LKQ Corp (LKQ) 2003 Q3 法說會逐字稿

Good afternoon. My name is Christy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Keystone Automotive Industries third quarter fiscal 2003 results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would like to turn the call over to Gary Mayer. Sir, you may begin.

Thank you. Good morning from California, everyone. Thanks for joining us for today's conference call. Before I turn the call over to Charlie Hogarty and John Palumbo I would like to remind everyone of the safe harbor statement included in today's press release.

The private securities litigation reform act of 1995 provides a safe harbor for certain forward-looking statement, including statements made during the course of today's call. Such forward-looking statements with based on the company's current expectations and beliefs concerning future developments, and their potential effects on the company. There can be no assurance that future developments affecting the company will be those anticipated by Keystone.

Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company, and are subject to change based upon various factors. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission, form 10K and 10Q. I would now like to turn the call over to Charlie Hogarty, Charlie?

)) 1Thanks, Gary. Good morning, everyone. I would just make this as brief as possible. I think the news release pretty well tells the story. We are extremely encouraged with the continued growth. This is really the eighth straight quarter of year over year increases and quarterly performance or in operating performance. We have no reason to believe that it's about to end.

The momentum is strong and in the marketplace. We continue to get good acceptance on the product lines and the continued pressure on the insurance industry to contain costs and look for cost savings alternatives is as strong as ever, and we expect that to continue. So, overall, looking forward, things look -- continue to look pretty favorable for us.

Same store sales continued very strong through this quarter at 9 percent, which is basically the number we have been running all year. Actually, the third quarter we reached an all-time record quarter revenue record even though historically the fourth quarter is our strong quarter. So, the problem is easy to overcome other third quarters but to overcome the fourth quarter previous high which was last year's fourth quarter is pretty significant for us.

Margins remain strong. The gross margin also remains strong. So -- obviously, that dropped down to operating income and looked -- we think we're about where we ought to be right about now.

Some other points I just comment on. The operating system that we have talked about for some time is making good progress. We actually have, I think, now 10 locations up as we really set up as more or less beta sites and test sites to make sure that it was absolutely bulletproof before we roll it out to other locations across the country. And now they're doing some fine tuning for the next 30 or 45 days. Then we really begin an aggressive rollout. But we're very happy with what we have, and with the way the system is working. We have encountered really no major bugs at all. It's just adapting the system primarily for our order entry people so they really see it the way we want them to see, it and the way to take care of the customers in the past in the most convenient way and give them an opportunity to up-sell. Those are the tweaks that are being made now. As it rolls out, we believe it will be a major improvement for us across the country.

Auto Zone, I think we mentioned that last month. We believe that we're on the verge of rolling out a wider program with Auto Zone. We have been involved with them with the test program for the last five or six months. That's been going well. It's not a gigantic revenue producer at a whole. We're only at this point working with one of their small groups as a test. But virtually all of the pieces are now in place to do business with them on a national basis, which includes EDI, which includes getting all of our parts into their catalog format, which is pretty much a retail standard. It also involves getting bar code readable UPC codes on our parts. Things that previously we didn't need for our -- you know, our standard, normal wholesale business, but for the retail trade, things that you do need.

The good news, I think, there is that once we get up and running with Auto Zone, which we are really hoping should be in the next 30 days or so, all of this work we have done with them will set us in good stead for rolling out similar programs with some of the other retail chains who have indicated that they would like the ability to have special order programs with us. So, just a little bit of --again, not our primary focus, but it's just nice, extra business and takes advantage of our national footprint of strong you know, distribution all over the country.

We have some good news earlier this week. The Erie suit, the class action suit against Erie Insurance Company out of Pennsylvania, which we wound up being named as co-defendants with Erie of course along with 20 other manufacturers and distributors. They have reached a tentative settlement agreement which would totally release us with no -- no additional cost to us at all, other than the fact that we spent defense money early on and answering questions and getting ready for the suit. So, that's good news. We expect to be totally out of that thing in another couple of weeks. Also on the legal front, we --there's interesting news, which in my mind kind of classify as good news.

In the State Farm suit which is now being heard by the Illinois Supreme Court, there have been a number of important entities that have filed amicus briefs on the side of State Farm such as various state insurance regulators, consumer groups. I think Ralph Nader's group, a number of people have filed amicus briefs there.

But what came out this week, which was very surprising, is that someone who you would never expect would file on the side of State Farm in an aftermarket case was Ford and General Motors. Both Ford and GM have filed on State Farm's favor with the court basically because of the -- you know, the potential problem that -- or what we believe is a major error in this case that it never should have been certified as a national class action. It should have been kept as an Illinois-only action, which would have had no impact, hardly any impact on us, and so, it's very encouraging that so many powerful people are coming down on the side of State Farm in this thing, and we would -- we are hoping that within the next five, six, eight months, we're going to see a resolution on it, and, you know, we're certainly hoping -- and really expecting, I guess at this point that common sense prevails, this decision is going to be reversed.

So -- which could take -- we would also believe that's been a shadow or overhang on the stock, and we would hope that once that gets lifted and is gone, it would -- you know, it would allow some additional upward movement combined with the improvements in revenue and profits to get more upward movement on the stock. But, overall, it was a very strong quarter, and we are -- we will be glad to answer any questions that you may have. So, let's open it up for Q & A.

))Operator: At this time, I would like to remind everyone if you wish to ask a question, please press star and the number 1 on your telephone keypad. We'll pause for a moment to compile the Q & A roster. Your first question comes from Scott Stanber () of Sidoti and Company.

good afternoon, gentlemen.

hi, Scott.

can you talk about how same store sales have progressed in January and February. In the Northeast and Southeast, there has been snow and inclement weather. Could you just talk about how things are trending for the month?

pretty much as they have been trending for the first three quarters. The sales back east in the south have been strong. The southern -- the west coast really hasn't had hardly any weather. The midwest, Chicago, Minneapolis, grand rapids, that group there has had very little impact with weather so far. Overall, we're happy. We're probably running first few weeks of January, we got to be running 9 -- pretty much in the 9 percent range.

It's been consistent all year.

very, very consistent. So, it's a strong number. I mean, that's not the number we're telling people long term that we expect to be able to achieve on the same store basis. We have always talked in terms of 6 to 8. So, it as on the high side of our, you know, guidance going forward. But we're -- you know, it's for now, it's still there. We're happy to get it.

okay. On the NQVP () program, new any participants joining?

none that I can name. However, there's been some pretty strong movement with another -- pretty strong movement with another insurer in the top 10 really, that has given us a pretty good indication that within the next quarter, actually, our first fiscal quarter, April on, they are pretty seriously looking at joining the program. There's been some personnel changes there favorable to us, and the NQVP program. And so we are hopeful that we are going to have at least one more major insurer on that program. That would really put that thing over the top.

OK. And the Auto Zone deal - when you talk about aggressively or moving back into that or moving forward, what's the time line on that? Can we just say how many stores?

Yeah. That has yet to be determined by them. I mean, it's really their decision. We're not exactly sure how fast they intend to roll it out. You know, they have got 3,000 stores. I think some of the conversations have been in the area that they would roll it out maybe 600 - 800 at a time in the beginning and then gauge it and then start to roll it out to, ultimately, the rest of the stores. It's not a big roll-out project from their side because it's all electronic. There's no stocking involved. It's not a major commitment on their side to, you know, to get it rolled out. It's more of what we can handle and what their stores - the success that the first group has. I would imagine that will determine how fast they push forward with it.

But again, we - from a time line, you know, we're probably - within the next two to three weeks everything would be ready electronically, EDI-wise and everything else to move forward. Then it's a matter of, you know, them pulling the switch and saying, you know, notifying their stores and loading it on their - giving their stores access to the data so they can start the program. So, it could be within the next month - month-and-a-half, we think.

Yeah. And we think it will have a gradual ramp-up, anyway, Scott (ph). We're not, in total, looking for a tremendous revenue enhancement here. But - and we do think it will take some time, because generally people would not be looking for our parts in those stores, but over time as they go in and they see the Keystone - the advertisement that we'll have for Keystone Platinum Plus, we think it will help our brand equity that we have been trying to establish with Platinum Plus and the people will know where to go when they need the lights.

We expect, mostly, it to be lights - headlights, taillights, maybe grills.

Mirrors ...

Mirrors.

... - easy to bolt-on stuff. We don't expect people are going to be putting on very many, you know, big plastic fascia covers that need to be painted or hoods that need to be painted. We don't expect very much of that.

They could get it if they want it. We just don't think that will be the market for it.

OK. Now, two quick questions here. The new system that you talked about aggressively rolling out once you get the tweaks done here. What are we talking about and time line wise and also John, if you could give the free cash flow and the cap ex numbers for the nine months.

We expect to be rolling out - we're going to basically try to do it as a hub-and-spoke combination of a - with the current - what now is a current hub with the spokes attached to that. They're the groups that we will be doing. The first one is going to be one of our biggest ones back out of the Mid Atlantic states covering Philadelphia and all of Pennsylvania, Maryland, New Jersey locations. Then we move on up the coast. I think the plan is every - for the beginning, every two months there will be a major group like that taken on. It could be as small as eight or 10 locations and as many as 12 or 13.

It's really a training issue. That is the, you know, that's the pacing item. How many people we can get trained at a time to - so when the system is turned on in their locations, they're not, you know, they're not paralyzed. They know how to go and what to do. So, it's - and we believe that as time goes by, we get the first, you know, two, three, four roll-outs or groups out there, we'll have that many more trained people. So in the last half of the roll-out we would be - expect to be able to even speed up the process because we'll have more people that are trained that we can take from one branch to another, you know, but pre-installation at the new branch to help them learn how to use the system. So - and it's a pretty significant training piece for our people, because it's a radically different system than what they're used to now.

OK.

Scott (ph), the depreciation is four million nine - depreciation amortization. And cap ex is seven million for nine months.

OK. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Mark Slagle (ph) of Greenville Capital.

Hey, guys, great execution. Couple quick questions - one on the Auto Zone - could you tell me if you need to have new routes for your drivers or will they just be visiting shops that are already in their routes - number one? And number two - any guess in the pilot how many - what kind of dollar amount per Auto Zone store you guys are seeing in revenues?

I think that we're seeing - I should know that number. I haven't looked at it for about a month-and-a-half so I'm kind of hazy on it. I think - it kind of ranges all over the place. In the test group, I think there were like 30 stores, and I know we had some stores that did almost nothing, and you had other stores that were doing $800, $900 a month. So it really depended, we felt, on either the neighborhood the store was in or the attention that the store manager gave to it. But, you know, some of the stores passed out the stuff, the flier notices in the bags to let customers know that, "Hey, now, you can ask us about crash parts."

So, I think - the point that we got very encouraged with is that quite a few of the stores in the test group did have $600, $700, $800 a month sales, which is totally plus business for them and obviously plus business for us.

As far as additional routes, no. The roll-out that we're talking - that Auto Zone is talking about, it goes under what they call their VDP program, which is vendor direct parts program. And about 90 - almost all of it is basically going to be through a FedEx - UPS - actually, I think they use FedEx mostly - program. so where a store places an order today, punches it into their computer, it's EDI to us, and - electronically, hopefully goes through the system and by that afternoon or no later than the next day, FedEx is at our building picking it up and redelivering it to the store the following day. So it's a 24 to 48-hour time line that Auto Zone gives to their customers saying, "Yeah, we can have this for you in two days." And I think they take - I think actually they take full payment for it up front to, you know, stop a whole lot of cancellations. And actually, returns - you know, everybody warned us up front with retail. "Oh, returns are going to be, you know, big problem - big problem." And it really hasn't been. There's been very few. I mean, there's some canceled orders. And if a customer comes back and wants to cancel, obviously, Auto Zone is going to be customer friendly and they're going to let them cancel the order and give them their money back.

But the fact that, I think, they laid their money down up front and made a commitment, we have had a pretty small percentage of parts where orders got canceled or we had returns. It's - it's just kind of another niche for us. But as John said, we think it helps brand equity. And if we are able to duplicate it with some other people around the country, you know, it could generate, $10 - $15 million for us, you know, a year in a reasonable period of time.

One more question for you in regards to the cost side of the equation in this last quarter, John, could you break out what legal fees and what IT costs were in this quarter and going forward in the fourth quarter here, how much of those will continue?

The legal - you know, I don't - Mark, actually I don't even have that - I meant to get that number for the call, and I don't have it. I know this year, our legal fees have been fairly substantial compared to prior years due to the Erie litigation, the H.K. litigation and some other things. Certainly, the Erie litigation is going to go away as we get into this quarter. It's been on the magnitude - I know in the first two quarters of this year, each quarter the incremental additional legal expense was about $300,000 higher than the previous year.

OK.

So, I expect probably continued close to that range in the third quarter. And, you know, we'll see that hopefully come down.

Way down in the fourth quarter. Two of the cases are basically settled. Erie is settled, H.K. is settled. And so that's - that was the major drain.

OK. And the IT costs, is there any way to separate that?

You know, that's a little bit trickier. Certainly, again, if you compared this year's quarter to last year's quarter, we have some infrastructure costs running out about $120,000 a month that weren't in last year. That's the communications and the data center hosting that we have outsourced. It's higher than 120 a month because we have got - we were using outside consultants a year ago. We have hired people today, and we're being much more conservative on the accounting piece. But, you know, again at minimum, it is, you know, 120-plus per month.

OK.

Now, that, as we go forward, those discrepancies will kind of go away. Because we had them in last year's fourth quarter. so when we look at this year's fourth quarter, as it relates to IT, you will get a pretty good apples-to-apples comparison.

The other distortion that we do see looking at this quarter relative to prior year's quarter is acquisition and startups we did a year ago. So, we have got, I think, five acquisitions that we did beginning in January of 2002 that are not reflected in the prior year's quarter and are in this year's quarter and we have got four startups that were done in the first half of last year - that did not appear in last year's quarter are in this year's quarter. If you just are looking at the selling costs, the G&A costs and saying, "Gee, they're really high or they're up quite a bit," you have to be careful because there is some differences structurally, as to what the company looks like.

Great. Thanks, guys.

Our next question comes from the line of Jim Larkins (ph) of Plasage (ph).

Good morning. A lot of my questions have been answered, but let me ask you a couple of details. Could you give guidance for tax for next quarter as well as next year.

Effective tax rate?

Right.

Yeah, Jim (ph), we did do early this - during this fiscal year, during the first half, we did do some tax restructuring to bring down that effective rate. So, I think going forward, it will probably be somewhere in the 39 percent rate, maybe a little bit better. In fact, I have got the guy that handles my tax provision in the returns and that is going to be here next week. That's going to be one of the subjects.

It didn't move this quarter, but you will see it move in the fourth quarter, and then going forward, it will start to come down a little bit. I mean, there's not - on a dollar basis, we're going to save a few hundred thousand dollars a year, probably 300 or 400,000 a year. The effective rate itself is going to nudge down. It's not going to move, you know, by four or five percentage points. It's just not available to us.

OK. I wondered if you could try to do a little decomposition on your comps and maybe just give us directionally how much you think the comps are being driven by good weather and, you know, Platinum Plus versus insurance companies kind of incrementally coming back to aftermarket. I don't know if that's possible at all, but just help me understand drivers of the comps.

Well, I think that the weather has a fairly minor impact, especially on the year-to-date basis because we didn't get any weather until, you know, some at the beginning of the third quarter. So, on the year to date basis ...

... (inaudible) third quarter.

... - excuse me - to the end - yeah, really the end of the third quarter and then only in certain parts of the country. Overall, weather has not been a real great help. Hey, we'll take what we got, no complaints.

But the real - I think the real drivers are a combination of the insurance companies coming back - continue to come back little by little, and yeah, the Platinum Plus is part of the reason that they do come back - part of the reason that, you know, they have a little bit more confidence or maybe, you know, shift a little bit - favor in our direction. I think, you know, the Platinum Plus has been a major help for us.

And - but I guess the first - no matter what we offer, if they're not willing to buy it, it isn't going to do any good. So I think the first - the major factor has to be a, you know, more inclinations on the insurers and the shops to use, you know, use our parts. I think that's the number one.

Yeah. And I think if you went back - excuse me - and looked at the quarter-by-quarter for the last two years or even went all the way back to State Farm's - and you find a year where we had several major insurers out of the business entirely, other - and most of the others restricting their utilization of aftermarket, once we got past the first year, which put us out into the 2000 year - or our 2001 fiscal year, we began, beginning with Nationwide with this MTVP program - we began to see that return. Of cousre when they returned with that program, it started with just a couple of product categories. They had lights in it and - I forget - one other ...

A few bumpers.

... yeah, a few bumpers in it. And over time, they began to add more and more product. So, that's been part of what we have seen in the last two years. As Charlie mentioned earlier, we pretty much expected that as other insurers saw the sort of success that they were having with that program, that they would look real hard at it. There's been a couple of smaller insurers that we think are - have been in the process of getting into the program - small regionals - and now a larger, more national firm is what we think may happen here. That's kind of, you know, pretty much what we expected. Nobody is going to jump right in and write every single part that's available. They'll ramp it up - because there's systems issues and they have to get the estimating systems set up and whatever it might be.

So that's - I think that's, you know, good and the big reason why business has been so strong here for eight quarters. We think it will continue this way.

Great. That's helpful. Do you see people coming back to some of the more controversial parts like some of the sheet metal?

Yeah. Yeah. Sheet metal sales are - sheet metal sales are strong. They're improving. You have the number, John, body parts number?

Total body parts is 23 percent. That includes lights up 29 percent, collision parts up 13.

OK. So 13 - so the sheet metal is up - for this quarter or year to date? For the quarter sheet metal is up 13 percent.

Year to date is 11.

Year to date 11. That's part of the increase.

OK. That's helpful. The acquisition in Missouri - is that going to be counted as a new office or a tuck-in?

No. That's a tuck-in. We already had an operation in Springfield. This one will just be combined with our facility.

It already has been. It's done.

It's done. Yeah. Those are really the best kind from an operating or overhead return, because we more than double the sales as an existing operation with most of the existing overhead - two or three or three or four extra people, but basic overhead stays - the fixed overhead stays the same. So, it's a - a lot of that drops to the bottom line almost instantly.

This is a very unusual one, as Charlie said. Sales are higher post-combination than they were of the two standalone operations. Typically, we would expect to lose some sales. Now, whether or not that continues I'm not counting on it, but it's been an unusual situation in that sales are actually better.

Maybe that might be a little weather-related. Maybe the shops just - in the area are just, you know, busier from a seasonal standpoint. But businesses - we have not lost any business and the combination of the two with one overhead is a, you know, definitely a plus to the bottom line.

OK. Great. And then can you give any guidance on what type of additional office rollouts you think we're going to see in the next, say, three years? Do you see that number going up very much, or is it mostly little tuck-ins?

Oh, no, Jim, we have got - we'll do those where they make sense, certainly, and this one did. But, really, we - our primary growth strategy still is to expand geographically into cities that we're not currently in. We would prefer to do that by acquisition, if we can. Virginia is a very good example. We really - we don't have any operations in Virginia. We know - we'd like to be there. We kind of get there a little bit from surrounding states, but that's an area we have targeted to expand in. Hopefully, we're able to do an acquisition there.

When we can't do acquisitions, then we're going to look to do a green field. The current example of that is Tulsa, Oklahoma. We expect to open up there in a couple of months.

ut we have identified, gosh, a good 25 cities that we're not in that we believe can support standalone operations. And it'll take, you know, it'll probably take that three years to do that. I don't see us doing, you know, more than somewhere between probably five, six, maybe seven a year. But, that remains our growth strategy.

But I think we we'll - there's plenty of geographic expansion. And, you know, again, this is the longer term, but Canada provides some opportunities. If we were to see something up there acquisition-wise - we've got one small location in Vancouver that we're looking at now. It's a different environment up there - operating up there than it is in the states. We have had some of the key industry relations people meet with the ICBC, which is the Insurance Company of British Columbia - it's a state-run thing. So we'll - we continue to see quite a few expansion opportunities.

And would you - would the timing on that - would some of it be dependent upon getting the I.S. system rolled out and then maybe we'll see acceleration in getting sort of five new offices a year, or are you ready to do that today as long as you find the ...

It's hard to say. We have got some areas that we have targeted, and again, we - we would prefer an acquisition and we're going to kind of exhaust that first in talking with people and gaining, you know, what level of interest they have in selling and whether or not valuations are reasonable and that takes some time. Sometimes it can take months to get through the process. We prefer not to have to do a green field because we know that typically, we're going to lose money for 12 or 18 months when we do that and sometimes longer. But - so, it's tough to exactly - we cannot control the timing element of that all the time.

I think the - but your question about whether the - you know, the IT department would be a pacing item (ph) on that - no, that will not hold us up or allow us. We can do what we need to do regardless of that, you know, how well - how fast we do the roll-out.

OK. Great.

Example - the new location we're going to put in Tulsa here in another month or so, day one, they'll be up on the new system.

OK. All right. Thanks a lot.

Thank you.

Your next question comes from the line of Barry Hepernun (ph) with Lord Abbott.

Good afternoon, gentlemen.

Hi.

Congratulations on the quarter.

A question regarding the body parts that you would be importing - things that are stamped abroad?

Yes?

Has the movement of the U.S. dollar - currency movements caused you any issues here currently, and/or do you see the potential for any issues looking ahead?

No. Virtually all of the sheet metal product that we bring in comes in from Taiwan. Taiwan has for many, many years - has been an extremely stable currency and is pretty well linked to the U.S. dollar. So, we have seen very little movement, actually, over 20 years - there has not been a lot of movement and certainly not volatile. So, no, we don't expect going forward - we don't really expect any issues there.

OK. And there has been some discussion in the steel markets that the cost of steel in Asia has stepped up here by a significant amount lately. Are you seeing that, and can that be any issue for you?

No. Well, no, we're not seeing it yet. If, in fact, it does get stepped up, obviously our suppliers will have pressure on them to pass that on to us. But typically in a commodity item like steel, you know, everybody rises with the tides. So, I don't ...

We've got the same parts. Our parts are going to go up by an equivalent amount. I have seen the same things where they are expecting clearly significant price increases on rolled steel.

But again, O.E. has the same pressure.

Given that, we wouldn't expect any real - anything to change for us.

So, your pricing methodology is dynamic enough so that if next month is comes through at ...

Yeah, we can change day to day.

OK. You would do that to just match the rise in the prices?

That's right.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of John Lewis (ph) of Gardner Lewis Asset Management.

Hello, gentlemen. It was a good quarter.

Hi, John.

John, you have to help me. I'm not sure I understand why Ford and another O.E. would write an amicus (ph) brief on behalf of ...

That's surprising. When you first hear it, you say, "That can't be right. They - they should not be on our side in this issue."

You know what? They're having to do a lot of damage control with their dealers because their dealers were, you know, happy when this whole thing happened, and now don't want to see GM or Ford do anything that may in fact help the aftermarket.

The problem is this, though. This goes back to what State Farm has said all along, that this case never should have been granted a national class action status in the first place, because insurance is regulated state by state. Each state has an insurance commissioner.

And the law that they were found - that the jury said they were guilty of was an Illinois statute.

That's right. So, Illinois cannot write law for the rest of the country. I think the exposure for O.E. - for Ford or General. Motors or for any of them or that matter, if that starts to happen, what happens the next time an SUV tips over or a tire blows out or brake fails, are we going to see national class actions for everybody? And it's just huge. You would have damage awards that would put them out of business. They don't want to fight these cases. They're separate - forget aftermarket collision parts. There are other liability issues. They cannot afford to fight those on a national basis. They would get bankrupted. I think that's where - they're not in there vouching for the - that there should be aftermarket parts, but what they're saying is we cannot have national class actions of this sort.

I understand that. OK. Can you can give me a little better understanding of the time line? Do we know when the Illinois Supreme Court is going to hear the case and any mother details?

No. We don't. The only thing that we have heard and we know is that it was to be heard in this session, and the session began I think in September. Now, we haven't heard -- I don't think they tell you anything until after it's done.

Now, the session ends in probably June or July, so - and I guess there's a chance it could always be carried over to the next session. But you know, we're hopeful that the facts are - you know, clear enough and plain enough that it's not going to take them two years to figure this thing out. And that - we're hopeful that sometime in the summer we're going to hear - you know, we're going to hear what their conclusion was.

All right. Thank you very much.

Thanks.

As a reminder, if you wish to ask a question, please press star, then the number one, on your telephone keypad.

Your next question comes from the line of John Lawrence (ph) from Morgan Keegan.

Good afternoon, guys.

Hi, John.

Congratulations on the quarter, but would you talk about the mix issue a little bit? You get this gross margin improvement. Could you talk about that a little bit first?

Yeah. John, you have the numbers in front of you. Why don't you ...

Yeah.

It is primarily a thing of mix where we're selling less of the lower margin product like the paint products and PVE and the stronger margin products like the crash parts and lights and those product lines - wheels, are - you know, making the - weighting the whole group.

We're actually down paint and PBE 5 percent for the quarter - almost eight percent for the year.

In sales.

Yeah, in sales. Some of that - glass is down. We don't sell much glass anyway. It's down about 11 percent. The rest of the product - bumpers and every other category is up anywhere from, you know, 10 percent to 28 percent or even higher, actually, for - radiators is up almost 50 for this year. We have made a conscious decision in some areas to discontinue some of the paint sales where we felt that they weren't, you know, as profitable in those locations - doing that, and trying to get them more converted to the core product group. We'll continue to tweak that as we go forward. The mix has continued to move in the direction of the high margin products.

And a standard systems question - now that you have got a few more of these open, you know, from when you started this process, and you look at the information that this system gives you, are you - is there anything on the inventory management that you are disappointed with, or is that coming along as you want it to?

Well, yeah, we're disappointed that we cannot get to it as fast as we want to get to it because we haven't seen the benefit yet, as - because it's going to be a gradual situation because we have 10 or 11 systems, you know, throughout the country. As we - and we have yet to, you know, knock out a complete system, so, the - replace a complete system. So, the - you know, the net effect right now is we just added a system. We added the new system to all of the other 10 existing systems.

But as we roll forward, and we start to get the groups like our group up in the northwest - when we take them on, which they'll be coming on pretty soon. They'll be in the first group, I think - or the next group. They have a separate system. Bang, one system will go away. When we get to our Phoenix group another system goes away. Miami, another system goes away. As we get visibility on the main - on the new system, that is when we ought to start - we will be able to start to see, you know, the kind of thing that we need to see, and visibility and reporting that we need to start to manage down the inventories.

The inventory has gone up, you know, pretty significantly this quarter over last - same time last year. But I will tell you the truth, I'm not disappointed about that. Due to the dock strike, we - you know, they were ought for 10 days. That screwed everybody up. Then there was the threat they were going to wind up going out again after the 60-day cooling off period came, so we were able to beef up our orders.

But the good news is that business has been strong, and if - this next quarter we're going to continue very strong, so we're probably at this point pretty happy that we have some of this extra inventory on the water, and in our buildings - coming into our buildings now that we had ordered, you know, in anticipation that there might be a prolonged dock strike. So, we're not at all concerned about the level of inventory because we know that we can manage it down quickly. Sales by itself we'll be managing it down in the next quarter or two.

Thanks. One last question. Charlie, would you talk just for a minute about the sales cycle itself? As you talk to new customers - insurance companies - talk about that cycle of the pressure points they're thinking about - how long does it take them to pull the switch and come back? Is there somewhat of a backlog due to timing or what else? What other things could affect that?

Well, with the insurance company, there is no pulling the switch, almost. These guys are very slow, very methodical. Even when they make a decision many times at headquarters, it can take months if not, you know, longer than that for - you know, for operations level people, local level people to really implement the programs. So, it takes - it takes quite some time.

That's why we have seen a gradual return, and that's why we expect it - to continue to see a gradual return. Nationwide Insurance Company has been in the NQVP program with us for two years. It's been a gradual buildup, but they still have regions that they're not happy with - that are not performing as well or utilizing the tools and the - you know, the parts - not utilizing them well - as well as other regions - real significant differences. So, it's a training issue with their people. It's getting the word out. It's getting, you know, just making things happen, and with these big organizations, it takes time. So ...

I think one of the advantages that we have, John (ph), is that we have in the last two years we have pulled together a group of some real high-level high caliber industry relations people that their job is to go and meet with the adjusters, claims people, and so on, and in every city I talked to a guy yesterday that happened to be in Vegas. He had three meetings scheduled that day and gets - gets a room and has a bunch of - 30 or 40 people in each session and explains Keystone and aftermarket parts. There's a fair amount of turnover with the adjusters and that. As Charlie said sometimes what they - what headquarters may think is happening or what headquarters wants doesn't get down to the field level. In many cases the guys have to be familiar with who the players are, why they should be using Keystone, why Platinum Plus matters, et cetera, et cetera. It's an ongoing thing, but I think the numbers reflect it's getting better. We think we can continue to make it get better.

All right. Thanks, guys.

Thanks, John.

At this time, there are no further questions.

OK. Well, again, we thank you for your time and attention. We remain confident that our fundamentals are strong. We're moving in the right direction, and things should continue to improve for us.

So, if you ever have any issues, questions, concerns, don't hesitate to call John or myself.

So, okay. Thank you.

Thank you for your participation in today's Keystone Automotive Industries third quarter fiscal 2003 results.