LKQ Corp (LKQ) 2004 Q4 法說會逐字稿

Good morning and thank you for holding. I'd like to welcome you to your conference call with Mr. Mark Spears. All lines are in a listen-only mode until we do begin a question-and-answer session. The call is being recorded. Mr. Spears, I'll turn the call over to you and thank you for using the Sprint conference service.

Thank you, good morning. Before we get started, I need to make a few comments 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 of strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results 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 24, 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.

Good morning, and thanks for joining LKQ Corporation's 2004 fourth-quarter and annual earnings call. On the call today are two members of management, Mark Spears, our CFO, and myself. My name is Joe Holsten; I'm the CEO of LKQ. I will begin by providing some high-level overview of our performance as well as some qualitative perspectives on the business during the quarter, and then Mark will go into a more detailed discussion on our financial results. We reported an impressive fourth- quarter revenue growth this morning of 35% to $113.8 million. Our organic growth rate was 8%, with 27% of our revenue growth coming from business acquisitions. For the full year, our revenue growth was 30% to $424.8 million. Organic revenue growth for the year was 11%, and 19% of our revenue growth came from business acquisitions. This marks our sixth consecutive year of double-digit organic growth.

As we move into Q1 of 2005, we have seen our organic growth rate return closer to the levels we averaged in 2004, even though Q1 of 2004 which had a 17% organic growth rate will be a tough comparison quarter on an organic growth basis. You may recall during Q3 2004, we suffered almost 1% of revenue gross margin slippage from Q3 of 2003, but we have broadly recovered in Q4. Our gross margin was 46.1% for the fourth quarter, which was fairly consistent with the gross margin in Q4 2003 of 46.2%. Our net income increased by 68% in the quarter to $5 million, and diluted EPS increased 57% to $0.22, which was well toward the high end of our Q4 EPS guidance. Approximately $0.01 of this EPS was related to a couple of infrequent items we are not expecting to recur in the near future.

Net income for the year increased 41% to $20.6 million, and diluted EPS for the year increased 15% to $0.92. And again, I will remind you for the full year of 2004, we had 23% more diluted shares outstanding than in the full year 2003. We were particularly pleased with the strong operating cash flows in the quarter which improved by 46% over Q4 of last year to $5.7 million, and for the full year we generated almost $26 million in operating cash flows, representing a 24% improvement over 2003. As we discussed on previous calls, we acquired six businesses during 2004. One of the larger acquisitions was Global Trade Alliance, GTA, that does business as Action Crash Parts and moved our entry into aftermarket product line. In late Q4, Action Crash opened two new branches, one near St. Louis and the other northwest of Baltimore, with both facilities housed in existing LKQ plants.

Also in Q4, we combined Action Crash with LKQ facilities in Detroit, Raleigh, Evansville, Indiana, and in the first quarter of 2005, the Atlanta market. That brings the number of collocated Action Crash and LKQ facilities to 10. The combination of these facilities has resulted in some level of route consolidation and in some cases headcount reductions. During fourth quarter, Action Crash also opened a warehouse in Oakland, California, which began serving the West Coast market on a limited basis in January. It's expected to be fully stocked by the beginning of March. We further expanded the size of the Dallas warehouse and plan to open aftermarket branches to serve Houston, San Antonio, and Oklahoma City in the upcoming quarters. The open of Dallas warehouses allow LKQ's recycled parts facilities located in Northern California, Texas, Oklahoma, Kansas, and Nebraska to now sell aftermarket parts.

While Action Crash was our initial expansion into selling aftermarket parts, we further enhanced our aftermarket parts platform with our recent acquisition of the Bodymaster business that supplies aftermarket parts into Eastern Pennsylvania, New Jersey, Delaware, Maryland, and Washington D.C. These geographic areas were not served by Action Crash, and for the most part are areas LKQ has little or no recycled marketshare either. The Bodymaster acquisition we acquired on February 1, 2005, had revenues in 2004 of $19.5 million, and we paid $15.4 million net of cash for the business.

Our aftermarket business now operates out of six large warehouses totaling about 400,000 square feet in size. These are located in Charlotte, North Carolina; Columbus, Ohio; Dallas, Texas; Oakland, California; Pennsauken, New Jersey; and Philadelphia, and Landover, Maryland just outside of Washington D.C.. The combined aftermarket business operates 25 transfer runs and 245 local delivery routes for the (indiscernible). This does not include the 53 transfer runs and 343 local delivery routes our recycled parts businesses operate. In various areas, the recycled parts route also deliver aftermarket parts. In total, LKQ has amassed a delivery system of almost 600 local delivery routes, and part our long-term strategy is to drive additional value from this distribution network.

For the full year 2004, our consolidated aftermarket collision replacement parts revenue was $43 million, with gross margins of 46%. One product line that Action Crash Parts carries is automotive aftermarket headlamp lighting, which is approximately 50% of our aftermarket part revenue. Headlamp lighting is about 1.5% of LKQ's total consolidated sales. As we have discussed on these calls before, several insurance companies have stopped writing aftermarket lighting because CAPA indicated four model types of aftermarket headlamp lighting may not meet required specifications. In particular, to the best of our knowledge, Allstate, State Farm, Geico, USAA, and AAA are not currently writing aftermarket headlamp lighting. Despite this, we have continued to see no revenue decline in our aftermarket headlamp lighting sales.

To talk about our recycling business a little bit. Our second significant acquisition of 2004 was Foster Auto Parts, and this related company that we closed on October 26, '04. We acquired Foster for approximately $19 million net of acquired cash. As we discussed in our Q3 2004 earnings call, this is a recycled OEM automotive replacement parts business based in Portland, Oregon which serves the Central and Coastal Oregon and Western Washington market areas through seven primary locations, three of which are retail. The trailing annual revenue of this business is approximately $28 million, and I'm happy to note that we have been very pleased with the performance of this business which we intend to use as a stepping stone into the Seattle market.

As it relates to our recycled facility, Greenfield expansion, our Southern Pennsylvania location began dismantling in Q2, our Central Texas location in the third quarter, and we began production operations in our Baton Rouge, Louisiana facility in the fourth quarter of 2004. At the time of our IPO, we were planning to do two Greenfields in late '03 and 2004. But as opportunities came up, we have moved forward on them. These three facilities have incurred and will incur small operating losses the first few quarters of their operation, but we believe these market entries will come at a very nominal cost to our shareholders.

Our EBITDA totaled $10.2 million for the quarter or 9% of revenue, compared to 6.5 million 7.7% of revenue in 2003. For the full year, our EBITDA totaled $42.2 million, about 10% of revenue compared to 31.6 million or 9.6% of revenue in '03. In terms of our salvage acquisitions, namely our procurement, we acquired approximately 21,500 vehicles during the fourth quarter, and 84,600 vehicles for the full year from all sources for our wholesale business, which was about 10% more than we acquired during the fourth quarter of 2003, and 13 percent more than the full year 2003. The percentage of vehicles we acquired from salvage auctions in 2004 accounted for about 92% of our total incoming product flow.

In terms of geographical expansion, we are working on a healthy backlog of recycling acquisition candidates, and expect to close on a transaction in the second quarter. In order to continue to grow marketshare, we market primarily through 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 strong relationship with insurance carriers continue to pay dividends. I would like to note just a few of the fourth quarter insurance-related projects.

First, we entered into a revenue share pilot with Nationwide Insurance. Vehicles are prescreened for entry into the program prior to being picked up. Having successfully met the expectation of the pilot, we are told our program will be rolling out into other markets. And once fully implemented, we expect to see approximately 150 to 200 vehicles per month from this program. We also received a commitment to expand our revenue share arrangement with farmers to new major markets. While not fully committed to volume, we expect to add at least 150 cars per month from this program expansion.

In conjunction with our revenue share arrangement with Nationwide, we also received a commitment for a repair order review program for their Northeast territory, including Ohio, Pennsylvania and New York, and we also began a small estimate review relationship with Unique Insurance of Illinois, which is a carrier that uses aftermarket products of all types. Finally, we participated in a pilot with ADT and State Farm to review estimates from South Texas during the fourth quarter. We were 1 of 13 recyclers afforded an opportunity to bid on potential parts opportunities. There are 54 repair shops in the program, and for the pilot we reviewed over 1500 estimates. We understand that ADT is pleased with the program and plans to expand it into additional U.S. markets. As I discussed on last quarter's earnings call, we want to continue to increase our sales staff levels for our recycled business, and we did so by an average of 13 people or about 4% more reps in the fourth quarter.

In summary, we believe the outlook for the business and our company remain strong as the industry continues to enjoy strong fundamentals or higher utilization of recycled and aftermarket repair parts. To our recycled and aftermarket parts offering, we believe we provide a compelling value proposition to a wide array of customers and have an industry unique position to leverage request activity in order to sell both product types to our customer base. Furthermore, we are beginning to better leverage our facilities, distribution systems, and sales organization of LKQ in order to provide faster growth of our aftermarket product line.

At this point, I'd like to ask Mark to move into his more detailed discussion on our financial report.

Good morning everyone. Let's take a look at the tables in our press release. Now 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 and related tables, our Q4 2004 revenue was up 35.1% to $113.8 million. For the full year, revenue grew 29.5% to $424.8 million, compared with 328 million for 2003. Our organic revenue growth was 7.8% for the quarter and 11% for the full year. Our facility and warehouse expenses for Q4 2004 grew 3.7 million or 38.9% over Q4 2003. The majority of this growth, however, was our 2004 business acquisitions, which accounted for 3.2 million of the growth. For the full year of 2004, these expenses as a percentage of revenue improved to 11.3% from the 11.8% in 2003. For the year, facility and warehouse expenses grew 23.6% over 2003. I wish 21.6% of the expense growth was due to our 2004 business acquisitions.

Our expenses were benefited for the year by $720,000 or 1.9% of 2003 facility and warehouse expense due to our acquisitions of real estate in the first half of 2004 that we previously rented as we have discussed in prior earnings calls. Our distribution expenses for Q4 grew $3.4 million or 35.3% over Q4 2003, of which $2.7 million 28.1% expense growth was due to our 2004 business acquisitions. For the full year of 2004, distribution expenses as a percentage of revenue grew to 11.3% from the 10.8% in 2003. For the year, distribution expenses grew 35.9% over 2003, of which $7.7 million 21.8% of the expense growth was due to our 2004 business acquisitions. The balance of the distribution expense growth over the year which is 14.1% growth was primarily attributable to our continued investment in our distribution network. We operated an average of 11.6% more daily salvaged transfer truck runs in 2004.

In 2004, contract to salvage transfer services also increased 29.2%, common carrier freight 12.4%, repairs and maintenance about 12%, and delivery supplies close to 19%. Our largest distribution network enabled us to grow the revenue that runs over our transfer runs by approximately 30% over the 2003 volume. In addition, fuel expense for the year increased by 21.4%. For 2004, fuel expense is approximately just under 12% of our total distribution expenses.

Selling, general and administrative expenses grew 3.2 million or 24.4% over Q4 '03, of which $2.5 million or 18.6% expense growth was due to our 2004 business acquisitions. For the full year, selling, general and administrative expenses as a percent of revenue decreased to 14.1% from the 14.7% in 2003. For the year, selling, general and administrative expenses grew 11.8 million or 24.4% over 2003, of which $6.5 million or 13.3% 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. During 2004, we include approximately $2.8 million in costs related to being a publicly traded company, compared to the $600,000 that we incurred in 2003. So on a full-year basis, our public company cost increased by $2.2 million in 2004 over 2003.

In addition, approximately $156,000 in costs related to vesting certain stock options was recorded in Q4 2004. As Joe mentioned earlier, our EBITDA on a full-year basis in 2004 was 9.9 percent of revenue compared to 9.6 percent in 2003. While this margin expansion is only 0.3% of revenue, the 2.2 million increase in public company cost accounts for a decline of 0.5% of revenue. As we move into 2005, the public company cost should not be increasing in 2005 from the 2004 levels. In fact, we will see somewhat of a drop. Our operating income for Q4 2004 grew 54.3% over Q4 2003. Operating income as a percentage of revenue was 7% in Q4 2004 versus 6.1% in Q4 '03. On a full-year basis, operating income for 2004 grew 34 percent over 2003's level. As a percentage of revenue, operating income improved to 8.2% in 2004 from the 7.9% in 2003. Again, the additional growth in public company cost would have recorded another dilution that came back. Like I said, it was about 0.5% of revenue.

Interest expense for the quarter is about twice that of Q4 '03. This is primarily due to debt incurred on our 2004 acquisitions. Interest expense net for the full year is lower than the 2003 amounts, primarily due to lower debt levels and lower interest rates. Included in interest expense in the first half of 2004 was approximately $346,000 of previously paid debt issuance costs that were written off related to terminating our secured credit facility back in February 2004.

Other income includes about $384,000 related to nontaxable proceeds from a life insurance policy. The accrual of this amount related to the death of an employee in Q4 2004. We have various life insurance policies on some employees to fund preferred compensation plans set up as retirement benefits for such employees. Our Q4 2004 pretax income grew 60.5% over Q4 2003 to 7.9 million. As a percentage of revenue, our pretax was 7% for Q4 '04, compared to 5.9% in Q4 '03. For the full year, our pretax income grew 40.2% over 2003 to 39.9 million. As a percentage of revenue, our pretax was 8% for the full-year 2004, compared to 7.4% in 2003. Our provision for income taxes was 39.2% for the full year of 2004, compared to 39.7% for 2003. However, note that the $384,000 of income on the life insurance policy we discussed earlier was nontaxable. Had it not been for the life insurance proceeds, our tax rate in 2004 would have been the same rate as in 2003.

Net income for Q4 2004 increased 67.9% to $5 million from $3 million in Q4 '03. Net income for the full-year 2004 increased 41.1% to $20.6 million from $14.6 million in 2003. Our diluted earnings per share increased 57.1% to $0.22 in Q4 '04 versus $0.14 in Q4 '03. For the full-year 2004, our diluted earnings per share increased 15% to $0.92 versus $0.80 in 2003. Be careful when looking at the full-year EPS growth of 15%, however, because the number of shares outstanding increased 22.8% over the prior year. Our diluted weighted average common shares outstanding were as follows. Q4 2004, 22.5 million, versus Q4 '03 at 21.5 million. Full-year 2004 at 22.4 million versus full-year '03 at 18.3 million. 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 half of '03, and then issued 5 million new shares in our IPO in early October 2003. We also issued approximately 187,000 shares in the first half of 2004, related to our business acquisitions. Other changes in average diluted shares outstanding related primarily to the effect of the exercise of stock options and warrants.

Let's take a look at our cash flow table. We generated 25.9 million in cash from operations during 2004, compared to 20.9 million in 2003. CapEx, excluding business acquisitions for 2004, was 25.6 million net of sale proceeds. This included, however, approximately 11.4 million in real estate we acquired during the first six months of 2004 that was previously under lease. Cash paid for our business acquisitions during 2004 was 61.6 million. Stock issued for our business acquisitions during 2004 was approximately 187,000 shares for $3.1 million, all coming in the first half of 2004.

In looking at our 2004 year-end balance sheet, you will note we had 50.3 million in debt, which included 47 million in debt under our unsecured credit facility with our bank group. As of today, our credit facility debt is at 60 million, with the increase related to acquiring the Bodymaster business in February 2005. At the time of acquiring Bodymaster, we increased our unsecured credit facility availability from $75 million to $100 million with our bank group. Our 2005 guidance below is consistent with our January 10, 2005, financial guidance announcement, and includes the $0.03 to $0.04 increase in diluted earnings per share effect of our recent Bodymaster aftermarket business acquisition that we did on February 1, 2005. We expect the full-year 2005 revenue will be within a range of $523 million to $529 million, and that organic revenue growth will be in the low double-digits, with the balance of the growth being the full year impact of 2004 business acquisitions and our 2005 acquired aftermarket business. We expect net income to be within a range of $24.6 million to $25.7 million, and diluted earnings per share to be between $1.07 and $1.12.

For the first quarter of 2005, we expect revenue to be between $129 million and $131 million, net income to be between 6.6 million and $7 million, and diluted earnings per share to be between $0.29 and $0.31. The indicated guidance does not include the impact of SFAS 123R, accounting for stock-based compensation, which is effective July 1, 2005. We estimate this recent accounting standard will have a negative effect on net income of the Company in the second half of 2005 by approximately $500,000 or $0.02 per share based on anticipated plans for our stock options. Our 2005 guidance does not include the effect of any future business acquisitions.

We anticipate that net cash provided by operating activities for 2005 will be in excess of $20 million. We estimate our full-year 2005 capital expenditures including any -- excluding any future business acquisitions we may do to be approximately $18.5 million. We estimate the weighted average diluted shares outstanding for the full-year 2005 to be approximately 23 million and for the first quarter to be approximately 22.9 million. These share numbers are estimates, and as such will be affected by factors such as any future stock issuances, the number of our options and warrants, exercise in subsequent periods and changes in our stock price.

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

Thanks, Mark. Just to sum up here, I would like to say that we're pleased with the performance of our company in the fourth quarter, and believe that the outlook for our company is strong. We service an enormous $125 billion automotive parts market, which has a high demand for parts alternatives that provide good quality and a good value proposition, and we continue to see the number of vehicles in operation and the total repair market to grow. We believe that LKQ enjoys a unique position of being the only national and well-capitalized company serving the market demand for recycled product, and through a combination of same-store sales expansion and acquisitions, we see minimum 20 percent top-line growth for 2005. We also believe that the Company is reaching the stage in its development that we will begin to see the financial benefits of leveraging our asset base, and specifically in our facilities warehouse and G&A cost areas. I'm happy to report that the business is off to a good start so far in the first quarter, and we look forward to reporting to you on our progress for 2005 in about 60 days. I think we are ready for any questions at this time, Mark.

(OPERATOR INSTRUCTIONS) Scott Stember.

Joe, could you maybe elaborate a little bit? You mentioned that the first quarter of '05 is off to a good start, and you mentioned some of the numbers from last year. Is it fair to assume that the comps are in that low to mid teens range so far?

Yes, we have got a real good view in January and the first couple of weeks of February. We are sitting right close to an 11 percent same-store sales growth for '05.

Okay. Would this indicate that at the body shop level that you are seeing some nice pickup, whether it is from a backup of orders from the Florida mishap in the third quarter or just from weather around the country in general?

I would say, Scott, it's more weather around the country in general. The second half of the year felt a little soft on the collision repair side of the business, and certainly the first quarter so far is feeling like a more normal repair market that we have seen kind of our six or seven years being in the business. I certainly wouldn't say that Florida is a robust market right now. It is pretty general across the country.

Can you talk about the auction climate, what you are seeing there as far as supply goes?

Yes, supply is very good. Just to give you an idea of the volume of product out there and other continued concerns about product that's going out-of-state and out-of-country, in any given week the auctions we attend have about 40,000 vehicles, sometimes maybe even a little bit more than that. And today to acquire the amount of salvage that we need for our business plan, we write up and assess somewhere between 25 and 28 percent of that product. Of what we assess, we win somewhere between 14 and 16 percent; maybe on a good week, we win 17. So I think that gives you an idea of the magnitude of the product that is available in the market throughout the country for us to look at. As to be fair, would we be interested in buying all 40,000 of those vehicles? Well, absolutely not. But it is a substantial amount of product in the market for us to assess every week.

Last question. Can you maybe just elaborate a little bit on Bodymaster? And you mentioned that you have very little, if any, salvage presence or recycled presence in the mid-Atlantic area? How would you plan on dovetailing some of those products into that region? Would you set up actual dismantling facilities there at some point, or just a matter of just shipping product in there?

No, Scott, we will ship product in. We will probably use the Landover, Maryland facility as a cross-dock operation. So we will leverage their warehouse and docking facilities there by overnighting recycled product into the market, and we will deliver recycled parts and aftermarket parts on exactly the same route truck. That is kind of the beauty of bringing these businesses together in my view. We get customer recognition and affiliations because of Bodymaster's long-standing presence in the market. It is going to provide recycled product line an opportunity to expand. In the Pennsauken or Philadelphia area, we already do some delivery into that market and have a small cross-dock operation. So that will be more leveraging our joint customer base as opposed to an actual facility benefit.

Okay, that is all I have. Thanks a lot, guys.

Craig Kennison.

This is actually Ryan for Craig. A couple of questions. First off, it looks like your collision replacement parts business did about 14 million in the quarter. Is there some seasonality in that or is it an acceleration in that business, or your expanded options -- has your expansion already started paying off there?

Yes. Probably our same-store sales growth on the aftermarket side, we had mentioned previously we think that we can achieve 20% growth in '05. And we were a little short of that level in '04, but as we are populating these warehouses we mentioned and we're opening up more inventory availability into the traditional LKQ recycled markets, we should see some acceleration in the same-store sales growth.

Then your revenue guidance of 523 to 529, what specifically is that assuming for your organic growth, and does that number increase throughout the year?

It is assuming low double-digits from the organic growth, and I think we have that pretty flat-lined across the year.

Okay. Finally, on the inventory it was up about 20 million year-over-year and 10 million sequentially. Was there something in the fourth-quarter number maybe from acquisitions that resulted in that bump-up?

Well, we acquired Foster Auto Parts in late October, and that was around $6 million of the increase in inventory.

Right.

Okay, great. Thank you.

Bill Armstrong.

Good morning. You mentioned earlier that a number of insurance companies have stopped funding aftermarket headlamps, and that is about 50% of Action Crash Parts business, but you haven't seen a revenue drop-off. How is that possible?

I'm sorry, I wasn't enunciating very effectively on the call. It is 15, 15%.

Oh, 15%.

15% of our aftermarket sales.

Okay. Even so, I would have thought that you would have seen some drop-off.

We watch it week-to-week and month-to-month, and it is not growing, but we haven't seen any loss of revenue in those product lines.

Okay. The other question is cash flow from operations for '05, you're projecting it a little bit over 20 million, which would be down from 25.9 million in '04. I was wondering where the difference is coming from.

We said over 20 million, what we tried to even do this, just probably bump our inventory up a little bit and didn't get it all done. So we're trying to grow our inventory a little bit. If you ask me for a range, it would be more like 22 to 25 million.

Okay, thanks.

There are no other questions at this time.

Okay, perfect.

I'm sorry, there is one that just came up. John Barnes (ph).

Can you just talk a little bit about on the aftermarket, since you have had that business and you continue to expand it, what are you seeing the dynamic of the insurance company on those calls coming in? Can you just update us on that a little bit? How does that change with the inventory position and how do the insurance companies view that, now that you have more inventory availability of the aftermarket side? Can you just walk us through that, please?

This is primarily more with the collision repair shop. The insurance industry, they are picking up aftermarket information in their quote system to (indiscernible) the package. They are picking up the availability of aftermarket through the various part data services that are out there. So our real opportunity here, the short answer to your question is that we have gotten fantastic feedback from all of our insurance customer relationships for having moved into the aftermarket business. They think it is a great fit of our product lines and think it is a tremendous value for their collision repair shops, their DRPs. That said, I think where the real sales opportunity comes in is not only getting our name on an estimate of having the aftermarket parts but having the availability of product when the actual collision repair shop is making their purchase. So there is a process to educate our customers that we have both product lines available, that it doesn't happen overnight, and that is why we feel that our same-store sales growth on aftermarket parts will start to accelerate as we move into 2005.

There are no other questions at this time.

I'd like to thank all of you for joining our call today. As I said, we look forward to updating you on the Company's progress for the first quarter of 2005. The business is off to a very good start, and we will talk to you all again in about 60 days to report on our results. Thanks again.