LKQ Corp.

The stable outlook on LKQ reflects our belief that management will improve margins and pace the company's future acquisitions such that it maintains leverage of less than 4x and a free operating cash flow (FOCF)-to-debt ratio of more than 10% over the next 12 months. We could lower our ratings on LKQ if debt to EBITDA moves above 4x or FOCF-to-debt ratio falls below 10% on a sustained basis. This could be because of operating problems, a loss of business, inability to efficiently integrate acquired properties, or other adverse market conditions such as an unfavorable change in how auto insurers fulfill their collision claims. To upgrade LKQ, we would need to believe the company's EBITDA margins will approach historical levels

...Wage, fuel, and freight inflation have affected North American margins in 2018, which we believe LKQ will partially offset in 2019 as part of its margin improvement plans. In response to weaker segment margins in 2018, the company is more disciplined with pricing and discounts. LKQ Corp. also is likely to benefit from its scale, reducing procurement costs and improving overhead expenses. However, the segment remains exposed to volatile scrap steel prices. Soft demand across many key markets in Europe combined with company-specific operating challenges also affected 2018 margins, and we expect 2019 macroeconomic conditions to continue to be soft. LKQ's key markets in Europe include the U.K., Benelux, and Italy. The ongoing uncertainty around Brexit continues to reduce overall demand, and a further weakening of the pound sterling could inflate procurement costs. However, although the market is very fragmented in Europe, LKQ is about 3x larger than its next largest competitor. LKQ's recent...

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