LKQ Corp (LKQ) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 LKQ Corporation Earnings Call. My name is Danielle, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the present over to Mr. Joseph Holsten, President and Chief Executive Officer. Please proceed, sir.

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 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 February 28, 2007 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 statements to reflect events or circumstances arising after the date on which it was made, except as required by law.

Good morning, and thank you for LKQ Corporation's First Quarter 2007 Earnings Call. On our call today are two members of management, Mark Spears and myself. My name is Joe Holsten, I'm the CEO of LKQ. I will provide some high level overview of our performance as well as some qualitative views on the business and our industry and Mark, our Chief Financial Officer, will provide a more detailed assessment of our financial results.

As stated in our press release, we are very pleased with our Q1 performance. We reported $235.3 million in revenue for the quarter, which represents over 22% total revenue growth over Q1 of 2006 and organic revenue growth of around 10%. Our EBITDA margin was 13.3% for the quarter, compared to 12.4% in the first quarter of 2006. Our net income increased nearly 31% to $15.8 million for the quarter, and diluted earnings per share increased by just over 27% to [28%].

As discussed on our February 26 call, we acquired two businesses in January and February. They were first Northern Light, a head and tail lamp refurbishing company that has 36 employees and operates out of a facility near Grand Rapids, Michigan. While a small operation today, we believe many of our light cores can be refurbished back into high quality replacement lights that can be sold to our collision repair and retail customers.

Northern Light was refurbishing 75 lights a day at acquisition time, but by the end of Q2 should be producing about 200 lights per day. This business provides us with the know how and the technology to refurbish used lighting products.

And second, we acquired Potomac German in February. Potomac German is a recycling business that serves the professional repair market, has 26 employees and operates on two properties totaling 13 acres. One of those facilities is in Frederick, Maryland and the other is in St. Augustine, Florida. Potomac has specialized historically in Mercedes Benz and BMW products. In March we acquired two businesses and in April we acquired one that combined had approximately $9 million in trailing annualized revenue prior to our acquisition date.

These three transactions are first Potomac, which is a retail oriented recycling business with two facilities in the Dallas, Texas area working from a combined total acreage of about 50 acres. Second, Crash Parts Warehouse, a small Aftermarket business located in Birmingham, Alabama and third, Thruway. Thruway is a small recycling business, revenue wise, located on 30 usable acres in Perryville, Pennsylvania.

This facility will essentially become a start-up recycling business in order to allow us to serve the professional repair market in the Greater Philadelphia area at a more meaningful level than we do today. This facility will likely be slightly dilutive to earnings in 2007 and probably neutral in 2008, but this market is huge and we believe we can organically grow this business substantially as we have done in many other markets. We expect these three acquisitions combined to provide less than $0.01 in diluted earnings per share for 2007, but in 2008 to provide over $0.01.

We continue to have a good pipeline of business acquisition candidates and in our press release this morning we announced three additional acquisition candidates have signed letters of intent. Other than the estimated combined annual revenues of $36 million from these businesses, we will not be divulging any further information on these potential transactions until they are closed.

With the deal flow that is closed and expected to close during Q2, we recently increased the capacity of our bank credit facility up to $205 million with an accordion feature that could take it up to $305 million with bank consent. On the Aftermarket side of our business we opened a I warehouse facility in Orlando, Florida during February that is next door to our recycling business.

The warehouse capacity dedicated aftermarket parts is approximately 55,000 square feet, and that allows us to offer a full line of aftermarket products for the first time in Central Florida, including both Central Coastal areas. Our recycling distribution and sales assets here should give us some nice sales transactions and this warehouse opening represents the ninth market cold start of our I operations in the last three years.

[Otherwise] in the Aftermarket business I'll just note now that we have not heard any new news from State Farm as to when they may begin requesting aftermarket products again, even though we are convinced that they will do so at some point. Our insurance relationships and programs continue to expand and contribute to our growth as well.

Our electronic estimate review service offering to the insurance industry, called LKQ Last Look, continues to be used in certain markets by three carriers today and a fourth is in the process of reviewing the product for a specific market as well. As we mentioned on our February call, we are also piloting with a body shop chain for their use of this system as well, to make it easier for them to buy all of their alternative parts from LKQ operations.

As we indicated on our year-end call, we have been trying to convince several carriers to directly provide us low-cost cars that would supply some parts to be sold into the professional repair market, with the remainder of the car being placed into our retail oriented businesses. For the last two quarters we averaged 125 cars per month of these low-cost type cars from one carrier in the Midwest market, and the number is now getting closer to 200 cars per month.

Also a second carrier has just recently signed up for a similar program that should generate up to about 50 cars per month of similar product. Our Right Choice Program with Advanced Auto Parts continues to grow and Q1 2007 grew 20% over the fourth quarter 2006 level. Our Q1 weekly average sales were about $135,000.

We are continuing to focus on more participation by Advanced stores and in Q1 about 57% of the 3,000 stores participated. At the end of Q1 we operated approximately 37 daily transfer runs and over 400 local delivery routes that carried primarily aftermarket parts and refurbished wheels, and approximately 64 daily transfer runs and over 420 local delivery routes that carried primarily recycled parts.

In various areas these recycled parts transfer runs and routes also deliver aftermarket products. In total LKQ has a delivery system of over 100 daily transfer runs and over 820 local delivery routes. We acquired approximately 31,800 cars in our Wholesale Recycled Parts business during the quarter. The percentage of vehicles that we acquired from salvage auctions during the quarter accounted for about 96% of our total incoming wholesale product flow.

We continue to increase our sales staff levels for our Recycled Parts business and we have done so by approximately 40 people more in Q1 2007 compared to Q1 of 2006. This is approximately a 9% headcount growth with approximately 18 employees or 4% coming from acquisition, and 22 employees or 5% coming from organic hiring.

In, summary we are very pleased with the growth prospects of the business as well as the first quarter results, and we continue to believe that we can grow our business organically at a rate in the low double-digits. We believe the business has a compelling and successful business model, as we have migrated our company operating model to be the nation's only major supplier of a broad product line of alternative repair parts to the professional repair industry, to provide an attractive value proposition to a wide array of customers as well as the industry.

We're in a unique position to leverage our inventories of recycles parts, aftermarket product and refurbished wheels, by having the ability to sell out of those combined inventories in response to customer request. We also believe that further margin expansion is possible as we continue to seek opportunities to better leverage our investment in facilities and distribution systems, and to find incremental value in the parts in each vehicle that we process.

At this point, I'd like to ask Mark to go into a bit of a more detailed discussion on our company's financial reports for the quarter.

Thank you, Joe, and good morning everyone. Let's take a look at the tables in our press release and know we have also included a table that reconciles net income to earnings before interest, taxes, depreciation and amortization, otherwise known as EBITDA. We also added supplementary data schedules related to our income statement to show growth in margin percentages.

Looking at our income statement and related tables, our first quarter 2007 revenue was up 22.5% to $235.3 million, from $192.1 million in Q1 2006. Our first quarter 2007 gross margin was 45.5% versus 46% in the first quarter of 2006. All of our gross margin erosion here is related to having an aluminum smelter. We had it for three months in Q1 2007, versus the two months that we had it in Q1 2006.

Our facility and warehouse expenses for Q1 grew $5.1 million or 25% over Q1 2006. The majority of this growth was from our 2007 business acquisitions and the full year impact of our 2006 business acquisitions, which accounted for $3.5 million of the growth or 17.1% expense growth. Excluding the effects of business acquisitions on facility and warehouse expenses, the first quarter of 2007 had increased costs over the first quarter of 2006, primarily related to labor and labor-related cost growth, of approximately $600,000. This related to increased staffing needs to handle parts volume growth.

In addition we had higher insurance and legal claims experience of $400,000, which included a single Workers' Comp incident of $250,000. Our distribution expenses for Q1 grew $2.2 million or 11.3% over Q1 2006, of which 1.2 million or 5.8% expense growth was due to our business acquisitions. Selling, general and administrative expenses grew $3.8 million or 15.3% over Q1 2006, of which 2.3 million or 9.4% expense growth was due to our business acquisitions.

Looking at these costs organically, during the first quarter of 2007 compared to the first quarter of 2006, we had 1.1 million in higher compensation and fringe costs. Our selling expenses tend to be fairly variable in nature due to our commissioned inside sales force. Our G&A costs are usually less variable in relation to revenue growth.

For the quarter our EBITDA grew 31.3% to $31.4 million. EBITDA was 13.3% of revenue for the quarter, compared to 12.4% in Q1 2006. Our operating income for Q1 2007 grew 34% over Q1 '06 to $27.3 million. Operating income as a percentage of revenue was 11.6% in the quarter, compared to 10.6% in Q1 2006.

We had net interest expense in Q1 '07 of $1.7 million, compared to net interest expense of $943,000 in Q1 '06. This was related primarily to higher debt levels. Our Q1 2007 pretax income grew 29.5% to $26.2 million, from $20.2 million in Q1 2006. For Q1 2007 our effective tax rate was 39.7%, however had it not been for $562,000 of non-taxable income on a life insurance policy, our effective rate would have been 40.5%.

This compares to an effective tax rate of 40.2% in the first quarter of 2006. Net income for the quarter increased 30.7% to $15.8 million, from $12.1 million in Q1 2006. Our diluted earnings per share increased 27.3% to $0.28 in the quarter, from $0.22 in Q1 2006. Our diluted weighted average common shares outstanding used for EPS purposes was as follows, Q1 2007 56.0 million shares, versus Q1 2006 55.5 million shares.

Let's take a look at our cash flow table. We generated $10.4 million in cash from operations during Q1 2007, which included the effect of investing $10.8 million of additional inventory. Purchases of property and other long-term assets in Q1, excluding business acquisitions, were $9.1 million. Cash paid for business acquisitions in the quarter was $14.6 million.

During the quarter we issued stock related to the exercise of stock options, that resulted in shares issued and dollar proceeds received that totaled approximately 29,000 shares for $358,000 in proceeds, which includes related tax effects. In addition, we retired 100,000 shares of redeemable stock for $1.1 million, related to a 2003 business acquisition. We issued no stock related to business acquisitions this quarter.

In looking at our March 31, 2007 balance sheet, you will note we had $117 million in debt, which included $103 million in debt under our unsecured credit facility with our bank group. As of April 26 our credit facility debt was at $117.5 million. We expanded this credit facility in April. Total maximum borrowings allowed under this bank facility is now $205 million, and if an accordion option feature is exercised and approved by participating banks, it could go to $305 million. This facility now matures in April 2012. At March 31, 2007 our debt-to-EBITDA ratio was 1.2 times.

The Financial Accounting Standards Board issued Interpretation Number 48 accounting for uncertainty in income taxes effective January 1, 2007. This new pronouncement required us to record additional income tax liabilities of approximately $300,000 related to previously unrecognized interest and penalties. The pronouncement required these liabilities be charged to retained earnings as of January 1, 2007.

Let's look at our 2007 financial guidance. We expect that 2007 organic revenue growth will be in the low double-digits, with the balance of the growth being the full year impact of 2006 business acquisitions, and our 2007 business acquisitions closed to date. We expect full year 2007 net income to be within a range of $54.2 million, to $57.2 million, and diluted earnings per share to be between $0.96 and $1.01. This guidance only includes closed business acquisitions.

For the second quarter of 2007, we expect net income to be within a range of $13 million to $13.5 million, and diluted earnings per share to be between $0.23 and $0.24. Due to a new State tax law that was enacted in April 2007, we will be required to adjust some deferred tax assets in the second quarter of 2007. We estimate that our tax assets and net income will be reduced by approximately $600,000, which will lower our diluted earnings per share by one penny in the second quarter of 2007.

Our earnings guidance for the full year 2007 and the second quarter of 2007 includes the effect of this new tax law. Accordingly, had we not had this tax law change, our diluted earnings per share guidance would have been $0.97 to $1.02 for the full year 2007, and $0.24 to $0.25 for the second quarter. We anticipate that net cash provided by operating activities for 2007 will be over $55 million.

We estimate our full year 2007 capital expenditures related to property and equipment, excluding the expenditures of LKQ acquiring businesses, will be between $45 million to $50 million. This includes approximately $5 million related to capital expenditures planned in late 2006 on projects that became delayed.

We estimate the weighted average diluted shares outstanding for the full year 2007 to be approximately 56.5 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 exercised in subsequent periods, and changes in our stock price.

I'd like to turn it back to Joe for any further comments, and to open up to Q&A.

Okay Mark. Let's just go right to the Q&A.

Yes, sir.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Tony Cristello with BB&T. Please proceed.

Thanks, good morning, gentlemen.

Hey, Tony.

Good quarter. I guess first I wanted to start, when you look at the quarter itself, how much did Transwheel contribute in Q1? I know you breakout total $60 million and that's reflective of a few pieces, but I'm just trying to look at the Transwheel part.

Yes we did right at about $8.5 million, so you'd be annualizing at $34 million. That's about a 20% higher wheel sales than what we acquired. I do want to point out, and we had this factor in the pro forma, immediately after we bought them we lost a couple million dollars of revenue because they had sales with one of our big competitors in the aftermarket on the wheel side of the business. So, if it wasn't for that we'd have grown 25% to date.

Okay. But that 8.5 is only over February and March though right? I mean I'm --.

I'm sorry, that 8.5 million was my Q1 2007 number.

Okay, but only two months of it are effectively included in your same-store sales base, is that correct?

Yes. We're just trying to tell you how much we grew the business.

Yes no, and I'm just trying to look at from a comp standpoint maybe a couple million dollars that have been included in year-over-year for the whole quarter would have been in -- your same-store sales could have been even higher, is that correct?

I'm not sure I follow.

I'm just trying to understand the difference here that, when you look at Transwheel as a whole, it wasn't included in all of the quarter last year. So apples-to-apples, same-store sales, if it was included, would have been higher and maybe your total revenue that was non-same store sales --.

Yes you're saying what if we had it three month to three month, would we have had higher same-store sales. Yes.

Okay. And then moving to some of these other acquisitions, I wanted to get some clarity on the business in it looks like Philadelphia I think, Joe, you said was going to be dilutive this year. Did I hear that correctly?

Yes slightly dilutive. There is a very small revenue base associated with the business. We were attracted to the company because of the significant amount of real estate that they have, we bought the company essentially for the fair market value of the dirt.

So I think, as we indicated, we have approximately 30 acres, we'll have to invest a little bit into the facilities and warehousing, but the 30-acre facility that is capable of serving Philadelphia at the dollar value area we look at as a very strategic asset for the long run. But it'll take us a while to build the revenue base up a little bit.

How much of the revenue of the 9 million trailing would be attributable to that piece, versus the other two?

Probably not even $0.5 million.

Okay so not nearly anything.

This is basically a startup operation.

Okay.

It has the licenses and permits.

Okay. But is it going to be mostly a recycled yard that focused more heavily toward the mechanical side of the business or, it'll just be functioning like all your other facilities would?

Yes it's like our other facilities. It'll be focused exclusively on the professional repair market, there's no intention to have a retail component or self service, they're 100% late model vehicle dismantling, recycling, sales and service.

Okay. One question, and I guess I got off track a little bit, but when you look at your organic growth for the quarter of [9.8], it's obviously very close to your low double-digit benchmark. Was there something in the quarter that you felt like kept you from getting above that 10% or a little bit higher? I mean I know that January started off soft, but how did the rest of the quarter progress?

Yes absolutely. You know we can look right at our weekly revenue generation report and we didn't see the spike from winter weather until the week of February 19, which jumps off a piece of paper like red ink.

So we came into January with I think our customers really having little backlog, especially on the collision repair side of the business because weather in December really wasn't materially different than what we saw in January.

And I don't need to repeat the statistics that everybody knows about record warm weather and lack of rainfall. We really didn't see any traction on the collision repair side of the business until the middle of February.

Okay. And I know that April, at least on the East Coast, has been an awful month, at least the first two or three weeks, with weather and that's probably beneficial to you, and I'm just wondering are you seeing some of that help in terms of trends?

Yes April got a pretty good start. Last week was a little spongy for some reason. But we're three weeks into the quarter. We certainly don't see any reason to kind of move our long-term ambitions based on what we've seen from the first four months of the year, we still think that low double-digit same-store sales growth is within reach for this year. And we would hope we'll do well enough to make up for the slight miss that we had in the first 90 days of the year.

And a couple other questions, tax rate, Mark, just going forward just assumed after the second quarter it's going to be more normalized? Or, will we continue to see something impact that tax line as State taxes are accrued for or accounted for?

Yes I mean, that's why I put in there what was the effective rate for Q1 if we did not have that life insurance. That was about 40.5%, it's going to be somewhere in that neighborhood going forward. And I'm not counting the 600,000 that's about to hit us, okay?

Right. That may be somewhere around 42.5 or something --?

Slightly more than that because the thing that's going to hit us for $600,000 is going to have a little impact going forward.

Okay. And then one last question of point clarity, in your comments you talked about your guidance includes closed business acquisitions. Are you saying that the LOIs that you have on that 36 million are not yet reflected in your guidance?

Correct.

Perfect. Great guys, thanks. Good quarter.

Okay thank you, Tony.

Your next question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning, gentlemen, this [inaudible] calling in for Sam actually. My first question, the deferred tax asset adjustment, how will that be accounted for just in terms of which line item will that show up in?

That'll be in tax expense.

That'll show up in tax expense?

Yes.

Okay. Secondly, it appears based on your Q2 guidance like you're assuming gross margins are going to decline sequentially. Now I see they did decline sequentially last year Q1 to Q2, I suspect maybe that had something to do with Transwheel, but I was wondering if there is anything seasonal in the business that would be causing that?

No I mean you're getting a little bit out of the prime winter season. They could decline a little bit, but we're talking -- to be honest with you when you're talking 20 basis points or something either way, you just have to kind of get through the quarter and see what you're volume is at. There's always going to be a little variability there. You'll have Transwheel three months, last year three months Q2, so that's not going to be messing with that really.

Okay, so maybe just a little conservatism in guidance?

Well I don't think we put our gross margin percentages in our guidance.

No okay. Let's see, moving on, in terms of same-store sales growth from the c side of the business, can you talk a little bit about what you're seeing there and whether or not that's helping or hurting you overall?

Yes I mean we're still seeing on the Aftermarket side double-digit organic growth in the quarter, which makes sense because those markets we're not in. Joe mentioned we opened one up in Orlando, so you're going to still see us moving into new markets on the Aftermarket side and that's going to get you that little extra growth over the salvage.

Is the Aftermarket business comping materially better or worse than the business as a whole?

Well as you can see, on the whole we were right at that 10%, so yes the Aftermarket, and we've said that in past calls, is growing. It's in the teens, probably more like around the mid teens or so for the aftermarket. But of course it's not a big part of our business so you're not seeing as much of an effect on the overall.

Have you noticed any trend there, either a pick up or a decline in the movement of organic growth?

Well as you evaluate that, I think you need to consider the first quarter we mentioned was a little soft on the Collision Repair side of the business. And 100% of your aftermarket parts sales are effectively into the Collision Repair side of the business. So yes it did weaken a little bit more in the first quarter than what we would have expected under part of the normal seasonal conditions. So that should bounce back in the second quarter though.

Okay thank you. The rest of my questions have been answered.

Thank you.

Okay.

Your next question comes from the line of Craig Kennison with Robert W. Baird. Please proceed.

Good morning, guys.

Good morning, Craig.

Regarding your acquisitions, we calculate about $24 million in revenue from acquisitions outside of the same-store sales revenue that you report. That tracked a little bit better than what we would have guessed based on the numbers you provided for those acquisitions. Is there anything in particular, maybe in addition to Transwheel, that performed above expectations?

Not really. I mean when we buy the businesses we talked about the trailing revenue, and we do try to grow them once we buy them. But I can't think of anything in particular.

Do you generally experience growth in the first year? Or might you, like in the Transwheel example, actually struggling in the first few quarters as maybe you lose a few customers?

You know it totally depends on the deal. Sometimes if we've got somebody that's selling to a big competitor, yes we've got to pro forma that in and we don't grow as much. Sometimes some of the small recyclers as well, it depends how much they're trading with other yards, we tend to lose that when we buy the company. But a lot of the other people we buy don't have that much trading revenue so it really depends on the deal you do.

And in the Aftermarket business you've consummated a couple of deals since the Ford litigation, are you seeing any change in valuations related to that litigation?

I wouldn't say so, no.

Okay. You've been very successful moving into the wheel refurb business and now the headlight refurb business, are there other categories that make sense and that you're doing some work on down the road?

Yes Craig, I think there probably are. I think for competitive reasons it's probably enough that we not discuss those. But yes I think we're always looking for more opportunities to get more value out of every vehicle we buy or to broaden the product line that we offer to our customer base. So yes, it's a very safe that our antenna is up looking at other opportunities, but there's certainly nothing on the near-term horizon that we would be announcing.

Does the Copart acquisition of a UK auction yard make it any easier for you to look at that market? Or, is it really no change?

You know that's a good question. We had established some relationship with the company that Copart acquired, not because we were interested in acquiring the company but it certainly appeared to be a valuable resource to try to understand the Insured Collision Repair business in the UK.

And it's our view so far that you almost have to create a market over there, it just isn't as well defined as it in the US. But I think Copart will be a good addition to the market and then the UK probably needs a company like LKQ in order for the insurance carriers to become serious about alternative parts being brought into the repair process on a more regular basis.

And then as it relates to the quarter, again the first quarter from our perspective seemed to have a lot of bad weather, and yet the same-store sales was not quite up to the 10% level you target. Is there a sense that some of that weather just created a bigger backlog and that you'll see some of those repairs happen in the second quarter? Or, is that more wishful thinking?

No I guess our view on the quarter and the impact of the weather may differ slightly from yours, I'm not sure how broad your kind of interview process was of the collision repair shops. But business was dead coming into the year in comparison to what I think we've seen historically in this business.

It's also our view that, from the time that you start to get some spikes in the accident levels caused by the inclement weather, you probably have close to two weeks delay before that product starts showing up at the collision repair shops. There's always the drive through work that gets addressed very quickly, but in terms of the major repairs a lot of times that's a couple weeks before you actually see that hit the collision repair shops. We didn't see any movement until the week of the 19th of February.

Good. And then lastly with respect to the merger of Insurance Auto Auction and ADESA, do you expect to see any change in price at the auction level due to that merger?

I don't. I think probably more relevant, at least from our view, is that as we look at how we had responded to past price adjustments by the auction houses, I think our company has been relatively successful in adjusting our bids to include price increases from the auction companies, just like they would increase in towing cost. I think that the industry as a whole has been pretty effective at doing that as well.

Great. Thanks guys.

All right thank you, Craig.

Your next question comes from the line of Eric Glover with Canaccord Adams. Please proceed.

Hi, good morning, guys.

Hi, Eric.

Good morning.

I was just wondering if you could comment on any plans for facility and warehouse consolidation? I believe you were undertaking some of that on the West Coast and I was wondering how that has progressed and whether you had plans for additional consolidation?

Probably more a couple focuses on I think adding capacity into some of our production facilities on the recycling side that without some additional investment their growth would start to become constrained within the next couple of years. And in those instances we'll certainly be looking for opportunities to bring aftermarket product into the warehouse.

For example, we have an expansion going forward in Ohio today that started out strictly to be additional warehousing and production capability. And as we looked closer at the market we decided we probably needed to go ahead and introduce aftermarket products into that same warehouse at all and revise the scope of the project. Mark do you have anything to add that?

Yes, Joe mentioned earlier about the Orlando warehouse and that is an aftermarket warehouse that is adjoining our recycle facility there, so that is one that we just opened and it's together. On one of our big CapEx projects we got delayed a little bit last year and pushed into this year is Northern California.

I think we told everybody we had put the Southern California Aftermarket business and recycling business together in the fourth quarter. And we were trying to do the same thing in the fourth quarter, but it's slipping a little bit, but it'll be done by Q2 where we put this thing together in Northern California, which is the San Francisco Bay area. So yes as we expand warehouses we look at that pretty close where we want to open it up.

And where the real estate permits we certainly look for opportunities to do that. And by real estate I mean the amount of real estate that we control.

Okay, thank you.

All right thanks, Eric.

Your next question comes from the line of Bill Armstrong with C.L. King & Associates. Please proceed.

Good morning, nice quarter.

Thanks.

It looks like the number of cars that you acquired in the first quarter was a little bit down year-over-year, was that because of the sort of weak auction environment in the early part of the quarter?

Yes certainly the auction environment in January was not as robust as we would normally see in the first quarter. Fortunately we started 2007 with a larger backlog than we have historically, so we were able to play off that backlog quite effectively. In addition to that, as we worked that backlog down we exited the quarter with about 1,000 cars fewer in backlog than we would have had a year ago.

So probably the short answer to your question is we had plenty of product for the business. As we got into late March and certainly into April our buying has accelerated quite impressively and I would expect our backlog to pick up quite materially by the end of the second quarter.

So are you seeing supplies at the auctions more plentiful than three months ago?

Yes compared to three months, much strong today than what we saw three months ago.

Okay. And what were your Aftermarket sales during the quarter? I know you sort of lump it in with wheels and --.

Yes we started, I guess I told you wheels already, but we've been trying to lump it together. We had 60.8 million for the first quarter of aftermarket in wheels. There's a little lighting in there too, but not much.

Okay. So lighting is pretty negligible.

Yes that was a small company we bought. While it's coming up, it's going to take a little while to put much dollars in there.

Right. Your entry into Philadelphia, I thought you were in the Philadelphia/South Jersey market already, or was that just aftermarket?

That's predominantly an aftermarket operation out of Pennsauken, New Jersey. We deliver some product on the recycling side into the market out of our Hunts Point facility, but that's not an effective to address and service a market as significant as Philadelphia. So that's why we looked for the second facility in Perryville to support that market.

Right okay. And then just a broader question, aftermarket sales in general have been growing faster than recycled sales for I guess a while now. Given the fact that OEM parts cost less for the insurer to use than aftermarket parts, it seems to me that OEM ought to be growing faster than aftermarket. Why do you suppose that is?

Well, I think what you're trying to say is the insurance companies prefer the recycled OE industry?

Right.

You've got to realize though the industry is out of stock 50% to 60% of the time in the recycle business, it's a different kind of product, our out-of-stock rate is much, much lower than that. So I think that's the biggest part of it, you just can't find it all the time.

If you look at the Mitchell Reports over the last several years, I think what you see is that the total alternative part utilization has been picking up about one point of market share, obviously on the collision side of the business, about each year. And the recycling parts have picked up some gains there and kind of held their fair share, if you will, but the more notable gain has really been coming out of that aftermarket part sales.

And clearly given your expansion within that market, you're not being scared off by this Ford litigation. You seem to feel ultimately that the industry should prevail on that?

We feel ultimately the industry prevails on that, we believe when the issue gets into the Federal Court system that both the Taiwanese manufacturers and Keystone, the defendants in the case, will prevail.

Okay. Thanks, very much.

Thanks, Bill.

Your next question comes from the line of Gary Prestopino with Barrington Research. Please proceed.

Hi guys, how are you doing?

Good, Gary, how are you?

Good morning.

Joe, could you just clarify something for me? And maybe I'm wrong, but in my notes from last quarter you had said the Right Choice Program was annualizing at about 9 million of revenues, and now you're saying it's about 135,000 of weekly revenues, which is somewhere around 7 million if I'm correct. Do I have a wrong number there for last quarter or --?

No you don't. I think what I did during the last call was I annualized off of about a three or four-week run we had, where the sales had spiked, probably during some of these weather events if you will. So I did want to get I think kind of a more realistic number out on the call this morning. But you're right, based on Q1 it's annualizing more like about a $7 million run rate.

And that's up 20% year-over-year, right?

That's 20% up over the fourth quarter of 2006.

Okay. All right one question I wanted to ask is your distribution expenses as a percentage of sales came in at 9.42%, last year there were 10.37% if I'm correct. And it looks like all last year they were trending down sequentially, is that just a function leveraging the distribution system with more product, aftermarket, OEM per run? And is that percentage of sales for distribution expense going to continue to creep down as we go throughout the year as you add more to your top line?

Yes I mean we are getting leverage on the distribution runs. If you look Q1 to Q1, organically we didn't add any transfer operations or the number of trucks running around. You're getting a little help Q1 to Q1. Well Q4 to Q4, I think we mentioned gas prices went down. We did have -- the average price of gas did go up Q1 to Q1, but it was only about 1.9% so we're getting a little help there as well. But [if an] increase is not like what it has been a year ago when we were talking to the '06 quarters.

All right, but as far as that percentage of sales number, we should hopefully continue to see that trend down --?

Yes but make sure you're talking about the right percentage, because we had very good leverage on the operating side. Distribution expense went up 11.3% but keep in mind I said 5.8% expense growth was for the business acquisitions.

Right okay.

Organically it grew 5.5%, that's a pretty low growth rate. And I wouldn't want you to take that and extrapolate it out for the whole year. I mean, we've shown 100 basis points margin improvement, there will be a quarter where we probably don't do that. We've always been comfortable saying 60 basis points or so to include when we do an acquisition that comes in at a lower margin. But that was a very good rate, fuel helped, we didn't need to put any more transfer trucks on line.

Okay. Thank you then.

Thanks, Gary.

Your next question comes from the line of Bill Gibson with Nollenberger. Please proceed.

Yes I missed a number when you were giving it out, what was the number of cars acquired during the quarter?

31.8, 31,8000 roughly.

Yes.

Okay thank you. And I noticed 4% and seems like the percentage from insurance companies went up a bit. Is that because of the program on the lower priced cars? Or, what's driving that?

Actually the number came down slightly.

Oh it did?

Yes it came down slightly. And we feel actually we're probably getting betting quality of vehicles just by buying at the salvage pools.

Okay. So that's your call on the quality of cars?

That would be our call, yes.

Okay thank you.

Okay.

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Your next question comes from the line of Chris Hussey with Goldman Sachs. Please proceed.

Hi, it's actually David Feinberg for Chris, how are you, gentlemen?

Good, David, how are you?

Good. Just one question today, when you look out, I think you provided some numbers and guidance around the M&A pipeline for 2Q, but as you look towards the back half of the year maybe you can described what the M&A pipeline looks like, whether it be for recycled and/or aftermarket facilities?

Really what I'm driving at is we've seen an increase in private equity involvement in the marketplace, I'm curious how if at all that's impacted the pipeline of acquisition growth that you look at?

Well first I'll just say we're pretty pleased with the pace we've seen. The second half of last year we went kind of down a number of paths where we looked at deals that we couldn't come to terms. So we're pleased that in terms of our target of a couple per quarter, it certainly looks like we'll have eight completed by mid year.

As for the second half of the year, the board I look at in terms of the deals that our acquisition team is working on, that's pretty impressive. Whether we'll get any of them done or several is kind of anybody's guess, but I'll just say I'm impressed with the quality of potential deals out there. It's a healthy quantity and healthy quality of possibilities.

In terms of private equity having impact on our acquisition flow to date, we really haven't seen, at least to the best of my knowledge, we haven't seen anybody else kind of following in our footsteps or acquiring some of the small operations.

Okay. So two follow-ups there, if you are comfortable, perhaps could you disclose the number of acquisitions you're looking at, at any given point? And then when you are going in for an M&A or any sort of acquisition, if it's not private equity that you're bidding against, maybe you can give a sense of who your competing against for those deals?

Yes I don't think we probably want to start talking about the quantity of our backlog. Today was the first time we've even ever preannounced LOIs, you probably won't see us do that in the future. The only reason that I felt we needed to do that on the call today was the fact that we're making an announcement relative to our credit facility expansion and I wanted to make sure everyone on the call understood why we were making that move.

The competitive landscape for deals, certainly Keystone is somewhat in the deal market. I think in the last couple of years they closed on two transactions that I'm aware of, there could be more, that's what I'm personally aware of. And then the Greenleaf/Schnitzer organization, to the best of my knowledge the last acquisition they completed was about a year and a half ago.

Does that mean then that the acquisitions you look at, there are typically no other bidders?

If there is another bidder it would be one of the two I just mentioned most likely.

Got you. Thank you.

Okay thanks, David.

Your next question comes from the line of Scott Stember with Sidoti. Please proceed.

Good morning.

Hi, Scott.

Can you talk about what you're seeing in the aftermarket versus recycling as far as acquisitions go? And it doesn't appear that you've done any acquisitions in the aftermarket segment for a while, are you guys a little bit gun shy until we get through this Ford case? Or is that not having any play on your decision at all?

Just to answer the second part of your question first, we did temporarily suspend any additional activities with aftermarket acquisitions while we, I'll say, reaffirmed our prior opinion on the likely outcome of the Ford and International Trade Commission case. And so, we are again actively looking at aftermarket transactions, we did close a small one in the second quarter.

The transaction I mentioned in Birmingham was in fact an aftermarket acquisition. So we are actively working transactions in both lines of business at this point, probably working more on the recycling side because of the view that we can successfully penetrate new markets on the aftermarket side through cold starts, which we did announce one of those today as well.

All my other question have been answered, thank you.

All right thanks, Scott.

Your next question comes from the line of John Lawrence with Morgan Keegan. Please proceed.

Good morning, guys.

Good morning, John.

Good morning, John.

Joe, could you just a little bit, in the past we've talked about some of the mature locations that both have added in aftermarket and been around for a little while, and at one point you gave a mid double-digit operating margin for some of those facilities. Can you give us a little sort of perspective on some of those mature operations, what they would look now in terms of comps and operating margins?

Yes I think you're talking about like a large recycle plant, what kind of levels some of the bigger ones hit. And we talked about before somewhere around 17% EBITDA and that really hasn't changed. I mean as our plants get larger, which is where most of our organic growth comes from is putting more volume through the footprint, and that helps with the operating improvement.

Not a whole lot of help with the gross margin, but it definitely gives us the leverage on the operating margin. But there's no change to that, I mean those big plants are still operating at that level.

And would they be doing low single-digit comps?

Or mid. You're talking about organic growth?

Yes.

Mid to high single-digit.

Okay so they're still doing those kind of volumes.

Not low, right.

Okay. They're still getting that growth --?

Yes they growing, still growing, yes. My point was once you get around 17% EBITDA it's kind of hard to get that much higher.

Right. Second question, Joe, you've mentioned some of the locations that have both type of facilities and you were instead of going after the pull-apart type of vehicle, you could step it up just a little bit, and had a different little model where you could drop the car off and take something off, recycle. How does that continue to move forward?

Generally pleased with the business, it's more focused toward the retail customer. But we're finding, as we've probably done a couple of those now that there is a wholesale component to that business that's probably a pleasant surprise that we're finding out of being in that product line. And that's really what's prompting us on the insurance side to seek vehicles in that niche that we think really kind of have appeal to almost two different marketplaces.

So that's another part of the scale that gives you opportunity in the longer term?

Yes, I would agree with that.

Right thanks, guys.

Thank you, John, I appreciate it.

Your next question is a follow-up from the line of Tony Cristello with BB&T. Please proceed.

Hey thanks, guys. Just a point of clarity, there's acquisitions you have LOIs out on, what is the potential timing for closure of those transactions?

Well, I would hope that all three would be concluded during the second quarter, probably late in the quarter though.

Okay, some time in June then likely?

Yes probably.

Great thanks, guys.

All right I appreciate it. Operator, I think we'll call it a call, we're coming right up on 11:30 and an hour. I'd like to thank everyone for joining us this morning and we'll look forward to talking to you in about 90 days to bring you up to date on how the operations performed in the second quarter. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, you may now disconnect and have a great day.