LKQ Corp (LKQ) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 LKQ Corporation Earnings Conference Call. My name is Colby and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to your host Mr. Joe Holsten, President and CEO. 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 28th, 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. Thanks for joining LKQ Corporation's second quarter 2007 earnings call. On our call today are two members of management Mark Spears, our Chief Financial Officer and myself. My name is Joe Holsten. I'm the CEO of LKQ and I'll begin by providing some high level overview of our performance as well as some qualitative views on the business and our industry. Then Mark will provide a more detailed assessment of the Company's financial results.

We reported $233 million in revenue for the quarter, which represents 19.6% total revenue growth over the second quarter of 2006 and organic revenue growth of 10.5%. Perhaps the aspect of the quarter that pleased me the most was the 90 basis point improvement in our EBITDA margin to 13% for the quarter compared to 12.1% in the second quarter of 2006. Our net income increased by 20% to $14 million for the quarter and diluted earnings per share increased by 19% to $0.25.

It is important to note that had it not been for the deferred tax asset that we had to write off in the quarter, our net income would have grown by just over 25% and diluted earnings per share by about 24% to $0.26. We discussed this write off previously during our last quarter call and Mark will elaborate on this charge later.

Let's take a few minutes to summarize the business acquisitions that have closed so far this year. The first business we acquired was Northern Light, a head and tail lamp refurbishing company. It has 36 employees and operates out of a facility near Grand Rapids, Michigan. While a small business of less than $1 million in revenue when we acquired them, we believe that 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.

This business provides us with the know-how and the technology to refurbish used lighting products. Since the acquisition we've increased production to 140 headlights and 55 taillights per day by modifying the production process and we expect to be refurbishing 200 headlights per day by early fourth quarter. To date we have generally been pleased with our ability to sell the product as well although further progress is anticipated as our customers become more aware of the product availability and quality.

Second Potamac German was acquired in February. This is a recycling business with historical annual revenues of approximately $5.5 million serving the professional repair market. Potamac has 26 employees and operates on two recycling properties totaling 13 acres with one facility in Frederick, Maryland and the other in St. Augustine, Florida. These locations specialize in Mercedes Benz and BMW product.

In March and April we acquired three businesses that had combined revenues of about $9 million prior to our acquisition of them. These include first Atomic, a retail-oriented recycling business with two facilities in the Dallas, Texas area that had a combined total acreage of about 50 acres. Second Crash Parts Warehouse, a small aftermarket business in Birmingham, Alabama and third, Thruway a small recycling business located on 30 usable acres in Parryville, Pennsylvania. This facility will basically become a start up recycling business in order to allow us to serve the professional repair market in the Greater Philadelphia area in a more meaningful manner. This operation's performance will be slightly dilutive to earnings in 2007 and probably neutral in 2008. But the market is huge and we believe we can organically develop this facility into a growing and profitable business.

In late May we bought two businesses that generated annual revenues of approximately $9 million in aggregate. They are Dominion Auto Recycling located near Toronto, Canada that serves the professional repair market. This business operates out of an approximate 13-acre facility and was our first acquisition in Canada. The other was Cenla Body Parts, an aftermarket business located in Alexandria, Louisiana. This company had approximately 17,000 square feet of warehouse space dedicated to aftermarket products and combined with our previous aftermarket operations allows us to provide coverage to all major markets in the State of Louisiana.

In early July we announced our second business transaction in Canada, a recycled parts business near Quebec City, Canada. Pintendre Autos Inc. generates annual revenues of approximately $29 million and operates on a footprint totaling approximately 125 acres. This company primarily serves the professional-repair market for not only automobiles but also several types of light-duty vehicles. The bulk of sales and profits are from the sale of recycled auto parts but they will also provide us a limited exposure to the parts recycling business for heavy-duty trucks, motorcycles, and recreational vehicles such as snowmobiles and all-terrain vehicles.

Pintendre also has a small retail service facility located in the Pintendre yard and while the business operations are concentrated in the Quebec City market, the company also provides service in Montreal through a redistribution facility. We've been very impressed with the Pintendre management team, which has remained in place.

Of course our biggest news on the acquisition front was our announcement that on July 16th we signed a definitive merger agreement to acquire Keystone for $48 per share. As I'm sure you know Keystone was the leading provider of aftermarket vehicle collision replacement parts and we held a conference call and webcast on July 17th related to this transaction where we indicated that the merger, which is subject to the approval of its shareholders of Keystone and other customary conditions, is currently expected to close early in the fourth quarter of this year. The total cash consideration is approximately $811 million on a fully diluted basis. For the 12-months ended March 31st, 2007 Keystone reported sales of $714 million and net income of $30 million.

We have a $1.09 billion senior secured financing commitment from Lehman Brothers and Deutsche Bank to support the transaction and refinance our existing debt.

Looking into 2008, calendar 2008, we expect the transaction to be slightly accretive to the EPS of the Company after taking into account the all-in cost of the transaction including all-season expenses, the interest expense on borrowed funds, amortization of intangibles created by the transaction and initial estimates for cost savings and synergies. But before certain restructuring costs, some of which may run through the income statement.

We believe the annual cost savings and efficiencies to be between $25 million and $35 million to be cashed for over the next several years. The exact of accretion will in part depend on when the transaction closes and how quickly we can commence the integration plan and begin to affect the anticipated savings.

At LKQ insurance relationships and programs continue to be very important to us. 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 pilot mode. We continue to pilot with a body shop chain for their use of the system as well to make it easier for them to buy all of their alternative products from LKQ.

One insurance carrier in the Midwest continues to directly provide us low-cost cars that will supply some parts to be sold into the professional repair market with the remainder of the car being placed into our retail-oriented operations. This program averages 125 cars per month and the carrier is interested in expanding our arrangements.

The second carrier has just recently signed up for a similar program that we estimate will generate up to 40 cars per month. Our Right Choice program with advanced audio parts has revenues that are now annualizing in the $6 million to $6.5 million range. We are continuing to focus on more participation of advanced stores and fee increased store participation.

As in Q1 about 57% of their 3,100 stores participated compared to 70% participation in Q2. At the end of the second quarter we operated approximately 39 daily transfer runs and approximately 410 local delivery routes that carried primarily aftermarket parts and refurbished wheels and approximately 64 daily transfer runs and 425 local delivery routes that carried primarily recycled parts.

In various areas these recycled part transfer runs and routes also delivered aftermarket products. In total LKQ has a delivery system of approximately 103 daily transfer trucks and approximately 835 local delivery routes. We've cleared approximately 32,700 cars in our wholesale recycled parts business during the quarter, which is 17% more than we acquired in Q2 a year ago. The percentage of vehicles we acquired from salvage auctions during the quarter were -- accounted for around 96% of our total incoming wholesale products sets.

We continue to increase our sales staff for our recycled parts business and we've done so by an average of 68 people more in Q2 2007 compared to Q2 2006 and we continue to invest in what we see to be the key to our business model, our sales and distribution systems.

Also I want to remind everyone that our business is not typically cyclical since our products are not really discretionary. So we are not materially affected by changes in the cycles of the economy.

In summary we're pleased with our growth prospects and we continue to believe we can grow our business organically at a rate in the low double digits even after the merger with Keystone. We believe we have a compelling and successful business model that provide an attractive value proposition to a wide array of customers in the insurance industry and are in a unique position to leverage our inventories of recycled parts, aftermarket products and refurbished wheels and lights by having the ability to sell all of these combined inventories in response to customers' needs and requests.

The Keystone merger will allow us to provide additional value to our customers over a larger market area giving us more breadth of inventory where there's very complementary product line. We also believe that further margin expansion is possible as we continue to seek opportunities to better leverage our investment and facilities and distribution systems and to find incremental value in the parts on each vehicle that we process. At this point I'd like to ask Mark to provide a more detailed discussion on the Company's financial report.

Thank you, Joe, and good morning everyone. Let's take a look at the tables in our press release. 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 which showed growth in margin percentages as well.

Looking at our income statement and related tables our second quarter 2007 revenue was up 19.6% to $233.3 million from 195 million in Q2 2006. Our first six months of revenue for 2007 grew 21% to $468.6 million compared with $387.2 million for the same period in 2006. Our organic revenue growth was 10.5% for the quarter and 10.1% for the six months. Our second quarter 2007 gross margin was 45% versus 45.2% in the second quarter of '06. For the first six months of 2007 our gross margin was 45.3% versus 45.6% in the same period in 2006.

Our facility and warehouse expenses for Q2 grew $4.5 million or 22.6% over Q2 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 $2.9 million of the growth or 14.3% expense growth.

Excluding the effects of business acquisitions the second quarter of 2007 had increased costs over the second quarter of 2006 primarily related to labor and labor-related cost growth of approximately $1.1 million. This related to increased staffing needs to handle parts volume growth. Additionally we had lower insurance and legal claims experience of about $0.5 million.

For the first six months of 2007 these expenses as a percentage of revenue increased to 10.7% from 10.5% for the same period in 2006. On a six-month basis facility and warehouse expenses grew $9.7 million or 23.8% over 2006. Business acquisitions represented 6.4 million of the growth or 15.7% expense growth.

Our distribution expenses for Q2 grew $2.4 million or 12.1% over Q2 '06 of which about $800,000 or 4.1% of expense growth was due to our business acquisitions. Excluding the effects of business acquisitions the second quarter of '07 had increased costs over the second quarter of '06 primarily related to labor and labor-related cost growth of approximately $1.1 million.

For the first six months of 2007 these expenses as a percentage of revenue improved to 9.5% from 10.3% for the same period in 2006. On a six-month basis distribution expenses grew $4.7 million or 11.7% over 2006. Business acquisitions represented $2 million of the growth or 5.0% expense growth.

Selling, general and administrative expenses grew 3.4 million or 13.7% over Q2 '06 of which $1.7 million or 6.9% expense growth was due to our business acquisitions. Excluding the effect of business acquisitions for the quarter we had 1.9 million in higher compensation and fringe costs.

For the six months of 2007 these expenses as a percentage of revenue improved to 12.1% from 12.8% for the same period in 2006. On a six-month basis selling, general and administrative expenses grew 7.2 million or 14.5% over 2006, of which $4 million or 8.1% expense growth was due to our business acquisitions.

Our selling expenses tend to be fairly variable in nature due to our commission inside sales force. Our general and administrative costs are usually less variable in relation to revenue growth.

For the quarter our EBITDA grew 28.2% to $30.3 million. EBITDA was 13% of revenue for the quarter compared to 12.1% in Q2 '06. For the six months our EBITDA was 13.2% of revenue versus 12.3% for the same period in '06. Our operating income for Q2 2007 grew 29.3% over Q2 2006 to $26.6 million. Operating income as a percentage of revenue was ll.4% in the quarter compared to 10.6% in Q2 2006.

For the first six months of '07 operating income improved to 11.5% of revenue compared to 10.6% for the same period in 2006. We had net interest expense in Q2 2007 of $2.1 million compared to net interest expense of $1.3 million in Q2 '06. This was related primarily to higher debt levels.

Our Q2 2007 pretax income grew 26.8% to $24.6 million from 19.4 million in Q2 '06. For the first six months of 2007 pretax income increased 28.2% to $50.8 million from 39.6 million for the same period in 2006.

For the first six months of 2007 our effective tax rate was 41.3% compared to 40% in the same period of 2006. During the first quarter of 2007 we had $552,000 of non-taxable income related to a life insurance policy, and in the second quarter of 2007 we had approximately $600,000 of deferred tax assets that were written off related to a change in the state's tax law effective Q2 2007.

This write off was discussed in our first quarter earnings call and it was included our guidance for Q2. If you exclude these items our effective tax rate for the first half of 2007 would have been 40.5%.

Net income for the quarter increased 20.2% to $14 million from $11.7 million in Q2 '06. For the first six months of 2007 net income increased 25.5% to 29.8 million from 23.7 million in the same period of 2006.

Our diluted earnings per share increased 19% to $0.25 in the quarter from $0.21 in Q2 2006. Had we not had the write off of the $600,000 of state deferred tax assets our diluted earnings per share would have grown 23.8% to $0.26.

For the first six months of 2007 diluted earnings per share increased 23.3% to $0.53 from $0.43 for the same period in 2006. Our diluted weighted average common shares outstanding used for EPS purposes were as follows, Q2 2007 at 56.2 million shares versus Q2 2006 at 55.7 million shares. The six months 2007 was at 56.1 million shares versus six months 2006 at 55.6 million shares.

Let's take a look at our cash flow table now. We generated $13.4 million in cash from operations during the first six months of 2007 which included the effect of investing $27.4 million of additional inventory.

CapEx in the first six months of 2007 excluding business acquisitions was $18.1 million. We also spent $5.9 million in the first half to purchase equity securities of Keystone. Cash paid for business acquisitions in the quarter was $24.2 million.

During the first six months of 2007 we issued stock related to the exercise of stock options that resulted in shares issued and dollar proceeds received that totaled approximately 329,782 shares for $4.2 million 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 June 30, 2007 balance sheet you will note we had $138.7 million in debt which included $126.2 million in debt under our unsecured credit facility with our bank group.

As of July 25th our credit facility debt was at $158 million. We expanded this credit facility in April. Total maximum borrowings allowed under this facility is $205 million and if an according auction futures exercise and approved by the participating banks it could go to $305 million. This facility now matures in April 2012. At June 30, 2007 our debt to EBITDA ratio was 1.3 times.

Of course we plan to retire our existing facility with proceeds from the $1.09 billion senior secured financing that is related to the closing of the Keystone business acquisition that we expect will occur in Q4 2007.

Let's take a look at our 2007 estimates. It is important to note that all our estimates we are giving here exclude any impact of acquiring Keystone which we anticipate closing on in the fourth quarter of 2007. 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 today.

We expect full year 2007 net income to be within a range of $56 million to $58 million and diluted earnings per share to be between $0.99 and $1.03. For the third quarter of 2007 we expect net income to be within a range of $12.5 million to $13.5 million and diluted earnings per share to be between $0.22 and $0.24.

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 to acquire businesses will be between $49 million and $53 million. This includes approximately $5 million related to capital expenditures planned in late 2006 on projects that became delayed. It also includes $1.9 million related to 2007 business acquisitions.

In addition we are planning to begin development of a self-service recycle operation on property adjoining one of our wholesale recycle facilities and have added approximately 1.5 million to our CapEx estimate we plan to spend in the fourth quarter of 2007.

We estimate the weighted average diluted shares outstanding for the full year 2007 to be approximately 56.5 million shares. 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.

Again all of the above guidance estimates are before any effect of the Keystone acquisition as we have not yet closed that acquisition. I would like to turn it back to Joe for any further comments and to open up for Q&A.

Okay great. Colby, why don't we get right to question and answers.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning Joe. Good morning Mark.

Sam, how are you?

Nice quarter.

Thank you.

A couple of quick questions. How did demand progress as the quarter progressed? I know that occasionally weather can play a part and April was fairly stormy and then they got real dry so how did the quarter progress from a demand standpoint?

I think actually it was a pretty level playing field throughout the quarter. We may have been just a little bit stronger in late April, early May but broadly I'd say the 13 weeks were pretty level.

And Mark, I might have missed this, what was the aftermarket growth versus the recycle growth on an organic basis in the quarter?

Yes we didn't comment on that.

Could you talk about aftermarket growth at least directionally?

Yes we continue to see really the same thing we reported in prior quarters that the aftermarket expansion on a same-store basis is a little heavier than what we see on the recycled parts side.

So if we were to assume mid to high teens that would be a good assumption?

That's probably a little frothy but certainly low double digits.

Okay and then you've now had some time to talk to your customers and your suppliers following the Keystone announcement. What's been some of the feedback that you've been receiving, if there are any concerns of perhaps certain regions that are overly represented? Or is it pretty much in unanimity that it's a terrific deal for the channel? How could you -- Joe if you could give a little color as to what the channel believes about the deal?

Yes unequivocally we have been thrilled with the feedback we've seen from our insurance constituents in particular just I think unanimous feedback from them. They like the transaction. I think they certainly see the benefits of better service and stronger inventories and they're very happy with that. Our discussions with body shops I would say certainly very positive as well. In the negative sense I have not seen what I would consider a single piece of correspondence of anyone thinking that this is not a good deal.

Aftermarket suppliers aren't voicing any concerns about two much of a consolidated customer base?

Not that I have seen, no.

Okay excellent last question you've already quantified the synergy, the efficiencies that you're expecting over the next few years or so. As you continue to look at the business which savings or what elements of the efficiencies are going to be easiest to pick up early and then which would be more accessible in time?

Yes I think the easiest ones certainly are going to be things like public Company costs, some of the corporate staff compensation where we have duplicate officers in the Company. Those are certainly the easy ones to get the duplication in marketing costs probably fairly easy to get. I think some of the cost savings on commodity purchases or freight probably relatively easy.

I think the ones that certainly will take more time -- I'm not saying that they're necessarily more difficult, they just require time, is going to be where we have overlapping warehouses and those warehouses will need to be merged and certainly on the distribution systems. Again I don't think there's anything complicated to get at. It's just the time it's going to take to work through.

Excellent. Very clear -- thank you again gentlemen.

Thanks Sam.

Thanks Sam.

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

Hey thanks. Good morning gentlemen.

Good Tony.

I guess one question I had just sort of general information, you gave the number of recycled vehicles. I think you said 33.1 -- was that correct, in that neighborhood for the quarter that you purchased?

I'm thinking it's 32,700.

32.7, okay. And did you give the number of self-serve vehicles you purchased during the quarter?

We did not.

Do you have that number.

I want to say around 97,000.

A little over 50,000.

Yes.

Okay.

And that will be in the Q when we file next time.

Yes, yes, when you look at your operating margin 11.4, you've now posted two quarters of pretty good EBIT improvement year over year and really the distribution line continues to show good leverage there. Is that simply the function of what you've got going on as you just put more throughput across those lines or is there something else that you're doing from route efficiency standpoint and mapping that is helping you save some money as well?

I think there are probably two or three things at play here and then Mark may elaborate a little bit more. One I think certainly if you look at the pace we were adding distribution runs and routes in 2006 that growth and expansion in 2007 has slowed a little bit as that cross docking if you will distribution systems pretty well built out right now. We're not really adding a lot more capacity into that system.

Certainly where we've been able to combine the LKQ distribution systems with aftermarket distribution routes we've had some pretty compelling successes there as 8, 10, 12 routes and one market in Ohio basically going away because those products are being delivered on LKQ routes. I think we've maybe got rid of almost 10 routes and maybe just added one into the LKQ network.

And I guess to be fair probably another minor component of that leverage you are seeing there has been a small shift in the revenue mix a little bit more toward the retail business and obviously there's no distribution costs associated with that aspect of our business and that's probably helped us out by some -- I really couldn't speculate on what that impact has been on the margins but I'm sure it's a modest contributor.

Okay you know and you've always stated that you could see 40, 50 basis points type of margin improvement and maybe more when you're without acquisitions but you've been exceeding those levels and I'm just wondering if just your whole model right now seems to be running a little bit more efficient.

And is that something that's sustainable, you look out in the next year, two, three years excluding what you do with Keystone. But is there something -- from an infrastructure standpoint are you well-staffed? I know you added some people. You added some people late last year. Is that something that you feel like you're comfortable with or will some of this margin improvement be spent on investing back into the infrastructure over the next few quarters or a year?

I don't see any what I would consider significant or material needs. One thing the Company we've operated really with kind of the same corporate overhead and region management structure essentially for about six years now. We are I'd say assessing the commitment of the Company to training in some areas and I think we've come to the conclusion through our operating committee that we're probably under-spending a little bit in that area.

The IT area the same thing, probably under-spending very modestly. So again I don't think I would say that we're -- we want to build this lean and we continue and expect to continue to do so but there probably are a few functional areas where it wouldn't hurt. But it would pay long-term benefits for our shareholders if we were investing a little bit more.

Okay one last sort of topic I just want to touch on is you had good growth on the wholesale salvage vehicles in the quarter. Did you get any benefit from the flooding that was going on in the Texas market or are those vehicles typically take I guess 45 to 60 days before they get the auction and the title and everything to clear before you can take a purchase. Will that present some opportunity in this quarter and then second maybe just some commentary on how trends in the first month here in July have been?

Yes I will say the business in Texas has been very healthy. It's certainly a bright spot in the Company in terms of the strong same-store growth particularly in the northern market.

In terms of the auction environment it's really been fairly healthy I would say across the whole country. It's been a while since I can recall sitting down with a local management team and hear them complaining about product deficits at the auctions.

July generally Q3 as you know is one of our slower quarters I would say July is off to a little softer performance than what we were seeing in Q2. That's normal -- certainly nothing that I'm alarmed about. The revenue per day is pretty much where we had expected it to be and as we head into August school is back in session end of September then we should start to see some modest acceleration as we get toward the back half of the quarter.

Okay great. Thanks guys.

Thanks, Tony.

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

Good morning guys.

Hey Craig.

Good morning Craig.

Congratulations on a solid quarter given all that you had going on.

Thank you.

Mark, do you have a feel for the incremental interest -- I'm sorry, incremental amortization expense that will arise from the Keystone transaction?

Just in total you mean? I mean we have a rough idea on the intangible. We're going to have to evaluate an intangible asset to amortize and I think we talked about it a little last time. Well that's not finalized. It could be maybe about $4 million a year of intangible asset amortization. Not the whole goodwill but a carved out piece.

As far as their trucks, most of their trucks I believe are leased so it's not like you're going to be modifying the value of the trucks. And there's only so many properties they own so we don't expect any bit write up of other, call it, fixed assets but we haven't gotten that far yet. But I doubt there's going to be much of an impact on that.

Okay thank you and then with respect to the big jump in the number of acquired cars did you see much of a change in the cost per vehicle?

Well actually it's about as flat as it can be on a year-to-date basis. Our average vehicle costs for the wholesale business is exactly $3 lower than it was the first six months of last year.

Would you consider acquiring or paying more per vehicle if necessary in the event that the salvage market dries up a little bit?

Well it's one reason we operate with a fairly healthy backlog to hopefully avoid ever putting ourselves in that position. But we're really focused on the demand for the product and balancing gross margin dollars per car with the gross margin percentage per car. We pretty much stick to our guns on our rule book on buying. We've been pretty consistent at that over eight years and it's not my expectation that we would have to deviate from that (inaudible) plan.

And you can see from our cash flow that we always invest up in cars. We saw some nice cars coming through. That's why we invested in the inventory there.

And then gross margin ticked down just a bit. Is that a function of mix or could it be also a function of the price you're paying at auction? I guess not.

If you went back and just yanked out what I talked about in the smelters there's a little more volume going to the smelter that we're able to put through and that's all of it. It is rather small. You're talking, like was it 20 basis point or something?

Right okay and then finally just your expectations for the tax rate going forward the rest of this year and even as you contemplate Keystone?

That's why I put in there what our tax rate was if you backed out all the junk running through taxes this year. It's that 40.5%. I don't have any reason to believe that's going to really change much.

And would it be somewhere similar to that on a pro forma basis with Keystone?

They're running a little slightly lower. I think they're like 39.6% or something like that so that might help us bring it down a little bit.

Okay thank you.

That's a function of where we do our business -- it's different states.

Right thank you.

Thanks, Craig.

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

Hi actually just one bookkeeping question. You mentioned the number of sales people you added, Joe. What's our total count now?

I think about 470.

Thanks a million.

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

Good morning everyone.

Hey Gary.

Hi Gary.

My questions have been answered but Mark what were the aftermarket parts revenue last year, Q2? Do you have that handy?

Q2 release -- about 40 million.

Okay and then I know Joe you said it was kind of a level playing field all year in terms of your business operations but there was a large insurer in the Chicago region that said per 100 cars insured their claims are up about 5% year over year. Is that -- are you seeing similar trends all across the country?

No I wouldn't say so. I assume you're probably referring to Allstate's recent earnings release where it -- actually I thought they said they were up like 2.3% or 2.4%. I wish I could tell you in good faith that we're seeing that across the country but I don't think that's really the case.

Okay thank you.

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

Good morning. Nice quarter. Mark, I see that the facility and warehouse expense as a percent of sales is up a little bit. What's driving that?

Probably the biggest thing there is the second half of '06 we bought several -- I say I think four in '07 of two more of the self-service yards, retail u-pull-it yards. And they operate with a higher level. That's where the bigger costs are in facility and warehouse debt. Because we didn't really see -- we didn't see going backwards on the organic, when I read through the organic cost numbers. So that's just acquisition, the mix of the acquisitions.

Okay, okay. And just remind us why it is that you've got a relatively small number of self-service yards compared with your wholesale yards but you consistently acquire more self-serve vehicles than wholesale vehicles?

Well a huge difference in cost. It's not the same kind of car. The wholesale is a car we put quite a bit of money into it and we sell most of the parts. The self-serve car -- and we buy those cars at the auction. A self-serve car they're abandoned vehicles that we bought from the tow companies for the most part. So I mean it's not even the same vehicle. I think if your question is --.

The turns on the self-service cars are four to five times as rapidly as the wholesaler car.

Operationally they turn that much faster.

Yes we're not delivering the parts. Those people come through the yard and then buy the parts and after the car has been there 45 days or so, 60 days, the car is taken out.

It's taken out in like a central crusher or something?

Yes.

Yes.

Okay, okay I didn't think there were that many individuals picking pieces off of them.

Yes I mean for the first half of the year about 12% of our revenue -- all the revenue related to self-serve business and so it's not a major part of our revenue stream here.

Okay, could you give us the revenue number for Transwheel, which I guess you now kind of bury in aftermarket?

We usually don't give that out more for competitive reasons. That's why we kind of buried it for our competitors to see how much our wheel business has grown.

Okay. All right a last question. Joe you mentioned a little earlier about business picking up when school is in session. Is that because you've got a lot of 17-year-olds behind the wheel more?

I don't know if that's the case, but there is certainly a lot more traffic congestion when school is in session and we see the fall off, a slight down tick in the business demand when school goes out of session and it comes back a few weeks after school goes back in session.

Okay great. Thanks.

Thanks a lot, Bill.

At this time there are no further questions in queue.

Okay great. Thank you for joining us. We appreciate your continued interest in our Company and look forward to a call in late October to update you on our continued progress. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.