is well above our initial expectations and while that ratio will moderate in the fourth quarter, I am very encouraged about the improvement relative to the last 5 years. The strong cash flows enabled us to buy back 3.9 million shares of LKQ stock for approximately $101 million in the third quarter.

Looking at Slide #26. For the program, to date, we have purchased 13.2 million shares at an average price of $26.66, a healthy discount to recent trading levels. Additionally, we paid down debt by $109 million in the quarter and $391 million in the 9 months to September 30. By doing so, we were able to decrease our net leverage ratio to 2.6x, which is the same level as the first quarter of 2018, the last quarter before we acquired STAHLGRUBER.

Getting back to the preacquisition leverage ratio, following the company's largest-ever transaction, within 5 quarters is a terrific accomplishment. And this, of course, does not reflect the active share repurchase program I referenced earlier. Returning cash to our shareholders, while reducing our net leverage ratio speaks to the strength of our business to generate strong cash flows. Nick mentioned the $500 million expansion to the share repurchase authorization, which is supported by our expectation of sustained strong cash flows and the success of our share repurchase program to date.

Now I'll cover our consolidated and segment results. Similar to last quarter, to save myself some words and also as the accompanying earnings deck is largely self-explanatory, when I refer to net income and diluted EPS, please note that I will be referring to the amounts from continuing operations attributable to LKQ shareholders. In addition, Nick covered the details on net income and earnings per share, so I will not repeat.

Please turn to Slides 12 and 13 of the presentation for a few points on the consolidated third quarter results. The consolidated gross margin percentage decreased 20 basis points quarter-over-quarter to 38.1%, do please note that the reported margin includes $17 million in restructuring-related costs classified in cost of goods sold, which represents a 50 basis point negative impact on gross margin. Setting aside the restructuring, we saw improvement in the quarter driven by a 100 basis point improvement in North America.

Restructuring and acquisition-related costs in operating expenses were $9 million as a result of ongoing expenses related primarily to the restructuring initiative we announced last quarter.

Interest expense was favorable by $9 million or lower by 21% compared to the third quarter of 2018 owing to lower interest rate in average debt balances and some favorable translation effects.

Moving to income taxes. Our effective tax rate was 28.1% for the quarter, which reflects the incremental expense for the year-to-date catch-up caused by a change in our estimate of the annual effective tax rate. We increased the estimated rate to 27.5%, up from 27% this quarter, primarily due to a shift in our projected geographic allocation of income.

Equity in earnings of unconsolidated subsidiaries, which relates mostly to our investment in Mekonomen, reflected income of $4 million versus expense of $20 million in the third quarter of 2018. You'll recall that we recorded a $23 million impairment charge on our Mekonomen investment last year.

Now please turn to Slide 16 for highlights on segment performance, starting with North America. Gross margin was 44.2%, or 100 basis points higher than last year. For the most part, the margin expansion reflects the continued benefits of initiatives in both our aftermarket and salvage operations, as well efforts in our glass business to be recognized for our quality of service and breadth and depth of our inventory, and also the ability and successfully to renegotiate underperforming contracts. While the self-service operation was a drag on segment gross margin, with a quarter-over-quarter decrease due to scrap pricing, the impact was not material on a year-over-year basis. Sequential changes in scrap prices had an unfavorable impact of $8 million for the quarter compared to a negative impact of $7 million in the third quarter of 2018, creating a $1 million year-over-year negative swing. With scrap trading at even lower levels in October, we are anticipating a further hit in the fourth quarter.

Operating expenses increased by 50 basis points relative to the prior year to 32% for the third quarter of 2019. We picked up a selling day this year, which had a positive leverage effect, but there were several offsetting factors that pushed expenses higher than a year ago. First, incentive compensation contributed to a 50 basis points increase year-over-year. Last year, this segment fell behind in its bonus targets, causing downward revisions of the bonus accrual, whereas this year's strong performance generated upward revisions in the third quarter.

Second, as mentioned previously, facilities expenses continued to trend higher this year due to expansions and rate increases related to renewals. Facilities expenses increased by 40 basis points relative to a year ago. Our North America team is actively working on monitoring underperforming locations for potential rationalization. On the positive side, North America showed positive leverage in other personnel costs to lower insurance claim costs as well as disciplined hiring and implementation of the cost-reduction plan I described last quarter. In total, segment EBITDA for North America in the third quarter was $166 million, up $12 million or 60 basis points higher than the prior year.

Closing out on North America, I'd like to recognize the team for following through on the pursuit of the profitable revenue growth objective. A year ago, we disclosed a 70 basis point decrease in segment EBITDA margin in the period with 5.2% organic parts and services revenue growth. This year, North America has recovered almost the full variance in margin with organic parts and services revenue growth of 1.4% on a per day basis. A disciplined approach of focusing on profitable revenue growth has been a significant enabler of the year-over-year margin improvement.

Moving on to the European segment on Slide 19. Gross margin in Europe was 35.3%, down 130 basis points relative to the comparable period of 2018. As Nick previously noted, we recognized restructuring expenses in the United Kingdom for branch and brand rationalization related to the Andrew Page operation. These expenses represented a negative 120 basis point impact for the quarter.

Outside of these charges, the segment gross margin was roughly flat with lower margins in our Central European operations due to pricing and mix, mostly offset by benefits of 30 basis points from centralized procurements and improving margins in the United Kingdom.

With respect to operating expenses, we experienced a 30 basis point increase on a consolidated European basis versus the comparable quarter from a year ago. Personnel expenses represented the largest portion of the increase, primarily related to the timing of bonus accrual adjustments, wage inflation and the negative leverage effect caused by lower sales growth.

For the third quarter of 2019, there was a 10 basis point headwind associated with the ongoing transformation efforts related to the 1 LKQ Europe program. The relatively low amount in the quarter reflects that many projects are in the early stages and/or the costs are currently being capitalized, for example, in the ERP program. We expect the operating expense portion of these costs to increase in the fourth quarter and going forward, into 2020. European segment EBITDA totaled $125 million, a 3.6% decrease over last year.

As shown on Slide #21, relative to the third quarter of 2018, both the sterling and the euro weakened by 5% and 4%, respectively, against the dollar causing a negative effect from translation. The net effect on GAAP EPS this quarter was not material but represented about $0.01 headwind on adjusted EPS. Segment EBITDA was 8.6% for the quarter, down 20 basis points compared to the same period last year with about half of the decrease attributable to transformation costs. We remain confident in our ability to deliver the outcomes detailed in our September 10th, 1 LKQ Europe call, and expect to finish the full year within the previously disclosed segment EBITDA margin range of 7.8% to 8.3%.

Turning to the Specialty segment on Slide 22. The gross margin percentage declined 80 basis points in Q3 relative to the comparable period of 2018. Of this amount, 40 basis points related to unfavorable product mix, while 20 basis points resulted from higher net product costs as our supplier discounts were lower than realized in the prior year.

On the other hand, operating expenses improved by 130 basis points with reductions in personnel and freight costs more than offsetting higher selling expenses. The improvement is partially attributable to the leverage benefit from an additional selling day in the third quarter in 2019.

Segment EBITDA for Specialty was $45 million, up about 6% from Q3 of 2018 and as a percentage of revenue was up 50 basis points to 11.5%. With a backdrop of low revenue growth, the Specialty team has taken decisive action, as evidenced by the year-over-year decrease in operating expense dollars and continues to evaluate the cost structure to protect the segment margins. Let's move on to liquidity and the balance sheet.

As presented on Slide 24, you will note that our operating cash flow for Q3 was $327 million, or 70% higher than a year ago. Our key working capital accounts, that is trade receivables, inventory and payables, generated a cash inflow of $58 million in the quarter compared to an outflow of $64 million a year ago. The purchasing teams continued to take a disciplined approach to inventory given soft trading conditions, which has contributed to a year-over-year improvement in working capital. That said, we anticipate inventory to represent a use of cash in the fourth quarter as we take advantage of buying opportunities and build inventory for the expected seasonal revenue increase going into Q1. Do note that while we are making solid progress on the vendor financing program in Europe, we do not expect meaningful benefits until we get into the new year.

CapEx for the quarter was $64 million, resulting in free cash flow for the quarter of $262 million and $800 million on a year-to-date basis.

Finally, moving to Slide #27. As of September 30, we have $433 million of unrestricted cash resulting in net debt of about $3.5 billion.

Now I would like to provide an update on our annual guidance. Please note the guidance assumes that scrap prices and foreign exchange rates hold at current levels. As Nick noted earlier, we are pleased with the third quarter results. North America continues to perform well despite the ongoing challenges in scrap metal prices. Our Specialty segment is continuing to create new service offerings that have won industry-wide acclaim and has been decisive on cost given the revenue outlook. We see challenges with European economic conditions holding for the remainder of the year. And despite the underlying business being resilient, the management team is adapting to the softer market conditions by accelerating the integration and cost efficiency programs, in addition to simplifying by thoughtfully evaluating various programs that may not deliver benefit in the near term. As you'll recall, details of the European actions were provided at a comprehensive briefing on September 10.

As mentioned earlier, we expect scrap metal prices to continue to negatively impact our results in the fourth quarter. Despite this backdrop, we are holding the adjusted EPS at the midpoint of $2.34, while appreciating some headwinds in Q4 from scrap metal prices and FX at the current levels. We are increasing our expected cash flows from operations for the year by $150 million at the low end to $950 million, and by $125 million to hit $1 billion at the high end.

I'll run you through the updated guidance figures. Organic parts and services revenue growth revised to 25 basis points to 100 basis points for the full year to take into account the actuals for the most recent quarter. Diluted EPS on a GAAP basis is updated to a range of $1.69 to $1.76, accounting for the first half activity primarily related to the noncash impairment charges as well as restructuring charges incurred through September. Adjusted diluted EPS in a narrower range of $2.31 to $2.37, and so $2.34 at the midpoint. Cash flows from operations has been increased to a range of $950 million to $1 billion, and capital spending range is narrowed to $240 million to $260 million.

In summary, the third quarter had several highlights showing where our actions are bearing fruit such as North America margins and generating strong free cash flow that's funded the ongoing share repurchase program and the materially higher debt pay down. While the softer macro conditions in Europe and the ongoing downward pressure in scrap gives us pause for thought, we believe there is resiliency in the model to adjust to the market conditions and deliver on our commitments. Overall, we remain optimistic about our prospects for the future.

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. In closing, I would like to review a few of the key initiatives discussed on previous calls that will continue to be points of focus during the balance of 2019 and as we begin our 2020 budgeting process.

First, we will continue to integrate our businesses and simplify our operating model. Second, we will continue to focus on profitable revenue growth and sustainable margin expansion. Third, we will continue to drive higher levels of cash flow, which in turn give us the flexibility to maintain a balanced capital allocation strategy. And fourth, we will continue to invest in our future.

And as you can see from our third quarter results, these programs and targets are gaining momentum throughout the organization and our teams are diligently working towards achieving their respective goals. We have well-thought-out plans, are focused on crisp execution and we are achieving positive results.

I want to thank our over 51,000 team members who daily endeavor to overcome the short-term variables that are out of our control by tackling opportunities to drive organic sales, aggressively pursue market share gains, implement operational efficiencies to enhance the productivity and profitability of our organization and to provide industry-leading customer service. We believe that when combined, these factors will 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) Our first question this morning comes from 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 [2]

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Apologies for the background noise. Varun, the cash flow, it's such an impressive season story right now. I'm curious to the extent you're drawing down inventory on a per-location basis, if you will, have you seen any impact on fulfillment rates? Or have you been able to sustain those fulfillment rates?

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

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Craig, it's Varun. I think it's a great question. And as I've said in some of the upfront remarks, the teams have just been doing a phenomenal job on the trade working capital program. Just for as a quick memory jogger, trade working capital comprises inventory payables offset by trade receivables. And as we've said, we work in an overboard position in several locations as we have optimized our overall distribution, including the level of inventory that we were holding in several sites, we have certainly seen a reduction.

The other piece to note is as we've always talked about, as revenue becomes a little bit softer and again, this is in line with the pursuit of profitable revenue, so the quality of revenue, inventories will also get readjusted. And that really is what's happening. To your specific question with regards to, are we seeing any stock out scenarios or any drop in fulfillment rates, absolutely not. This will be done very, very carefully in terms of where we were holding excess inventory, inventory that was not moving, for example. And to kind of give you one specific example, you would've noted that we took a cost restructuring for our Andrew Page operations in the United Kingdom, again, as part of the branch and brand rationalization. There was inventory that frankly, did not fit with the future plans for that business. And that's really how it's taking place. But no, we see no drop off in any fulfillment rates.

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Operator [4]

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Our next question comes from Bret Jordan from Jefferies.

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

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Could you talk about the impact from this Fiat Chrysler battery distribution shift. I mean, I guess, what was it -- what would be the revenue comparison with it exiting the business? What's the margin benefit? I think those were, sort of, profitable sales. And then what's the timing of it? Does it impact the fourth quarter? Or is that a 2020 shift?

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [6]

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Bret, we started the FCA agreement in January of 2018. As we ran through last year, clearly the impact on organic growth is about 1% in a positive fashion. So that's basically what we're going to be giving up over the next 12 months. It will start a bit here in Q4. It won't be a full impact. Probably 70 to 80 basis points of pressure on organic and then we'll obviously, the full revenue, give-back, if you will, will occur in 2020. But again, the reason for not renewing that contract is it wasn't meeting our internal, kind of, hurdles as it relates to margins and returns. And I think the folks at FCA, appreciated that. So it was an amicable kind of separation if you will. As I indicated in my prepared remarks, while it will have an impact on organic growth, the impact on earnings will be nominal and so margins will be going up by getting rid of that low-margin business.

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Operator [7]

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Our next question comes from Stephanie Benjamin from SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [8]

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I wanted to touch on what you're seeing on the North America aftermarket business. I think you pointed to salvage really outperforming, but you were seeing some acceleration on the aftermarket side as you move throughout the quarter. Is that more a function of just seeing some easier comps? Or how should we kind of think about the performance of really the strength in the salvage and then what's going on in the aftermarket?

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [9]

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Sure. On the salvage side, obviously, we have a leading position. We've been able to buy cars in a total losses at a reasonable price. And so our margin in that business are strong and we believe they will continue to be strong. On the aftermarket side of the business again, the growth early in the quarter was a little bit slower. We showed progress during the quarter. The early returns here in October looked very good. As it relates to aftermarket product, we think some of it, again, has to do with the pitch towards higher APU by the insurance companies and obviously aftermarket reflects a larger share of the alternative marketplace. We've seen a little bit of positive movement out of the folks down in Bloomington at State Farm. Nothing to write home about, but again, movement in the positive direction, if you will. And then actually the GM strike has helped us a little bit as well. So there's a number of things that are kind of gentle tailwinds in the aftermarket business and we're anticipating that they will continue in Q4.

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Operator [10]

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Our next question comes from Michael Hoffman from Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [11]

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Happy Diwali, Varun.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [12]

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Last weekend.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [13]

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Yes. It was.

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [14]

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Yes.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [15]

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Cash flow from operations is at one of its best percent of revenues ever. Where can that go? And how do I think about that progressing into next year?

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [16]

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Great question, Michael, and really appreciate the kind wishes for Diwali also. It is a big event in the Hindu calendar. And again, for those of you who celebrate Halloween and my family celebrates all of it, happy Halloween to everyone. We're certainly enjoying great LKQ weather here in Chicago, needless to say.

Yes, listen, with regards to cash flow generation, this is something that we've talked about with the markets for quite some time. This is the case of operating our businesses with a tremendous amount of focus. Again, as I kind of said in some of my upfront comments, the pace at which our fields team have taken over this initiative has been phenomenal. We're thrilled about it. And it really gives us various options. If you think about it, the way we have deployed the capital over the last year, last 4 quarters, it's been a balanced capital allocation strategy. Not only have we bought back $352 million worth of LKQ stock, in addition to that, last 12 months, we paid down close to $426 million on our debt that we've been carrying also. In addition to that, as we think about going into 2020, there will be the seasonal uptick with regards to revenue. And so we are seeing at this point of time, certain buying opportunities in all 3 of our segments, North America wholesale, Europe and also Specialty, and we will judiciously deploy that cash.

And with regards to the share repurchase program, given the success of that program as we announced earlier this morning, the Board has re-upped that for a further $500 million. So at this point of time, we have close to $650 million of capacity. And then again, the debt pay-down will continue. We don't talk about corp dev transactions in any case, but we have made a commitment that there were no large platform transactions that were in the pipeline and really will be kind of going back towards our debt pay-down, share repurchases and things along those lines.

I think the one piece that I'm not sure very many people have noticed but at the high end of our operating cash flows in the updated guidance, we're calling out a $1 billion of operating cash flows in the current fiscal year. And we think that is tremendous. It doesn't happen overnight. And again, just really a massive thanks to our field teams for really getting back in terms of the focus on this initiative.

As we think going forward, various options to move forward in terms of how we deploy the cash. There are plenty of alternatives. And I'm happy to report that there are a number of very exciting opportunities of what we can do. We will certainly give further guidance when we give guidance for 2020 in terms of more robustness, in terms of how we plan to deploy that capital but as of now, we do have several levers that we could deploy that cash.

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [17]

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And Michael, one of the things going forward that has had almost no impact thus far is the vendor financing program, as Varun indicated in his prepared remarks, that will really begin to kick in next fiscal year, and so that will be incremental lever that we will have on a going-forward basis.

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Operator [18]

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Our next question comes from Daniel Imbro from Stephens.

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Daniel Robert Imbro, Stephens Inc., Research Division - Research Analyst [19]

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Wanted follow up on the revenue rationalization. You guys have done a great job kind of rationalizing unprofitable business in both the U.S. and Europe. You mentioned the FCA contract, but how far along are we in that process? Is there still further business that you think you can rationalize in Europe and then same question for U.S. as well?

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

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Yes. So in the U.S., we think we're largely done. Again, we spent a lot of time last year, earlier this year really focusing on profitable revenue growth and margins -- gross margins in our North American business. Clearly, the FCA contract didn't fit within that -- those parameters so again, we decided to exit. In Europe, it's less of a product line review and more of a kind of a country-by-country review. I mean, part of the reason for exiting Bulgaria was that it was an incredibly low-margin opportunity. We still have some other businesses that are being held-for-sale in Europe and they are lower-margin businesses as well.

We continue to monitor, and will continue to monitor both on a product line basis and kind of a legal entity basis to find opportunities for -- looking forward it's just those activities or businesses just are not going to return at the level of margins and return on capital that we believe our shareholders desire. And we will continue to be aggressive in kind of pruning opportunities. But there's no one big material item out there, Daniel. It's kind of pruning some smaller businesses and/or lines of business.

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Operator [21]

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(Operator Instructions) 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 [22]

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So first up, a great job on the free cash flow in North America margins, really impressive. I did want to focus on Europe, though, with that said. Relative to the guidance that you gave on 9/10, just wanted to get a sense for -- it looks kind of a steep implied ramp in Q4. Did something change at all at the margin when you gave that guidance? Or is this always meant to be Q4-weighted? And then -- at the midpoint, anyway? And then just as a related thought, I don't speak Dutch, but it seems like you've made some branding efforts in the Netherlands, in Belgium with rebrand to Fource, was hoping you could kind of comment on what you are doing there and kind of what that means for the overall portfolio if you see a broader rebranding taking place?

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Dominick P. Zarcone, LKQ Corporation - President, CEO & Director [23]

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Yes. So I'll start and Varun can fill in.

The results for the third quarter for Europe are exactly in line with our expectations when we set forth the guidance back at September 10. And yes, we anticipate that Q4 will be a decent quarter for us in Europe. So there's no change, if you will, in kind of the quarterly progression for what we anticipated back on September 10.

As it relates to your comment in The Netherlands and Fource, the reality is, while we referred to Sator as the broader organization in the Benelux region and that's the name of the holding company, our go-to-market brand has always been Fource and that's been the case for many, many years. I think what you may have seen is some programs where that kind of has bubbled up to the surface. But there's really been no change there. That's always been our tradename in the Benelux region.

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Operator [24]

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Our next question comes from Ryan Merkel from William Blair.

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Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [25]

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I wanted to follow up on the EBITDA for Europe in the fourth quarter if I could. I'm just curious, do you think you can expand margins year-over-year or is the macro still too much to overcome?

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Varun Laroyia, LKQ Corporation - Executive VP & CFO [26]

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Ryan, it's Varun. Yes, we do believe we can expand it. I'll give you a couple of data points to think through. First of all, from the investor discussion we had 7 weeks ago on the 10th of September, with regards to Europe, we're very careful in terms of how we were putting forward the cadence of the margin progression, not only for 2019 but for the next few years also. Nothing has changed on that front even, including the macroeconomic piece. It has been playing out exactly the way we thought it would be. You will probably recall, in the second quarter, we had called out a restructuring plan and the restructuring plan essentially was to contemplate across all 3 of our reporting segments, optimizing the infrastructure costs, given the macroeconomic outlook with regards to revenue. We know that there was a certain level of revenue that we needed given the relatively high fixed cost nature of the European business. And with regards to that, we have been taking action and you would have noted in addition to the $17 million of COGS restructuring, we took another $9 million was undertaken in the third quarter, we will see some of those benefits come through also. So overall, it was planned along those lines. And we do fundamentally believe that our European business will be within the range of the 7.8% to the 8.3% that we called out 7 weeks ago. So nothing has changed from that perspective.

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

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And on a year-to-date basis, we're at 7.8% in Europe, so the fourth quarter does not need to be heroic, if you will, to hit the guidance that we set forth on September 10.

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Operator [28]

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(Operator Instructions) We have no one in queue at this time. I'll turn the call over to...

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

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Okay. Thank you, operator. Well, to everybody on the other end of the call, we greatly appreciate your time and attention. We understand this is a very busy reporting season and we appreciate you spending this past hour with us. Again, we look forward to chatting with everybody, again, in late February as we announce our 2019 year-end results, which I believe is going to be on February 20th. And we're looking forward to a good conversation then as well. So thank you, and we'll talk to you soon.

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Operator [30]

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This concludes today's conference. Thank you for your participation. You may now disconnect.