Good morning. My name is Chris and I'll be your conference operator today. I would like to welcome everyone to the LKQ Corporation's Fourth Quarter and Full-Year 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Joe Boutross, Vice President of Investor Relations for LKQ Corporation. You may begin your conference.

Thank you, Operator. Good morning everyone, and welcome to LKQ's fourth quarter and full-year 2020 earnings conference call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning as well as the accompanying slide presentation for this call. Now let me quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements. For more information, please refer to the Risk Factors discussed in our Form 10-K and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release and slide presentation. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today, and as normal, we're planning to file our 10-K in the next few days. And with that, I'm happy to turn the call over to our CEO, Nick Zarcone.

Thank you, Joe, and welcome to everybody on the call. This morning I will provide some high-level comments related to our performance in the quarter, and then Varun will dive into the financial details and discuss our 2021 outlook before I come back with a few closing remarks. A year ago on this call, we mentioned the Coronavirus a couple of times, mostly related to supply chain considerations. With a year of hindsight, I can safely say that we, like the rest of the world, vastly underestimated the impact that COVID-19 would have on our way of life. I want to express my condolences to all those who have suffered a personal loss from this unfortunate pandemic. And my sincere thanks to all those on the frontline, the doctors, nurses, first responders, teachers, and all those putting themselves at risk to serve their community. We simply cannot thank you enough. During the fourth quarter, we faced the second wave of the pandemic and related restrictions on mobility. Yet, we still produced very strong results, which were materially ahead of our expectations when we spoke with you on our third quarter call. As we mentioned at the outset of 2020, and reiterated throughout the pandemic, we were focused on a few key initiatives. And I'm proud to say our segment teams again embraced and executed on many of these initiatives, not only in the fourth quarter, but for all of 2020. And let me restate our key initiatives, which continue to be central to our culture and our objectives as we've entered 2021. First, we'll continue to integrate our businesses and simplify our operating model; second, we'll continue to focus on profitable revenue and sustainable margin expansion; third, we'll continue to drive high-levels of cash flow, which in turn will give us the flexibility to maintain a balanced capital allocation strategy; and fourth, we'll continue to invest in our future. We have three market-leading businesses and the benefits of the structure shined brightly during 2020. Each business made significant progress on its goals and the diversity of markets and customers helps to balance out some of the ebbs and flows impacting any individual business. Alongside these operating initiatives, the continued build-out of a comprehensive ESG program is a key focus for the organization on a go-forward basis. We've made tremendous progress and I'm pleased to announce that we will be releasing our inaugural Corporate Sustainability Report in the second quarter of this year. While this will be our first formal report, we have been an environmental leader since the day we were founded in 1998, as a salvage dispenser and recycler of passenger vehicles. Today, we're the largest global recycler of vehicles having processed over 810,000 cars and trucks in 2020. While we're widely known for our recycling and environmental stewardship, we also have a long history of responsible and thoughtful social and governance practices, which we look forward to highlighting in the upcoming months. Now on to the quarter. As noted on Slide 4, total revenue for the fourth quarter was $3 billion, a decline of 1.9% from the comparable period of 2019. Parts and services organic revenue declined 5.2% in the quarter, and 6.1% on a per day basis. Net income during the fourth quarter was $180 million, an increase of 29% year-over-year. Diluted earnings per share for the fourth quarter was $0.59, an increase of 28% year-over-year. On an adjusted basis, net income was $212 million, an increase of 27% over 2019. Adjusted diluted earnings per share for the quarter was $0.69, an increase of 28% year-over-year. So let's turn to some of the quarterly segment highlights. Slide 5 sets forth the monthly revenue trends from October through January and it's quite clear that we didn't witness any change to the upside either in North America or in Europe. There were simply no meaningful catalysts to reverse the ongoing constraints on mobility. We're encouraged by the initial rollout of the vaccine in the U.S. and certain parts of Europe. But there still remains uncertainty about virus resurgence, that same distribution, fiscal stimulus, and geopolitical risks. As we come through and further relief from the stay-at-home mandates, we should see some positive movement in mobility. We're cautiously optimistic that we may see a slight recovery in demand towards the second half of this year. As you'll know from Slide 6, organic revenue for parts and services for our North American segment declined 13.7% in the quarter. While still down on a year-over-year basis, we continue to perform well in North America, especially when you consider that according to CCC, collision and liability-related auto claims declined 27% in the fourth quarter. Faced with year-over-year organic declines in parts and services revenue in each quarter of 2020, the North American team used its agility and decisiveness to protect the business by focusing on profitability, embracing various KPIs to drive efficiency, and aggressively rightsizing the cost structure to be aligned with the revenue trends. These actions contributed to North America having its highest annual EBITDA margins in the history of the company. Moving to our European segment, organic revenue for parts and services in the fourth quarter declined 3.1%. Demand trends softened sequentially in the fourth quarter as a second wave of lockdown provisions were enacted across all of our European regions with larger impacts in November and December. Most of our regional operations experienced similar revenue declines in the quarter, except for Italy, which struggled. As we articulated at our Investor Day in September of last year, we continue to execute on our 1 LKQ Europe program. Of note during 2020 we added significant talent to the European team including new operating leaders in Italy, the Benelux region, and Central and Eastern Europe. We recruited a new CFO and added new positions of Controller, Head of HR, VP of Strategy, and several other positions. Our shared services effort is progressing well with a new center located in Poland that should become operational in the second half of 2021, and we're also currently leveraging our Bangalore campus. Our pan-European ERP initial implementation was successfully completed at Rhiag, Switzerland and we expect to go live with Rhiag Italy in mid-2021. Our team is actively focused on driving permanent reductions in SG&A as available government support diminishes. Our vendor financing program is coming along really well and our LKQ Europe head office in Zurich, Switzerland, was occupied beginning of January 2021. Lastly on Europe, this time last year, I mentioned that we began construction on our new Central Distribution Center or CDC for our Fource business in the Benelux region. Today, I'm happy to report that the keys have just been turned over and our team is starting the logistical and operational phases of the build-out. The logistical layout is expected to be completed in the second quarter of 2021, after which LKQ Fource will enter the testing phase. At the end of this year, we will begin using the shuttle system and the new software. During 2022, we'll begin to migrate the activities in the four existing distribution centers over to the new CDC. As part of LKQ's sustainability agenda, the roof of this new building is fully equipped with solar panels, making the building completely energy self-sufficient. The building is also completely gas-free, and will provide sufficient charging infrastructure for plenty of electric vehicles. Additionally, the large number of windows in the building provides plenty of natural light, creating an attractive work environment for our team. Now let's move on to the Specialty segment. During Q4, Specialty reported organic revenue growth of 16.6%, performance well above our expectations and represents the highest quarterly organic revenue growth since the closing of our acquisition of Keystone Automotive operations back in 2014. A primary factor driving this tremendous performance is the ongoing demand for RV Parts, a trend we anticipate will continue as the growth in new unit RV sales will result in a larger RV park and that will inevitably need more replacement parts as those vehicles work through their lifecycle. No one is better positioned to take advantage of that opportunity than LKQ. Also driving the performance is the demand for our dropship business and consistent with the industry strong demand for our worn products. From a corporate development perspective, in 2020, our team did a fantastic job of focusing their efforts on rationalizing our asset base in divesting non-core assets. In 2020, we completed four divestiture transactions, all of which related to European assets that came along with the 2018 Stahlgruber acquisition. As you all know, vehicle technology continues to lead to more complex repairs and to be positioned at the forefront of this trend, we have made strategic acquisitions in the diagnostic space. Since acquiring Elite Electronics and VeTech Automotive Electronics in 2019, we have grown to become the largest U.S. provider of mobile on-site vehicle services to the automotive collision repairs, mechanical repairs, and the national fleets. This past January, we combined the two mobile automotive services together under a single brand known as Elitek Vehicle Services. We remain confident that we'll continue to increase our market share and brand awareness within this unique and rapidly growing market. And yes, we're just scratching the surface on the opportunities ahead during these exciting times for passenger and commercial vehicle design. As the car park evolves, we have a tremendous opportunity to leverage our distribution network to increase our product and service offerings to capture the growth in hybrids and EVs. Our strategy and development teams continue to identify new markets and products to pursue some of which we touched on during our Investor Day back in September. No one in my opinion is better positioned to take advantage of those opportunities than LKQ as we have the people, the network, the scale, and the capital to be successful. And I'll now turn the discussion over to Varun, who will run you through the details of the segment results.

Thank you, Nick, and good morning to everyone joining us today. While there is a lot to share from our fourth quarter results, full-year 2020, and outlook for 2021, I'll keep my prepared comments brief, as there is a lot more detail in the accompanying earnings presentation. While 2020 proved to be an extremely challenging year for a variety of reasons, LKQ's resilience shone through in tough times, as evidenced by the following highlights: one, record high annual earnings per share, including the two highest quarterly results in the company's history, those being the third and the fourth quarter; two, record high annual segment EBITDA margin for North America and for the company since 2015; three, record free cash flow at well over $1 billion, the first time we've exceeded $1 billion, and now the third in a row, record free cash flow year in the company's history; and finally, net leverage dropped to 1.9 times, the first time it's been below two times since 2015, which was well before the Rhiag, PGW, Stahlgruber and several other acquisitions. To put these results in perspective, consider we beat the midpoint of our pre-COVID adjusted EPS and cash flow guidance despite falling well short of our organic revenue growth range of 0.5% to 2.5%. In dollar terms, that's over $1 billion shortfall on revenue relative to our original guidance at the midpoint. Our profitability and cash flow results are a testament to the ongoing margin and cash programs that we accelerated and the actions we prioritized at the onset of the lockdown measures last March. Now we all know such outcomes don't happen by accident. And so a massive thank you to all my LKQ colleagues for their tireless efforts over the last year to deliver a truly outstanding outcome for our company, customers, suppliers, and several other stakeholders, while persevering through the ongoing pandemic. I'll now cover the fourth quarter financial highlights and liquidity before sharing our thoughts on the outlook for 2021. As you can see on Slide 11, North America continued to deliver in the fourth quarter with segment EBITDA margin up 420 basis points over the prior year, and 60 basis points sequentially. Permanent cost savings in overhead expenses was the primary driver of the improvement and precious metal prices remained and gave us a healthy tailwind for the quarter, with an estimated $18 million year-over-year benefit on gross margins. Moving over to Slide 12, Europe produced another solid quarter with an 8.6% segment EBITDA margin, up 100 basis points relative to a year ago, largely due to operating expense reductions. Importantly, Europe generated an 8.9% segment EBITDA margin for the second half, which is solidly above the 8% to 8.5% range provided at last September's Investor Day and represents good progress towards delivering on the 1 LKQ program. And these results include higher year-over-year transmission expenses. Despite the negative effects of the second wave of COVID, at this time, we remain comfortable with our 2021 projection of segment EBITDA margin of 9.2% to 10.3% for the segment. With Specialty on Slide 13, Nick highlighted the impressive 16.6% organic growth in the fourth quarter. Gross margin was down 40 basis points owing to unfavorable movements in vendor and customer rebates, though some of the fluctuation is timing, as we had positive true-ups from the fourth quarter activity a year ago and negative impact this year with the volume increase. Overhead expenses were favorable by 50 basis points and would have been more without the negative effects of about 80 basis points from incentive compensation adjustments. Now onto cash flow and liquidity. Q4 was yet another successful quarter for cash flow generation. We added a further $309 million in operating cash flows, as we continued to benefit from the trade working capital programs we've been driving since 2018. Benefits from receivables and payables offset the expected growth in inventory, although the inventory rebuild wasn't as high as previously anticipated due to supplier delivery challenges. As shown on Slide 14, operating cash flows were $1.4 billion for the year and CapEx cash outlays were $173 million. The resulting free cash flow and cash on hand was used to pay down almost $1.4 billion in debt for the year. We're very pleased with the trend in EBITDA to free cash conversion, as presented on Slide 15. Though as I previously highlighted, the 2020 ratio of 98% just isn't sustainable as it reflects inventory levels by over $400 million to align with demand forecasts. As growth returns, we plan to invest in inventory levels, though largely offset by the ongoing vendor financing program to ensure we maintain our best-in-class service levels and fill rates. On Slide 16, you can see the progress we've made this year to strengthen our liquidity position. I want to specifically highlight the net leverage ratio, which has decreased to 1.9 times from 2.6 times at the end of 2019, and is in line with our target net leverage of approximately two times. We're very comfortable with our liquidity position, including the availability and cost of funds and believe we're very well positioned in our pursuit of investment grade metrics. As mentioned last October, we restarted our share repurchase program after the third quarter earnings call. During the quarter, we repurchased roughly $30 million of LKQ shares for a total investment of $117 million for the year. We had $531 million available on our authorization as of the year-end. So now I'll close with our thoughts on 2021. As COVID uncertainties remain, we're not providing full financial guidance for the year at this time. We'll revisit this position as the year progresses and we have greater clarity on the vaccine rollout and its impact on the duration and severity of the pandemic. We're comfortable providing the following statements, all of which are based on the assumption that one, extreme mobility restrictions beyond what are currently in place are not re-implemented in our major markets; and two, scrapping precious metal prices and foreign exchange rates continue near their recent levels. So a few points to highlight. First, we believe that parts and services revenue will be higher on a full-year basis in 2021, though down in the first quarter relative to 2020. We anticipate that the revenue recovery will accelerate as vaccines are distributed more broadly and mobility restrictions falloff. So, we do not expect to return to our 2019 annual revenue figure until sometime in 2022. Please note that we have two fewer selling days in North America in 2021, one fewer in Q1 and the second in Q4. While Europe is flat with one fewer day in Q1 though that catches up in the second quarter. The second point I'd like to highlight is with revenue growth and the ongoing benefits of margin and operating expense programs, we expect our 2021 adjusted diluted earnings per share will be above the comparable figure for 2020. With that in mind, we're projecting an adjusted diluted EPS range of $2.65 to $2.85 with the midpoint of $2.75. On a GAAP EPS basis, this would be $2.40 to $2.60. Given the momentum of our European business in the second half of 2020 exceeding the upper end of the range provided last September, we're reaffirming the outlook for the European 2021 segment EBITDA margin range of 9.2% to 10.3%. Four, we project that free cash flow for the full-year 2021 will be a minimum of $800 million. While the absolute number is lower than the 2020 figure, we've been very clear throughout this past year that 2020 was a strange year for cash generation as a result of the pandemic. As we aligned inventory levels to forecast the demand, our stock levels declined by well over $400 million, which in turn produced a significant cash inflow. However, we're going to get some of the inflow back in 2021, as we replenish our inventory levels to support the anticipated revenue growth. Some of the investment in inventory will be offset by improvements engaged payables resulting from the vendor financing program, which we expect to yield more significant benefits in 2021, and in line with the target we had set out in September of 2019, when we launched the 1 LKQ program. And finally, on capital expenditures, we plan to get back to our normal level of 2% to 2.25% of revenue. All of these factors will produce a lower free cash demand in 2020. But importantly, will still put us within our target conversion range of 55% to 60% for free cash flow to EBITDA, widely considered to be best in class for industrial distribution companies. Thank you once again for your time this morning. And with that, I'll turn the call back to Nick for his closing comments.

Thank you, Varun for that financial overview. In closing, if you asked me in late March 2020, after the onset of the pandemic, to predict the financial results that we would achieve in 2020, and how we end up the year, I would likely have not even come close to guessing at such a remarkable outcome. But the one thing I never questioned are the capabilities of my team. These results are a clear testament of the pride, dedication, resiliency, and capabilities of the LKQ team members across the globe. One famous college football coach said ability is what you're capable of doing. Motivation determines what you do. But it's the attitude that determines how well you do it. Despite the challenges and unknowns we face, it is the positive, nothing will stop us attitude that our 44,000 dedicated team members bring to work each day. And that carried us through the headwinds of 2020 that simultaneously generated favorable outcomes that allowed us to reach certain key milestones. We right-sized the North American segment and generated record margins. We made solid progress on our 1 LKQ Europe program and generated higher second half margins than projected at our September 2020 Investor Day. The uniqueness of our diversified portfolio of businesses allowed us to benefit from the rising demand for RV replacement parts. We effectively managed our working capital and generated almost $1.3 billion in free cash flow, an annual record for the company. And the excellent free cash flow allowed us to pay down a record $1.4 billion of debt, reducing our leverage ratio below two times. We continued our Talent Acquisition initiatives by adding individuals to key roles across our broad and diversified portfolio of businesses. We made good progress on our global sustainability programs and we continued to provide best-in-class customer service, in spite of the pandemic, and importantly, all while focusing on the health and safety of our team. As I've said both internally and externally, we'll come out of this pandemic period, a stronger, better organization, further solidifying our market-leading position. And with that operator, we're now ready to open the call for questions.

Thank you. Your first question comes from Craig Kennison of Baird. Your line is open.

Hey, good morning and thanks for taking my question. Congratulations on navigating a tough year. My question is on inflation here, just curious how your business is set up to absorb inflation and where you see your most important sensitivities, whether it's gas prices, metals, or other factors?

Good Morning, Craig. It's Varun here. Absolutely, I think it's a great question. And I'd say over the past couple of months, we've especially seen inflation move up, whether it be ocean freight, which we know is running at record highs at the moment, we know wages, here in the U.S., it's difficult to find delivery drivers. So I think you kind of get the message in terms of the inflationary pressures that are building up, and also with oil prices now moving up in the higher 50s, close to $60 a barrel in any case. We have navigated, as you know, not just this past quarter, but I'd say starting 2018, when we put in place our margin programs, and obviously kind of accelerated our OpEx program, in conjunction with a cash program, our teams have navigated those inflationary pressures pretty darn well. We're proud of what they do. And we believe we have the ability to continue to drive a number of the permanent cost reductions that our North America business has taken the lead on, but I do know that our European team is also following up with. So long story short, yes, are there inflationary pressures, absolutely. Are we well set up to undertake those inflationary pressures? Yes, up to a certain point. It really depends on what kind of comes through the next call it, several weeks such but we do expect a number of these inflationary pressures to begin to ease-up, for example, ocean freight, as the MTs get back to the appropriate positions, back up in Asia, and things along those lines. Nick, anything to add from your end?

No, I think that was great, Varun.

And, Craig, if there's any follow-up question, we're happy to kind of take it now, or if you'd like to get back in the queue, we can certainly take it there also.

Good morning, guys. And I echo Craig's comments on a great job navigating the very tough year.

Thank you.

Thank you.

Let me talk about the North American business. I know that much of this is based on mileage driven and people getting out in mobility. But we look out the window, the weather has been quite awful the last six weeks, I'm trying to figure out whether you guys have seen any change in demand there. And if you think that maybe this could be a potential tailwind as we go from the first and then to the second quarter?

Great question, Scott. And again, the weather has been nasty particularly the last couple of weeks. I'm actually sitting in Austin because I got iced-in going back this Sunday. The reality is our business is very much driven by total miles driven. And as you saw in the chart, we included in the earnings deck, not just for the fourth quarter, but also for January. You could see that January kind of picked-up where September left-off or picked-up where December left-off, right. So until there's a really meaningful movement in mobility, we think we're going to be kind of in this level of activity. Ultimately, we've gotten a number of questions in the past about what's going to drive an increase in mobility and clearly getting through the pandemic, and people getting out of their homes and returning to their daily lives, this will be the biggest impact. We don't believe that everyone is going to work from home forever. We don't think everybody on this call will permanently be working from home. And while we've all become fairly efficient and productive in the working from home, there's clearly a lack of community that is hard on organizations. So we may not get back to 100% of folks being back in the office. But we do think a number of folks will get back into the office. We think kids are going to get back into school. And when all that happens, we think the use of public transportation will remain depressed for a longer period of time, just because of the safety issues related to the virus and life. So as some of those workers begin to head into the office or back into their workplaces, those who took public transportation may opt to take private transportation, which means instead of hopping on a train or a bus, they're going to hop in a car. So we're cautiously optimistic that miles driven will move back north and that will help our business. Clearly with the ice storms that have hit the last couple of weeks throughout the United States that should ultimately create demand for our business. I'll tell you here in Texas and based on the news stories of the pile-ups in Dallas and Austin and Houston, that is probably going to create a bigger opportunity from a salvage buying perspective and a parts perspective because a lot of those salvages are anticipated when they sent an ice storm of 40 miles an hour. But again, we’re cautiously optimistic that we'll get back to more normal levels of miles driven which will lead to a more normal level of demand. It's going to take some time, we don't think it’s going to just pop back in the second or third quarter but hopefully by 2022, we'll be back at historical levels of miles driven.

Got it. And then last question on the Specialty side, you talked about RVs really leading the way I guess that's more retail driven. But you also last year like expanded your warranty program, could you talk about how that contributed and how that probably will contribute even more as we move through the next year or two more RVs on the road, many of which will potentially be easily built and just more, just opportunities on that side?

Yes, absolutely. I mean, there was an enhancement, I think we noticed a massive shift in discretionary spending, away from things like restaurants and lodging and air travel, theaters, sporting events, all those group events, right. And outdoor recreation camping has absolutely been a huge beneficiary of that shift in discretionary spending. Our RV business historically has not been tied to the RV SAR in any particular year. It has been very highly correlated to campground spending. In 2020, the OEMs produced about 425,000 RV units which was a great year; the expectation for 2021 is over a half a million units, which will be an all-time record high. The key there is that the size of parts, the number of RVs in the park is expanding. And that's great for the Specialty business, as all those incremental units that will be on the road for years and years to come will create demand for the parts that we sell. So even if the SAR ultimately settles down over the next two or three years, the units are still going to be on the road, and that larger base is going to provide a great opportunity for us to sell profitably parts for many years to come. So the growth may ultimately slow down. We don't think we're going to continue to grow at 16% year-over-year like we did in the fourth quarter. But we don't anticipate substantial declines in the overall revenue base.

Sort of big picture question here around parts demand for EVs. And obviously, Europe's got a jump on it; you did a lot of business in Norway. But could you talk a little bit about how you see the different parts that versus internal combustion and what this does to demand down the road long-term?

Certainly. It's a pertinent question that has been a topic of discussion in the industry for most of the year. We believe that the supply chain for EV parts will resemble that of internal combustion engines significantly. There will be considerable overlap in suppliers, and we expect major vendors like Bosch, Continental, and Schutter to develop EV parts. While we will initially focus on OEMs, we recognize that their aftermarket business currently yields better profit margins than their original equipment parts business. It won't be long before they shift their OE manufacturing capacity to produce aftermarket parts. We have strong relationships with these vendors and leading distribution capabilities in Europe, making collaboration logical. Additionally, over the next decade, much of the electrification transition will involve hybrids, which combine internal combustion engines with electric motors. This presents an opportunity for us to sell new types of parts such as electric coolant fans, electric air conditioning compressors, and electric-driven motor inverter coolers. Moreover, hybrid components associated with internal combustion engines tend to be more expensive than their non-hybrid counterparts. For instance, an AC compressor for a hybrid vehicle can cost three times more than that of a conventional internal combustion engine car, and a coolant pump could be five or six times more expensive. This presents a valuable opportunity for us to distribute these higher-value parts. Finally, we see significant prospects in relation to EVs, particularly with batteries. Just as the engine is the most valuable component of an internal combustion vehicle, the battery holds the same significance for an EV. Batteries do have a limited lifespan and won't last indefinitely; however, the vehicle will remain operational long after the battery is replaced. We foresee opportunities for us to remanufacture EV batteries since typically, only a few cells fail rather than the entire battery. It would be too costly to replace the whole unit. Therefore, we believe we have numerous promising opportunities ahead concerning the electrification of vehicle parts.

Thanks. Thanks for that. And a question on the technology as well. So you're standing in diagnostics program that you just talked about? Could you sort of talk about the revenue expectations and maybe the margin structure of a more service-based business like Elitek?

Yes. So this industry is nascent. It's pretty small. The typical competitor is somewhere between 6 and 12 technicians that have banded together to provide services to the marketplace. Okay. Our business is just shy of the $50 million mark today, and it's growing. The great thing about the services business, it has better EBITDA margins than our North American parts business. And so that should help as that business continues to grow. Now, we're not going to be able to grow that business necessarily through acquisition to gain significant scale because, like I said, most of these operators are tiny, they're tiny. So we'll buy and look to buy perhaps some of the larger groups even though they're still pretty small, and rollout on a Greenfield basis by really educating technicians and then putting them out in the field as part of our Elitek service offering. So we're excited about the business.

Congratulations again, in a really nice year. I wanted to touch on, you kind of brought up in the beginning of your prepared remarks that really the fourth quarter exceeded your expectations, and even kind of how you outlined things, the last time we spoke. We'd love to hear some color about what moved in your direction during the quarter and kind of how you're seeing things turned out in the beginning of 2021? Thanks.

Sure, great question. The revenue didn't help us. And if you go back to that page, when we laid out the last four months, you can see that say for the Specialty Group, which just rocked during the fourth quarter, the revenue in both North America and Europe were down pretty consistently from the prior-year levels. So Europe is doing better than North America because of our collision focus here. So really wasn't revenue that led to the outperformance, Stephanie, it was our operating margin. We've had good improvement on the gross margin line. And while on a consolidated basis, it looks like gross margins came in a couple of basis points. That's just a mix shift, because the North American business has margins north of 46%, the Specialty business has margins around 28% and the high margin business kind of falling 13% and the low margin, gross margin business dropping 16%. So you shouldn't take anything from that at all. The key is the operating leverage that we got out of that. Each of our segments worked hard to get the cost structure to reflect the current state of demand. And we're very proud of what our folks have done. Unfortunately, a lot of that has come on the back of labor. We're down substantially from a total number of employees today versus what we were a year ago. But that's just what it attracted to right-size the business. And those are permanent reductions; we're going to be very cautious to add people and/or expense back to the SG&A line until we see the revenue rebound. And then we'll need to add some people back just to keep our customer service levels where they need to be. So think about the intense focus on controlling our costs because we're in an environment where we don't necessarily control our revenue.

Good morning, everyone.

Good morning, Gary.

A couple of questions here. Varun, what is your priority for your free cash flow? I assume you would be paying down debt this year?

Yes, I think it's a great question, Gary. Simply put, if you kind of go back to our Investor Day presentation from September. So probably about four, five, six months ago, we were very clear in terms of; we expected our free cash flow generation on a sustainable basis to kind of continue. We kind of reset the overall business model. So that kind of starting off is a great option to have as a business. We've always said that the key priority is investing in our own business. So capital expenditures will be kind of priority number one. Following that, we've set high synergy tuck-ins and building up critical capabilities. There was a question earlier on the call about scanning and diagnostics. That is a business that we’re investing heavily into. Again, as Nick said they are very small transactions, 6 to 12 technicians, on a market-by-market basis. So certainly wherever we have the ability we are certainly acquiring those but really also supplementing it with capital expenditures to kind of expand that specific service. We do not have any large platform transactions on the horizon. We do not see we need those at this point in time, which essentially leads us to a point where the excess free cash flow really would go towards either debt pay down, although, as you've seen, we've certainly made a tremendous amount of progress being at $1.04 billion in 2020; we're well within our target leverage at this stage of time. So really, it becomes the highest return on capital opportunities, and we still believe that our shares are undervalued. And we certainly see no reason given the authorization we have from the board to be able to repurchase our stock.

Okay, thank you. And then just,lastly in terms of what you've done with the cost structure and what you can do obviously, in the future, as you move from an acquisition growth strategy to more of just integrating and bettering your operations, do you every year, I would assume you're really pushing your divisional heads to get the costs down. And I just wondered, where is the biggest component of costs going to come out in the future for the company, and I assume you're going through a program every year, we need to get our costs better in line on an annual basis?

Absolutely, Gary, it's Varun here. Two years ago, as you rightly pointed out, we pivoted to an operational excellence mode. And ever since that, we've essentially been driving productivity through integration. And these programs you really see in terms of how our North American business has taken the lead on that front. Just look at the fourth quarter operating expenses, that business, yes, we certainly had challenges in terms of what the VMT has been in, so collision rates have come down. But as we think about how our collision business has performed relative to the data we're getting in from CCC, we're performing much better than what the repairable claims are out there. So that's kind of good. But really, it is the productivity piece of it that our North American leadership team has just did an outstanding job. You then kind of move over to say for example, the next large component of our overall business, and that's in Europe. And Europe also has kind of begun to make some progress, they'll be setting so some operating expenses come down in the fourth quarter, there's a lot more productivity to go get out there. And that really is the overall 1 LKQ program. We need to make investments out there, for example in the European ERP program, setting up a back office for example, that really the longer-term productivity really is from our European business. And that is something that we know our European team has a laser-like focus in making sure that they certainly follow from, within the portfolio companies, as we shared best practices between our businesses and our divisions, I know our North American leadership team has spent time with our European team also. It's just one thing Nick and I kind of pushing and pulling certain levers. But as the peers speak with one another, largely, it's a base similar business, it's a distribution business, and that certainly has helped a lot also. But yes, you're right, overall productivity programs, every business of ours, every function of ours has productivity programs to essentially offset the inflationary pressures that typically come around in any case, but it's the nimbleness and the agility that we're tremendously proud of, and that really came through in spades, with the onset of the pandemic. I hope that response to your question.

Yes, good morning, guys. Thanks for taking the questions.

Good morning.

I wanted to start on a broader supply chain question. Obviously, you mentioned varying time rates are much higher, there's a problem getting things over from overseas, how has that impacted your aftermarket supply here in North America? And related to that with limited supply at auction and potentially disruptions in the aftermarket side, do you think your supply chain can support the anticipated return to growth in North America? Or could that be a pinch point this year as you look forward?

Good morning, Daniel. It's Varun here. That's a great question. We have strong vendor partners on the aftermarket side who have been very supportive since we started this business. Regarding ocean freight challenges, such as the number of carriers outside the Port of LA and Long Beach and returning empty containers to Asia, we do have long-term contracts with vessel providers and some brokers. This allows us to secure space on carriers, although we have to pay more for it. Moreover, LKQ has always maintained a top-notch inventory and fill rates, ensuring we have the necessary products. However, in some cases, we need to use local transport or shuttles within the region, like shipping items from New England to California. We are working to keep our fill rates consistent, even though the inventory may not always be located perfectly. We have learned a lot over the past few years to maintain our fill rates without incurring excessive costs. Historically, the Chinese New Year has led to increased ocean freight costs, but we expect that to level out in the coming weeks and months. This remains a risk, but as mentioned earlier, we have the product and more on the way. We believe that things will stabilize as we look to return to growth starting in Q2, especially with easier comparisons, and we anticipate a stronger growth trajectory in the second half of the year.

Okay, that's helpful.

Daniel, we just think we're better positioned than the typical competitor out there, given the size and scale, depth and breadth of the inventory coming into this. This time we're shipping is an issue. We'll be able to work our inventory to be a competitive advantage.

That's helpful. Thanks Nick. And then the related follow-up would be a follow-up on an earlier question on inflation. Obviously, cost inflation is coming and we talked about it happening. Are you seeing any signs of being able to pass that through on like-for-like pricing amidst cost inflation? And if not, what do you think is going to take to see that revenue tailwind return considering the cost pressures right now feel pretty broad? Thanks.

Yes, to build on my earlier response, we have a dynamic pricing model in place. We maintain a threshold for OEM parts, and any changes in that area could certainly be beneficial. Our teams are doing an excellent job with pricing. Additionally, our salvage business is performing well. There is limited supply in the aftermarket, but we have the necessary products. Our goal is to assist everyone, especially the carriers and customers, in acquiring the right parts at the right time. We are also focused on enhancing productivity and have successfully reduced costs that were initially temporary in the second quarter, and we are now transitioning to more permanent cost reductions. This approach is proving effective for the entire organization. However, we cannot solely rely on growth to return; it will also help us redeploy our workforce. For now, we are pleased with how our teams are managing the various challenges we face.

Good morning, thanks for taking my questions.

No problem.

Just first one on the cash flow and outlook of the minimum kind of $800 million coming from the $1.3 billion that you saw in 2020, can you maybe break out the buckets that go from the $1.3 billion to $800 million? Obviously, inventory is a piece of it, you talked about DSOs is a little bit of an offset in CapEx. But could you give a little bit more color on that?

Yes, listen, it's actually very simple and it was in my prepared comments. During 2020, we essentially realigned our inventory base with what demand projections were. Our inventory balances came down by over $400 million. And that really is the kind of delta between call it the $1.3 billion and the minimum $800 million that we're talking about.

So it's all inventory. It's really, I'm guessing little bit of CapEx?

CapEx is about $100 million.

Yes.

It's basically inventory about over $400 million and CapEx is about $100 million. I mean that basically kind of $500 million right there from the $1.3 billion to the $800 million.

Okay, that's good. For a follow-up regarding the growth pace into 2021, I anticipate that the first quarter will remain relatively weak, based on the revenue shown from January. How should we approach expectations for the growth rate in the second quarter and then into the latter half of the year?

Yes, great question. So as you indicated, we're anticipating Q1 is going to be down year-over-year, largely because we started-off last January and February of 2020 very strong. And obviously, you can see the January numbers are down, February will be down and then March is an easier comparison. Second quarter will obviously be up because even if we just stay at these levels of revenue, the revenue came off so dramatically in Q4 last year, second quarter will be up. And then the third and fourth quarters, those are obviously hard to predict they're further away. We're anticipating a little bit of upward movement on a year-over-year basis. But again, not back fully to 2019 kinds of levels.

And just one additional piece to kind of highlight, we do have one less selling day in Q1 across the entire enterprise. So in North America, there's one fewer selling day in Q1, a second fewer selling day in the fourth quarter. And in Europe, we have one fewer day in Q1 but we make up that day in Q2 for the European business. So just to kind of think about, this is something we've talked about previously and just wanted to make sure that you had that into your models.

There are no further questions at this time. I'll now turn the call to Mr. Zarcone.

Well, as always we greatly appreciate your time and attention. We know this is a very busy time for everybody on the call during earnings season, with a lot going on. We appreciate your listening to our story. We're incredibly proud of what we've been able to deliver in 2020, particularly given all the challenges that companies around the globe have had to deal with and we had our fair share of challenges as well. The team I could not be more proud of, they came through beyond any expectations and I could not be more proud to work alongside all of them. We look forward to sharing with everybody at the end of April when we will announce our first quarter results and again, it's going to be more of the same, we're going to keep our head down, we're going to drive as much revenue out of the market that we can, but it's really going to be more focus on keeping our cost under control and generating cash. And with that, we'll bring the call to a close and hope you all have a good day and we'll speak again in April. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.