LKQ Corp (LKQ) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter LKQ Corporation Earnings Conference Call. My name is Gina, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating and question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this call is being recorded. I'd now like to turn this presentation over to your host for today's conference, Mr. Joseph Holsten, President and Chief Executive Officer. You may proceed.

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 statement to reflect events or circumstances arising after the date on which it was made except as required by law.

So good morning, thanks for joining LKQ Corporation's Third Quarter 2007 Earnings Call. On the call today are two members of management, Mark Spears, our Chief Financial Officer, and myself. I'm Joe Holsten, the CEO of the Company. I -- I'll begin by providing some high-level overviews of our performance, as well as some qualitative views on the business and our industry. And Mark will provide a more detailed assessment of the Company's financial results.

Well, a lot of activity since our call just 90 days ago and a lot of positive developments during the third quarter. First, we had a very successful public offering whereby LKQ sold 11.8 million shares of its common stock generating just under $350 million in cash -- net proceeds for the Company.

The interest in this offering was very high as we upsided the offering by 1.5 million shares. And an additional 1.8 million shares were sold pursuant to the exercise of the underwriters' over-allotment option. The high success of this offering allowed us to lower the amount of debt we needed to finance on October 12th when we closed the Keystone acquisition. And Mark will elaborate on that later.

Second, we delivered excellent financial results for the quarter. We reported $243.5 million in revenue for the quarter, which represents 23.2% total revenue growth over the third quarter of last year. This is the highest level of revenue we've ever achieved in a quarter, and our organic revenue growth was close to 16% for the quarter.

We continued to make excellent progress to leverage our infrastructure as we expanded our EBITDA margin by 150 basis points. And our EBITDA margin was 12.3% for the quarter, compared to 10.8% a year ago. Our net income increased by 39.2% to $14.6 million for the quarter, and diluted earnings per share increased by 31.6% to $0.25.

Finally, on July 16th, we signed a definitive merger agreement to acquire Keystone, the leading provider of aftermarket vehicle collision replacement parts. As we previously reported, that acquisition closed on October 12th.

Total cash consideration for Keystone stock was approximately $807 million on a fully diluted basis. For the year ended March 30, 2007, Keystone reported sales of $714 million and net income of $30.3 million. For the 13 weeks ended June 29, 2007, Keystone reported $180.7 million of revenue and $7.4 million of net income. Due to the closing of this acquisition, Keystone will no longer be reporting on its own.

We believe the costs -- the annual cost savings and efficiencies, excluding any restructuring costs, will be between $25 million and $35 million to be captured over the next several years. We believe that in 2008, the cost savings and synergies excluding any restructuring costs will be between $15 million and $20 million. The cost efficiencies for the two and a half months we will own Keystone in 2007 will be minimal.

The cost savings and efficiencies will be achieved in several areas and include eliminating overlapping facilities, consolidating distribution routes, reduction of administrative headcount, elimination of the public company and other duplicative administration costs and finally, implementation of purchasing efficiencies. These would be in addition to certain revenue synergies that we also believe can be achieved.

While we expect the effect of the Keystone acquisition to be dilutive to earnings in 2007, looking into 2008, we expect the transaction to be slightly accretive to EPS after taking into account all-in costs of the transaction including all fees and expenses, the interest expense on borrowed funds, additional shares issued in our recent common stock offering, amortization of intangibles created by the transaction and initial estimates for cost savings and efficiencies but before certain restructuring costs, some of which may run through the income statement.

We have only owned Keystone for eight working days, we are not in a position to give any guidance -- further guidance on Keystone at this point. I want to take a few minutes to summarize the earlier business acquisitions that were closed during the first three quarters of 2007. The first business we acquired was in January, was Northern Light, a head and tail lamp refurbishing company that has 36 employees and operations out of a facility near Grand Rapids, Michigan.

While a small business with less than $1 million of sales when we acquired them, 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. We've been focused on improving the quality of these lights and are now generating high-quality products at a production rate of 90 headlights and 60 taillights per day.

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

In March and April, we acquired three businesses that had approximately $9 million in trailing revenue prior to our acquisition of them. These business are Al's Atomic, a retail-oriented recycling business, with two facilities in Dallas, Texas operating on 50 acres; Crash Parts Warehouse, a small aftermarket business in Birmingham, Alabama; and Thruway, a small recycling business on 30 acres in Parryville, Pennsylvania will be a start-up for us to better server the professional repair market in the greater Philadelphia area.

Today, this business is very small, and it will be slightly dilutive to earnings in 2007 and probably neutral in 2008. But the market's huge, and we believe we can organically develop this facility into a growing and profitable business.

In May, we acquired two businesses that operated at annual revenue levels of approximately $9 million. These businesses are Dominion Auto Recycling located near Toronto, Canada that serves the professional repair market and operate out of an approximate 13-acre facility and Cenla Body Parts, an aftermarket business operating in Alexandria, Louisiana.

And finally in July, we acquired Pintendre Autos, a recycled parts business near Quebec City, Canada that generates annual revenues of approximately US$29 million. The business primarily serves the professional repair market for not only automobiles, but also for heavy trucks and several types of light-duty vehicles, and operates on property totaling approximately 125 acres. While the primary operations are centered in Quebec City, the company also distributes into the Montreal markets.

At LKQ, insurance relationships and programs continue to be 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. It's gone from a small pilot, to being now 80% rolled out in the state of Florida with a fourth carrier.

We have two insurance carriers in the Midwest that directly provide us low-end cars that will supply some parts to be sold into the professional repair market, with the remainder of the car being placed into retail-oriented locations. These two programs are providing us 320 cars per month. Several other carriers have expressed interest in these types of programs in the Midwest and other market areas as well.

At the end of Q3, we operated approximately 39 daily transfer runs and approximately 400 local delivery routes that carried primarily aftermarket parts and refurbished wheels and approximately 68 daily runs and approximately 440 local delivery routes that carried primarily recycled parts.

In various areas, these recycled parts transfer runs and local delivery routes also deliver aftermarket parts. For the third quarter, LKQ operated a delivery system of approximately 107 daily transfer runs and about 840 local delivery routes.

We acquired approximately 28,600 cars in our wholesale, recycled parts business during the quarter, which is a 20.5% increase over Q3 of 2006. The percentage of vehicles that we acquired from salvage auctions during the quarter accounted for about 20 -- 96% -- excuse me, 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 an average of 97 persons or 21.5% more in Q3, compared to a year ago as we continue to invest in what we see to be the key to our business model, our sales and distribution systems.

In summary, we are 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. We provide an attractive value proposition to a wide array of customers and the insurance industry.

We are in a unique position to leverage our inventories of aftermarket collision replacement products, recycled OEM products and refurbished products such as wheels, bumper covers and lights by having the ability to sell [all] of these combined inventories in response to customers' requests for alternative parts.

The Keystone acquisition will allow us to provide additional value to our customers over a larger market area, giving us more breadth of inventory to our expanded national network of nearly 300 facilities. 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 acquire.

At this point, I'd like to ask Mark to provide a more detailed discussion on our quarter's financial results.

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

Looking at our income statement and related tables, our third quarter 2007 revenue was up 23.2% to $243.5 million, from $197.7 million in Q3 2006. Our first nine months of revenue for 2007 grew 21.8% to $712.1 million, compared with $584.8 million for the same period in 2006. Our organic revenue growth was 15.9% for the quarter and 12.1% for the nine months.

Our third quarter 2007 gross margin was 44.5% versus 45.2% in the third quarter of 2006. For the first nine months of 2007, our gross margin was 45.0% versus 45.5% in the same period in 2006.

Our facility and warehouse expenses for Q3 grew $3.7 million or 16.7% over Q3 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 $2.1 million of the growth or 9.2% expense growth.

Excluding the effects of business acquisitions, the third quarter of 2007 had increased costs over the third quarter of 2006, primarily related to labor and labor-related cost growth of approximately $1.5 million. This related to increased staffing needs to handle parts volume growth. In addition, we had lower insurance and legal claims experience of about $400,000.

For the nine months of 2007, facility and warehouse expenses as a percentage of revenue decreased to 10.7% from 10.8% for the same period in 2006. On a nine-month basis, facility and warehouse expenses grew $13.4 million or 21.3% over 2006. Business acquisitions represented $8.4 million of the growth or 13.4% expense growth.

Our distribution expenses for Q3 grew $3.4 million or 16.8% over Q3 2006 of which $1.3 million or 6.2% expense growth was due to our business acquisitions. Excluding the effects of business acquisitions, the third quarter of 2007 had increased costs over the third quarter of 2006, primarily related to labor and labor-related cost growth of approximately $1.4 million.

For the first nine months of 2007, distribution expenses as a percentage of revenue improved to 9.6% from 10.3% for the same period in 2006. On a nine-month basis, distribution expenses grew $8.1 million or 13.4% over 2006. Business acquisitions represented $3.2 million of the growth or 5.4% expense growth.

Selling, general and administrative expenses grew $3.5 million or 13.7% over Q3 2006, of which $1.6 million or 6.4% expense growth was due to our business acquisitions. Excluding the effect of business acquisitions for the quarter, we had $2 million in higher compensation and fringe costs.

For the nine months of 2007, SG&A expenses as a percentage of revenue improved to 12.1% from 12.9% for the same period in 2006. On a nine-month basis, selling, general and administrative expenses grew $10.7 million or 14.3% over 2006 of which $5.7 million or 7.6% expense growth was due to our business acquisitions.

Our selling expenses tend to be fairly variable in nature to our commissioned inside sales force. Our general and administrative costs are usually less variable in relation to revenue growth. For the quarter, our EBITDA grew 40% to $29.9 million. EBITDA was 12.3% of revenue for the quarter, compared to 10.8% in Q3 2006. For the nine months, our EBITDA was 12.9% of revenue, versus 11.8% for the same period in 2006.

Our operating income for Q3 2007 grew 43.2% over Q3 2006, to $25.6 million. Operating income as a percentage of revenue was 10.5% in the quarter, compared to 9% in Q3 2006. For the first nine months of 2007, our operating income improved to 11.2% of revenue, compared to 10.1% for the same period in 2006.

We had net interest expense in Q3 2007 of $2.2 million, compared to a net interest expense of $1.8 million in Q3 2006. This was related primarily to the higher debt levels. Our Q3 2007 pretax income grew 46.4% to $23.8 million, from $16.3 million in Q3 2006. For the first nine months of 2007, pretax income increased to 33.5% to $74.6 million from $55.9 million for the same period in 2006.

For the first nine months of 2007, our effective tax rate was 40.5% compared to 38.8% in the same period of 2006. If you exclude certain non-taxable items and adjustments to provision for income taxes, our effective tax rate for the first nine months of 2007 would have been 40.2% compared to 40% in the same period of 2006.

These non-taxable items or tax provision adjustments were during the first quarter of 2007, $562,000 and during the third quarter of 2007, [$352,000] of non-taxable income related to life insurance policies.

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 a state's tax law. Also during the third quarter of 2006, we had approximately $688,000 of tax benefit, primarily related to the statutory closing of certain tax years.

Net income for the quarter increased 39.2% to $14.6 million, from $10.5 million in Q3 2006. For the first nine months of 2007, net income increased 29.7% to $44.4 million, from $34.2 million in the same period of 2006. Our diluted earnings per share increased 31.6% to $0.25 in the quarter, from $0.19 in Q3 2006.

For the first nine months of 2007, diluted earnings per share increased 27.9% to $0.78, from $0.61 for the same period in 2006. Our diluted weighted average common shares outstanding used for EPS purposes were as follows, Q3 2007, 57.6 million shares versus Q3 2006, 55.9 million. Nine months 2007 was at 56.6 million shares, versus nine months 2006 at 55.7 million shares.

Let's take a look at our cash flow table now. We generated $31.5 million in cash from operations during the first nine months of 2007, which included the effect of investing $21.9 million of additional inventory. CapEx in the first nine months of 2007 excluding business acquisitions was $25.7 million. We also spent $5.9 million in the first nine months to purchase some common stock of Keystone.

Cash paid for business acquisitions in the first nine months was $55.7 million. On September 25, 2007, we completed a very successful public offering of 13.8 million shares of our common stock at a price per share to the public of $31. The offer included 11.8 million shares sold by LKQ and 2 million shares sold by selling stockholders.

The shares sold by LKQ included 1.8 million shares sold pursuant to the exercise of the underwriters' over-allotment option. We received approximately $349.5 million in net proceeds from the sale of the shares by us in the offering after deducting discounts and commissions and the estimated expenses of the offering.

During the first nine months of 2007, we also issued stock related to the exercise of stock options that resulted in shares issued and dollar proceeds received that totaled approximately 1.4 million shares for $20.5 million in proceeds, which includes the related tax effects. In addition, we retired 100,000 shares of redeemable stock for $1.1 million related to a 2003 business acquisition.

In looking at our September 30, 2007 balance sheet, you will note we have $12.5 million in debt. We have $225.3 million in cash and zero in debt under our unsecured credit facility as a result of our public offering completed the last week of September.

To refinance our existing debt and to finance our acquisition of Keystone, we obtained a $1.09 billion senior secured financing commitment on July 16th from Lehman Brothers and Deutsche Bank. However, as a result of our successful public offering of our common stock, the level of needed debt financing was reduced.

Accordingly, we obtained a senior secured debt financing facility from Lehman Brothers and Deutsche Bank on October 12th to fund a portion of the Keystone acquisition. This facility consists of approximately $750 million of borrowing capacity. It is made up of a six-year $610 million term loan, a six-year $40 million Canadian currency term loan, a six-year $15 million dual-currency revolving credit facility that can be in U.S. dollars or Canadian dollars and a six-year US$85 million revolving credit facility.

As of October 25, 2007, we had outstanding debt under our debt facility of approximately $650 million. On October 18, 2007, we filed a Form 8-K with the SEC that gives a summary of our new debt facility and included a copy of the credit facility.

Let's look at our 2007 estimates. 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 the acquisitions we have completed so far in 2007.

On July 26, 2007, as part of our second quarter earnings release, we indicated that we expected our 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. We also estimated at this time that the weighted average diluted shares outstanding for the full year 2007 would be approximately 56.5 million.

These estimates were prior to any effects of our recent equity offering, the closing of the Keystone acquisition and the related senior secured debt financing. If the equity offering and the Keystone acquisition had not taken place, we would expect our full-year 2007 financial guidance to be closer to the higher end of the net income and diluted EPS range that we indicated on July 26th.

Because we closed the Keystone acquisition on October 12th, there will be minimal effect on 2007 of any cost synergies. Accordingly, we expect the effect of this acquisition and the related financing on our previously estimated 2007 financial guidance to be slightly dilutive.

As Joe indicated earlier, we expect to obtain between $15 million and $20 million in gross cost synergies from Keystone in 2008 and expect this acquisition and related financing costs exclusive of any restructuring expenses to be slightly accretive to our 2008 dilutive earnings per share. We will be giving 2008 financial guidance for LKQ and Keystone combined in early 2008 after completion of our detailed budgets.

We estimate the weighted average diluted shares outstanding for the fourth quarter of 2007 will be 69 million, and for the full year 2007 will be approximately 60 million. These share numbers are estimates and 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 would like to turn it back to Joe for any further comments and to open up for Q&A.

Let's just go right to Q&A.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Sam Darkatsh with Raymond James. You may proceed.

Good morning Joe, good morning Sam.

Hey, Sam.

Sam.

A few questions here, first off, I note the gross margin tends to bounce around a little bit. And it's often affected by the smelter operations. But, it was down a little bit both sequentially and year-on-year. Can you give a little color, Mark, as to the genesis, as to why that might be?

Yes. If you kind of look -- and to be honest with you, we really tend to look at the year-to-date margins. There is seasonality in our business here, especially on the recycle side. And if you looked at our year-to-date gross margin, its lower -- it's lower by about -- if you take the smelter out of that, it's lower by like about 20 basis points. So, it's not a big swing for the year-to-date.

Like, I'd say quarter to quarter, you're going to see some bounce up and down. Sometimes, you see it go up a little bit and sometimes and a little down. But on a year-to-date basis, we're really pretty close to that.

How should we look at the smelter margins and the impact on the smelter margins on a going forward then for modeling purposes?

Yes. I think you've got to kind of almost look at the smelter, the tie-ins to gross margin and you say, that's how many dollars is going to come through and kind of back it out. We really try to manage the smelter on a spread basis, a gross profit dollar basis, not on a margin basis.

Got you, okay. Second question, I know you gave the aftermarket sales year-to-date, and we can back into the year-on-year growth rates. But, could you help with respect to what the organic growth was in the quarter for aftermarket business and the refurbished wheels and then as such?

We usually don't break out our different product increases by that, I think we've historically been saying the aftermarket [in] Wheel has been a little bit better just because we've been trying to grow it.

Well what I'm getting at is, did the aftermarket business for you guys grow in excess of your 16% organic growth rate, below it, was it similar to that? I'm just trying to get a sense of where the --.

Yes, it was pretty similar.

Okay. And then in the last quarter Keystone was mentioning how there were some pricing issues that they were having I believe, were you seeing some of that ease up a little bit once the deal was announced? Or, could kind of give a little color as to what you're seeing in the aftermarket industry from a pricing standpoint?

Well I think we have to say in the third quarter there certainly wasn't any easing up. Both companies unfortunately continued to butt heads pretty good right up until the closing date. One of the first things that we've done in terms of our integration work is to start to work on the price list and the discount levels, so, I certainly would think that that tension and the systems abating right now.

And I signed on a little late, did you mention what Keystone sales were in the September quarter?

No, I think what Mark indicated was that their results were really in line with what the Street consensus was pretty much all around.

And I know you've been in there much more detailed fashion over the last couple weeks or so, being able to dig around and get your nails dirty a little bit, any surprises plus or minus from what you've been able to see over the first blush?

I guess a pleasant surprise has been really the level of enthusiasm from the Keystone field leadership. I think they've really stood up and embraced the transaction. I think they've embraced -- well let's say the cost synergies that we've outlined, and those were targets we put together not them. So I'm particularly pleased with the way their team has kind of rallied around the synergy targets.

Last question, I know that this isn't much of a receivables business but receivables were up more than the sales growth, would that indicate that business accelerated as the quarter progressed?

Yes. Because what you're comparing is the month revenue September to September, correct.

Right, so September was a better comp in the 16 that you showed?

I don't know, to be honest with you we don't break out organic revenue on a monthly basis, but I'm just saying the volume of the revenue was up.

Okay, thanks, folks. I'll defer to others, thanks.

Thanks, Sam.

Your next question comes from the line of Rod Lache with Deutsche Bank. You may proceed.

Good morning, everybody.

Hey, Ron.

Hey, Ron.

Just looking back over the past two years, your organic growth has been bouncing around the 10% to 12% range and now almost 16%, it's a pretty big spike. I was hoping you could give us a little bit more color on what's driving that increase and whether you think that there's some sustainability to it.

No -- we're still looking at same-store sales growth and a low double-digit -- the Company enjoyed a particularly good quarter. I think we've said consistently that that number probably will bounce around a little bit quarter to quarter, based on things as simple as just kind of aberrations in weather conditions and demands from the shop.

I think we may have gotten a little bit of help from we got slightly more expensive cars in the quarter than we had a year ago, that may have given us a little bit more assist on the top line. And the volume of product at our self-serve operations was up a little bit. But this was a very broad based successful quarter -- aftermarkets, recycled products, all the product lines really showing good same-store sales comps.

Do you have any data to suggest that you're seeing more cross selling between the aftermarket business and the recycling business?

No. Way too early to come to any conclusions on that. That's really a systems -- I mean if you're talking about Keystone, that's going to really be a systems driven issue. What I will say is that, during the quarter as we kind of watched the ability of the recycled inside sales reps to sell aftermarket products, they've been hitting all-time highs in each successive week through September and to October.

So, if that's what you're referring in terms of cross selling, yes that has been a very, very gradual acceleration, it's been very even and it continued right up to last week.

Do you have any estimates of what that might be adding to your growth?

I don't. I really couldn't quantify that.

Okay. And then, the operating margin improvement year-over-year, also quite a bit stronger than the trajectory that you'd been running. Is that something that you think might be lumpy?

Yes, exactly. Don't take one quarter and run that out, we try to tell people to kind of look at the year-to-date trends. And it's showing higher margin enhancement than in prior years, quite frankly, because we had a little less level of acquisitions and we've always said acquisitions sometimes pull down our operating margin as we get them to improve. Obviously our revenue growth is down compared to like '05 and '06, you're seeing a little more of that organic margin expansion.

Right. Okay, thank you.

Thanks, Rod.

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

Thanks. Good morning, guys.

Hello, Tony.

Hello, Tony.

A couple questions, one, this is typically a seasonally more volatile or slower quarter, and can you talk just a little bit about what's going on at the auction level? I know there was a lot of flooding in mid summer in Texas and Oklahoma markets, I wanted to know how that impacted you from a buying standpoint, and how you feel your positioned going into a seasonably stronger December and March quarters?

Yes, I think we would characterize the auction market for the wholesale cars in the third quarter to be pretty healthy. I tend to look at just simply how much product is at the auctions each week, and I think every week during the quarter -- well it was accelerating toward the end of the quarter and in September we were seeing 44,000 cars at the auctions most weeks.

In July, I think that number was [probably] down around 40, so, a pretty healthy market all around for buying. We did pull our backlog down during the quarter, which is our normal operating model, but we didn't pull it down as much as we did a year ago. And I think that's somewhat reflective of what we've generally felt was to be a positive buying environment.

So would you categorize yourself as better positioned going into the Q4, March/Q1 periods this year than you were last year?

That would be tough for me to really draw that conclusion. I'd just say we're going into -- October will continue to be -- the flood gates don't really open up in the auctions until probably January or February when, at least the way I see it, kind of the peak buying season comes.

So fourth quarter continues to be a relatively tough buying market historically, we've positioned ourselves well with good backlog coming into the fourth quarter and we'll hope for some bad weather here. It's uncharacteristically warm and dry in most of our markets.

And keep in mind, Tony, when we go to the auction to buy a car, that car was wrecked 60 or more days ago.

Right okay, that's fair. So just shifting gears a little bit, when you look at your mix of business, you do benefit from the mechanical side of the business in some of the summer months. That's been a softer environment overall in automotive repair and I'm just wondering what you saw with respect to mechanical performance and how that may have played into some of your same-store sales growth that you saw.

I can't say that we've seen any -- of what I would consider unusual weakness in the mechanical repair market. We monitor the percentage of our revenues that come from mechanical parts versus crash parts. I can't say that that mix is really altered by any material amount during the quarter.

Okay. And one last question, I wanted to get maybe, Joe, your thoughts behind this. State Farm has implemented some pilot testing on reduced MSRPs in two markets to the OEs by about 3% and I'm just wondering, in your discussions with your contacts there, what the rationale, other than trying to help their systems and I think they're trying to get more electronic.

Is there any bigger read into that at this point? And do you think that that, at least right now at the margin, would have any impact whatsoever in them trying to reduce cost? Does that expedite maybe perhaps getting involved more aggressively on aftermarket parts at some point?

Let's say at this point we certainly aren't reading anything unusual into the move by State Farm. We're taking it for face value that it is what they say it is, trying to help expedite and improve shop functionality and efficiencies. The 3% I view as being kind of irrelevant in the marketplace, at least at this point, and as you know, State Farm does not write aftermarket products today. So with the revenue that's generated from their collision repair shops doing work for them, I would not expect any real impact on our business from the program.

Okay, great. Thanks, guys.

Thank you, Tony.

Your next question comes from the line of Bill Armstrong, C.L. King & Associates. You may proceed.

Good morning. You mentioned that the auction supply environment was pretty healthy. Could you discuss vehicle pricing trends?

Yes on a year-to-date basis we're up a little bit more than what I had reported during our second quarter call. The average cost to salvage, and again this is for our late model wholesale business, those costs are up about 3% on a quarter-to-quarter basis, meaning second quarter to third quarter of this year, very flat.

So the 3% is on a year-over-year basis?

That's a year-over-year basis, yes.

Okay. And then just for modeling purposes, what approximately do you expect your interest expense to be going forward, just on a quarter by quarter and intangibles amortization?

[Prior to that I'm] giving you the interest expense number, right now we've got 650 million in debt it's basically LIBOR plus 225 basis points. Interest amortization, I think we said was just under $4 million a year.

For intangibles [amortization] ?

Intangible amortization due to the Keystone acquisition.

Got it. Okay that's all I had, thank you.

Thank you.

Your next question comes from the line of Michael Cox with Piper Jaffray. You may proceed.

Good morning, congratulations on the quarter.

Thank you.

Thanks, Mike.

My first question if you could provide some sort of update on the patent that litigation that Keys and now you are involved with.

Yes really no change from what we discussed on the last call. Both sides agreed to move to a mediation process. There has been one mediation meeting to date, nothing really developed or grew out of that session that would suggest there is common ground between the two opinions.

We will move forward, appeal the ITC decision and, as I'm sure Ford is submitting their appeals on those parts where the patents were overturned. And we continue to believe that Keystone has a better case, and will prevail once this gets into the Federal court system. In terms of timing, our best estimate is that this is probably late 2008 at the earliest by the time we'll see anything out of Federal Appeals Court.

Okay, that's helpful. And you mentioned early on the call one of the first priorities of the integration was to get Keystone on your same pricing and discount schedules. Could you comment on any of the other early priorities from an integration standpoint?

Yes, absolutely. We've formed an integration team on day two and day three to kind of agree and set priorities. We've accelerated a warehouse merger on the West Coast that was actually a result of the fact of the LKQ management in the region that had allowed a lease that [was] ready to expire -- really to creep up on us and didn't have a real good exit strategy from the lease property.

So we moved forward to accelerate the merger of these two warehouses, we're doing prelude training with sales people this week and next week, parts are being moved from one warehouse into the Keystone warehouse as we speak. So we'll know a lot after the couple weeks, we'll have this completed by the end of October.

That's really going to provide us with a tremendous learning experience of kind of what rough areas are that we need to get perfected in order to facilitate proper planning of subsequent conversions. No real change from the cost synergies that we've set out in the past. We are actively working today to line up the price list of the two companies so that we have the exact same price for all parts in both companies.

We've started the process, and this could take a month to work through region managers from Keystone and local plant managers from LKQ to work through, account by account, what the discount structure for our customers will be going forward.

We would project that before the end of this year we'll have two of the major warehouses consolidated and that we will close three of the LKQ depots. We've been in the process of renegotiating freight rates on our ocean freight. We'll have new pricing in effect on that before the end of the year. We have closed Keystone's Taiwan trading company effective this week and should start to see financial benefits of that certainly before the end of the year.

We've noticed about 30 people to date in terms of terminations. A lot of those quite frankly were LKQ people that, going into the merger, we knew we would not replace and would eliminate their positions. So in effect I think in terms of the projected general and overhead reductions that we had forecasted the first year, we're pretty much at that level already.

A lot of meetings with the Taiwan vendors or to say our overseas suppliers, I'd say that those meetings are going very well. Obviously we're trying to obtain the better of the two companies' pricing and payment terms structure in those discussions and it generally, as I say, the manufacturers have been stepping up as we had expected them to.

That's great. It sounds like you're off to a great start. Thanks a lot.

Thank you.

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

Good morning, guys.

Hi, Craig.

Hi, Craig.

Could you give us an update on the Right Choice Program with Advanced?

Yes it's probably the same report that I gave you 90 days ago, unfortunately. The program really seems to be kind of stuck at this $6.5 million, $7 million a year level. We [at] LKQ will be trying some new things in the South Eastern markets. We've put together some television advertising and newspaper advertising that we'll be funding to see if we can drive a little more store activity. The store participation rate, really pretty good, at least by my view.

I think 70% of their stores participated in the program during the quarter and would estimate that probably 20% of their stores are out of our market areas. So the participation rates not an issue, it's just that there's not a lot of volume being driven through the individual stores.

So we like the program, we'll continue to work it and we have, as I reported last quarter, we have a lot of our business development people going in and out of the Advanced stores. We'll continue to do that and certainly will be meeting with Advanced sometime over the next quarter because Keystone is also supplying parts to the Advanced stores. So we'll need to kind of sync up those programs.

I know it's early, but have you made any decisions yet with respect to Keystone's Mexican operation and with respect to the cross-dock initiative they had in place?

We have not really dug very deep into the Mexico operations yet. [It's clear to us that, for that to be successful there has to be a lot more volume going through the plant. So, we'll continue to kind of dig deeper into that as time permits. We're kind of focused on picking up the low-hanging fruit right now, if you will, before we deal with the more complex issues.

The cross-dock, same thing, we will not be making any immediate closures of cross-docks, nor will be rolling out any additional cross-docks. I think during the budget process it'll provide an opportunity for us to do some modeling of what a couple of the markets may look like with the cross-dock and without the cross-dock, now that I think six of them are in place I think we can make more sensible decisions.

It's clear to me that it's a very intricate system, I think the system as it's put together today there's just too much tension in it, there's not enough flex in it to allow for anything to go wrong. So if nothing else, we just need to put I think more cushion into the system. But we'll have better feedback for you on that next time we get on a call with you.

And then as it relates to the transaction, what has been the customer reaction? Are your customers aware of the merger? And have they changed their ordering patterns or behaviors at all with respect to that?

I'd say no change from what we discussed on the last call. I think the market's broadly aware of the transaction, the support from the insurance industry I think has been very favorable. I think they like the deal because they would expect their alternate part utilizations and can likely gain from the merger of the businesses in terms of customers shifting their buying habits, way early for any of that to happen.

Okay thanks, congratulations again.

Thanks, Craig.

Your next question comes from the line of Scott Stember with Sidoti & Company. You may proceed.

I'm not sure if you guys mentioned October trends of [leasing], if you were to exclude what's going on with any benefits from Keystone, whether we're still trending in this mid teen range or is it the typical low double-digit range.

October same-store sales growth has certainly slackened off from the average of the third quarter. You know it's too early in the quarter to call where it will end up, obviously again focused on the long term we think that we'll be right around the 10%, 11% as we roll forward.

October is admittedly soft, and I don't think we've really seen some of what we would consider kind of normal fall weather patterns hit in many markets yet. But we've watched this before, I think we've been on these calls quite regularly telling you that the quarter gets off to a soft start and 90 days later we get a good pop and come in with our low double-digit numbers.

Okay. And just tying back to the question on pricing at the auction level, could you talk about the percentage of vehicles that you actually won bids on versus a year ago?

I can't say that there's been a measurable change there. Our lend rate's generally in that 13%, 14% range and I don't think we've -- it's rare that I even see a week when we would move out of that range.

Okay. And just last question, with the heavy lifting that you have going on with Keystone right now, it's obvious or safe to assume that you will be out of the market with anything else going on, whether it be on the recycle side or aftermarket side as far as acquisitions go?

Well, I'd like to say we'll be actively on the sidelines to the extent good quality opportunities come along with good valuations, our company should be players and I think we owe that to our shareholders to figure out any way we can to take advantage of good value opportunities that may be in the market. However, I will say that we're not out stirring the pot a lot and looking for deals right now, but we don't intend to let anybody steal anything.

Okay, that's all I have, thank you.

Okay, Scott, thanks.

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

All my questions have been asked, good call though.

Okay, thanks, Bill, I appreciate that.

Maybe one thing, I answered a question earlier, just to refer you guys to because I know you guys are trying to do your modeling a little bit with Keystone in the future period. You know basically kind of reference back to that perspective supplement.

I mentioned earlier that interest was 225 basis points over LIBOR, which you can see in our 8-K filing that we did. We do have debt issuance costs you need to put in there and you can kind of gather that from a perspective supplement, it's about a $2.2 million amortization a year of debt issuance cost because there was quite a bit of debt.

I mentioned, I think it was Bill Armstrong's question earlier, about 4 million a year of intangible assets created in this transaction that would also be amortized. And maybe the last point, which is also in the perspective supplement, we said we were going to have to write up inventory due to, I won't get into the FASB but its FASB 141, about $2.7 million.

And we expect that extra cost to come through cost of sales over the following four months or so. So you might want to, as you're building your models, go back and peek into that supplement a little bit and it talks about those items.

We're coming up on 11:30, maybe one more call -- or one more question.

Your final question will be from the line of John Lawrence with Morgan Keegan. You may proceed.

Good morning, guys.

Hi, John.

Hi, John.

Would you just take one step into that a little further, as far as the meetings with vendors and negotiating freight rates, I mean I would assume that obviously with the scale now that you will consolidate all of these vendors. Can you give any kind of idea as to what numbers those would go down to?

I think it's a little early for us to do that. We'll certainly be able to put a lot of color on that when we get into our year-end call, and start actually kind of working through some invoices. The consolidation of vendors on freight, that's really taking place right now, so that should be done this week or next week.

The other vendors of course, yes there's still a need in our view to keep good balance between the vendors and Keystone was pretty careful not to put all their eggs in one basket. And we share that philosophy that we need to use multiple suppliers of every product line that we can [so] that we keep our negotiating power pretty strong.

And, Mark, is there any kind of -- at this point you probably wouldn't break out sort of what the run rate and cost was for the trading company in Taiwan.

It's probably $500,000 or $600,000.

Okay. Thanks, guys.

All right. Well thank you, everyone, for calling in and joining us. We appreciate your interest in the Company, and look forward to talking to you on our year-end call in late February. Thanks again.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.