Joseph P. Boutross - Director, Investor Relations Robert L. Wagman - President, Chief Executive Officer & Director Dominick P. Zarcone - Chief Financial Officer & Executive Vice President.

Anthony F. Cristello - BB&T Capital Markets Craig R. Kennison - Robert W. Baird & Co., Inc. (Broker) Nate Brochmann - William Blair & Company, L.L.C David L. Kelley - Jefferies LLC Benjamin Bienvenu - Stephens, Inc. Jamie Albertine - Stifel, Nicolaus & Co., Inc. William R. Armstrong - C.L. King & Associates, Inc..

Greetings, and welcome to the LKQ Corporation Fourth Quarter and Full Year 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joe Boutross, Investor Relations for LKQ Corporation. Thank you, Mr. Boutross. You may begin..

Thanks, Devon. Good morning, everyone, and welcome to LKQ's fourth quarter and full year 2015 earnings conference call. With us today are Rob Wagman and Nick Zarcone. 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 our Safe Harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies.

Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the risk factors discussed in our Form 10-K and subsequent reports filed with the SEC.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. And with that, I'm happy to turn the call over to our CEO, Rob Wagman..

Thank you, Joe. Good morning and thank you for joining us on the call today. We are again delighted with our quarterly and full year results, and before I provide an update on our operations, let me briefly highlight a few key financial metrics from the fourth quarter and for the full year 2015.

Turning to slide three, Q4 revenue reached $1.75 billion, an increase of 3.8% as compared to $1.68 billion in the fourth quarter of 2014. Excluding the impact to our Other Revenue category, revenue grew 8% for the quarter.

Net income for the fourth quarter of 2015 was $95.1 million, an increase of 18.1% as compared to $80.5 million for the same period of 2014. Diluted earnings per share of $0.31 for the fourth quarter ended December 31, 2015, increased 19.2% from $0.26 for the fourth quarter of 2014, while adjusted EPS increased from $0.27 to $0.32.

Organic revenue growth for parts and services was 6.2% for the quarter, and on a constant currency basis, total growth for parts and services was 10.9%. I am particularly pleased with our EPS performance, given that the effect from FX and weakness in commodity prices, which combined negatively impacted the year-over-year change in EPS by $0.03.

For full-year 2015, revenue reached $7.19 billion, an increase of 6.7% as compared to 2014. For the first time ever, revenue surpassed $7 billion, a major milestone for the company. Net income for the full year was $423.2 million, compared with $381.5 million for the prior, an increase of 10.9%.

Organic revenue growth for parts and services for 2015 was 7%, a solid performance given the tough comp of 9% in 2014. On a constant currency basis, total revenue growth for 2015 was 10.1%, while total revenue growth for parts and services was 14.1%.

Our adjusted EPS for all of 2015 was $1.42, representing an increase of 11.8% from the $1.27 reported in 2014, again, net of the adverse impact of FX and commodity pricing. Now a brief update on our operations, which are highlighted on slides six and seven.

During the quarter, our North American operations continued to benefit from various macro trends. According to the U.S. Department of Transportation, miles driven was up 3.5% in 2015 as compared to 2014. Miles driven in 2015 was the highest number reported since 1990.

With low prices and ongoing improvements in the unemployment rate, we do expect a continuation of this trend. Though initially a headwind, as newer vehicles requiring repair tend to receive new OE parts, the increase in the SAAR rate presents attractive growth prospects for our alternative products as these vehicles age.

The SAAR rate for 2015 was 17.4 million units, compared to 16.4 million units for 2014, a 6.1% increase year-over-year. Auto industry analysts expect this trend to continue in 2016, which again should be good for our North American collision businesses as well as our specialty segment.

These trends helped drive North American organic growth for parts and services of 5.6% in Q4, despite the mild weather patterns we faced throughout December.

During Q4 and for full-year 2015, we purchased over 73,000 and 288,000 vehicles, respectively, for dismantling by our wholesale operations, which is essentially flat year-over-year for both periods. During Q4, our pricing at auction was flat compared to Q4 2014, but we were also buying a younger vehicle by over one year.

This younger vehicle procurement strategy continues to perform well and played a role in the improvements we witnessed in Q4 year-over-year in North American gross margins.

For our North American aftermarket business, we continue to see improvements in our total collision SKU offerings, as well as the total member of certified parts available, each growing 13.2% and 32.2% respectively in 2015.

In our self-service retail business, during Q4 we acquired over 112,000 lower-cost self-service and crush-only cars, which is a 4% decrease over Q4 2014. For full-year 2015, vehicle procurement was approximately 471,000, a decrease of 8.4% from 2014.

As mentioned on past calls, this reduction in the self-service procurement was intentional, given the dynamics we faced with the scrap markets throughout the year. Nick will provide more detail on scrap during his comments, and in particular its impact on revenue.

Turning to the 2015 results of our ongoing intelligent parts solution initiative with CCC Information Services, the revenue and number of purchase orders processed through the CCC platform during 2015 each grew 66% respectively year-over-year.

Clearly, the trend towards shops adopting this feature within the CCC platform continues to gain traction, with this initiative currently annualizing over $28 million in revenue for LKQ. And lastly on North America, I want to provide an update on our productivity initiatives to identify potential operational efficiencies.

As mentioned on previous calls, we have identified several significant opportunities in four key areas, with one of them being procurement.

During the quarter, AlixPartners led an internal focus group tasked with assessing our current maintenance, repair and operations, or MRO, and indirect spend categories, and the details behind what we can change or can consolidate.

Following this extensive analysis, we modified and redefined several positions within our procurement team in attempt to optimize our ability to capture the potential savings uncovered.

Though early in the process, we are extremely encouraged by the savings we could achieve in areas of both direct spend on after-market parts and the MRO, and the indirect spend categories such as logistics, corrugated boxes and shipping supplies, vehicle rentals, IT hardware, and various services.

While it will take a few quarters for the savings on parts purchases to be realized and rolled through our inventory turns, we anticipate we will begin to realize some of the savings on the other items in late Q1 of this year. Now moving on to our European operations.

In Q4, our Europe segment had organic revenue growth of 6.3% and acquisition growth of 5%, which was offset by a decrease of 6.7% related to foreign exchange rates.

During Q4, ECP drove organic revenue growth of 8.9%, and for branches open more than 12 months, ECP's organic revenue growth was 6.8%, solid performance given that the UK witnessed one of the warmest and most mild winters since 1985.

During the quarter, ECP opened one additional branch, bringing our UK network to 199, an increase of 110 branches since we acquired ECP. With the continued market opportunities in the UK, I am pleased to announce that we approved an additional 13 branches in 2016. During Q4, collision parts sales at ECP had year-over-year revenue growth of 21.2%.

I am pleased with the continued double-digit performance in this line of business, especially given the mild Q4 weather in the UK and a tough 2014 comp. And lastly on ECP, I'd like to provide a brief update on our new 750,000-square-foot national distribution warehouse, currently under development in the UK.

Upon completion of the building shell in early February 2016, we began our lease payments and also started absorbing duplicate expenses that will continue through 2017 as we begin to move towards finalizing the full consolidation of our existing NDCs into this state-of-the-art facility. Nick will cover the impact of those costs shortly.

During Q1, we began installing interior racking in preparation for using the facility for bulk storage in Q2, with the automation and more sophisticated storage spaces scheduled to be completed in 2017. For the quarter and for full year 2015, we did not incur any material costs related to this project. And now turning to our Sator business.

With the network build-up in the Netherlands largely completed via a combination of acquisitions and innovative partnering solutions, Sator has now turned its focus towards integrating the systems in place at the wholesale level.

By year-end 2016, we plan to have consolidated from six systems to two, with integrated end-to-end inventory and customer visibility, a key enabler for driving logistical and working capital improvements in the business. And now to our Specialty segment.

Our Specialty segment continued its strong performance by posting year-over-year total revenue growth of 16.2% in the quarter, including the benefits of the Coast acquisition and strong organic revenue growth of 8.1%. During the quarter, all integration activities from the Coast acquisition continued as planned.

In total, our Specialty team integrated 5 of the 17 Coast warehouses into our existing KAO distribution centers, with two additional warehouses integrated in January.

In addition, during Q4, our Specialty team stocked the 360,000-square-foot warehouse in Michigan, mentioned on the previous call, and in January we officially began shipping product from this facility. I am also pleased to announce that in 2015, the Specialty team achieved two significant milestones.

For the first time, Specialty eclipsed $1 billion in annual revenue and made over 1 million delivery stops. Congratulations to our Specialty team for reaching such an impressive milestone. Now on to corporate development.

In December 2015, the company announced that it had signed a definitive agreement to acquire Rhiag-Inter Auto Parts, a leading pan-European business-to-business distributor of aftermarket spare parts for passenger cars and commercial vehicles, for an enterprise value of €1.04 billion.

This acquisition gives us access to the rapidly growing Eastern European market, and of course Italy, where Rhiag's base business is well positioned for continued growth beyond their current 15% market share.

The targeted closing for Rhiag is progressing as expected, with all the filings required by the EU and Ukraine regulatory authorities submitted, accepted and deemed complete. Those regulatory agencies are now in the final review process, and we anticipate this deal to close in the first half of 2016.

In addition to the Rhiag announcement, during the fourth quarter of 2015 we acquired a wholesale salvage business in Sweden and an interest in a pan-European distributor and remanufacturer of engines and powertrain products. Lastly, earlier this month the company sold its interest in ACM Parts, our JV in Australia, to our JV partner Suncorp.

LKQ played a pivotal role in the creation of ACM Parts, and we will continue to have a strong working relationship with the business. Key formal strategic alliances between ACM Parts and LKQ, particularly those related to aftermarket parts sourcing and technology, will remain in place.

This transaction allows us to maintain a presence in Australia while redeploying our capital, both human and financial, towards the multiple opportunities we have in Europe.

Clearly, 2015 was another very active year, with our development efforts resulting in the completion of 18 acquisitions, which combined, expanded our geographic footprint and extended our leadership position in each of our operating segments.

At this time, I'd like to ask Nick to provide more detail and perspective on our financial results and our 2016 guidance..

Thanks, Rob, and good morning to everyone on the call. I'm delighted to run you through the financial summary for the quarter, and over the next few minutes I will address the consolidated results of our company and review the performance of each of the three segments, before touching on the balance sheet and addressing our guidance for 2016.

For those of you who accessed our earnings presentation on the website, you will notice that we have included detail on both the fourth quarter ended December 31 as well as the full year of 2015. My comments will generally follow the flow of the presentation, but as usual, I will primarily focus on the quarterly results.

The short version of our financial performance in the fourth quarter of 2015 would be a repeat of the third quarter. Save for our self-service operation, we had a great quarter in which we experienced solid revenue and earnings growth despite the continued headwinds from lower scrap prices and the strong dollar.

As Rob mentioned, consolidated revenue for the fourth quarter was $1.75 billion, representing a 3.8% increase over last year.

That reflects an 8% increase in revenue from parts and services, offset in part by a 38% decline in other revenue, primarily related to the continued decline in prices for scrap steel and other metals, which I will address in a few minutes.

The components of the parts and services revenue growth include approximately 6.2% growth from organic activities, plus 4.7% from acquisitions, equated to constant-currency growth of 10.9%, before backing out the translation impact of FX, which was a 2.9% decline.

I will provide a bit more detail on the organic growth of each business as I walk through the segment results. As noted on slide 11 of the presentation, consolidated gross margins improved 40 basis points to 39.9% during the quarter.

The uptick reflected approximately a 50-basis-point improvement from operations, offset by a 10-basis-point decline due to revenue mix, as the revenue growth in our Specialty business, which has the lowest gross margin structure, outpaced that of our other operations.

We lost about 20 basis points of efficiencies in our operating expenses, again largely due to our self-service operations.

Those operations continued to experience a meaningful decline in revenue related to the lower scrap steel prices and an uptick in expenses, the combination of which resulted in materially higher cost as a percent of revenue in each expense category.

Outside of the impact of metal prices, our consolidated distribution cost as a percent of revenue benefited from lower fuel prices, and our SG&A expense benefited from the acquisition integration synergies in our Specialty operation. Segment EBITDA totaled $193 million for the quarter, reflecting a 5.7% increase from 2014.

As a percent of revenue, segment EBITDA was 11.0%, a 20-basis-point improvement over the 10.8% recorded last year.

The increase in EBITDA, when combined with lower relative levels of depreciation and amortization and interest expense, allowed pre-tax income to increase by 7.5% during the fourth quarter of 2015 compared to the same period last year, and pre-tax margins expanded by 30 basis points to 8.0% from 7.7%.

Our net tax rate during the fourth quarter was 30.4%, down from 37.3% in 2014. The tax rate reflects an effective rate of 34.55% for the quarter, as well as a favorable adjustment to get us to that level on a year-to-date basis, as we have been accruing at an effective rate of 34.75% through the first three quarters.

The 2015 annual rate reflects a favorable shift due to a relative increase in earnings sourced from the UK, which has a low tax rate.

We also benefited from a few discrete items during the quarter, including a couple of deferred tax adjustments due to favorable state or foreign tax rate changes, a couple of refunds, and some FIN 48 reserve releases due to settlements or statute expirations.

As Rob mentioned, fully diluted EPS for the quarter was $0.31 compared to $0.26 last year, a 19% increase, and adjusted earnings per share before restructuring charges was $0.32 a share versus $0.27, again reflecting a 19% improvement.

A solid fourth quarter brought our adjusted EPS for the year to $1.42 which is exactly the midpoint of our guidance provided in February of 2015, notwithstanding the fact that the plunge in scrap prices had a $0.07 negative impact and the strong dollar had a $0.04 negative impact on our year-over-year EPS growth during 2015.

As mentioned in December, starting in 2016 we are changing the definition of adjusted EPS to exclude the after-tax impact of intangible amortization. As highlighted in Appendix 4 on page 32 of the slide deck, 2015 adjusted EPS under the new definition is $1.49 a share.

As highlighted on slide 13, the composition of our revenue continues to change due to the varying growth rates of our different businesses and the impact of acquisitions.

Since each of our segments has a different margin structure, this mix shift impacts the trend in consolidated margins, and that will become more accentuated once we close the pending Rhiag acquisition and we begin to consolidate the Rhiag results. And with that, let's get into the details on the segments.

Revenue in our North American segment during the fourth quarter in 2015 increased to $1.018 billion, or almost 1% over 2014. This is the combination of a 7.9% growth rate in parts and services, offset by a 39% decline in other revenue, again the latter which was due to the lower prices received for scrap steel and other metals.

Importantly, organic growth in North American parts and services was 5.6%. All in all, this was a very solid quarter. Margins in North America during the fourth quarter increased 90 basis points relative to the comparable period of the prior year, to 43.2% from 42.3%.

This increase was primarily due to our improved pricing to customers in our aftermarket operations, improved procurement in our salvage operations, and a mix shift away from self-service, which has lower gross margins than our wholesale operations.

With respect to operating expenses in our North American segment, we lost approximately 90 basis points of margin compared to the comparable quarter of 2014. On the upside, we continued to experience improvements in fuel costs relative to last year, as diesel fuel averaged $2.43 a gallon compared to $3.58 a gallon.

As a percent of revenue, fuel costs declined by 40 basis points, while we experienced some modest increases in facility and SG expenses in our wholesale business.

Unfortunately, our self-serve unit experienced an increase in operating expenses, but meaningfully lower revenue due both to the significant decline in scrap prices and a modest reduction in the number of cars processed.

As a result, operating expenses as a percent of revenue for our self-service operation increased very significantly on a year-over-year basis. Slide 16 takes a closer look at scrap steel prices over the past 24 months.

You will note that the average price we realized in Q4 of 2015 was approximately $82 a ton, down 56% compared to the average of $187 a ton realized in Q4 of last year. In total, the lower pricing for scrap steel reduced our revenue for the quarter by approximately $26 million on a year-over-year basis.

The decline in scrap steel prices had approximately a $0.03 negative impact on our EPS during the quarter. Scrap steel prices have leveled out the last few months, and hopefully we will not see continued deterioration.

While we have been dealing with falling scrap prices for a while, during Q4 we also experienced a continued material decline in the prices received for other metals that are a residual of our recycling activities, including aluminum, copper, platinum, palladium and rhodium, which were down between 20% and 45% compared to the fourth quarter of last year.

So while revenue from scrap steel was down $30 million during the quarter, revenue derived from selling these other precious metals and catalytic converters, excuse me, was down an incremental $16 million compared to Q4 of last year.

So in total, the falling metals prices depressed our North American business by approximately 160 basis points during Q4 of 2015 relative to the margins in the prior year. In total, for the North American business during the fourth quarter of 2015, the total EBITDA was $131 million, reflecting a 1.3% increase compared to last year.

As a percent of revenue, EBITDA for North America was 12.8%, flat with the comparable period of the prior year.

In both dollar and percentage terms, the wholesale operations improved relative to the comparable period, with EBITDA margins being up 70 basis points, but the overall segment results were flat as a result of the decline at our self-service operations. Moving onto our European segment.

Total revenue in the fourth quarter accelerated to $487 million from $465 million. Organic growth in Europe during the quarter was 6.3%, reflecting the combination of 8.9% growth at ECP and just under 1% at Sator.

The impact of acquisitions in Europe resulted in an additional 5% increase in revenue, so on a constant currency basis, European revenue was up 11.3%. These gains were offset by a 6.7% decline due to the translation impact with the strong dollar, creating a negative impact on revenue and resulting in total growth for Europe of 4.6%.

Gross margins in Europe increased to 38.9%, which was a 160-basis-point improvement over the comparable period of 2014. Both ECP and Sator experienced higher gross margins from operations, as we continued to benefit from improved procurement in the UK and the internalization of the gross margins from acquisitions in the Netherlands.

These are the highest quarterly gross margins we have achieved in Europe since early 2012. With respect to operating expenses in Europe, we loss about 40 basis points, due largely to higher SG&A expense at our UK operation, reflecting higher personnel cost to support the growth of the business, including our e-commerce development.

European EBITDA totaled $47.4 million, which was a 23.6% increase, even after taking into account the impact of the strong dollar, which had a negative effect of about $3 million. As a percent of revenue, European EBITDA in the fourth quarter of 2015 was 9.7% versus 8.2% last year, reflecting a 150-basis-point improvement.

As noted on slide 19, relative to the fourth quarter of 2014, the pound declined 4% and the euro declined 13% against the dollar.

We estimate that for the fourth quarter, the strong dollar reduced European revenue by approximately $31 million compared to Q4 of last year, and removing the impact of the currency swings would have resulted in Q4 revenue growth of 11.3%.

Given the significant margin improvement, constant currency EBITDA growth was 32%, which we believe is quite strong. When taking all currencies into account, the strong dollar reduced Q4 year-over-year EPS growth by a fraction of $0.01 compared to last year.

Turning to our Specialty segment, revenue for the fourth quarter totaled $245 million, a 16% increase over the comparable quarter of last year. Obviously the impact of the acquisition of Coast Distribution in August of 2015 accounted for the largest component of growth at 9.5%, but the organic growth rate of 8.1% was also quite strong.

Gross margins in our Specialty segment for the fourth quarter declined by 280 basis points compared to last year, largely due to the impact of the Coast acquisition.

On the bright side, operating expenses as a percent of revenue in Specialty were down by about 150 basis points as we continue to see the leverage from integrating the acquisitions into our existing distribution network as well as the benefit of the lower fuel prices.

EBITDA for the Specialty segment was $15 million, essentially flat with 2014, and as a percent of revenue, EBITDA for the Specialty segment decreased by 120 basis points to 6.1%. This is a highly seasonal business and the fourth quarter is by far the weakest, as demonstrated by the graph in the lower right-hand corner of slide 20.

As highlighted during the third quarter call, we fully anticipated the Coast acquisition with its focus on the RV marketplace would accentuate the normal drop in fourth quarter margins, and it did.

Now, let's move on to capital allocation, which given working capital swings, the lumpiness of capital spending, and the timing of acquisitions is best viewed on a full-year basis, as presented on slide 22.

You will note that our after-tax cash flow from operations for 2015 was approximately $530 million as we experienced a strong increase in earnings and only a moderate increase in working capital.

In 2015, we deployed $330 million of capital to support the growth of our businesses, including $170 million to fund capital expenditures and $160 million to fund acquisitions and other investments. So for 2015, we generated $200 million of free cash flow, and we used all of that and some excess cash to repay $224 million of our debt.

We closed the quarter with approximately $87 million of cash, of which about $59 million was held outside of the United States. At December 31, we had $1.6 billion of total debt outstanding, which reflected a leverage ratio of approximately 1.7 times as defined by our credit agreement.

As announced earlier this month, we completed an amendment to our credit facility, increasing the total capacity by $900 million to a total of $3.2 billion, and extending the maturity to January of 2021.

Today, our total availability under the new facility is approximately $2.2 billion, which is more than sufficient to fund the acquisition of Rhiag and support the continued growth of our businesses. Finally, as noted in our press release, we have provided some guidance on some of our key financial metrics for 2016.

Please note that our guidance excludes any impact from the proposed Rhiag acquisition, which we hope to close in the second quarter. As it relates to the organic growth for parts and services, we ended up at 7% for 2015 and have set the full-year range for 2016 at 6% to 8%, essentially consistent with our recent experience.

Our range for adjusted EPS, which now excludes the impact of intangible amortization, is $1.59 to $1.69 a share, with a midpoint of $1.64. Assumed in that estimate is approximately $19 million of after-tax amortization, or about $0.06 per share.

Said another way, based on the former reporting definition, the midpoint of adjusted EPS would be $1.58, which is consistent with the current analyst estimates for 2016. Going forward, I would ask that all the analysts adapt to the new adjusted EPS format so we have consistency in the EPS estimates.

To assist with some of the year-over-year comparisons, appendices four and five of the callback include a reconciliation to the new adjusted format on an annual basis from 2015 to – from 2011 to 2015, and on a quarterly basis for the four quarters of 2015.

The EPS guidance all assumes that the pound sterling, euro and Canadian dollar remain at budgeted levels of $1.45, $1.10 and $0.70, respectively, and importantly that scrap remains at current levels as well.

On a year-over-year basis, I would note that the lower exchange rates have a $0.03 per share negative impact on earnings, and consistent with what we presented in the second quarter callback in July, the new Tamworth distribution facility will have another $0.03 negative impact during 2016.

So that's a combined headwind of $0.06 a share compared to 2015, and at the midpoint of the guidance we are still expecting a 10% year-over-year improvement. The corresponding adjusted net income guidance is from $490 million to $520 million.

Our assumed tax rate for 2016 is 34.7%, reflecting the slightly lower relative earnings contribution coming from the low-tax-rate United Kingdom, and the impact of the new distribution facility in Tamworth will slow the earnings growth from that country.

Our guidance from cash flow from operations is approximately $520 million to $550 million with a midpoint of $535 million, a small increase over 2015 reflecting continued growth in cash earnings, offset by a more meaningful investment in working capital during 2016 compared to 2015.

And finally, we set the guidance for capital spending at $170 million to $180 million, up just a bit over 2015. At this point, I will turn the call back over to Rob to wrap up..

Thanks, Nick. To summarize, we faced some challenging headwinds this year with scrap and currency, two dynamics that are outside of our control, yet despite these challenges we delivered solid results for 2015. Now looking ahead.

Since the 2008 recession in North America, we have witnessed an increased level of road congestion, which undoubtedly has played a role in the number of the paid claims increasing every year since 2009. Also, the number of vehicles in the U.S.

continues to rise, with 264 million registered vehicles on the road at the end of 2015, a year when we witnessed the highest growth rate since 1999. These trends, coupled with the recent upswing in miles driven and lower gas prices, should continue to provide a nice tailwind to our collision business.

In the UK, the miles traveled on all roads and classes and the number of vehicles licensed reached their highest levels on record in 2015, trends that should continue to benefit our branch network across the UK.

At Sator, we have largely completed our three-step-to-two-step transformation and are now prepared to move the business forward as a single business operating unit. In addition, with the pending acquisition of Rhiag, our European strategy continues to evolve, and once closed, Rhiag will solidify our market-leading position across all of Europe.

Yet, we have more runway to grow this fragmented market. Also, we continue to be pleased with the performance of our Specialty segment and the timing of our entry into this large and highly fragmented market. The project – the projected trend – upward trend in the SAAR rate should continue to benefit this segment.

In closing, I am proud of the hard work and dedication that our 31,000-plus employees delivered for the company, our stockholders, and most importantly our customers in 2015. I am equally proud of our team's commitment on delivering continued and consistent performance, as reflected in our 2016 guidance.

To further that point, over the last 16 years the LKQ team has delivered, on average, 7.5% organic growth, an accomplishment that few can claim, yet one that we have delivered predictably and consistently each and every year. Devon, we are now prepared to open the call for Q&A..

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Tony Cristello with BB&T Capital Markets. Please proceed with your question..

Hey, thank you, good morning..

Hi, Tony..

The first question I had stems from the EBITDA and the margin. In the U.S. it's holding steady, some of the margins that you talked about today were actually better than would have expected.

And I'm just wondering how that margin improvement will translate in Europe, and is this a situation where you will be able to close the gap, knowing that they're two totally different businesses? But yet there are some efficiencies that have yet to been extracted?.

Tony, this is Nick. Good morning..

Good morning..

Obviously, the North American margins are a little bit of a tale of two cities, right? With the increase in EBITDA margins and the wholesale business I mentioned on the call, about 70 basis points, against a drop in the self-service margins. The margins in Europe hit double digits for the year.

There are a lot of folks who 12 months ago were wondering how many years it was going to take us to get to double-digit margins in Europe, and we're at 10.1% for the year, so we are very proud of that.

You know, we do think that ultimately the margins in Europe will have the ability to trend north, though I would caution folks that actually in 2016, because of the Tamworth facility, I quantify that as $0.03 a share.

The reality from a margin perspective, if you take the – the roughly $13 million of P&L hit due to Tamworth, and you lay that against our 2015 results coming out of Europe, we would lose about 65 basis points to 70 basis points of margin just because of that facility.

So, taking that aside, we think we can get some improvement in margins in Europe in the coming years, as we continue to rationalize.

We think that once the Rhiag transaction is rolled in, that will give us incremental opportunities to get some savings on procurement, some savings on cataloging, some savings on the e-commerce platform, private labeling, all the things that John is hard at work on over in Europe..

That's helpful. And then, I wanted to talk a little bit about the strategy to continue to get, I guess, later model buying at the auctions.

Bigger picture, and if you look at the touch points for repair on today's vehicles, are there – are these later model vehicles actually providing you with more opportunities to sell an LKQ part?.

Absolutely, Tony. And the other important part to note is, these are higher-priced parts. We like to give an example of the F150, the 2015, the taillight has blind spot detection, it's an $800 taillight, and the 2014 taillight was $85, it was just a piece of plastic.

So these later model cars will give us some upside on pricing as well as just availability as they work through the SAAR rate.

We think that with a strong SAAR rate for the last couple of the years, once they start hitting that sweet spot, that's going to provide a nice tailwind, and we're about six months to a year away from those really starting to hit in mass..

Okay. And then just my last question with Rhiag.

You talked about, I guess the second quarter, is there any thought on terms of the accretion that it may have now, based on the timeline of the close? I think originally you had said somewhere in the neighborhood of a $0.11, if I am not mistaken?.

Yes. That's still our best thinking Tony, $0.11 a share on our new adjusted EPS basis, so you would layer that on top of the midpoint of the $1.64 that we just referenced..

Tony, we are absolutely on pace to close at when we thought we would, early Q2. So we're very well along that way, the path, with the authorities over Europe..

Okay. Great. Thanks for your time..

Thanks, Tony..

Thank you. Our next question comes from the line of Craig Kennison with Robert W. Baird. Please proceed with your question..

Yeah, good morning. Thanks for taking my questions as well.

Just to follow up on what Tony had to say there, is the $0.11 the, excuse me, the annual impact, or would that be the impact as if you owned it for six months?.

That is a partial year, Craig, it's not the annual impact. You notice that in 2017, the EPS accretion that we gave folks back in December is $0.21 a share..

Got it. That's – that is helpful to clarify that.

And then, with respect to your European operational priorities, I think you addressed it a little bit, Nick, in your prior response, but could you add a little more color as far as how we should evaluate your progress in Europe in terms of the goals you've set operationally?.

Craig, this is Rob. As Nick mentioned, John is hard at work and obviously we're very pleased with the double-digit EBITDA that we put up this year. The priorities would be – with Rhiag coming on board is to get that integrated into the system, and on purchasing, the e-commerce as Nick mentioned. So we've got some work to do there.

As I mentioned in my prepared remarks, Sator is basically done from the three-step-to-two-step conversion. So we are anticipating getting back to normal there, and I also mentioned we're going from six systems to two systems.

So the work at Sator is to finish that, get the systems on one play, get the Rhiag integrated, and of course the UK still opening branches, et cetera, and we're working that game plan. The other thing I'd like to add, as I mentioned in my notes, we did take a JV interest in a remanufacturer in Europe.

We're going to end – start bringing those products into our different operations. So that's another opportunity as well. So those are the major priorities over in Europe this year..

Thanks, Rob. And then finally, you have this Tamworth distribution center, which is exciting as it rolls out.

Should this be considered a model for what you plan to do in Europe once you've got most of your footprint laid out?.

Yeah. I think it's fair to say we will combine major warehouses where we can. The Tamworth 2 facility is 750,000 square feet and semi-automated, that would be the plan going forward as we build out the network in Europe, is to put a massive DC with semi-automation as well.

So assuming this one goes well, and right so far, it's on plan to budget and to the timeliness. We are very excited about getting that online because I think it's going to make us much more efficient..

So, that's dilutive early in the process, but obviously accretive down the road.

But when we think about that accretion down the road, should we also have in the back of our mind that you may add additional DCs that could be, again short term dilutive, long term very accretive?.

I think that's fair. As we continue to work on Europe and the opportunity presents itself, we would likely put another DC into somewhere in Europe..

Thank you. Thank you so much..

Thanks, Craig..

Thank you. Our next question comes from the line of Nate Brochmann with William Blair. Please proceed with your question..

Good morning, everyone..

Good morning, Nate..

So, Rob, thanks for some additional color on the AlixPartners kind of consulting project, in terms of where you're going with that.

I was kind of curious a little bit in terms of just, if you look back a year ago when you started with that, in terms of like the progression and uncovering additional opportunities, relative to your additional – or your original expectations? And then, the second part of that is, how much of that improvement are you guys kind of including in your guidance, and whether there could be more upside as you uncover more opportunities?.

Sure. I'll let Nick answer the guidance, but let me talk first about the – what we've found so far. We're very pleased with the work completed. I mentioned on the call – on my prepared remarks about the purchasing, but we're also seeing equal progress in our sales initiative, as well as our routing software.

So the fourth leg of that, of course, was the efficiencies at our dismantling. Just to give an update on that, we have hired a Six Sigma Black Belt that's working on that project as well. So, these will take time to work through the system, but we are in the process of consolidating our sales centers into call centers, regional call centers.

And then on the routing software, rolling out every one of our trucks, we'll know exactly where that truck is, we'll be able to be much more customer-focused on their timeless of delivery, and then also taking out cost on that, because we'll be able to be more efficient in the routing.

As far as the guidance, Nick?.

Yeah. And Nate, obviously the benefit that we gain from procurement pricing in the aftermarket parts marketplace, it takes time to get those POs in place.

We have most of the adjusted pricing locked down with our vendors, but now we have to start placing orders, the product needs to get shipped over the ocean, delivered to our warehouses, and then we have to turn it through the inventory. So you're not going to see a whole lot of impact there in 2016.

On some of the other items, we do believe we will be begin to get some flow-through late Q1, early Q2. As far as our guidance, is there a meaningful impact there? No. The biggest proportion will come from the aftermarket procurement..

And then just bigger picture, along with that, to Rob is like philosophically, obviously, it's always been about putting the pedal down on terms of growth, and obviously that's still priority number one in a lot of potential acquisitions, particularly over in Europe and still more to go in North America.

But obviously, particularly with that project, as well as the procurement initiatives in Europe, there's a little bit now of a focus in terms of getting efficiency improvements and generating the more consistent margins and hopefully more consistent cash flow.

How do you philosophically think about that now, in terms of running the organization?.

Yeah, I think it's making us much more efficient, Nate. We had, through the years, operated really decentralized, and I think getting consistencies on our sales process and how we measure our sales reps across the country and across the world, quite frankly, is going to make us much more efficient.

And I think, though we'll get maybe some head count efficiencies, but also just being able to track our people on metrics that we think are key to driving the business. So it's an important initiative within our company.

And as far as the routing software goes, that's equally important, being able to give our customers better service, and that will definitely be a result of this routing software. It's an amazing software that allows us to track the truck down to the mile and where it is and its ability to get to a customer.

So we're going to be much more interactive with our customer base, which we think is a big advantage..

Okay. And then just one last quick question regarding ECP. Obviously, getting a little bit more mature over there in terms of the branch build-out and whatnot.

What do you see as the biggest growth opportunity now over the next three years for ECP? Is it still blocking and tackling in terms of market share gains, or is it about the new product injections or a combination of everything?.

It's a combination of everything. There are absolutely market share gains that we're continuing to get there, and we will to continue to get that we think. Adding the paint, adding the re-man engines now into the marketplace, and we'll have calipers and transmissions as well. We think that's really the big opportunity there.

Of course, the Tamworth 2 is going to be absolutely critical to really outpacing our competitors and being able to get the product to them much more quicker. So we think we're going to get a big competitive advantage when we get T2 online. Tamworth 2..

Great. Thanks for the time..

Thanks, Nate..

Thank you..

Thank you. Our next question comes from the line of David Kelley with Jefferies. Please proceed with your question..

Good morning, gentlemen. This is David in for Bret Jordan.

How are you?.

Good, David.

How are you?.

I'm doing well, thanks. Just a couple quick ones.

Could you maybe provide some color on the ongoing MSO consolidation trend in the market, and maybe the impact you're seeing on alternative parts utilization at the moment?.

Sure. The MSO consolidation is continuing, it's – there are several very active buyers of body shops. We believe that's a positive for us. These MSOs are very tied to the insurance industry in driving alternative parts, so we are very pleased with that, and that – I don't see that slowing down any time soon, David.

They are very aggressive in consolidating. I did just see a recent report that there're still 40,000 body shops in the United States, so there are still a tremendous amount of independents, but the consolidation will continue.

As far as AP usage goes, we haven't seen the 2015 number yet from CCC, but we expect it to be relatively flat again at 36% mainly as a result of the SAAR rate. These news cars are demanding new parts. As I said earlier, we do think that's a benefit, as these tend to be higher-priced parts.

But what we have seen, interestingly enough, is the number of parts per estimate continues to grow. In 2015 it went up to 9.2 parts per estimate, which is a huge trend in our favor. Obviously as cars get in accidents, we like to see parts get replaced versus repaired so that we can sell a product. So we see that trend continuing for two reasons.

One, the complexity of the cars – the aluminum car is coming; I know we see magnesium is being entered into the parts stream as well. These will get replaced more often than repaired, that's a positive.

And then the complexity – the body shop industry tends to be focusing more on replacing than repairing, so all positive trends, and we think, when these SAAR rates start to get into the sweet spot, we'll see that alternative part usage go from 36% to even higher as the parts make their way into the system..

All right. Great; very helpful. And then just a quick follow-up here. You mention your price paid at auction I believe was flat year-over-year, but the average age of the vehicle purchased was a year or so younger.

Do you have maybe a comparable same-age change in price? We were just hoping to get a feeling for ASPs, given some of the recent FX and scrap movements we're seeing in the market here..

Well, I can tell you on the self-service, the lower end car, our purchase price is down $51 sequentially, so that's where you are going to see the scrap impact. Manheim (54:07) has been stubbornly high still, at 124.7 was the last number we saw.

I did listen to the Car Call and I heard them say they were expecting used car prices to soften 3% to 5% this year, so we do expect some relief there, but the new car that we are buying is critical to our strategy, because as the SAAR rate gets through, we are going to see more demand on that new car.

So, the fact that the prices are flat and we are buying a newer car, we do know that's obviously a positive for us..

All right. Perfect. I appreciate the color, and thanks for taking my question..

Thanks, David..

Thank you. Our next question comes from the line of Ben Bienvenu with Stephens. Please proceed with your question..

Thanks. Good morning, guys..

Good morning..

Good morning..

So if I could just talk about weather quickly, you mentioned warmer winter weather. Obviously that was a headline in the automotive space in the fourth quarter.

Presumably that potentially diminishes the demand for collision products in the period, but if I recall in 2014 – excuse me; in 2015, there was a backlog in a number of the repair shops as a result of the pretty severe winter weather outlook for the fourth quarter.

Could you talk about maybe the puts and takes there, across 4Q and 1Q, and sort of how we should think about that landscape in the current environment?.

Yeah. Let me talk about how the quarter is looking thus far. January was on plan, and thus far through February, we are also on plan as well, and we're up against some really tough comps in New England. As you remember, last year they had a blizzard it seemed like every other week for January and February, so there was some backlog.

Just to put some color on the winter in Q4, ECP in December, their battery sales for one month were off 30%; that was $2.5 million difference just in battery sales. So the mild winter wasn't just here, it was also in Europe, so little bit of impact obviously in Q4. But so far through Q1, we are on plan and we're pretty happy.

Now, there were some horrendous storms that came through the Southeast yesterday. Obviously those take time to get through the system, we'll see what that does. But so far, we are pretty pleased considering the comps we were up against in 2014..

Great. And then maybe dovetailing on your ECP commentary, the two-year stack on a same-store sales basis accelerated nicely despite that warm winter weather. You talked about market share gains.

Could you disaggregate for us, of the 6.8%, what was secular growth, what was market share gains, and sort of what your expectation in there going forward?.

Yeah. That's really hard for us to get our arms around because so many of our branches over there, Ben, are relatively close together, and we're consolidating some branches and the like. We think that the majority is related to market share gains, as we continue to expand out throughout the country.

But there's, every time we open up a little branch, there's a little bit of cannibalization of the branches around it. So it's really hard to disaggregate that the way you want it..

Sure..

I think it's fair to say, though, Ben, that the industry is growing circa GDP, so it feels like most of it's market share gains..

Okay; great. And then just one last one for me, sticking with Europe, the collision business, obviously is a big opportunity longer term.

Any updates there, and sort of some of the things that you are working through to build that business?.

we did add one more insurance company into the program. So we are now up to 9 of the top 10 insurer company. As I mentioned in my prepared remarks, it was still well over 20% growth, so still strong double-digit. We are very pleased with that, and we are excited about bringing that to the continent.

I think Rhiag also provides an opportunity there as well, in the Eastern European countries, so we are excited about that opportunity and I expect to see something here in the tail half of 2016..

Very good. Good luck, guys. Thanks..

Thanks, Ben..

Thank you. Our next question comes from line of James Albertine with Stifel. Please proceed with your question..

Great. Good morning and thanks for taking my question, gentlemen..

Morning, Jamie..

I can speak wholeheartedly to that storm yesterday in Washington. If you do some water removal in basements, let me know. Real quickly, on the guidance, you mentioned FX and you also mentioned some headwind from Tamworth. I didn't hear any mention of scrap in the guidance. Maybe I missed it.

But what should we be considering, assuming there is continued pressure as there has been sequentially now for several quarters?.

Yeah. So if scrap prices, particularly scrap steel prices, stay where they are, there should be maybe $0.01 or so, maybe $0.02 at the most in Q1, but by then most of the – this $80 scrap price will have rolled off, and we'd be in the clear.

So we are not anticipating a big headwind from scrap, but again, that all assumes that prices stay where they are and they don't fall..

Got it. And I wanted to ask as well on the Rhiag side, and going back in the, sort of – I appreciate the appendices, and apologies for having sort of a confused initial look earlier this morning on the guidance side. But with respect to one element of Rhiag you had talked about in December, refinancing opportunity there.

Is that considered in your $0.11 for the balance of this year, or is that something that would be incremental theoretically to the $0.11 guide?.

No, that's included. We assumed that we would take out the 7.25% fixed-rate notes very quickly after – at closing, and that is our full intent. Part of the reason we increased the line of credit was to give us the flexibility to do that.

Now, we will come back and – at some time during 2016, depending on how the euro markets are, is replace out with our own bond, which will be at a – obviously it will be a fixed-rate instrument at a higher rate than under our line of credit, but we fully anticipated in the $0.11 accretion in 2016 that we would be taking out all the existing Rhiag debt..

Okay, great. And if I may just ask one more, I know it's getting late in the call and I appreciate you taking the question.

On the working capital side, just there seems to be quite a bit of sort of change that you are unearthing, both you're working on things with AlixPartners on procurement, and obviously you're bringing Rhiag on here potentially, and then some of the three-to-two-step transitions.

But how should we think about sort of the big swings in working capital? What should we watch for as it relates to upside-downside to your – to the cash flow from ops guidance? Thanks..

Yeah. So, if you look at the funds flow statement, Jamie, 2015, a little bit unusual. As we told you going back a year, we had built inventories in Q4 of 2014 in anticipation of a potential port strike on the West Coast.

And so as you – we came into the year kind of flush with inventory, and so we didn't need to add as much during the year to support the growth of the business. There was $83 million expansion in inventory during the year. Accounts receivable actually went down in 2015. That is very unusual, given a company that's growing its revenues.

A lot of that had to do with some new things we were doing, particularly in the Netherlands, at Sator, some new focus on their receivables processing, if you will. We do not anticipate we will get another downtick in accounts receivable. We actually think receivables are going to grow in 2015 as our revenues grow. And so, that's the biggest swing.

I know each year there seems to be something unusual.

When you look at the – if you go back and you look historically at the kind of cash flow from operations, we were at $206 million in 2012, $428 million in 2013, down to $371 million in 2014, up to $521 million in 2015; most all of that has to do with swings related to working capital, and what I would suggest, if you kind of trend-lined it and normalized that to take out the peaks and the valleys, that's what you should be thinking about on a kind of long-term basis, recognizing that in any given year things could move up or down a little bit..

Okay. That's incredibly helpful, I appreciate that. And on the inventory – I mean, just a follow up to that, the inventory, you're buying some newer vehicles at a little higher price point, but you're buying fewer vehicles.

Is that sort of going to net out, as we think about sort of inventory swings? And granted, you are working on improved terms and some other items that you noted with the AlixPartners work..

Yeah. So the item that you referenced, which is the procurement of cars and newer cars and the like, that only impacts our North American salvage business.

Actually, most of the inventory is on the aftermarket business here in the U.S., the Specialty business in the U.S., and the whole entirety of the European business, right? Because that's all aftermarket products. So while there will be a little bit of an impact from the salvage operations, that's a minority of our overall inventory balances..

Okay, great. I appreciate the clarification, and best of luck. Thanks, guys..

..

Thank you. Our final question comes from the line of Bill Armstrong with C.L. King & Associates. Please proceed with your question..

Good morning, gentlemen. I want to just ask about Europe.

Can you remind us what the average age of the car park is there? How that's trending, and how that might impact demand for your aftermarket parts?.

Yeah. It's about 8.7, Bill, is the average age, but it is growing, like the U.S. So we do expect that to be a nice tailwind for our European car parts business. As old cars get older, sort of what they're seeing here in United States, you'll see more need for those mechanical parts. So, definite positive trend..

Got it. Okay. And one other sort of futuristic question, I guess, and that's driverless cars, collision-avoidance technologies. There are some out there to think that's going to be – eliminate accidents.

How do you guys see that, playing out in terms of how that might impact your business over the next – both over the near term, and then maybe over the next five years to 10 years?.

It's still very early days on that, and from what we've – the research we've looked at, Bill, most of this is currently an option right now, it's not a standard part. And it's mainly on higher end vehicles, although they are starting to work their way down.

There was actually a study done by Thatcham over in UK that suggests that they believe claims volume will not drop precipitously, but severity will, and they actually expect total losses to drop, but the number of claims will. So instead of that violent roll-over collision, there will still be a collision but it just won't be as severe.

So they're actually predicting pretty stability. So I think it's fair to say that it's still early days, but I will say this, it is actually part of our strategy to diversify the business. We do think it's coming, but we – and everything we've read says it's a decade-out problem, at the earliest.

So we're going to continue to diversify the business, look to get away a little bit from the collision, as we've been doing over the last couple of years, but we do think there's at least a solid 10 years left of collisions that are going to stay pretty normalized..

Got it. That makes sense. Thanks very much..

Thanks, Bill..

Thank you..

Thank you. I'd like to now turn the floor back over to Mr. Wagman for closing comments..

Thank you, Devon, and thank you everyone for your time today. But before we sign off, I just want to announce that we're very excited about, we'll be hosting our first ever Investor Day in New York City on March 15.

You'll have the opportunity to hear from each of our segment leaders as they discuss their businesses, and we look forward to providing a deeper dive into our company. We hope you can join us, either in person or via our webcast. Thank you, everybody..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..