Joseph P. Boutross - LKQ Corp. Robert L. Wagman - LKQ Corp. Dominick P. Zarcone - LKQ Corp..

Ali Faghri - Susquehanna Financial Group LLLP Craig R. Kennison - Robert W. Baird & Co., Inc. Benjamin Bienvenu - Stephens, Inc. Samik X. Chatterjee - JPMorgan Securities LLC James J. Albertine - Consumer Edge Research LLC Bret Jordan - Jefferies LLC.

Good morning. My name is Tracey, and I will be your conference operator today. At this time, I would like to welcome everyone to the LKQ Corporation Fourth Quarter and Full-Year 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr.

Joe Boutross, Director of Investor Relations, you may begin your conference..

Thank you, operator. Good morning, everyone, and welcome to LKQ's fourth quarter and full-year 2016 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 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.

Also note, the guidance for 2017 is based on current conditions including acquisitions completed through February 23, 2017, and excludes any impact of restructuring and acquisition-related expenses, gains or losses related to acquisitions or divestitures including changes in the fair value of contingent consideration liabilities, loss and debt extinguishment, and capital spending related to future business acquisitions.

Hopefully, everyone 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-K in the next few days. 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. This morning, I will begin our review with a few high-level full-year 2016 financial results, followed by an update on our operating segments. Nick will follow with a detailed overview of our financial performance in Q4 and our guidance for 2017.

For full-year 2016, revenue reached $8.58 billion, an increase of 19.3%, as compared to $7.19 billion for full year of 2015. This number excludes revenue from PGW's OEM glass manufacturing business whose planned divesture was announced in Q4. Nick will provide the overall financial impacts of this transaction shortly.

Net income for full-year 2016 was $464 million, an increase of 9.6%, as compared to $423.2 million for 2015. Diluted earnings per share for full-year 2016 was $1.50, an increase of 8.7%, as compared to $1.38 for the same period of 2015. On an adjusted basis, diluted earnings per share were $1.80, an increase of 20.8%, as compared to $1.49 for 2015.

For the full year of 2016, parts and services organic revenue growth was 4.8% and acquisition revenue growth was 19%, while the impact of exchange rates was negative 2.5%, for total parts and service revenue growth of 21.3%.

Adjusting for differences in selling days during the fourth quarter of 2016, the company achieved global organic growth of 5.2% on a per day basis.

Turning to our North American operations, adjusted for having one less selling day, our North American segment had organic revenue growth for parts and services of 3% during the fourth quarter, performance consistent with what we've witnessed throughout all of 2016.

For full-year 2016, North America had organic revenue growth for parts and services of 2.9%, which is 40 basis points above the full year 2.5% collision and liability-related auto claims reported by CCC. It's important to note that when looking at our North America growth, there continued to be variations across the platform.

There were geographic differences with the Central and West regions continuing to perform much better than our Northeast and Midwest regions where we witnessed mild weather conditions.

In wholesale aftermarket, certain part types like our core Keystone fenders, hoods, bumpers, and lights grew faster than the overall North America growth rate, while paint and related products, cooling products and aluminum wheels experienced year-over-year declines. So, there were definite spots of strength and spots of weakness.

As we enter 2017, we are implementing additional programs targeted at specific product lines and making some adjustments to the sales organization, all in an effort to drive improvement in the growth metrics. During Q4, we acquired 77,000 vehicles for dismantling by our wholesale operations, which is a 4.1% increase over Q4 2015.

For full-year 2016, procurement of dismantling vehicles was 291,000, a slight increase over 2015. For our North American aftermarket parts business, we continue to see improvements in our total collision SKU offerings as well as the total number of certified parts available, each growing 9.8% and 17.8% respectively in 2016.

This trend validates our suppliers' commitment of investing in the development of new tools to manufacture aftermarket parts to support the growth in SAAR and related new model designs. In our self service retail business, during Q4, we acquired 129,000 lower-cost self service and crush only cars, which is a 14.5% increase over Q4 2015.

For full-year 2016, vehicle procurement was 524,000, an increase of 11.3% from 2015. Turning to the 2016 results of our ongoing intelligent parts solution initiative with CCC. The revenue and number of purchase orders processed through the CCC platform during 2016 grew 66% and 63% respectively year-over-year.

On an annualized basis, the revenue from this initiative is now tracking over $47 million. Lastly, I am pleased with the progress of our Roadnet productivity initiative.

Since inception, we have been able to increase miles per route from 101 to 129, allowing us to cover eight stops per miles driven versus a previous average of six without any significant increase in head count.

At the end of 2016, Roadnet was operating at 319 locations across North America with 3,900 vehicles traveling 9.6 million miles per month across a network of 74,000 routes and making 1.1 million stops per month.

During his presentation, Nick will discuss the financial benefit of our overall productivity initiative realized in 2016 and their projected impact in 2017. Now, moving to our European operations.

In 2016, our Europe segment had solid organic revenue growth for parts and services of 7.2% with limited contribution from new branch openings, and acquisition growth of 47.1% primarily related to Rhiag. This growth was offset by a decrease of 7.9% related to foreign exchange rates.

For full-year 2016, ECP continued its impressive track record of delivering strong organic revenue growth for parts and services of 8.1%. For branches open more than 12 months, ECP's organic revenue growth was 6.6%. This performance is particularly impressive in the midst of all the market uncertainty surrounding Brexit.

In addition, collision parts sales at ECP continued their double-digit growth, posting 15.4% in 2016. Operationally, the collision team had a busy 2016, which included entering the Republic of Ireland with our paint business and the integration of six UK paint locations into existing ECP branches.

This integration will produce synergies with a shared fleet and will provide a collaborative sales approach between our collision parts specialists and our paint sales advisors to target and service the body shop requirements with a one-stop shop solution. Today, we offer over 18,000 unique collision SKUs to both the UK and the Republic of Ireland.

With respect to the T2 project, I am pleased with our continued progress. We expect to begin testing the T2 automation in Q2. Once the automation process is solidified, we plan on starting deliveries in early Q3 and to be fully live in Q1 of 2018 for ECP's base business. This project continues to be both on budget and on schedule.

Regarding Andrew Page, the UK Competition and Markets Authority continues to review the acquisition and assess whether transaction would be – would unreasonably lessen competition in the UK market. With that, we do expect this transaction to have a dilutive impact on 2017 earnings.

With the number of licensed vehicles in the UK and overall traffic levels reaching an all-time high in 2016, and the inevitable ageing of the UK car park, ECP is very well positioned to continue their growth with their extensive network, robust product offerings, and the opening of T2 in 2018. Turning to our Sator business.

In 2016, Sator achieved organic revenue growth for parts and services of 4.5%, the highest annual rate since we acquired this business in 2013. Also, since acquiring the business, Sator achieved their highest annual margins in 2016.

This ongoing performance is a clear validation of our strategy to convert their network to a two-step distribution model, the expansion of their existing product lines, and the leveraging of procurement synergies with ECP and now with Rhiag. And with respect to Rhiag, it continues to track in line with our expectations.

We opened an additional eight branches during the quarter, primarily in Central and Eastern Europe, bringing the total, since acquisition, to 28.

Importantly, and as I mentioned on the last call, we continue to aggressively gather the necessary data and communication plan amongst our European businesses with the objective of implementing a targeted and sustainable Pan-European procurement function. Now, on to our Specialty segment.

Our Specialty segment posted year-over-year total revenue growth of 13.5% in 2016, including the benefits of The Coast acquisition and an impressive organic revenue growth of 6.9%.

During 2016, the Specialty team continued to focus on streamlining fulfillment processes, route optimization, ensuring best-in-class inventory availability, and expanding product and service offerings including dealer-friendly online solutions.

This focus enabled our Specialty segment to generate their best EBITDA margin since the company entered this segment in 2013. Now, turning to the glass business. As previously mentioned, on December 19, 2016, we announced the sale of our OEM glass manufacturing business to a subsidiary of Vitro.

The results of our OEM glass manufacturing business are reported in discontinued operations for 2016. Importantly, this divestiture will allow our team to focus on the existing aftermarket glass distribution business and the synergies that exist with our North American aftermarket locations and customer base.

Going forward, the aftermarket replacement glass or ARG will be combined with our North American segment from an operating perspective. To understand the synergy opportunities and facility overlap, please turn to slide 8 in our earnings deck, which highlights the ARG locations in relations to our – the existing aftermarket locations.

For 2017, we are projecting integration of nine ARG locations into LKQ existing wholesale warehouses and adding three new satellite locations into our existing network. And now, turning to corporate development. On December 1, 2016, the company acquired a 26.5% equity interest in Mekonomen Group from Axel Johnson.

Headquartered in Stockholm, Sweden, Mekonomen Group is the leading independent car parts and service chain in the Nordic region of Europe. Mekonomen will remain independent of LKQ's existing European operations.

However, we look forward to exploring, together with Mekonomen's management, areas where the companies can work together in a mutually beneficial manner. Following the announcement of this investment on January 10, 2017, Joe Holsten and John Quinn were appointed to the Mekonomen Board of Directors.

In addition to the previously mentioned acquisition of Andrew Page and our investment in Mekonomen, during the fourth quarter of 2016, LKQ acquired a distributor of aftermarket automotive products in the Netherlands, a salvage yard in Sweden, a distributor of automotive paint products in Pennsylvania, and three heavy-duty truck aftermarket radiator distributors in the U.S.

Also in the fourth quarter, LKQ's European operations opened two new Euro Car Part branches in United Kingdom and eight new branches in Eastern Europe. At this time, I'd like to ask Nick to provide more detail and perspective on our financial results and our 2017 guidance..

Thanks, Rob. And good morning to everybody on the call. I'm delighted to run you through the financial summary for the quarter before touching on the balance sheet and addressing our guidance for 2017. In December, we announced we had entered into an agreement to sell the OEM operations of the PGW business.

And with that, the accounting rules require us to do several things that make the fourth quarter results a bit confusing.

So, I will spend a little less time on the segment results, which I set forth in the presentation, and I will spend a bit more time trying to get everybody on the same page in understanding the correct apples-to-apples comparisons.

The sale of the OEM business, which is slated to close on February 28, requires us to treat the OEM activities of PGW as a discontinued operation, and thereby, eliminating the related OEM revenue and expenses from the consolidated totals both for the quarter and for the year as a whole.

So, the revenue and expense line item amounts shown in our income statement include the aftermarket replacement glass side of PGW, which we refer to as ARG, but exclude the OEM side. The impact of the OEM business is netted down to a single line item on the income statement labeled Income from Discontinued Operations.

In arriving at the OEM income, under U.S. GAAP, 100% of the costs related to any person or expense item that had some involvement with the aftermarket business during the year, regardless how limited, had to be recorded as continuing operations even though the people and/or expenses are actually going to Vitro as part of the sale.

So, even though most of the PGW officers like the President, CFO, Heads of HR and IT, et cetera, and most of the Finance IT and HR teams will be employees of Vitro after the sale, 100% of their costs since the acquisition date are recorded as part of ARG and included in continuing operations.

So, it will appear that the OEM business is more profitable and the ARG business less profitable than how their respective businesses will actually perform post-closing, everything else being equal.

Next, even though the sale has not closed in Q4, we needed to record a non-cash charge reflecting the difference between the anticipated sale proceeds and the book value of the assets of the OEM business.

In our 8-K filing last December, we highlighted a probable loss of $25 million to $35 million, and we came in near the lower end of that range at $27 million on a pre-tax basis. The after-tax impact of the loss is netted against the OEM operating income and is included in the line titled Income from Discontinued Operations.

Finally, you will note that we have eliminated the glass segment from our line of business reporting. Due to differences between the glass manufacturing business and our prior lines of business, we have been reporting the entire glass business as a separate segment.

With the sale of the OEM business, the aftermarket glass operations will be melded into our North American aftermarket management structure.

Importantly, as Rob noted, we are in the process of physically integrating a handful of existing PGW aftermarket branches into LKQ aftermarket warehouses, and anticipate more of that to come over the next few years.

So, while ARG represents a new product, it's basically the same business, the distribution of aftermarket auto parts sold and delivered to repair shops. And the business now reports up to Justin Jude, our Senior Vice President of North American Wholesale Operations.

With all that, the glass business no longer qualifies as a separate reportable segment and is now part of North American operations.

Since the margin structure of the ARG business is slightly different than our historical North American businesses, some of the year-over-year margin changes in the North American segment simply reflect a mix shift in the addition of glass, and I will try to point out the impact of those changes as we go through this discussion.

Revenue for the ARG business will continue to be accounted as acquired revenue until the anniversary of the acquisition at the end of April, at which point in time, it will be folded into the North American organic growth metric. So, now onto our results. The fourth quarter of 2016, when taken as a whole, was an excellent quarter.

Organic growth for parts and services in the fourth quarter was right in the middle of the range we discussed during our last call, and adjusted earnings per share fell right on top of the consensus estimates of the analysts who cover our company. Consolidated revenue for the fourth quarter of 2016 increased 23% over last year.

That reflects a 23.5% increase in revenue from parts and services, the components of which include approximately 3.8% from organic growth plus 23.5% from acquisitions, for constant currency growth of 27.3%, before backing out the translation impact of FX which was a 3.8% decline. Remember, we had one less selling day in 2016 compared to last year.

So, on a same day basis, the organic growth was 5.2%. The OEM sale does not impact any of the metrics for organic growth in parts and services, as all of the PGW revenue fell in the acquired revenue bucket in 2016.

As noted on slide 13 of the presentation, consolidated gross margins declined 130 basis points to 38.6% due primarily to the impact of the big acquisitions. You will recall that both Rhiag and PGW have lower gross margins than our historical businesses.

While consolidated gross margins were down, consolidated operating expenses as a percent of revenue were also down by about 80 basis points lower than last year. Some of that reflects the impact of the different margin structure of the two acquisitions and some of it reflects improved efficiencies in the historical businesses.

Segment EBITDA totaled $222 million for the quarter, reflecting a 15% increase from 2015. As a percent of revenue, segment EBITDA was 10.3%, a 70-basis-point decline from the 11% recorded last year.

Depreciation and amortization was up about $22 million, mostly related to the acquisitions; and the same holds true for interest expense which was up by about $11 million. With that, pre-tax income in the quarter was up 3.1%. Our effective tax rate during the fourth quarter was 32.9%, up from the 30.4% in Q4 of 2015.

This reflects a base rate of 34.75% and the benefit of a few discrete items. Diluted earnings per share for the quarter, including the impact of the loss on sale, was $0.28, which was down 9.7% compared to last year.

Importantly, adjusted EPS, excluding restructuring charges, intangible asset amortization, the adoption of the new accounting rule related to the tax treatment of stock-based compensation, and a variety of other non-recurring gains and losses, was $0.39 in 2016 compared to $0.34 last year, reflecting a 15% improvement.

The $0.39 was comprised of $0.35 a share from continuing operations and $0.04 from discontinued operations. Again, continuing operations include certain overhead costs that will be transferred with the sale of the OEM glass business.

As anticipated, during the Q3 call, currency fluctuations negatively impacted earnings per share in the fourth quarter for continuing operations by about $0.02, and the acquisition of Andrew Page had a $0.02-drag on earnings during Q4 which was a touch higher than initially anticipated. For the year, diluted earnings per share was $1.50 a share.

And adjusted EPS was right on top of the consensus estimates of $1.80 a share, comprised of $1.69 from continuing operations and $0.11 from discontinued operations. The impact of the costs allocated to continuing operations that will be gone with the sale of the OEM business was about $0.03 a share. And with that, let's briefly touch on the segments.

In North America, total revenue during the fourth quarter of 2016 increased to $1,114 million or a 9.4% increase over the last year. This is the combination of a 9% growth rate in parts and services and a 14% increase in other revenue.

The total parts and services growth included organic growth of 1.5% and acquisition growth of 7.4% primarily related to the aftermarket glass business. The organic metric was reflective of the one less selling day. And on a constant day basis, the organic growth in North America parts and services was 3% during Q4.

Gross margins in North America at the end of fourth quarter of 2016 were 43.4%, a 20-basis-point improvement over last year.

We continue to benefit from the procurement initiatives in our aftermarket collision parts business and improvements at our salvage and self service operations, which collectively contributed to an 80-basis-point increase in North American gross margins.

On the other side, the inclusion of the aftermarket glass operations, which have lower gross margins than the rest of North America, had a 60-basis-point negative impact on the segment's gross margins. In total, segment EBITDA for North America during the fourth quarter of 2016 was $140 million.

As a percent of revenue, EBITDA for the North American segment was 12.5% in Q4 of 2016, down 30 basis points from the 12.8% reported in the comparable period of the prior year.

Importantly, the margins for our historical North American businesses, excluding glass, increased 110 basis points and reflected the highest fourth quarter EBITDA margins in the last five years. So, while the growth was a bit lower than we would prefer, we are making great strides in terms of controlling costs and increasing margins.

In total, we estimate that the aggregate benefit of the productivity initiatives during the fourth quarter was approximately $9.3 million, up from the $8.6 million in the third quarter of this year.

The inclusion of the aftermarket glass operations had a 140-basis-point negative impact on North American EBITDA margins, in part, due to the inclusion of the allocated overhead costs that will disappear post-closing.

So, we're up 110 basis points in our historical businesses, down a negative 140 basis points from glass for a net impact of down 30 bps. Moving onto our European segment, total revenue in the fourth quarter accelerated to $779 million, a 60% increase.

Organic growth for parts and services in Europe during the fourth quarter was 7.2% on a reported basis, reflecting the combination of 8.4% at ECP and 2.6% growth at Sator. On a same day basis, European organic growth was 8.3%.

The impact of acquisitions in Europe resulted in an additional 66% increase in revenue with the most significant amount reflecting the addition of Rhiag. So, on a constant currency basis, European parts and services revenue was up 73% in the fourth quarter.

This constant currency revenue increases were offset, in part, by a 13% decline due to the translation impact of the strong dollar, particularly relative to the pound sterling. As you can see on slide 21, the average rate during the quarter was about 18% below last year, and the sterling was at about $1.25 at year-end.

More recently, the sterling has continued to trade in the $1.21 to $1.27 range, while the euro has fallen to about $1.05 from $1.10. The translation impacts of these FX rates will weigh on our 2017 results, which I will quantify in just a bit.

Gross margins in Europe were 36.1%, compared to the 38.9% recorded in the comparable period of 2015, largely reflecting the impact of Rhiag in the 2016 results. Rhiag has a lower gross margin structure than either ECP or Sator.

And during Q4 of 2016, the inclusion of Rhiag reduced the consolidated European gross margins by about 190 basis points compared to last year. European EBITDA totaled $64 million, a 34% increase over last year.

As a percent of revenue, European EBITDA margins in the fourth quarter of 2016 were 8.2% versus the 9.7% last year, a 150-basis-point decline, of which about 30 basis points relate to the incremental costs associated with the Tamworth project, some of which was recorded in cost of goods sold and some of which was in SG&A, and then a 110-basis-point decline related to losses at Andrew Page.

Again, the incremental costs related to the Tamworth project in Q4 were approximately £1.6 million or about $2 million, and again, it reflects a negative 30 basis points' impact on the European margins.

Turning to our Specialty segment, revenue in the fourth quarter totaled $259 million, a 5.7% increase over the comparable quarter of 2015, all of which reflected organic growth, which was up from the 3.7% reported in Q3. On a same day basis, organic growth in Specialty was 7.4%.

Gross margins in our Specialty segment for the fourth quarter were down about 220 basis points compared to last year, primarily related to the timing of advertising credits and costs related to stocking of the two new distribution centers brought online in 2016. EBITDA for the Specialty segment was $19 million which was up 28% from Q4 of 2015.

And as a percent of revenue, EBITDA for the Specialty segment increased 130 basis points to 7.4% in 2016, due largely to improved efficiencies in SG&A, which more than offset the lower gross margins. This is a highly seasonal business with the Q4 always being the softest.

For the year, EBITDA margins for the Specialty business was the highest in the three years we've owned these operations, reflecting the integration benefits of the tuck-in acquisitions. Now, let' move to capital allocation.

As presented on slide 24, you will note that our after-tax cash flow from continuing operations during 2016 was approximately $571 million.

During 2016, we deployed a little more than $2.2 billion of capital to support the growth of our businesses, including $183 million to fund capital expenditures and approximately $1.8 billion to acquire businesses and make strategic investments like our minority ownership position in Mekonomen.

We closed the quarter with approximately $227 million of cash, of which $175 million was held outside of the United States, and we had roughly $3.3 billion worth of total debt outstanding.

So, our net debt was approximately $3.1 billion; and on a pro forma basis, taking into account the impact of the acquisitions, our net leverage was approximately 2.7 times the latest 12-month EBITDA.

We intend to use the $310 million of proceeds from the OEM sale to repay balances on our revolving line of credit, so our net debt should continue to decline. At quarter-end, the total availability under our credit facility was approximately $1 billion.

And with the sale of the OEM business, we will have just over $1.3 billion of availability which we believe is sufficient to support the continued growth of our business. Finally, as noted in our press release, we have provided updated guidance on some of our key financial metrics for 2017.

To be clear, these metrics exclude the OEM glass business and reflect the activity from continuing operations only. As it relates to the organic growth for parts and services, we have set guidance at 4% to 6%, which we believe is very good relative to other automotive parts distributors.

Importantly, 2016 was a leap year, which means we have one less selling day in 2017, and that will hit the reported full year for about 0.5% of growth. For those building quarterly models, the one fewer day actually falls in Q3 and will result in approximately a negative 1.5% impact on the reported growth rate during that quarter.

Given the year that we've been through, we are tempering expectations for North American growth to the 2% to 4% range. Importantly, Q1 growth will be lower than the year as a whole, as some of the trends from 2016 have continued into the beginning of 2017.

Our range for adjusted earnings per share from continuing operations is from $1.80 to $1.90 a share with a midpoint of $1.85, reflecting a 10% growth rate over the earnings per share of $1.69 from continuing operations recorded in 2016.

There are a number of discrete items influencing the 2017 EPS guidance, so in an effort to bridge the year-over-year growth, we've included a new slide, number 28, which is a bridge from our actual 2016 results to the midpoint of our 2017 guidance range.

For purposes of a simplified presentation, we show each bridge item as a point estimate, but in reality, there's a range of potential impact for each item. The biggest uptick, about $0.17 a share, relates to the continued growth of our businesses.

We will also benefit by about $0.03 a share from owning Rhiag and the aftermarket glass business for the full year.

As mentioned earlier, the carve-out accounting rules don't reflect how the PGW aftermarket business will be run post-sale, so relative to 2016, we will pick up about $0.03 a share by eliminating certain expenses included in the 2016 results from continuing operations that will move to the new owner.

We will, however, give about $0.01 of that write-back in 2017, as we need to record the allocated overhead to continuing operations for the first two months of this year. The next phase of the Tamworth build-out will cost an incremental $0.02 a share in 2017 compared to last year.

Assuming current exchange rates hold for the year, the weakness of the European currencies relative to 2016 will clip us for yet another $0.03, and the losses at Andrew Page will amount to an incremental $0.01 or more decline on a year-over-year basis.

Importantly, the positive items on the bridge are permanent in nature, while the items having a negative impact are more transitory in nature. It's also worth pointing out that when thinking about the year-over-year comparisons, the negative impact related to FX will be felt more in the first half of the year.

And again, we have to include the allocated PGW expenses in the first two months of 2017, and that $0.01 headwind will hit us in Q1. The net income associated with the EPS range is $560 million to $590 million, and assumes an effective tax rate of 34.75%.

Our current guidance for cash flow from operations is approximately $610 million to $640 million, and the guidance for capital spending is $200 million to $225 million. To be clear, the 2017 guidance assumes pound sterling and euro exchange rates of $1.25 and $1.05 respectively.

And importantly, that scrap remains at the current levels of about $150 a ton. For consistency, we would ask that all the analysts adjust their models to be on a continuing operations basis.

And to help get things on an apples-to-apples comparison, appendix number 5 on slide 39 provides quarterly data for 2016 reflecting the performance of our continuing operations only. At this point, I will turn the call back over to Rob to wrap up..

Thanks, Nick. In closing, I am proud of the hard work and dedication of our 40,000-plus employees delivered for the company, our stockholders, and most importantly, our customers in 2016. I am equally proud of our teams' commitment to deliver continued growth in 2017.

This focus allows us to project solid EPS gains for 2017 with the midpoint of our guidance representing a 10% increase over the comparable 2016 EPS results. With that, operator, we are now ready to open the call for questions..

Your first question comes from the line of Ali Faghri from SIG. Your line is now open..

Good morning. Thanks for taking my question..

Good morning, Ali..

Good morning..

Can you talk about the cadence of North American organic growth trends through the quarter? And then, maybe as a quick follow-up, you mentioned continued geographic differences in performance between certain regions in the U.S., did you see that performance gap between those regions close at all in the fourth quarter relative to last quarter?.

Yeah, I'll let Nick talk about the cadence over the four quarters but let me just touch, Ali, on what we saw on organic growth, and I also want to talk about the sales initiatives that we have in place for this year. From the data we have from CCC, the weather was clearly an impact. For 2016, CCC reported claims volumes up 2.5% versus 4.6% in 2015.

So, there was a definite decline. We did some studies on our top 20 states that we do business in, which is the lion's share of the population. They were up 1.3% compared to our 2.9% increase, so we're definitely seeing some momentum in the right places.

There are regional differences that continue to this day, the West and the Central are definitely doing better than Northeast and Midwest. The core business though of our hoods, fenders, lamps, covers were all higher than our overall North American, again across.

So, I am convinced when collision returns to normalized levels, we will reap the benefits. We're well positioned for inventory as soon as all those collisions start coming back. I do want to touch quickly on total losses, those were up 18.8%. From a few years ago, they're about 16%.

We do expect that to plateau though as these newer cars come into the process. So, total losses cut both ways for us. Obviously, the cars don't get repaired, but that's how we require our inventory. So, a healthy total loss rate isn't a bad thing for us either.

And the last thing I'd say, just on the acquisition – on the organic growth rate, just from acquisition financials, our pipeline still remains robust. We're seeing this as an industry issue. We're seeing some pretty soft financials come into the M&A.

So, we do anticipate this to turn around, and I'll take this time just to talk about those sales initiatives I mentioned in my prepared remarks. One of the big things we're going to be doing is moving from a transactional pay to a customer result for our sales reps.

So, instead of getting a commission on every single sale they make, they'll be tied to a customer and the growth of that customer. So, this brings us more to a proactive rather than a reactive approach with our customer base. We've always had a customer focus, however, this raises the bar for our sales reps to drive that revenue on a customer basis.

Our goal obviously is to get more of the wallet of their share – wallet share of that customer's purchases. But we do expect, if we're successful at this, we'll also improve our operational costs because we're delivering more to the same customer.

As part of that, as I just mentioned, we're looking to get better inventory fill rates, and balancing our inventory as necessary. I mentioned in my prepared remarks as well the success we've had with Roadnet, that's going to allow us to increase our delivery service, so provide better service.

And the final thing we plan on doing is targeted pricing for those product lines that are a little soft for us. We're going to go after those customers.

Nick, do you want to talk about the cadence?.

Sure, Ali. It's – it was a little bit unusual, we started off the quarter – and I think your question was how do things roll from October to December.

You recall that at the very beginning of the quarter, the Southeast got hit with the hurricane, and that clearly had an impact on our growth in October, particularly in the Southeast region, which is actually down on a year-over-year basis for the quarter as a whole. Things picked up a bit in – obviously, in November and December.

We can't quantify exactly the impact of the hurricane. We do know it had negative impact on the results for the quarter and particularly in October. But I wouldn't say that there was a big acceleration from October to December when you try and adjust everything out, if that's helpful..

It is. Great. Thanks for all that color.

So, just to be clear, you're guiding North America to 2% to 4% growth in 2017, it sounds like you're saying probably closer to the low end of that range in the first half of the year and maybe improving throughout the year, is that the right way to look at it?.

That's right way to look at it, yes..

Absolutely..

Great. Thank you..

Thanks, Ali..

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

Good morning. Hey, thanks for taking my questions as well. Just wanted to ask that North American question in a slightly different way, but we saw reports from Copart and Insurance Auto Auction yesterday showing a surge in activity at salvage auctions, and that's driven by distracted driving and other factors.

So, help us reconcile that trend with the soft trends you're seeing.

I realize there are regional differences and maybe a change in the totalled frequency, but maybe just for investors trying to reconcile that, what would your explanation be?.

Yeah, Craig, I think the answer is that it – we're totalling an older car. We get stats from CCC that show older cars are definitely totalling. We still have an average model year of 11.5 years old, it doesn't take much to total that car. The volume at auctions is definitely up. We'd track that on a weekly basis.

And they are surging for sure, but it is an older car, it appears..

And the higher the total loss rate goes, that means those cars are not getting repaired and we can't sell parts to help repair those vehicles..

Got it. Thank you.

And then, just as a follow-up, get you on record if I could, on the border adjustment tax proposal, I realize there are lots of different proposals out there and who knows what's going to pass, but how have you positioned yourselves for tax policy changes and what issue should we anticipate?.

Yeah, Craig, the reality is the border tax proposals and the like are incredibly vague and incredibly complex. So, we really can't put a number on it. Here is what I can tell you, that between our aftermarket and our specialty businesses, we purchase about $1.3 billion worth of product that is manufactured outside of the United States.

But there is about $500 million of that, that we actually procure from the U.S. subsidiaries of those foreign suppliers. So, only $800 million is actually purchased from non-U.S. companies. So, with respect to the $500 million, it's absolutely unclear as to who would get hit with the theoretical border tax, if you will.

The reality is, in the parts that we procure, there are not a lot of U.S. domestic suppliers that we can turn to, to acquire the volumes that we need to service our customers. The other part of the border tax is a lower corporate tax rate of 20%. Included in that is immediate deductibility of capital expenditures.

Of the $225 million of CapEx, about $140 million of that is really U.S. based. So, that would help move things in the other direction. But again, there is – it's so unclear, it's almost impossible to quantify the real impact on the business..

And let me just add, Craig, one of our largest manufacturer actually overseas does have manufacturing capacity here in the U.S. And we had a team over there last week talking to them that in the event there are some taxes imposed that they would ramp up production here in the U.S. So, we are actively looking at alternatives should that happen.

But the other piece of good news is that the OEs are actively against this and have been very vocal about it. So, I think they have the same exposure we do. So, all in all, it could be an even playing field at the end of the day..

That's really helpful. Thanks, guys..

Your next question comes from the line of Ben Bienvenu from Stephens. Your line is now open..

Thanks. Good morning, guys..

Hey, Ben..

Good morning, Ben..

I have – just one point of clarity on the incremental Tamworth cost of $0.02, is that on top of the prior $0.07 to $0.09 you were expecting when you initially discussed the dilution associated with that? Or is it on top of the dilution you experienced last year?.

It's on top of the dilution experienced last year, so we think that at the end of the day, the overall kind of duplicative cost over the span of the project will be less than we originally anticipated back in the summer of 2015 when we've put this on the radar screen for everybody..

Okay, great. And then, maybe just a quick follow-up to that.

You had alluded before that you would see accretion in 2018, are we close enough to 2018 to where you can take a stab at what you think that level of accretion could look like?.

No, it's going to really depend on how quickly we can kind of turn down the two facilities that we're going to ultimately close because that's where the benefit is going to come from. We will be – at that point in time, in January of 2018, we'll be fully staffed up and running at T2.

And then, we will ultimately close the facilities, either transfer or eliminate labor at the two other facilities, and obviously save the lease payments as well..

Thanks so much.

And then, if I could ask a question about the organic growth disparities between geographies, do you think you've seen enough normalized weather coupled with the comparisons from last year, such that you would expect those gaps to close as we move into the balance of 2017? Maybe just help us think about that comparison year-over-year..

Well, two days ago, here in Chicago, it was 75 degrees. And this morning when I came in to work, it was 55. So, the normalization of the winter weather has not been even across the country.

And so, my expectation is, particularly like in the Midwest which seems to be having really May weather here in February, we're not going to get much of an uplift, if you will. Obviously, the – essentially, the significant rains out West down in the Texas area, that should help us out.

So, my expectation is we're going to continue to see regional differences from a growth perspective. But, Rob, you may....

Yeah. I would just add to that, Ben, that we track miles driven by regions, and the Northeast in December was negative 1.4, and the North Central was negative 2.3. So, it seems like it's going to be a little soft, but we do hit some softer comps in the back half, so we're cautiously optimistic..

Yeah. Thanks. And just one last quick one from me.

Is the repayment of debt with the proceeds from the OE sale of glass business, is that reflected in the EPS guidance?.

It is..

Okay. Great. Thanks. Best of luck..

Thanks, Ben..

Thanks, Ben..

Your next question comes from the line of Samik Chatterjee from JPMorgan. Your line is now open..

Hi. Good morning. I did want to go to....

Good morning, Samik..

Hi. Good morning, Rob. I did want to go back to the North America parts and service organic growth, and you're guiding to 2% to 4% in 2017 for organic growth. It will be interesting to know how you're thinking about how this impacts long term the growth for that business.

Do you think there are headwinds here that sort of persist for a few years, and hence, impacts – Rob, I believe you've said in the past that you're sort of looking at this business being a mid-single digit grower, but do you think this impacts about how you think about this longer term as well? And maybe just a quick follow-up on that, the sales initiative that you're working on, how long do those take to sort of kick in and deliver some improvement in the growth?.

Yeah, the – on North America, I do have – I'm very bullish on the long term actually. The 2% to 4% this year is really related to what Nick just mentioned, Samik, just a minute ago about being soft weather that we've had, so far, this month certainly in Chicago and across the North. So, now I do believe the macro trends are definitely in our favor.

We've had a strong SAAR rate for a couple years. Those cars are going to get to be four or five years old and really come into the sweet spot. You've got miles driven for the most part increasing, a later-model car park is going to be fully insured. The cars are much higher valued, so much more difficult to total. So, I think long term, we're fine.

And the number of cars hitting our sweet spot are starting to increase. So, the macro tailwinds are definitely in our favor for the outlier years..

Got it.

And any color on how long does it typically take, in your experience, for the sales initiatives to sort of gather pace in terms of delivering some growth?.

Yeah, we're starting roll those out as we speak. So, I think we'll start to hopefully see some positive impacts here in the back half of the year..

Okay, got it.

And then, on Andrew Page, you've started to include it in your guidance for 2017, is there any updated thoughts that you have on how many of those branches that you intend to keep? Is there a cash bent towards restructuring some of the branches there, any color on that?.

Yeah, let me give you an update on Page. We are still under the hold separate order. However, we do have limited contact now with the Andrew Page management team, and we're assisting in procurement, fleet management, and the back-office. What we're prohibited from doing is sharing market plans or pricing.

So, to answer your question, it's a little hard to figure out which branches, what we'll close, what we'll keep. But we are, from a 35,000-foot view, analyzing that. The biggest problem they had was that many suppliers had cut them off. So, while their overhead costs had remained flat, revenue was negatively impacted by the lack of inventory.

So, with ECP's help over the last couple months, we were able to stabilize the business, reestablish those supply agreements, and improve the fleet logistics in the internal controls. Now, that it's stabilized, the Andrew Page team is looking to rightsize the cost structure.

The full integration and synergy capture can't occur until we get the release from the CMA. So, to comment on how many locations we'll keep, it's a little early still to be able to do that..

Okay. Got it. Great. Thank you..

You're welcome..

Your next question comes from the line of James Albertine from Consumer Edge. Your line is now open..

Great. Thank you and good morning, gentlemen..

Good morning, Jamie..

Good morning, Jamie..

It just seems like it's the right thing to do. So, let's keep the ball rolling on North America. Look, we get a lot of questions in a lot of different ways, and some of those have been asked already. The way I want to look at this is strictly speaking from a residual value perspective.

What's your view – you mentioned loss ratios, you have a view on that. How do residual values play into your outlook? And to the extent – really what I'm focused on is not so much the 11-year-old-beyond vehicle that might get total loss, as Rob alluded to earlier.

At the earlier part of the curve, you've got vehicles with much more expensive content, whether it's headlights that are significantly more expensive, taillights with blind spot detection or what have you.

And I'm wondering, if residual values were to fall off, will insurance companies be more likely to sort of total loss those vehicles or is there a risk of that?.

Sure. Absolutely. We believe we're strongly tied to the Manheim. Used car values, residual values, as cars, that diminishes, obviously it's much more easy to total a car. However, we do believe that the cost of these vehicles is substantial in these newer vehicles, that a lot of these cars are going to repair.

I think the proliferation of a $3,000 headlight or taillights are still years away. I think we're still well-positioned, Jamie, to weather that storm. Talking to insurance companies, they don't believe they're going to see a huge spike in total losses because of that anytime soon..

Yeah. I mean, in general, the rule of thumb in the industry in every insurance company is a little bit different, as a car will get totalled when the cost to repair starts to get to around 65% of the value of the car.

So, if the value of the car comes down because of used car pricings and the like, that could push a few more vehicles into the total camp than not. But when you have cars that are coming out that are very high-priced, it takes a boatload of damage to get to 65% of just that higher number..

So, if I'm hearing you correctly, and I appreciate that additional color, the 65%, but it sounds like we're not near that pivot point from a strictly-speaking higher part perspective.

But I guess as a follow-up to that, are you seeing OEMs act differently as they're becoming more aware that there's a – there could be a big market opportunity for them to supply those parts? And it does take some time, right, before the newest vehicles make their way to auctions and sort of off-warranty and whatnot, so any competitive sort of changes that you've seen would be helpful..

We have not seen the OEMs do anything in terms of anything more aggressive quite frankly. We track their prices regularly, and we are still averaging that 1% to 1.5% increase in part prices. So, nothing abnormal from them at all..

Okay. And if I can sneak one last one in, strategically on acquisitions, and thank you for the time. Just given the fact that you have seen some weakness and you've kind of benchmarked that for us, right, you said in certain markets, it's sort of worse than what you're reporting. And so, your spread is still, if I hear you correctly, holding up.

But if the benchmarks are weakening, the markets are weakening, wouldn't that, in theory, sort of open up some acquisition opportunities for you? And I'm wondering, there's any – if you have eyes to maybe accelerate your plans to get into the mechanical parts business in North America in the near term? Thanks..

Yeah. I will say, that the pipeline is extremely robust, Jamie, it's – we get a weekly report from our M&A team of the status of our deals, and it's quite a spreadsheet now. So, there is quite a bit of activity there. As far as the hard part side of the business, we're continuing to look at opportunities there.

As you know, we've been quite successful in Europe with our hard part strategy. In the UK, specifically, with the combination of collision and hard parts. So, it is absolutely on the radar for sure..

Great. Thank you again. And best of luck..

Thanks, Jamie..

Thanks..

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

Hey, morning, guys..

Hi, Bret..

Good morning, Bret..

I got to get my North American question in.

So, if we're looking, I guess, your comment about the softer first half of 2017 as a result of some residual issues from 2016, could you weight the residual weather versus the residual total loss increases in that impact, which one is more significant and sort of give us some buckets?.

Yeah, that's really hard to do because at the end of the day, all we know is kind of what's happening from a repairable claim perspective, that was 2.5% increase for the year as a whole, the fourth quarter number was 2.8%. The reality is we don't sense that we're losing any share, kind of call volumes are consistent.

We do have some anecdotal information, Bret, in chatting with our vendors which we do all the time, right, and a couple of our largest providers of aftermarket parts over in Taiwan have told us that their non-LKQ sales last year were flat to down, which says that our competitors, if you will, were buying the same or even a little bit less aftermarket inventory, which is I think just reflective of the market and a relatively low increase in repairable claims.

But it's almost impossible for us to split weather from other market trends. The key, it's important I think the folks to understand is that the growth of the kind of the core products was higher than the 3% overall in the fourth quarter, okay, when you think about that core aftermarket product of hoods, fenders, mirrors, bumpers and the like.

As some of these secondary products, the paints and the radiators and like where we've got some special programs being designed to attack that, they were actually down on a year-over-year basis.

And so, our core kind of collision – your question, I think, really went to the trends in the core collision market, in those core collision products, we're more than holding our own and we think we're probably continuing to take a little bit of share..

And then, let me just add, Bret, your comment about the auction and what we're seeing there. Q4 year-over-year, our salvage purchases were up 5.2% at $47 less a vehicle. So, that surge of inventory – like I said, it's allowing us to buy more inventory at a cheaper price, our self service was up 14% Q4-over-Q4.

So, the inventory being available is not a bad thing for us..

Okay. And then, the highlight obviously ECP comps, the 12-month stores being up over 6%.

What's going on over there, is that the market growth rate? Are you taking a lot of share ? And I guess, is that also benefiting from the collision mix that you're putting through those stores or is that separate?.

Yeah. The collision was definitely helping because that is in the numbers as well. But we are definitely taking market share, and we believe the industry is growing likely GDP. Interesting enough, Brexit has not hurt us at all in terms of the driving population.

In fact, they've coined the term staycations that the BRICS can't go to Europe because their dollar is not – the pounds is not travelling as farther. So, they're staying home. So, we're seeing miles driven up. We believe – we're very confident in ECPs continued growth in that marketplace..

Okay, great. Thank you..

Thanks, Bret..

This concludes the Q&A session. Mr. Rob Wagman, I turn the call over to you..

Thank you, everyone, for joining us on the call today. We look forward to updating you on our next call in April when we report Q1 results. Have a great day..

Thanks, everyone..

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