LKQ Corp (LKQ) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth quarter 2007 LKQ Corporation earnings conference call. My name is Daniele and I will be your coordinator for today. At this time, all participants are in listen only mode. And we will facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes.

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

Before we get started, I need to talk about forward-looking statements. The statements in this press release and web cast include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements regarding our expectations, beliefs, hopes intentions of strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. These factors include the risk factors and other risks. They 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 update to reflect events and circumstances arising after the date in which it was made except as required by law. I also want to remind everyone that we declared a 2 for 1 stock split December 2007 so all earnings per share amounts and share counts discussed today reflect the split. Okay, good morning. Thanks for joining LKQ fourth quarter 2007 earnings call.

On the call today are two members of management, Mark Spears and me. My name is Joe Holsten. I'm the CEO of LKQ. I will begin by providing some high level overview of our performance as well as qualitative views on the business and our industry and Mark will provide a more detailed assessment of our financial results. I will also update you on some of our integration work relative to the recent acquisition of Keystone. Today, we are reporting a very good fourth quarter with respect to several things. First, we delivered excellent financial results for the quarter. We reported $414.7 million in revenue for the quarter which represents close to 103% total revenue growth over the fourth quarter of 2006. Our preKeystone businesses delivered a strong quarter as our organic revenue growth was just over 13%. This is the highest level of revenue we have ever achieved in a quarter and of course the acquisition of Keystone is a major contributor to the growth. Second, we continue to make excellent progress to leverage our infrastructure because we expanded our EBITDA margin by 150 basis points. Our EBITDA margin is 12.2% for the quarter compared with 10.7% in the fourth quarter of 2006.

Finally, our net income increased just over 111% to $21.5 million for the quarter and diluted earnings per share increased by close to 78% to $0.16 per share. As we previously reported, the Keystone acquisition closed on October 12th and their financial results are included in our financial report for the last two and one-half months of 2007. For the Keystone fiscal year ended March 30, 2007, as a reminder of Keystone reported sales of $714 million and net income of 30.3 million. So needless to say with the acquisition aside, our primary focus on the fourth quarter was a consolidation of these two businesses. The first priority we completed in Q4 was a cross reference literally thousands of part numbers and catalog prices and development a common catalog from a shop estimating systems showing the same parts and prices. And Keystone and LKQ shared some common customers with different customer discounts for certain part sites, we had to average and modified these discounts to what would be fair to both our customers as well as ourselves. This process was time consuming, required significant efforts by our field management and while it is now substantially complete, discount levels will receive constant review both up and down on an on going business, on going basis as the key business process. We also prepared computer conversion programs that conferred costumer data out of LKQs information system and a prelude, the Keystone ERP system.

Currently, we have converted 33 LKQ or action locations which now sell aftermarket parts through the prelude system. This includes the physical combination of nine warehouses and 13 aftermarket selling locations which have or will be closed. The remaining 11 converted locations will not be physically merged with Keystone locations. By the end of 2008, it is our plan to converted 56 locations to prelude which includes the physical combination of 25 warehouses and 14 aftermarket selling locations. You can think of a selling location as a store front with very nominal warehousing capacity. We are also reviewing currently the volumes and capacities of roughly six, excuse me, roughly 70 bumper wheels and light refurbishing locations to determine the possibility of consolidating some locations in the future. As part of these consolidation efforts, we have also be standardizing our refurbishing processes to achieve consistent quality and increased volumes. But we have reduced corporate overhead as a result of merging corporate functions. There were certain functional areas where we had combined resources of Keystone and LKQ to strengthen the overall organization.

These include risk management, human resources, organizational development and training and Government affairs. We previously indicated that in 2008, the cost savings and efficiencies excluding any restructuring costs would be between $15 and $20 million. Based on current estimates, we believe these cost savings will be much closer to the $20 million level in 2008. We also indicated the annual cost savings and efficiencies excluding any restructuring costs would be between $25 and $35 million to be captured over the next several years. We now believe we will be much closer to the $35 million level and we believe our ongoing efforts identify new synergies to add to this list. Moving on to some other acquisitions that we completed, you may recall in the first three quarters of 2007, we acquired eight businesses. These eight acquisitions consisted of five recycled parts businesses. Potomac German acquired in February and recycling business serving the professional repair market with facility in Frederick Maryland and St. Augustine Florida, Al's atomic retail oriented recycling business with two facilities in Dallas, Texas acquired in March. Thruway a small recycling business acquired in April [consists of] 30 acres in Parryville, Pennsylvania. This facility is in effect to start up for us to better serve the professional repair market in the greater Philadelphia area. Dominion Auto Recycling acquired in June located near Toronto, Canada also serving a professional repair market and in July, we acquired Pintendre Autos, a large recycled parts business near Quebec city.

This business primarily serves a professional repaired 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. We also acquired two small aftermarket businesses. Crash Parts Warehouse, a small aftermarket in Birmingham, Alabama acquired in March and in May, we acquired similar body parts and aftermarket business Birmingham, Alabama acquired in March and in May, we acquired Cenla Body Parts, an aftermarket business located in Alexandria, Louisiana. And in January 2007, we entered the head and taillight refurbishing business through our acquisition of northern light. These eight businesses reported approximately $53 million in trailing annual revenue just prior to our acquisition of them. We made three more small acquisitions in the fourth quarter which included Northwest recycling falls in November, a retail oriented recycled parts business in Portland, Oregon. In December, we acquired a small recycled parts business near Birmingham, Alabama while extremely small company. It is located on 35 acres of fully permitted property. We plan to construct warehousing and make other improvements here in 2008 and ultimately relocate our large Birmingham recycled part business on to this property late in the year.

Finally in December, we acquired a business located in California and Indiana that specializes in buying only repaired part that can provide our recycled businesses additional sellable products. These three businesses reported approximately $15.1 million at trailing annual revenue just prior to our acquisition of them. At LKQ, insurance relationships and programs have always been important to us and are even more so now with our investment in Keystone. We have three insurance carriers, up one from the prior quarter in the Midwest that directly provide us low end cars that will provide some parts to be sold into the professional repair market and with the remainder of each car being placed into retail oriented self serve locations. These three programs are providing us about 250 cars per month and there is another large carrier that is expected to enter this type of program shortly. Our Right Choice Program with advanced auto parts has revenues that continue to be annualizing in the $7 million range, separately Keystone also sales to advance but at a much lower volume. We have identified all advance stores in close proximity to Keystone locations and integrated them them into the Right Choice Program. At the end of Q4, LKQ operated approximately 265 daily transfer run and approximately 2,400 local delivery routes. We acquired approximately 32,900 cars in our wholesale recycled business during the quarter, which is 19% more than we acquired in Q4 of 2006. For the full year 2007, we acquired 126,000 in such cars which is 13.1% more than the full year 2006.

The percentage of vehicles we acquired from salvage auctions during full year 2007 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 an average of 90 persons or 19.6% more in Q4 2007 compared to 2006 as we continue to invest in what we see to be the key to our business model our sales and distribution system. In summary, we are pleased with our results for the quarter and look forward to 2008. The combination of LKQ and Keystone provides an attractive value proposition to a wide array of customers and to the insurance industry that we serve with our network of nearly 300 facilities. We are in a unique position to leverage our inventories of aftermarket collision replacement product , recycled OEM parts and refurbished OEM products such as wheels, bumper covers other and lights, by having the abilities to sell all of these combined inventories in response to customer requests. In addition to providing an enhanced level of service to our customer, we believe the combination of LKQ and Keystone will result in improved levels of profitability as we capture the revenue and cost synergies and integrating our operations. Furthermore, I will remind you in particular, given the current concerns about the U.S. economy, I would point out that we believe our industry is generally not cyclical business. At this point, I would like to ask Mark to add more detail discussions on the company's financial

Thank you, Joe. Good morning everyone. Let's look at the tables on our press release and know we've also included a table that reconciles net income to earnings before interest, tax, depreciation and amortization otherwise known as EBITDA. We also added supplementary data scheduled related to our income statement that shows growth and margin percentages. Looking at our the income statement and related tables, our fourth quarter 2007 revenue was up 102.8% to $414.7 million from $204.5 million in Q4 2006. Our revenue for the year grew 42.7% to over $1.1 billion compared with $789.4 million for the full year 2006. Our organic revenue growth was 13.3% for the quarter and 12.4% for the full year 2007. Our fourth quarter 2007 gross margin was 44.6% versus 44.8% in fourth quarter of 2006. For the full year 2007, our gross margin was 44.9% versus 45.3% in the same period in 2006. Our facility and warehouse expenses for Q4 grew $16.9 million or 72.5% over Q4 2006. The majority of this growth was from our 2007 business acquisitions and the full year impact of our to 2006 business acquisitions which accounted for $15.6 million of the growth or 67% expense growth. Excluding the effects of business acquisitions, cost increases in Q4 2007 over Q4 2006 were primarily related to labor and labor related cost. This related increased staffing needs to handle parts volume growth. For the full year 2007, facility and warehouse expenses as a percentage of revenue decreased to 10.3% from 10.9% in 2006.

For the full year, facility and warehouse expenses grew $30.3 million or 35.1% over 2006. Business acquisitions represented $24 million of the growth or 27.8% expense growth. Our distribution expenses for Q4 grew $20 million or 100.3% over Q4 2006 of which $17 million or 85.3% expense growth was due to our business acquisitions. Excluding the effects of business acquisitions, the fourth quarter of 2007 had increased distribution cost of over fourth quarter of 2006 primarily related to labor and labor related cost growth of approximate approximately $1.2 million and also had additional fuel costs of $1.1 million. For the full year of 2007, distribution expenses as a percentage of revenue improved to 9.6% from 10.1% in 2006. For the full year 2007, distribution expenses grew $28.1 million or 35.1% over 2006. Business acquisitions represented $20.3 million of the growth or 25.3% expense growth. Selling, general and administrative expenses grew $27.9 million or 103.8% over Q4 2006 of which $26.9 million or 100.2% expense growth was due to our business acquisitions. Excluding the effect of business acquisitions, the quarters growth was primarily due to higher compensation and fringe costs. For the full year 2007, SG&A expenses as a percentage of revenue improved to 12.5% from 12.9% for the same period in 2006. For the full year, selling, general and administrative expenses grew $38.7 million with 37.8% over 2006 of which $32.7 million or 32% expense growth was due to business acquisitions.

For the quarter, our EBITDA grew 132.3% to $50.7 million. EBITDA was 12.2% of revenue for the quarter compared to 10.7% in Q4 2006. For the full year 2007, our EBITDA was 12.6% of revenue versus 11.5% for same period in 2006. Operating income for Q4 2007 grew 135.1% over Q4 2006 to $43.2 million. Operating income as a percentage of revenue was 10.4% in the quarter compared to 9% in Q4 of 2006. We improved operating margins 140 basis points with Keystone in our results for 2 and a half months in Q4 of 2007. An important point to remember, however, is the best margin quarters for Keystone and the aftermarket business for that matter in general as Q4 and Q1 with lower margins in Q2 and Q3. Keystone seasonal strength in this quarter allowed little effect on our overall operating margin in Q4 2007. For the full year 2007, operating income improved to 10.9% of revenue compared to 9.8% for the same period in 2006. We had net interest expense in Q4 2007 of $9.9 million compared to net interest expense of $1.7 million in Q4 2006. This was related to higher debt levels from the acquisition debt incurred to acquire Keystone on October 12, 2007. Our Q4, 2007 pretax income grew 98.7% to $33.7 million from $17 million in Q4 2006. For the full year 2007, pretax income increased 48.7% to $108.3 million from $72.8 million for the same period in 2006. For Q4 2007, our effective tax rate was 36.1% compared to 39.9% in the same period of 2006.

If you exclude certain nontaxable items and adjustment to provision for income taxes, our Q4 2007 effective tax rate would have been 39.6% compared to 39.9% in the same period of 2006. Full the year 2007, our effective tax rate was 39.1% compared to 39% in the same period of 2006. If you exclude certain nontaxable items and adjustments to the provision for income taxes, our effective tax rate for both the full year 2007 and the full year 2006 would have been at 40%. Net income for the quarter increased 111.3% to $21.5 million from $10.2 million in Q4 2006. For the full year 2007, net income increased 48.4% to $65.9 million from $44.4 million in 2006. Our diluted earnings per share increased 77.8% to $0.16 in the quarter from $0.09 in Q4 2006. For the full year 2007, dilute earnings per share increased 37.5% to $0.55 from $0.40 for 2006. Our diluted weighted average common shares outstanding used for EPS purposes were as follows: Q4 2007 at $138.8 million shares versus Q4 2006 at $112.3 million shares. The full year 2007 at $119.9 million shares versus full year 2006 at $111.6 million shares. Let's take a look at our cash flow table now. We generated $54.4 million in cash from operations during 2007 which included the effect of investing $35.1 million in additional inventory. CapEx in 2007 excluding business acquisitions was $38.4 million. Cash paid for business acquisitions in 2007 was $868 million which included $806.8 million for Keystone acquisitions.

On September 25, 2007 we completed a very successful public offering of $27.6 million shares of our common stock at a price per share to the public of $15.50. The offering included $23.6 million shares sold by LKQ and $4 million sold by selling stockholders. The shares sold by LKQ included $3.6 million shares sold pursuant to the exercise of the underwriters over allotment option. We received $349.5 million in net proceeds from the sale of the shares by us in the offering after conducting discounts and commissions of the offering. During 2007, we also issued stock related to exercise the stock options that resulted in shares issued and dollar proceeds received that totaled $3.9 million shares or $31.1 in proceeds which includes related tax effects. In addition, we retired 200,000 shares of redeemable stock to $1.1 million related to a 2003 business acquisition. In looking at our 2007 balance sheet, you will note we had $658.5 million in debt that included $650.3 million under our unsecured credit facility. We also had $74.2 million in cash and equivalents as a result of our public offering completed the last week of September. Note that we obtain the Senior Secure Debt Financing Facility on October 12 to fund a portion of the Keystone acquisition. As of February 26, 2007, we had outstanding debt under our debt facility of approximately $650 million in cash and equivalents of around $45 million. On October 18, 2007, we filed a form 8-K with the SEC that gives us a summary of our new debt facility and includes a copy of that credit facility.

Let's look at our 2008 financial estimates. We expect that 2008 organic revenue will grow by approximately 10% with the balance of the growth being the full year impact of 2007 business acquisitions. Excluding the effect of any 2008 restructuring expenses, we may have related to the Keystone acquisitions, we expect full-year 2008 net income to be within the range of $102 million to $108 million and diluted earnings per share between $0.73 and $0.77. We anticipate the net cash provided by operating activities for 2008 will be over $85 million. We estimate our full year 2008 capital expenditures related to property and equipment excluding the expenditures of LKQ to acquire businesses will be between $65 million and $75 million. That includes about $10 million related to capital expenditures we really planned for late 2007 on projects that were delayed into 2008 and approximately $4.8 million related to restructuring our aftermarket business as a result of the Keystone acquisition. We estimate the weighted average diluted shares outstanding for the full year 2008 will be approximately $140 million. These shared numbers are estimates and will be affected by factors which is any future stock issuances, the number of our options exercises and subsequent periods and changes in our stock price. I would like to return back to Joe for any further comments and we will open up to Q&A.

Daniel, I think we will just go right to the question, please if you could open it Q&A, please.

Yes, sir. (OPERATOR INSTRUCTIONS). The first question comes from the line of Sam Darkatsh with Raymond James. Please proceed.

Good morning, Joe. Good morning, Mark.

Hi, Sam.

A few questions here. There was a fair amount of snow fall in Q4 and here into Q1. Could you see if you could at least directionally help us with how that help the total business. I know October was a little soft heading into the quarter and what you are seeing into Q1here, Joe.

Yes, good point. Certainly the Crash Part Business I think got a little [inaudible] in the sale, and early to mid December from some early winter activity. And selected markets certainly continued into the first quarter. If you look at the belt between the Oklahoma, Kansas market up through Wisconsin and Illinois, we have enjoyed very strong results that are certainly in part weather related. Other parts of the country, have not been blessed quite as much as tax is after a really good fourth quarter has been fairly dry so far in the first couple of months of this year. The Florida market and southeastern U.S. is remain in drought conditions. The mid Atlantic states and new England just over the last couple of weeks, we started to see some favorable kind of weather impacts in those markets. So kind of unbalance we have certainly enjoyed good benefits in a number of markets but a substantial part of the country has not really participated in what we have seen here in the Midwest.

And in Q1, is, so far in the first couple of months, would you characterize your organic sales growth pretty similar to what you saw in Q4?

All in I would say maybe not as quite as strong as 13, but I would say we are happy with what we have seen so far.

Okay. Second question, Mark, what do are you looking at in terms of expected restructuring P&L impacts in 2008 and the tax rate in 2008, how we should be modeling for those two items?

Yes, I think the last part first. Our tax rate would be safe will be around 40%. That's why I tried to put it in my script a little bit on talking about when you pulled out life insurance proceeds and things we had this year, what the real effect this rate was and that would be included with Keystone. As far as the restructuring expense hitting P&L, that's tough. We have planned out what that will be, to the extent, we let people go to their own Keystone books parts of accounting a part of that to go against good will to extend the drivers on LKQ drivers [inaudible] to P&L. So at this point, it is pretty hard for us to tell you what that split is even though we have laid out head count numbers and things like that that we are looking at.

Something perhaps similar to what we saw in Q4 for the next couple of quarters.

Yes, it was pretty small. I think EBITDA was like 230,000 was the effect of restructuring. It gets more until we start negotiating and get out of certain leases.

They will have to look out on that.

[inaudible] will have to work it out whether -- we will explain what it is and where it hits on the income statement or the balance sheet. But.

Okay. In terms of Keystone, if you had owned it, both last year and this year in Q4, what was the organic sales growth in Keystone in the quarter and what are you projecting for 2008 versus your organic business?

We are doing various things here and negotiating discounts whatever. We are not really going to be disclosing that. We got to look at a combined company here. We're not dig out Keystone Q4 revenue. Keep in mind, we had it for two and a half month not the whole quarter. And also keep in mind in our prior quarter is they didn't really end this until the last day of a quarter. It was always 4th or 5 type system. So it's a little hard for us to dig right that out anyway. And as we start moving business between each other, it's going to be even harder. So we are not really going to be disclosing that.

Let me rephrase the question then. Keystone organic sales growth in Q3 as I recall was a little soft and there was some talk that there was some, the reason for that was because there was some discounting in the industry and you talked about that you modified a lot of the discounts in the integration process, are you at least seeing a bit of a recovery in Keystone's sales growth rates from what you saw in the summer and late fall at present and would you consider, if you have seen a bit of a pick up would you expect that to continue?

What we saw is going into December, we started to see some acceleration and I think that's continued into the first quarter, but I think what's so fuzzy here is that these are naturally pretty strong sale seasons for the aftermarket side of the business. So it is really hard for us to segregate how much of the improvement is coming from the rationalization of some of the markets as supposed to what would have just happened ordinarily because of the seasonality.

Would you be disappointed if Keystone didn't provide a 10% sort of or close to company average sort of organic growth rate, would you be disappointed if that didn't happen?

Yes. Our overall goals for 2008 is for a roughly 10% organic growth. That's how we set our internal budgets and managements bonus and incentive pay outs will be based on that. Let's be clear, there will be some account losses here. We have made a lot of changes. We have moved our price list around, settled with customer discounts. We are merging businesses and moving deliveries from one driver to new drivers. There's bound to be some modest amount of costumer [inaudible]. I just tell you I think we're on it in our field management is very in tune to in parts with the revenue base and everybody is focused on protecting the customer base and growing our market share with the customer base.

But your 10% guidance for organic sales growth excludes Keystone by definition or wouldn't it for the vast majority of 2008? Because it is organic and you have already said.

No, it's going to happen in 2008 as we mix businesses, we are not going to [inaudible] to organic. We saw it giving businesses to Keystone and vice versa. So in that context, we are really talking about over the combined companies.

Got you. Last question and then I will refer to others. The acquisition pipeline, I know you made a couple of small deals after the Keystone deal was consummated in October. Would you expect that sort of [inaudible] or would you expect to be a little bit more reserved or circumspect with acquisitions in 2008 while you integrate the two businesses.

I think it is fair to say we will definitely stay focused on the Keystone acquisition, the integration. I think last time I used the term that we would be actively on the sidelines and I think that's a fair characterization. During the quarter, we have submitted a couple of offers to acquire businesses. They were rejected as our intent to what we target, we are are going to negotiate hard for and try to get what we think is a very fair price to our shareholders. We will be -- I will say next quarter or two, we will really be in the phase of evaluating alternatives to set our priorities when we do fully re-engage in the deal market.

Thank you, gentlemen.

Thanks, Sam.

Your next question will come from Scott Stember with Sidoti & Company . Please

Good morning.

Good morning, Scott.

Could you disclose what Keystone sales were in the quarter?

Again, we started merging businesses and moving accounts and revenue from LKQ operations within about 10 to 12 days after the close. Unfortunately, the revenues have been blended very quickly.

Going forward we are not going to be able to be breaking out Keystone versus the others. Keep in mind we didn't have them the whole fourth quarter, we had them two and a half months. That's why we are not really getting that disclosure.

Fair enough. I'm just thinking a high level look at the integration and some of the things that you have to do yet. You guys touched on that already, but if you have it state where we are in the nine inning baseball game, how far with are with the integration and if you have to look at your crystal ball as to when we would be done, could you just do that?

At price, say here in late February maybe we're in the third inning of that process. We talked about the conversions on the prelude or we are well over 50% done on that. A lot of the heavy lifting remains to be done on the major warehouse consolidations, as we have said we have 25 warehouses to be combined. We have done nine so far, and of those nine that are completed, six or seven of those were pretty easy consolidations. We would expect to have the warehouse consolidations completed by the end of the year. The head count area between corporate and I will call it operating and nonoperating positions, the price is about 125 people taken off the payrolls through the end of January through the end of fiscal year 2007, only a few route reductions have been achieved. So that's an area where significant work remains to be done as in the routing, something we think we will achieve through. Corporate costs, those are in the bank reducing the board positions, lowering director and officer and certain cost lowering [inaudible] the general public company costs of Keystone, those have all been eliminated. And an area where a lot of work has been done but the financial results phase in differently over 2008 would include things like we have been able to lower the liability insurance premiums for the company by leveraging our purchasing power.

Third parties rate carrier rates have been negotiated down and that would include ocean freight. That will be phasing in fairly early in the year. We have been able to lower the administrative costs associated with administrator medical benefit plan. We won't see those cost benefits until second quarter and middle of the year. Same thing with administration and 401-k plans. Those costs have been identified to come down, but we won't start seeing that just quite yet. We have really negotiated a lot of the cost of our product in terms of maintaining volume discount and purchasing discounts. That is really get phased in as we turn the inventory at this point. Marketing costs have been reduced. Those are hitting pretty early in the year and then, the reduction of some is of the outside consultants being used by Keystone. That's starting to show benefit here in the first half of 2008. So it is a pretty lengthy lift of things and I would say third to fourth inning is probably a good characterization.

Okay. And you talked about some of the bumpering for manufacturing capabilities and what you're trying to do. Can you talk about Keystone's facility that may head up in Mexico, where that stands with plans for that?

Yes, absolutely. The facility in Mexico we, you know, our plans initially were just to get the production up on that which we did. Our business plan for next year calls for about another 10% increase in volume. So, we should see the facility running over 300 bumper covers today. The work that's being done on the bumper covers there is all essentially all covers but probably be disposed of in the U.S.. So while they're productivity in terms of bumpers per person or bumpers per person per day is a lot less than what we see in U.S. markets. The people are repairing bumpers that would be noncost- effective in the U.S.. I think our probably, the enhancements we have made there is that we have been able to leverage, I think the day you at that points for LKQ, the recycled side of the business really understanding where, what product has actual demand and based on that, we have been able to create a build list. We are doing all of our sorting in the U.S. now linking the product to that build list to make sure what goes to Mexico we actually have demand for the United States and accordingly, we have seen the amount of actual scrap in Mexico come down to a pretty acceptable level. So that's the plan for 2008. We will continue to focus on the type of for that product with good pricing in the U.S. and to bring the production upside of 10%.

Okay. Just two quick last question. Could you just comment on the auction activity? It appears that it was robust for you guys at least at auction and also talk about for the ITC, where that stands right now.

Sure. On the auction front, the, I would say that the fourth quarter of 2007 was relatively normal. I wouldn't characterize it as being particularly strong or weak. As we move into the first quarter, however, I would characterize the solid cool environment as robust. We don't attend all of the auctions in the U.S. but we are certainly the best snapshot you can get unless they open their data to you. We've had some weeks where we've seen 50 to 52,000 vehicles at the auction. We probably increased the number of auctions we attend compared to last year. Last year a typical week may have been 44 or 45,000 vehicles per week. There's a lot of products out there at least right now. We are taking advantage of that to build our backlog up and the self service business, the end of light vehicles the competition for those vehicles accelerated throughout 2007 and that acceleration is continuing into 2008 given the pretty high scrap prices that we have seen. Regarding for ITC appeals by both parties have been filed. There is a Federal certain court that is dedicated specifically to intellectual property claims. It is our view that they're going to delay reviewing these appeals into that court has reviewed another case which which is known as the Egyptian goddess case. So we don't think that it is likely we will see any decision from the Federal Court of Appeal until very late this year or possibly even into 2009.

Both sides are -- we do continue some mediation discussions with people for the -- while I don't see personally that the mediation discussions are going to resolve and something that will resolve our dispute with ford, regarding the design patents, I haven't been encouraged that the mediation discussions may serve as some business opportunities. We think we enjoy pretty strong relationships with a number of OEs and we would love to also be in that position with the ford motor company. So I have been encouraged that there are some very modest business opportunities being surfaced as a result of those discussions.

He has got wanting to follow up on the procurement [inaudible] questions on it. Joe said Q4 wasn't really robust, and now the next question, then why did you buy 19% more cars year-over-year. You have to go back to Q4 2006 and now at the quarter, I think we actually bought 1%less cars in Q4 2006 than Q4 2005. So that's kind of more of the factor of what the environment was a year ago. And Q4 2006 and Q1 2007 was also weak for us in the purchasing and the pricing.

All right. That's all I have. Thank you.

Thanks Scott.

Your next question from Tony Cristello with BB&T Capital Markets. Please proceed.

Thank you. Good morning, gentlemen.

Hi, Tony.

I guess, Joe, you have only had a few months in and you have already adjusted cost savings to the higher end of your prior range. Can you comment maybe on some of the areas where you are finding even greater cost savings opportunities versus with what you have seen so far at Keystone?

You are talking about things other than what we just went through on the cost list.

Certainly. You had a prior guidance range of expectation and it sounds like that has been bumped up and there's certainly opportunity for more and I am just wondering is there anything in particular that you have found perhaps some wasteful spend areas at Keystone or maybe a different approach to spend on their business than you would have done that affords you an opportunity for greater cost savings.

Some of the areas that we have seen so far we really hadn't counted on some of the consultant costs that we have identified so those have been kind of upside items for us. Some of the expenditures and the marketing area have -- were greater than what we had expected. That has been clear. I think in the administrative management of benefit, health care for 01-k, those are other areas where the cost savings are surprising us a little bit on the upside. And quite frankly, some of the head count moves that our team running the business have achieved, they're coming in slightly stronger than maybe we had initially expected. Some other areas that yes, I think we will continue to look at because we really haven't focused heavily on them, but certainly, in the bumper and wheel area, we believe, we haven't completed our assessment in these areas. But we think there's likely some additional benefit to the company that will come out of those areas over the next one to two years as we were able to dig a little deeper into those production facilities.

Do you think you will continue with the cross docking processes that Keystone had implemented?

Yes. That's a good question. The kind of the first observation I will make is our view first of all that during the first quarter when it is kind of, everybody is slinging their elbows to try to service the customer when things are pretty busy, it is not a great time to fiddle with your distribution systems. So we have left the distribution systems kind of untouched here and we will focus a little bit more on that when the peak business activity falls off a little bit. But since we closed on the deal, we have within reviewing the positives and negative aspects of the cross docks and it is pretty difficult to apply one set of rules if you will to review the viability of those. We think we have the cost pretty well isolated and understand those. It is a benefits that may not be quite so obvious and those benefits can be tough to measure such as your fill rate, your inventory turns, the avoidance of relocating entire facilities to larger warehouses.

For our 2008 plan is that we expect to be able to improve leverage from the existing cross dock structure by putting the same or more volume through that investment with really very nominal increases in cost. Our plans for 2008 do not specifically include closing any cross docks, Our plans do not include opening up any new ones either nor are we spending any effort assessing the opening of new cross docks. The one thing we will do differently in 2008 is that we will go more container direct to the major warehouses and circumvent sending as much product through the cross docks. We also may perhaps 10% of the volume going to the cross docks today, perhaps that can be moved container direct by taking advantage of our Taiwan trading company and avoiding the double handling.

And that so be sure more evaluation process and then we'll see some potential changes in 2009 with respect to that.

That's a fair assessment, Tony.

Okay. Another question, was there a different compensation structure in place for Keystone sales force versus what you had in place for LKQ?

Yes. A number of the inside Keystone service center people are generally hourly people and hourly paid people whereas I think 100% of the LKQ and action sales people are commission-based. To the contrary, the driver reps on historically on Keystone are compensated kind of a combination of the base pay plus a fairly modest commission whereas the LKQ drivers are virtually all straight hourly paid people.

And are you in a process of converting everyone to, is that part of the sort of plan to have everyone on the same page at some point?

Well, what we have done is to make as the work gets shifted from one business activity to another business activity, it is our plan to kind of recut the commission levels so, you know, people who are doing more work are going to get paid slightly more for it. But people who are getting kind of a wind fall of additional revenue to manage don't necessarily get a wind fall in their pay. We are seeking to kind of share that between our shareholders and the employees.

Okay. And just two quick ones and I will let someone take over. Facility and warehouse on a margin basis saw a big improvement this quarter. Mark, is that something we should think is sustainable going forward in and the question would be you made a small acquisition to a company that specializes in buying repair parts, can you maybe give a little bit more explanation on that and how you intend to grow that business?

Yes, about the warehouse, that's why I added a little point in my script, you have to be a little careful just baking in margin improvement for us when we didn't have Keystone to how we ended up with Keystone, when that's one of your stronger Keystone quarter, Q4. We will continue to get margin improvement but it was kind of draft and as you know, just us by ourselves and some of the slower quarters we don't get quite the same kind of margin improvement. So it is that extra volume coming through your given footprint. That's not a quarter that really hurt us from there, their margins have been lower than us but in that period they're not. So kind of watch that when you kind of model out. As far as to the company, we bought. That's a small company and it was a company that was able to out and get some bulk buy of certain types of OE product. They kind of had expertise of getting it and then reselling. We are bring that expertise of getting it. We want to be the guys who [sale] for the most part. It was a supply-type arrangement.

Okay, great. Thank you, guys.

Thanks, Tony.

Your next question comes from the like of Scot Ciccarelli with RBC Capital Markets. Please proceed.

Hi, guys. It's Scot Ciccarelli. How are you?

Great, thanks.

Good. A couple of questions. First of all, can you guys give any kind of description. I know it is still early but what kind of impact, improved in stock rates are having with customers. I know there's obvious cost synergies here but can you give us a description on what's going on the improved in-stock rates.

Yeah, that's really tough to answer at this point. We are moving product from one warehouse to another. We are increasing the number of SKUs we hold in most warehouses. In particular we have, we are introducing a value line specifically into the Keystone operations. It is a new product for them to sale which we hope will help them achieve their top line growth goals for the year. And finally, the methodology historically used in Keystone to measure in stock we don't think is really probably the most meaningful measurement. So we are kind of redeveloping the measurement tools to be used to evaluate in-stock levels.

Okay. It sounds like it is still early.

It's still early, yes. Thanks. Also, in the quarter, it is busy anyway. So that's not the best quarter in a snapshot measure your fill rate anyway.

All right. That's fair. Now, the push back that you've had from customers where you had customers kind of turned away from you guys, was it pricing or were there other factors, they don't want to be to tied to the combined company, is there anything else that may have impacted those relationship there?

Yes, I hope I didn't over, kind of overstate that as an issue or a concern, but we have noticed for the last two years frequently when we acquired businesses the revenue growth can go sideways or get stalled. A lot of that is where businesses acquire brokered like in the recycled business, a lot of sales to other yards or the ability to broker parts from other yard frequently comes to a halt or at least temporarily installs when we require business installs. So this is really something we have been kind of working through for several years now. But what the situations we may see here, there are jobbers who were acquiring parts from Keystone or LKQ and they have made a decision now that they would prefer to buy from someone other than our company or maybe even try to go container direct, Keystone did the have a fairly modest business where they were selling aftermarket parts to other recycler's traditional competitors of LKQ. That's a very small piece of business. But a lot of those recycler's, they don't want to do business with us and they will seek out other suppliers. That's fine with us. Maybe the other thing that we have, we have witnessed on some occasion is that a lot of the professional repair shops will want to use two top suppliers and prior to the acquisition, Keystone may have been the top suppliers and LKQ was the back up supplier, now that we have put the businesses together, some of those shops are out looking for a new second supplier.

In theory, if we had our inventory working right and delivery systems working well, we should not suffer really much or any revenue loss associated with that. In terms of push back from what we have done with our price list or discounts, I would say that's been a very negligible issue for us. We will be starting a process just here the next couple of weeks where we will be going back to that whole process a second time, reviewing activity on an account by account basis and making a determination whether or not we need to make further adjustments.

Okay.

I think we are on it.

All right. That's helpful.. Just one last quick question. It sounds like you guys still have more expense reductions in the back pocket that's going to be implemented during the course of 2008. Are there any big incremental costs outside of restructuring that you may still need to incur?

You mean in terms of capital.

Yes.

We did put in that we will spend $4.8 million on extra CapEx because of merging businesses together. We are going to have some costs and they are in our cash flow outlook numbers, they're mixed in there. We're going to have cost to get out of some leases. We are talking about merging 25 warehouses. We are going to -- some of it maybe almost up so just finish paying the rent for a little while. And that's going to be those kind of restructuring. If it is LKQ it will be P&L. If it is Keystone, we go to the good will on the purchase accounting. We are going to have that, but it is built in our cash flows.

Okay. And I am assuming the same on IT as you roll out systems, et cetera.

Yes, I mean that's all, that's in our numbers. I mean, we did detailed budget for 2008 for those combined so that would be included in our numbers. I can't think of anything that's big enough that would come out of the ordinary that would mess us up on a cost side.

Okay. That's what I was trying to get to. All right. Thanks a lot, guys.

Okay. We have run over a little bit. I think we will take one more question and then call it a call.

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

Thanks. Most of my questions have been answered. I just have two housekeeping questions really for Mark. For 2008, what is your best estimate for depreciation and for interest expense?

We haven't put those out. I mean, you can kind of, you know, our bank loan is LIBOR plus 225. You can kind of see what that is looking it up. We are looking at some potential interest rate swaps here. You can probably find all of that information, that's kind of open information out on the market. Yes, I don't want to put out a depreciation in guidance right now. We don't really put our guidance to that level.

Okay. And then, in terms of working capital, it just sort of looks like your working will be a net use of cash by maybe $40 million or something there about.

We said cash flow from operations would be at or above $85 million positive.

Right. So when you take your net income and depreciation which is well above the $85 million, I would imply working capital would be use of cash. So will you be basically increasing inventory on a per location basis?

That's seasonal. We have actually done that. Our inventory went up quite a bit in Q4 from seller, but aftermarket because you are hitting that Q1s side of the business. To say are we going to be increasing inventory December to December 2008? Yes. As we grow, we put that in there but not really any faster than how the revenue will grow.

Okay. So pretty much just growing in line with revenues then.

Yes, it is.

Okay. All right. That's all I you had.

Okay. All right. Well, I would like to thank everyone for calling in. I apologize we have run over here. I know there's a lot of earnings releases going on today. I am sure you all have pretty busy schedules. I look forward to talking to you about in about 60 days to update you on the first quarter of 2008.

Ladies and gentlemen, this concludes your presentation, you may now disconnect and have a great day.