LKQ Corp (LKQ) 2004 Q1 法說會逐字稿

Thank everyone for holding and welcome to today's LKQ conference call. I am required to inform you that today's conference call is being recorded. We will be in a listen-only mode for the first 20 minutes, and then after 20 minutes we will open it up to questions and answer session. I will give instructions at that time on how to place yourself in queue to ask questions. Now I'll turn today's conference call over to Mark Spears, and thank you for using Sprint Conferencing Services.

Good morning. Before we get started I need to talk about forward-looking statements.

The statements in this press release and webcast include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations, beliefs, hopes, intentions, or strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or result may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. These factors include the risk factors and other risks that are described in our Form 10-K filed March 24th, 2004, and in other reports filed by us from time to time with the Securities and Exchange Commission. We assume no obligation to publicly update any forward-looking statement to reflect events or circumstances arising after the date on which it was made except as required by law.

Okay. Good morning and thanks for joining LKQ Corporation's first quarter 2004 earnings call.

On our call today are two members of management, Mark Spears, our Chief Financial Officer, and myself. My name's Joe Holsten, and I'm the CEO of LKQ. I will begin by providing some high-level overview of the quarter's performance as well as some qualitative views on the business during the quarter, and then Mark will provide a more detailed assessment of our financial results.

Let me begin by stating that I'm extremely pleased with the company's financial performance for the quarter, which did exceed our expectations. Today we are reporting revenue for the quarter of $100.1 million. This level of sales is 26.3% greater than the first quarter of 2003. Our first quarter results showed revenue growth from acquisitions of 9.3%, and an organic growth contribution of 17%, as a result of strong demand from our collision repair customer base. We are very encouraged to see this strong combination of internal and acquisition-driven top-line growth as we continue to employ the proceeds of, and the financial flexibility provided by, our IPO of last October.

I'd also then very pleased with the progress to date in integrating Global Trade Alliance, or GTA, into our company. And while much work remains to be done, the initial reaction from our customer base has been quite positive. Our recently acquired self-service retail business in Florida is also performing according to expectations, and has been rapidly integrated into our business management system.

Distribution expenses continue to grow faster than other costs as our company continues to invest in its valuable distribution network, which in turn has contributed to a high organic revenue growth in the quarter. Our EBITDA totaled $11.5 million for the quarter, or 11.4% of sales. This performance reflects a 35.3% growth over the first quarter of 2003.

Finally, our net income for the quarter was $5.6 million, which is an increase of 43% over the first quarter of last year. Our EPS for the quarter, fully diluted, is 25 cents, compared to 21 cents last year, and I will remind all of you that when comparing the Q1 '04 EPS to the Q1 '03 EPS that LKQ incurs the dilutive impact of our newly issued shares from the Q4 2003 public offering.

For the quarter we acquired approximately 22,750 damaged vehicles from all sources for our wholesale business, which was about 16% more than we acquired during Q1 of last year. The percentage of vehicles that we acquired from salvage auctions in the quarter accounted for around 92% of our total incoming product flow.

In terms of our market development activities, our focus remains unchanged. We continue to market primarily to the insurance carriers and secondarily to the collision repair shops in order to attempt to first increase the utilization of recycled parts, and then to supply aftermarket parts to the extent recycled parts are unavailable. Our Vice President of Insurance Services continues to work with major carriers, and we are hopeful that additional programs for estimate review assistance and direct salvage purchasing will continue to be implemented throughout 2004.

During our last earnings call we indicated that we were working on a small direct salvage program coupled with an estimate review program in Ohio with a major carrier. We did sign that agreement in late February, but the program was delayed due to temporary issues between the carrier and a local auction company. The carrier has worked through those issues and has indicated that they will begin vehicle shipments to LKQ around the first of June.

I was also pleased that the salvage business has continued improvement in the sales area, as we were able to achieve our increase in third-party sales while only adding an average headcount of about 4.6% in the sales staff area, as compared to the first quarter of 2003. We continue to press for geographical expansion opportunities. One greenfield was completed and began operations in mid-February of this year. This operation, LKQ Penn-Mar, is located in south-central Pennsylvania and will also service our platform to supply the Baltimore market, a relatively new market for LKQ. We continue to have one greenfield development that is pending local zoning approvals of our building permit which looks more like a late 2004 completion date now, and we are in the process of obtaining property that is permitted for dismantling operations in two southern states that we expect to become operational in the second half of 2004. As these developments are cold starts, we do not expect any contribution toward 2004 EPS from either project.

As we reported on our last earnings call, we completed three business acquisitions in the first quarter of 2004. These consist of first a full production salvage facility near St. Louis. That was on January 28th. Second, the acquisition of Global Trade Alliance, or GTA, one of the largest suppliers of aftermarket collision automotive replacement parts in the midwestern United States. That was completed February 20th. And third, the acquisition of a business in the greater Tampa, Florida area, that is in the self-service retail recycled automotive parts business, and we completed that on the 25th of February.

By entry into the aftermarket collision automotive replacement parts market the addressable insured collision repair market for LKQ was effectively doubled. We'll remind you there are also operational synergies to be achieved through combination of LKQ and GTA, which include sales and marketing, local delivery, intercompany transfer systems, facility utilization, and certain administrative functional areas. We view the acquisition of GTA as a very important development to further enhance our core competency of procuring the product that we need, only what we need, and becoming a more valuable and predictable supplier of replacement auto parts to the collision repair and insurance industries.

For the period beginning February 20th, through the end of the quarter, March 31st, GTA's revenue was $5.5 million, and the related gross margin was 44.3%. We're pleased with the results of all of our new business acquisitions.

At this point, I'd like to ask Mark to provide a more detailed discussion on the company's financial reports.

Thank you, Joe.

As Joe indicated earlier we had a good first quarter. Let's take a look at the tables in our press release. I know we have also included a table that reconciles net income to earnings before interest, taxes, depreciation, and amortization, otherwise known as EBITDA. Looking at our income statement, our first quarter 2004 revenue was up 26.3%, to 100.1 million from 79.3 million Q1 '03. Our organic revenue growth was 17%. Our first quarter 2004 gross margin was 47.0%, versus 47.3 in the first quarter of '03.

Our facility and warehouse expenses for the first quarter improved as a percentage of revenue to 10.7%, versus 12.2% for the same period in 2003. These expenses grew 10.6% in the quarter over Q1 '03, of which 8.4% expense growth was due to our 2004 business acquisitions.

Our distribution expenses for the first quarter as a percentage of revenue grew to 10.7%, versus 10.3% for the same period in '03. Distribution expenses grew 31.4% in the first quarter over Q1 '03, of which 10.4% expense growth was due to our 2004 business acquisitions. The balance of the distribution expense growth was primarily attributable to our continued investment throughout '03 and '04 in our distribution network. We grew the number of our local salvage delivery routes by an average of around 12% for the first quarter over the same period in '03. We also operated an average of 15% more salvage transfer truck runs in Q1 '04 over Q1 '03.

In addition, during Q1 '04 we converted five of our small size transfer trucks that we operated internally to a large -- to large tractor-trailer rigs that we then subcontracted out. The product we transferred between our plants during Q1 2004 was approximately $37 million, which was just over a 38% increase from the level that we transferred in Q1 '03.

Fuel prices for '04 as compared to '03 for the quarters had actually been fairly comparable. Selling, general, and administrative expenses as a percentage of revenue were a 14.2% for Q1 '04 and '03. Selling, general, and administrative expenses grew 26.3% in the first quarter over Q1 '03, of which 6.1% expense growth was due to our 2004 business acquisitions.

Our selling expenses tend to be fairly variable in nature due to our commissioned inside sales force. Our general and administrative costs are usually less variable in relation to revenue growth. However, in the first quarter of '04, we incurred approximately $600,000 in additional costs related to being a publicly traded company. These additional costs include an increase in insurance premiums on director and officer insurance coverage, and additional legal, audit, and other fees related to the normal reporting requirements of being a publicly traded company. We anticipate this additional level of cost will continue in the future.

Our operating income for the first quarter of 2004 grew 40.5% over Q1 '03. Operating income as a percentage of revenue was 9.9% in Q1 '04, an improvement from 8.9% in Q1 '03. Interest expense in Q1 '04 included approximately $346,000 of previously paid debt issuance cost that were written off related to terminating our secured credit facility in February 2004. This equated to approximately 1 cent of diluted EPS effect. This is, of course, nonrecurring.

Our Q1 2004 pretax income grew 43.7% over Q1 2003 to 9.4 million. As a percentage of revenue, our pretax improved to 9.4% in Q1 '04 compared to the 8.3% in Q1 '03. Our provision for income taxes was 40.2% for '04, net income for Q1 2004 increased 43% to 5.6 million from 3.9 million in Q1 '03. Our diluted earnings per share was 25 cents in the first quarter of '04, versus 21 cents in the first quarter of '03.

Be careful when looking at this 19% EPS growth, however, because the number of shares outstanding changed over the year. Our diluted weighted average common shares outstanding were as follows: Q1, 2004, was 22,181,075; versus Q1 '03, which was 18,539,292 -- that's a 19.6% increase in share count.

You need to note that the number of weighted average common shares outstanding in 2004 versus 2003 changed primarily as we repurchased 3.6 million shares of our common stock back in the first two quarters of '03, and then issued 5 million new shares due to our IPO in early October 2003. We also issued 123,000 shares in the first quarter of 2004 related to our business acquisitions. Other changes in average diluted shares outstanding related to the effect of changes in our stock price and the exercise of stock option and warrants.

Let's take a look at our cash flow table. We generated 5.9 million in cash from operations during the first quarter of 2004, compared with 5.1 million in Q1 2003. We did so while increasing our salvage inventory by some 4.4 million, or approximately 8% over the Q1 2003 level and the Q4 2003 level. Cap Ex for the quarter was 6.7 million, that's the gross number before retirements, excluding business acquisitions. Cash paid for our business acquisition in the quarter was 39.6 million. We also exercised a warrant to buy 100,000 shares of Keystone Automotive stock at $6.50 per share, but these are restricted shares subject to a holding period under SEC rules.

In looking at our first quarter 2004 balance sheet, you will note we had 34.4 million in debt, which includes 30 million in debt under our new credit facility. As of today our credit facility debt is 33 million. Our quarter end inventory is up to $66 million, but 7.8 million is related to our 2004 business acquisition, with the majority being GTA.

As we discussed on our last earnings call, we completed a new credit facility effective February 17th, 2004, for 75 million unsecured revolving credit facility to replace our secured credit facility. As part of this loan closing, we did terminate our secured credit facility.

In summary, we are pleased with our first quarter results, which were slightly ahead of our expectations. In our February 26 press release, we gave guidance for full year 2004. Including business acquisitions we have announced to date, we expect revenue to be between $410 million and $425 million, net income between $20.6 million and $21.7 million, and diluted earnings per share between 92 cents to 97 cents. This annual guidance range remains unchanged from that previously issued.

For Q2 2004, we expect revenue to be between 103 million and 106 million. Net income between 5.2 million and 5.6 million, and diluted earnings per share between 23 cents and 25 cents. Using these estimates, our net income growth for Q2, 2004, over Q2, 2003, is expected to be between 26% and 36%.

We estimate the weighted average number of diluted shares outstanding for the full year and the second quarter 2004 to be approximately 22.4 million shares. These share numbers are estimates, and as such, will be affected by factors such as stock issued in any future acquisitions we may do, the number number of stock options and warrants that are exercised in subsequent periods, and changes in our stock price.

We estimate our full year 2004 capital expenditures, excluding any future business acquisitions we may do, to be around $30 million. However, this does include approximately $12 million to purchase real estate we have under operating leases, $3 million related to new start-up facilities, $1.4 million to consolidate our core business operations in Houston from two facilities to one, and $2 million related to our three Q1 2004 acquisitions.

I would like to turn it back to Joe for any further comments and to open up for Q and A.

Thanks, Mark. We're very happy with the start of the business to the year. We're particularly pleased with the strong internal growth that our business operations accomplished the first 90 days of the year, and we also would reflect on the fact that the investments that we have made to date from our IPO proceeds are performing as we had expected.

At this point, I think we'd like to open the call up to questions, please. Chris?

Yes, if anyone would like to ask a question, please press star 1 on your touch-tone phone. And our first question is from Mark Sullem [ph]. Go ahead, please.

Thanks. I've got two separate issues. First, can you discuss the seasonality to your business, and whether we would expect stronger revenue in the middle two quarters or is the growth -- the organic -- the growth in your business overshooting the seasonality?

I think you've probably seen from our revenue charts tracking our quarterly history over the last five years, we historically have seen some softening late in the second quarter and into the third quarter, and then that starts to reverse as we get into the winter season, and that's particularly true on the collision repair side of the business. The mechanical side of our business probably is more flat, and if anything may actually show a little more strength in the summer months.

So the short answer to your question, you know, we do see -- typically we see some slight softening in the collision repair side of the business in late Q2 and Q3.

My second question, one of your -- there's a vice president that's been selling stock from March 24th through April 19th. Are there any restrictions in terms of what periods of time management can sell shares?

You want to go ahead?

Yes, we have a insider trading policy that prohibits trading during certain blackout periods. However, that particular vice president entered into a 10-B-5-1 trading plan, so he has given up his discretion and has agreed to sell at certain prices and levels.

Thank you.

Next question is from Craig Kennison. Go ahead, please.

Good morning, Joe and Mark. This is actually Brian Tilton on Craig's behalf. Congratulations on a solid quarter.

I was wondering, has your fill rate improved following the acquisition of GTA? On the last call you indicated you had as many as 1 million missed potential sales opportunities across the company, and do you see -- are you capturing some of those now?

Pretty early in the process to -- for to us make that claim. We are seeing the sales of GTA product to LKQ plants increasing percentage-wise it's been a fairly impressive growth over the last several months.

Keep in mind that the real focus of GTA the first 60 days has really been on, you know, keeping -- you know, getting the management team kind of linked up and solidified along with LKQ. There's been a strong focus on addressing some of the cost excesses that we felt existed within GTA, and to identify those areas where we have overlaps of costs, so the first 60 days we've really been mainly focused on those types of matters. We are in the process now of seeking two warehouses for a major inventory hubs, and we've also placed orders for parts to stock three of the LKQ plants with fast-moving aftermarket parts.

I think we're probably still a couple months away before starting to see that machine really work the way we think it can.

Okay. And my second question is, do you have any update on the Illinois Supreme Court situation involving generic parts?

No. It's just kind of going every other week to every other week. It's our understanding that the court is in adjournment until the end of May, so it would seem unlikely to us that there will be anything issued from the court until that time.

Okay. Thank you.

If anyone else would like to ask a question please press star 1 on your touch-tone phone. The next question is from John Lawrence. Go ahead, please.

From Morgan Keegan. Thanks.

Joe, would you comment just a little bit on -- about the process of how you decide how many purchased vehicles you will buy in a quarter and just walk through that process a little bit, please?

Sure.

The primary driving factor for our procurement is all demand-driven. As you probably recall, our buying group takes data that's collected by scouts, and they compare that data to recent demand history as well as stock levels within each of our trading zones, and through that process we seek to avoid significant replication overbuying of certain products.

The first quarter, in our opinion, is typically a more lucrative buying market for our industry and for our company, so we did accelerate purchases of product in the first quarter. It was the strongest buying quarter that we've ever enjoyed as a company, so our backlog of unprocessed vehicles is at an all-time high, as we speak.

Our thinking there was we would take advantage of good and healthy buying conditions in the first quarter, and then as we move into the last-half of the second quarter and into the third quarter, that we would draw down that backlog.

Great. Thank you.

Mark, just one quick question on the guidance. Does it have any -- I don't know if you can answer it this way or not. Any improvement or would you be expanding distribution costs within that guidance?

I think what you're asking is -- Q2 and the rest of the year, will we continue to add [inaudible] distribution runs, et cetera, and I would say yes. Probably not quite at the level we have. We have been trying to minimize that to an extent, but as you saw we had some pretty strong organic revenue growth, and I'm not sure we would have had all that had we not made the decision to expand some of our transfer runs, as long as we see that it's accretive here and growing our business we'll keep doing that.

Great. Thanks, guys.

Thank you.

At this time I indicate there are no further questions in queue. If you would like to ask a question, please press star 1.

And I still indicate no further questions, Mr. Spears.

Okay. Well, thank you for joining us today. It was a pleasure to report on the progress and status of the company, and look forward to talking to the group in another 90 days. Thanks again.