LKQ Corp (LKQ) 2008 Q4 法說會逐字稿

Greetings and welcome to the LKQ Fourth Quarter 2008 Earnings Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Sarah Lewensohn, Director of Investor Relations. Thank you, Ms. Lewensohn. You may begin.

Thank you. Good morning, everyone, and welcome to the LKQ Corporation Fourth Quarter and Full Year 2008 Earnings Conference Call.

With me today from LKQ Corporation is Joe Holsten, President and Chief Executive Officer, and Mark Spears, Executive Vice President and Chief Financial Officer. Both Joe and Mark will share their thoughts on our results and then open the call up for questions.

In addition to those who are listening by telephone, we are providing an audio cast by the LKQ Website. And both forms will have replays available shortly after the conclusion of the call.

Before we begin with our discussion, I'd like to read the following - The statements in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions, and 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. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date from which it was made, except as required by law. We ask that you please refer to our 2008 form 10-K and the press release we issued this morning for information on potential risk.

And with that, I'll turn this over to Mr. Holsten.

Hi. Good morning and thanks for joining us today. I'll begin by providing some high-level comments about our performance, as well as the perspective on the business, our industry, and the markets that we serve. 2008 was a year where we realized significant achievements yet faced sizeable challenges. We reached our ten-year anniversary, having founded the Company in 1998 by combining five recycled automobile parts businesses with combined annual revenue of only $33 million.

As you can see from the results we issued this morning, we have come a long way from where we started. Revenue for the year was $1.9 billion, a 72% increase over revenue for 2007. And we generated diluted earnings per share, after restructuring costs, of $0.71 for 2008, a 29% increase over earnings per share of $0.55 in 2007.

While most of the revenue growth is a result of our acquisition of Keystone, completed in October 2007, we did deliver organic revenue growth for 2008 of roughly 9%, which was calculated as if we owned Keystone for all of 2007.

On a pro forma basis, total revenue for the year grew approximately 13% as compared to 2007, driven by increases in the sale of recycled parts and services and by the growth of other revenue. Aftermarket, new, and refurbished revenue for 2008 was up slightly, or by 1%, reflecting a slowing of the growth we realized in the first half of the year to a modest decline in the second half of 2008.

While gasoline prices dropped during the fourth quarter, high fuel costs throughout much of the year led consumers to drive less and stay closer to home. Miles driven for the fourth quarter were down 3.5% as compared to the fourth quarter of 2007 and for the year down 3.6%.

Claims volume continued to decline in the fourth quarter. Recent data from carriers (inaudible) indicate they're down 5% to 10% over the prior year. Allstate indicated their claims were down 7% in the fourth quarter over prior year and down 6.5% for the entire year.

With revenue growth of 23% for the recycled parts and services category and relatively flat revenue for the aftermarket, other, new, and refurbished product category for all of 2008, we believe that we are running a greater share of the collision repair parts business in both recycled and aftermarket parts. In the fourth quarter, we saw a decline in aftermarket, other, new, and refurbished parts sales of 2% on a year-over-year basis. Yet with supplier reports of aftermarket part imports down 7% according to one vendor and down 20% from another vendor, we believe our share of the aftermarket collision parts industry is growing.

The continuation of high fuel prices, lower miles driven, and a reduction in [insured] claims limited the growth of our collision repair parts during the year. Demand for mechanical parts appeared to have been impacted to a lesser extent.

Purchase of cars for wholesale recycled parts totaled 38,000 units during the fourth quarter, a 17% increase from the nearly 33,000 we acquired in the fourth quarter of last year. Wholesale vehicles that we acquired from the salvage auctions accounted for approximately 97% of the total incoming wholesale product flow. During the quarter, we purchased more than 77,000 lower-cost, self-serves, and crush-only cars as compared to 52,000 in the prior year. The fourth quarter 2008 total includes approximately 28,000 purchased cars from the Pick-Your-Part acquisition that we completed in late August. For the full year 2008 we purchased 144,500 cars for our wholesale recycled parts business as compared to 126,000 cars in 2007. During the same period, we acquired 297,000 lower-cost, self-serve, and crush-only units, an increase of 50% over 2007. If we exclude the vehicles acquired at our Pick-Your-Part locations, we purchased 257,000 units, a 30% increase as compared to 2007.

The value of crushed-car bodies, like most steel-related commodity prices, reached record highs by mid summer and near record lows in the late fall. For the most part, scrap metal from crushed-car bodies is a byproduct of our recycling operations. The dramatic price movement, however, was in a relatively short period of time, negatively impacted our financial results in the fourth quarter. The operating results for the fourth quarter reflect the challenges we face with this rapid collapse of the scrap markets at the start of Q4.

Gross margin for the quarter declined 260 basis points as compared to the same period last year as a result of the increases we realized on our cost of goods when we sold the scrap from the cars we had in inventory at the beginning of the fourth quarter. Operating income was further impacted due to lower volumes at our self-service facility. Despite these challenges, net income for 2008 grew 52% to $100 million from $66 million for the prior year.

Mark will talk more about the financial results in a few minutes.

Now let me turn to the summary and update of the integration of Keystone with the LKQ operations-- and probably the last quarter we'll discuss this. When we first announced the acquisition of Keystone, we indicated that we anticipated annual savings of $35 million by 2010. Having realized at least $20 million in 2008, I now believe we will reach our target of $35-million run rate and savings by the end of '09.

Over the past 15 months we have accomplished much as we have completed all except two of the plan conversions to the prelude point of sale and inventory management system in the US. We've reduced 37 operating sites by consolidating warehouses and closing storefronts. We've conformed customer discounts and company price lists. And we have trained hundreds of LKQ sales and operating people in the prelude sales and inventory system.

The review of sales volume and production capacity of the remaining 55 bumper, wheel, and light refurbishing locations is continuing so we can determine future plant consolidation opportunity. We are committed to continue to improve operating margins by integrating the two companies into one by the end of the year. Our regional management structure was completely combined. By consolidating the management oversight of both the aftermarket and the recycling businesses in a given geography, we intend to enhance revenue growth opportunities and achieve improved cost control. The remapping of the organization is allowing us to consolidate and [share shuttles], integrate delivery routes in a number of markets, and consolidate sales representatives from the recycled and aftermarket businesses.

Today, members of our products and business development teams call on repair shops with a brighter side of alternative collision parts and product solution.

Last quarter I mentioned that we were testing a new customer service called [Kelus] that automates the estimate review program and creates streamlined parts ordering. This program electronically synchronizes an estimate written by an insurance estimator or a repair shop to our inventory systems and notifies the user of available recycled or aftermarket parts. If customer desires to do so, the aftermarket portion of the estimate can be converted into an online order, increasing accuracy and moving more of our sales into a B2B arena. Kelus also provides LKQ with a list of parts that could not be located within our inventory to allow us for a last look for additional sales.

We have installed Kelus in several markets. We're one of the top-seven insurance carriers. And to date the results and feedback have been quite positive. We anticipate they will look to expand its reach to other markets in which they operate. The product is also being rolled out to fleet management companies that increasingly own, rather than lease, their fleet. And as most self insure for damage, they have a direct incentive to control collision repair expenses.

During the year, we completed a number of acquisitions - the largest, the purchase of Pick-Your-Part auto wrecking - a self-service operation with nine sites in California that reported annual 2007 revenues of $114 million.

During the quarter, we purchased two recycled operations in western Ontario in order to expand our market presence in that Canadian province.

We acquired three heavy duty recycled truck parts operations in Chicago, Toledo, and Houston and linked them with our Quebec operation to form a network of recycled truck parts businesses.

More recently, in 2009, we acquired another heavy duty recycled truck parts business based in Tampa and a wholesale salvage recycling business in Durham, North Carolina. The two new locations generated $13 million of combined historical annual revenue.

The heavy duty recycled truck parts market (inaudible) to market attributes we saw when we first began to acquire auto recycle businesses. It is an industry that is highly fragmented. And there are numerous small mom-and-pop companies operating with little benefit of scale and who lack the capital necessary to finance inventory and growth.

The trucking industry is facing significant cost pressures while revenues contract along with the economic downturn. Many trucking companies have moved to an asset-light economic model that has shifted more of the financial burden onto owner/operators. Use of recycled truck parts offers a strong value proposition to these very cost-conscious customers.

We are building traction with secured disposal and assigned two large national accounts - one a global parcel delivery company, and the other a large cement business - to handle their outgoing fleet.

Secured disposal is a service where we believe we have a significant competitive advantage over local and regional truck salvage operators. We believe we can leverage some of our existing systems and capabilities, such as our yard management system and our procurement discipline to further enhance the financial performance of these acquired businesses.

I'd like to ask Mark to walk you through some of the financial information at this point.

Good morning, everyone. As we did last quarter, we included a few additional tables that we believe are helpful as you evaluate our results. One of the schedules is a comparison of our major revenue categories on a pro forma basis as if we owned Keystone for all of 2007. Recall the acquisition occurred in mid October of 2007. So the 2008 financials reflect Keystone as part of LKQ for the full year, but they are only in 2007 for two and a half months.

Looking at our income statement and the related tables, our fourth quarter revenue was up 13.4% to $470.3 million from $414.7 million in Q4 2007. Revenue for 2008 grew 71.9% to $1.937 billion, compared to $1.127 billion for 2007. As Joe mentioned earlier, our organic revenue growth calculated on a pro forma basis that assumes we own Keystone for all of 2007 was just under 1% for the fourth quarter and 8.8% for the full year 2008.

Gross margin for the quarter of 2008 was 42% versus 44.6% in the prior year. The decline was largely due to scrap and commodity pricing in our recycled product line, in particular the self-service facilities. On a year-to-date basis the 2008 gross margin was 44.2% versus 44.9% in 2007.

During 2008, we combined the vast majority of LKQ's preexisting aftermarket operations into Keystone's operations. The majority of our operating expense growth in 2008 over 2007 was attributable to the Keystone acquisition.

Our facility and warehouse expense for Q4 2008 increased 26.7%, or $10.7 million, as compared to Q4 2007. Facility and warehouse expense as a percentage of revenue for Q4 2008 was 10.8% versus 9.7% in 2007. The percentage decline in the quarter was related to our self-service operations, as they run at a higher percentage of these types of costs to revenue. On a full-year basis, facility and warehouse expenses grew $71.1, or 61%, over 2007. As a percentage of revenue it was 9.7%, a decrease of 60 basis points from the prior year. Sequentially from Q3 to Q4 2008, facility and warehouse expenses grew $2.4 million. This increase was primarily due to our acquisition of Pick-Your-Part on August 25, 2008.

Distribution expenses for Q4 2008 grew $3.3 million, or 8.3%, over Q4 2007. As a percentage of revenue, distribution costs decreased to 9.2% in Q4 2008 from the 9.6% in Q4 '07. For the full year 2008, distribution expenses grew $71.9 million, or 66.4%, over 2007 and as a percentage of revenue improved to 9.3% from 9.6% for the same period in 2007.

Selling, general, and administrative expenses grew $10.3 million, or 18.8%, over Q4 2007. SG&A as a percentage of revenue increased to 13.9% in Q4 2008 from 13.2% in Q4 2007. This growth as a percentage of revenue for the quarter is related to our self-service yards, like it was in the facility and warehouse expense. For the full year 2008, SG&A expenses grew $111.1 million, or 78.9%, over 2007. For the same period, these expenses as a percentage of revenue increased to 13% in 2008 from 12.5% in 2007. Selling and administrative costs tend to be higher for the aftermarket products than for the recycled.

During the fourth quarter, we had restructuring expenses of $1.9 million as part of operating expenses and for the full year had $8.6 million, all of which are related to the Keystone acquisition. You should note that certain costs of the Keystone acquisition related to severance and certain facility closure costs are considered purchase price allocations and are not charged to the income statement.

Our operating income decreased 35.6% to $27.8 million in Q4 2008 from $43.2 million in Q4 '07. Our operating margin was 5.9% in Q4 2008, compared to 10.4% in Q4 '07. Excluding restructuring expenses, operating margin in Q4 2008 would have been 6.3%. Looking at the full year 2008, operating income grew 61.2% to $197.7 million from $122.7 million in 2007. The 2008 operating margin was 10.2%, compared to 10.9% in 2007. Excluding restructuring expenses, 2008 full year operating margin would have been 10.6%. The erosion of Q4 2008 and full year operating margin, excluding restructuring expense, is attributable to our self-service facilities.

The results of our self-service operations for the fourth quarter were extremely disappointing and considerably below the expectations we had when we updated guidance as part of our third quarter earnings release. We did not fully anticipate three things. First, the values of both ferrous and nonferrous metals plunged far below nearly everyone's worst case scenario and at a faster speed. Second, the competitive market to buy self-service vehicles remained extremely strong, resulting in prices for cars that were not supported by scrap values. And, third, car volumes available was much lower than our expectations.

In order to understand the situation better, let me start by providing a sense of scale to the self-service business. In 2008, total revenue for our self-service operations was $184 million, or 9.5%, of LKQ's total revenue. Approximately 33% of the self-service revenue was included in recycled and related products and services, reflecting part-related sales. And 67% was included in other revenue, comprising of core and scrap sales. Revenue for the fourth quarter of 2008 in the self-serve businesses was $38 million, or 8.2%, of total revenue. Approximately 50% was for recycled products and 50% was in the other revenue category in the fourth quarter.

We generated the following statistics when comparing Q4 2008 to Q3 2008 for our self-service businesses, excluding the Pick-Your-Part, or PYP, business we acquired late in August 2008. Self-service cars procured in Q4 cost 34% less than those procured in the third quarter. Average scrap prices received per car dropped 60% from that received in Q3. We procured 38% less self-service cars in Q4 compared to Q3. The effect of having more expensive cars in inventory in Q3 that were then sold at the lower Q4 scrap prices generated approximately $8 million of lower gross margin, but we only owned them one month and a week in Q3.

All of our self-service operations generated gross profits of around $9 million in Q4 2008 but generated an operating loss of $11.8 million, or approximately a $0.05 impact on Q4 EPS.

Our acquisition of PYP increased the size of our self-service operations, where PYP now represents close to 44% of our total self-service operations. Accordingly, they multiplied for us the negative impact of the trends.

As we look forward, we are increasing the tools and guidance provided to our self-service managers to better balance their cost per car with the volumes they acquire. Our gross margin per car is not yet where it needs to be. We are moving in the right direction. Our guidance for 2009 reflects these trends.

We very much like the self-service business. Historically it has performed well. And we expect it to return to more normal trends as we enter the second quarter.

Looking further down the income statement, we had net interest expenses in Q4 2008 of $8.6 million, as compared to $9.9 million in Q4 2007. This decrease is primarily a result of lower interest rates.

The Q4 2008 pretax income decreased 41% to $19.9 million from $33.7 million in Q4 2007. For the full year 2008, pretax income increased 51.1% to $163.6 million from $108.3 million in 2007.

For the full year 2008, our effective tax rate was 38.9%, compared to 39.1% in 2007. If you exclude the effect of certain adjustments for a new federal tax deduction and certain new state tax credit, our effective tax rate for 2008 would have been 39.7%. If you exclude certain nontaxable income offset by write-offs of certain deferred tax assets in 2007, our effective tax rate would have been 40% for 2007.

Net income for the quarter decreased 39.8% to $13 million from $21.5 million in Q4 2007. For the full year 2008, net income increased 51.6% to $99.9 million from $65.9 million for the same period of 2007.

Our diluted earnings per share decreased 43.8% to $0.09 for Q4 2008 from $0.16 in Q4 2007. For the full year 2008, diluted earnings per share increased 29.1% to $0.71 from $0.55 in 2007. Without restructuring expenses, earnings per share for Q4 2008 would have been $0.10 and for the full year 2008 would have been $0.75.

Our diluted (inaudible) and common share outstanding used for calculating EPS were as follows - Q4 2008 at 142.4 million shares versus Q4 2007 at 138.8 million shares, full year 2008 at 141 million versus full year 2007 at 119.9 million shares.

Shifting our focus to the cash flow table, we generated $133 million in cash from operations for the full year. Capital expenditures for 2008, excluding business acquisitions, were $66.9 million. Cash used to acquire businesses for 2008 was $74.2 million.

During the full year 2008 we issued 2.7 million shares of stock related to the exercise of stock options. That resulted in $22.9 million in cash, which includes related tax benefits.

Taking a look at the balance sheet as of December 31, 2008, you will see we had debt of $642.9 million. That included $638.3 million under our secured credit facility. Cash and equivalents were $79.1 million at the end of 2008. As of February 25, we had approximately $53 million in cash and equivalents.

As many of you know, we have a revolving credit facility of $115 million provided under a secured credit facility. Currently we have $5.3 million of borrowings under this line. And there are approximately $23 million of letters of credit that are backstopped by this facility, reducing the availability for future borrowings to approximately $87 million.

As we previously reported in an 8-K filing with the SEC, Lehman Commercial Paper, Inc., which account for $15 million of revolver funding commitment, filed for chapter 11 bankruptcy protection in 2008. Accordingly, we no longer believe this $15-million commitment is available. So, in effect, our availability has been reduced to $72 million; however, we do not feel this $15-million number is significant to our liquidity needs.

Let's move to our 2009 financial guidance. As Joe indicated earlier, in light of current economic environment and its impact on collision repair trends, we anticipate our organic revenue growth for 2009, excluding the other revenue category that we show in our financial tables, to grow at a rate of 6% to 8%. LKQ anticipates full year 2009 net income will be in the range of $114 million to $123 million. And earnings per share will be in the range of $0.80 to $0.86, excluding any future restructuring expenses.

Net cash provided by operating activities for 2009 is projected to be over $145 million. While this $145 million cash from operations does not increase a lot compared to 2008's number, it is important to note that in 2008 we had some specific cash flow benefits.

Looking at our cash flow statement, you'll note we generated approximately $4 million in cash flows as we lowered our total inventory levels. This was primarily related to the benefits of combining the Keystone and LKQ aftermarket related inventory, as we merged facilities on the aftermarket side, reducing aftermarket inventory by around $17 million, partially offset by the increase in our salvage inventory.

In 2009 we anticipate inventories to grow at the same pace as revenue - that 6% to 8% level. Offsetting this working capital growth, we expect to have $15 million less in payments in 2009 related to Keystone accrued acquisition expenses and restructuring expenses.

The Company estimates 2009 capital expenditures related to property and equipment, excluding expenditures of acquiring businesses, will be between $75 million to $80 million. Maintenance or replacement capital expenditures are expected to be slightly less than 20% of this range.

We are also providing quarterly guidance for the first quarter of 2009. Excluding any restructuring expenses, net income is projected to be between $30 million to $32 million. And diluted earnings per share is anticipated to be approximately $0.21 to $0.22. Weighted average diluted shares outstanding are anticipated to be approximately 143 million shares for 2009. Share numbers are estimates and will be affected by factors such as future stock issuances, the number of options exercised in subsequent periods, and changes in our stock price.

I'd like to turn back to Joe for some closing comments.

Okay. Before we go to questions, I'd like to make a few more comments and share our outlook for the businesses and the industries in which we operate. While we are operating in a period of economic [certainty], we at LKQ continue to believe that the current financial woes will translate into benefits that will accrue to the shareholders in our Company. Over the past five years we have realized compounded annual revenue growth of 43%. And our shareholders have realized (inaudible) annual earnings growth of 29%.

What made LKQ a good investment over that time period we believe still holds true today.

The demand for alternative collision and mechanical parts will continue to grow. Recycled and aftermarket collision parts provide significant cost savings over the use of new OEM parts to repair vehicle damage. Insurance companies are the payment source for nearly 85% of all collision repairs, operate in extremely competitive markets, and are constantly searching for ways to improve their operating ratios without raising premiums. LKQ's alternative parts offer a way for them to reduce claims cost without sacrificing quality.

For those instances where consumers are the ultimate payer, they, too, will look to find ways to mitigate the repair cost by doing only what's necessary and by looking for less costly ways to complete their repairs.

Next I'd say our Company has the right inventory in stock. The flux in the automobile industry is leading to service erosion by selected auto dealers unable to consistently deliver new OEM replacement parts. OEM inventories are lean as a result of factory closures, both temporary and permanent. And the closure of auto dealerships is threatening the availability of new OEM replacement parts.

We are seeing instances, especially in rural markets, where the closure of a dealership results in an underserved market area and an opportunity for LKQ to provide alternative parts in a timely manner. A recent study by [Mitchell] seems to validate this trend as they reported that the usage rate of new OEM parts and collision repairs declined by two full points over the last six months.

Used car prices are down, leading the (inaudible) claims being declared total losses and helping generate a healthy supply of vehicles for purchases at the salvage pool. Our fulfillment rate continues to be well above the industry average. We see the benefit of this in the prices that we are paying for cars as well, as our average cost for wholesale car was down 9% in the fourth quarter as compared to the prior year fourth quarter.

Some of our vendors in Taiwan have lost OE supply contracts, which is enabling them to focus additional resources on the production of aftermarket parts. On the procurement side for aftermarket parts, the drop in steel prices and shipping costs will help us protect our margin.

It is generally believed that the economic downturn will lead to consumers owning their cars longer and deferring new car purchases. This may enhance demand for alternative parts, both collision and mechanical, as a result of the nation driving an older fleet of cars and as consumers look to minimize repair costs.

We've also focused on our balance sheet and its strengths as it provides us with the flexibility to grow our operations, as our leverage is less than three times EBITDA. We have liquidity in excess of $120 million. Our maintenance capital spending is roughly only $15 million per year. And we obviously have sufficient cash flow to fund our growth.

The combination of LKQ and Keystone cemented our significant market leadership position as a provider of recycled and aftermarket parts and provides operating leverage to grow revenue by selling ancillary product lines to repair shops and to expand margins by reducing redundancies. While the current economic environment is posing challenges for many, we are well capitalized to take advantage of the many opportunities that we believe are like to come on the horizon over the next several years.

At this point, we would like to open the lines for questions.

Yes. Thank you. We will now be conducting a question and answer session. (Operator Instructions). Tony Cristello, BB&T Capital Markets. Please proceed with your question.

The first question I want to ask is when you look at the 6% to 8% organic growth, which I guess is a function of both the aftermarket and recycled, what are the underlying assumptions there from an organic standpoint? Is it fair to say that--? At least if I'm backing into it, my assumption would be or the implication would be that recycled might be positive low double and aftermarket might be low single.

Maybe not quite to that extreme, Tony, but you're right. The budgets we've put together would show slightly stronger organic growth for the recycled part as compared to the aftermarket product.

So if you look at the mix of business, the aftermarket, obviously, is going to be a bigger contributor if that's of the organic on a mix proportion. So you're saying that what we saw here the last few quarters on organic for recycled is that level or better; whereas, aftermarket you were down too. So am I still thinking flat to down is sort of where we need to be on aftermarket?

No. Absolutely not. I think the recycled parts business is getting a little more strength on organic growth, due to the fact that there is a mechanical component that is not present in the aftermarket product line. The assumption on our aftermarket product-- Quite frankly, we think we've slugged through a year of integration work. Certainly our comps are going to become easier as the year progresses. But I think most importantly-- As I indicated, I think the integration work is largely behind us. There was significant amounts of training of LKQ sales reps on new systems - very disruptive-- as well as the price list integration work we did, as well as the (inaudible) of customer discounts. We know that we lost jobbers throughout 2008 as a result of some of that work. But that is all behind us at this point. So it's our anticipation that with the integration frustrations buried at this point we should see the Company's growth start to accelerate a little bit.

So two months into the first quarter are you seeing better aftermarket trends than were resulted in the fourth quarter?

Yes, we are. We're six weeks into the year and the performance in both our aftermarket parts business as well as the recycled parts business-- We're very pleased with the results we see. They're running-- through the first six weeks running at or over our plan.

In both segments?

In both segments.

Okay. And then just a follow-up on a point of clarification, Mark-- When you look at the detail you gave in the scrap category-- Some of the numbers I didn't get down. But I think you said the Q4 number was $38 million for scrap. And it was about 8.2% of total revenue. And it was 50% recycled and 50% other.

Yes. The $38 million was the total revenue of our self-service operations, okay? And 50% of that revenue was the scrap related to the self-serve and 50% was parts related to the self-serve.

Okay. And did you also say that--? Did you give a gross margin number on that scrap business?

Well, I don't want to call it scrap business because 50% of it is parts. No. We just said that our gross profit for the quarter was $9 million positive. And we had operating losses of $11.8 million.

Okay. And that was related to the values of scrap, the competitive marketplace, and volumes?

Yes.

Okay. Has the cost of those cars sort of stabilize now? Have you sort of [anniversaried] some of those three issues?

Yes. There's been good progress. The decline from the third quarter to the fourth quarter was probably $140 a car. January flattened a little bit. Here in the second half of February, I think we're seeing another leg down in what we're paying for cars. I'd say it's a gradual recovery. That is coming along according to plan. I would leave it at that.

Okay. And then just really quick-- You gave good color on Q4. What are the first three quarters of sort of the headwind of what you face from a scrap or other categories standpoint look like? Is there any way you can quantify that a little bit for us? And then I'll leave it at that.

I'm not quite sure what you're asking.

How much benefit did you have the first three quarters of 2008 versus the hit that you had in the fourth quarter of 2008?

I think between the volume issues and price issues-- I think that's pretty tough for us to really discuss that meaningfully on this call. It would probably warrant a follow-up discussion. And I don't think we're prepared to address that at this moment.

Okay. Fair enough. Thank you.

Scott Ciccarelli, RBC Capital Markets. Please proceed with you question.

Hi, guys. Scott Ciccarelli. First, just a housekeeping item, I guess, for Mark. Can we assume a pretty steady tax rate to what you experienced in '08 for '09?

Yes. I think I said the normal rate was like 39.7%, right around that. We use 40% for our guideline because you never know how it fluctuates between different states you're in.

Okay. Got it. And as auction prices have come down, does that provide you guys with incremental margin opportunities or is that pretty much a full flow through to the (inaudible)?

Repeat that.

Auction prices have come down right? You can buy the recycled vehicles or the scrap vehicles for cheaper. Does that give you incremental margin opportunities that you can kind of hang onto at all?

You're talking about the wholesale yards?

Yes. I'm sorry.

The wholesale yards, they don't fluctuate as much because there's not near as much scrap that comes off those cars with the way we do the cores and everything. So they have come down a little bit, which helps us on-- because the little bit of scrap we get off of them has come down as well.

Scott, maybe another way to look at that is we typically price our parts based on new OE parts. And whether we pay $1,600 for a car or $1,700 for a car, how we price the parts that we sell is irrelevant in what we pay for a vehicle.

But the 9% you referenced was your cost for a wholesale vehicle, correct?

That is correct.

Okay. And then the last question, I guess, is a little bit of follow-up from what Tony was asking. If I remember correctly, after the third quarter you guys had talked about a pretty nice pickup in the aftermarket business. And then it looks like it must have softened quite a bit in November and December. Now you're suggesting it's bounced back up first part of the first quarter. Can you help us understand why the growth rate might be so volatile there or why you're comfortable with, let's call it, a mid single-digit growth rate from that business when you're kind of flat to negative for most of '08?

I think I just go back to our view that the business line integration issues are behind us at this point. I think that's probably the most important thing. I might add too-- I'm not going to repeat those comments, but I would probably add to them that we've also had an entire year now to rework our inventory. We've rebalanced probably over $20 million of inventory that we felt in Keystone. It was good, sellable inventory; it was just in the wrong market and in the wrong warehouse. It's taken us about a year or two to move that product out to kind of a better diversity in the warehouse locations. And we've also introduced an additional product line in our aftermarket parts arsenal. It's what we would refer to as a value line of parts. And that is creating growth opportunity for the Company as well. And just to be clear, those are parts that are probably typically going to be sold to rebuilders not sold to the collision repair shops who are typically seeking (inaudible) or platinum plus products. (Inaudible) create a nice growth opportunity for us.

All right. That's helpful. But can you specifically address the fourth quarter? Maybe I had misinterpreted the third quarter comments, but I thought you said aftermarket was doing well and then we finished kind of slightly down on a quarter-over-quarter basis. Was there a big slackening in November and December or was that just economic driven, Joe?

I would probably have to say it was economic driven. The mileage driven, accident rates probably continued to deteriorate or stayed soft longer than we probably would have expected. The Allstate numbers for Q4 for their collision and claims experience, I think, continues to improve from their standpoint or get worse from our standpoint.

I think, actually, November had the biggest drop in miles driven than the whole year. It was a little surprising because the gas prices were down, but miles driven dropped 5.3% in the month of November. So some of the mileage in October and November were pretty weak. They got a little better in December. That somehow ties to demand. If people really don't drive as much, it's going to hurt you a little bit on collision.

Just one other comment on that. We're not trying to be evasive in answering your question. The aftermarket product lines are-- It's amazing how quickly sales respond to weather events as well. Weather is a pretty big factor in the revenue trends in our aftermarket product lines. Quite frankly, we'll see revenues start to move on a daily basis within two or three days of storm activity. I would assume moderate weather conditions probably impacted the November/December results as well. And obviously we've seen some good benefit from good weather conditions the first six weeks of the year.

Got it. Thanks a lot, guys.

Craig Kennison, Robert W. Baird. Please proceed with your question.

Good morning, everybody. Joe, you said you expected to get around an incremental $15 million in cost synergy from the Keystone, on top of $20 million enjoyed in 2008. How much of that $15 million is already in the bag? And how much will result from actions you have yet to take?

I'd say the majority is already in the bag. The kind of final flow through items we're talking about are really down in kind of the guts and bowels of the Company. This is a truck coming off the street here and continuing to work out of a few modest warehouses. I indicated on former calls, there's kind of another wave of integration savings that comes out over a three- to four-year period. And these are markets where we'll continue to look for opportunities to merge the LKQ and Keystone aftermarket operations into single facility. We're working on one of those in Houston right now that we would expect to be operational by the end of 2009. Here's a situation where between the LKQ and Keystone operations we're leasing three to four different facilities that have managers and administrative people in all those locations. By the end of '09 all of those operations will be on a single piece of real estate, operating from common warehouses. And the ability to integrate routing, administrative functions, management functions, and our sales organization will just be exponentially improved. There are probably 10 to 12 markets like that in the United States that will probably take a good three to four years to get all of them.

Okay. Thank you. That's helpful. On the scraps deal issue, obviously there was a bubble in price. And we're trying to quantify the impact there. But was there also a bubble in volume? In other words, a lot of cars may have come out of the woodwork. And, so, as we model forward into 2009 not only should we assume lower prices but also fewer cars going through the self-service business.

I think that's a fair assessment. When scrap prices briefly, I think, moved over $400 a ton or very close to $400 a ton, you are correct, the volume of product in the market very robust. We're not expecting the-- Obviously those levels of scrap prices are not in the cards here any time soon. So, yes, I would assume if the volume is available, then the market will be constrained a little bit.

Any chance you can quantify that? Should we expect a 10% or 20% decline in volumes? Is that a fair assumption?

Not really. It kind of comes back to what you want to pay for the car. And that's what we've been working with. You can get all the volumes you want if you want to pay too much for the car. So the question is what's the volume at the price we need based on scrap. So it's kind of hard to sit here and tell you what the volume decline is going to be. It depends what price we end up at.

Okay. A couple other quick questions here-- In terms of your guidance, what kind of potential acquisitions are embedded in that or would acquisitions be incremental?

No. They'd be incremental. We did not put in any unknown acquisitions here or any that we would be working on. The only thing on these numbers is any deals we've closed and we've talked about.

Okay. That's helpful. And then, Joe, what's the margin profile on your Kelus program? You're selling parts through sort of a different B2B channel in some cases. Is the margin profile different there?

No. No, it would not be different.

And, lastly, your program with Advance Auto Parts-- Any update there?

Yes. Actually it's mildly encouraging. The results we've been seen going through that program in the last two weeks are annualizing around $10 million, maybe even a hair over that. The Advance people have put a lot more-- I'd say more pressure on their store managers to support the program or catalogs of recycled parts being created and are available in the Advance stores. So year on year the percentage gain is pretty meaningful-- the dollar, impact of the program in the scheme of a couple billion-dollar company-- still pretty nominal.

Great. Thank you.

Michael Cox, Piper Jaffray. Please proceed with your question.

Thank you very much for talking my question. My first question is on the self-serve segment of your business and the acquisition you completed. It seems to have increased your exposure to scrap and just sort of general volatility in the market. Are you continuing to look for acquisitions in this field?

We are not actively pursuing acquisitions of self-service business at this point. It seems like everybody's had a question on that. Maybe it's worth just taking a few minutes to retrace our background in the self-service business.

We've been in the business for five years. Our first transaction was exactly five years ago, I think, this week. And 19 out of 20 quarters that we've reported the results of the business have really been quite attractive. Obviously the fourth quarter suffered because of what we perceive to be kind of an unprecedented and immediate plunge in scrap prices after an unprecedented run up in the second and third quarters. As we discussed with Craig, obviously the volumes accelerated quite a bit in 2008 because of the strong prices.

(Inaudible) profile today, as Mark indicated, the self-service business is less than 10% of the total company. And, again, just to be clear, of that revenue generated from being in self-service-- somewhere between 40% and 50% of that is really coming out of the actual sales of parts and services and admission fees that we charge. We have been busy the last 60 days addressing kind of the overall business segment. We've successfully lowered our car costs significantly. And with that the volumes have come down slightly. In Q1 we're seeing fairly stable cost per car. And, again, I think we're seeing the cost per car that we pay drop again at the end of February.

We've cut a lot of headcount out of the business. And if we look at our operations and overhead costs in January compared to where we were in October of last year, they've come down about 12% or 13%. We've increased prices on the parts and services at the majority of our locations. We've raised them anywhere from 5% to 8%. That actively took place in January of this year. And we're developing a new point of sale system that we think is going to allow for some further enhancements in our core charges and fees we charge.

So we continue to like the business. We think it generates certainly gross margins and operating income margins that are consistent with our recycled parts business. We do believe we're living through a couple-quarter issue as the markets adjust to the wild flings of the scrap businesses.

That's a great overview. I appreciate that. And then taking it to the next step and looking at gross margins stabilizing, it sounds like Q1 you're expecting that to be soft again. But is Q2 really when we should start to see a more normalized margin?

In self-serve in January we operated at a small loss - certainly significantly less than what we saw in any of the months in the fourth quarter. I would note that part of that loss was attributed to the fact that the majority of our self-service managers help their nonferrous scrap in January, which is being shipped in February and March. So we're expecting February probably to be around a breakeven in the business. And if we're successful in moving the car costs down another $40, which we think we will be, we should see the margins start trending back toward more normal levels in March and certainly in Q2.

Okay. That's great. My last question-- If you could just provide an update on the appeals court process with the ITC--

Yes. There are probably two issues to talk about. The first is the F150 case. All the parties involved in that - Ford, a representative of the ITC, and LKQ/Keystone - all presented their oral arguments to the court of appeals. That was on February 5. And the timing of getting a decision from the court of appeals appears to be pretty broad range of (inaudible), as the feedback we've gotten-- we should expect anything nothing shorter than four months and nothing longer than 14 months. So we've got a little time to wait on that.

On the Mustang case, the parties have substantially completed their discovery. The trial will take place in front of as ITC-appointed administrative law judge and is scheduled to begin in the last week of March. And the ITC has set November of this year as their target date to complete investigations. Again, on that one we continue to think that the issue of prior [art] is still at the heart of the case and legal arguments. And we continue to believe that those arguments are on our side.

Okay. Thank you very much.

Rod Lache, Deutsche Bank. Please proceed with your question.

Good morning, guys. This is actually Dan (Inaudible) in for Rod. First of all, can you clarify--? Did you say that aftermarket was down 2% in the quarter organically?

Yes. And the way to kind of see that is look at those pro forma tables. You can see that.

Got you. Can you provide an organic number for the other two segments - a growth number for the quarter?

Yes. We don't usually break those out, but I will say you can kind of get sort of close to that. If you note we haven't done a lot of acquisitions on the recycled. And obviously-- We've given the annual revenue of those we did and kind of when we did it. Rather than me quoting that, I think you guys can figure that out.

In terms of the wholesale recycling business-- As cores and scrap per unit are less, even though they're not a big portion of the entire vehicle, my understanding is that in terms of (technical difficulty) to a particular part sale, you guys use kind of a historical average cost of goods sold percentage. Will the core decline and scrap decline per unit affect that historical cost of goods sold percentage materially?

We also look at projected costs. We don't just blindly look at historical costs on that. And I think the biggest thing on that is we have seen the car costs come down a little bit. And, quite frankly, the scrap revenue on a wholesale car is nowhere near the percentage of like the self-serve. That's not a big issue for us.

So net net gross margin shouldn't change too much in that business?

Right.

Okay. And then on the operating expenses, in terms of the two pieces - facility and warehouse and SG&A - that went up, were you saying that the self-service business has higher percentages of those costs and that's why they went up?

Yes. Now, that doesn't mean all their operating expenses are higher. The one thing they don't have, really, is distribution expense. They don't deliver parts in trucks. So you've got kind of a little different animal there. You've got quite a bit of facility and warehouse people there and the sales people, which are really cashiers and things like that. In those (inaudible) they do operate at a higher percentage, but then they have zero distribution. And you saw distribution actually improved quite well.

But the self-serve business seemed like-- or the other revenue business was less of a mix of total revenue this quarter. So why would the operating expense--?

Because the facility expenses of the self-serves and the selling expense is really-- They're more fixed in nature. You can't cut back on your people in [the yard] very much because your scrap volume is down. They're handling the parts side of the business.

Got you. And just to-- Is there still a bid for all the commodities that you guys do take out of these vehicles? Is there still an active market in copper and platinum and steel for you to get rid of these parts?

Yes. The markets are active right now. Actually, I'm glad you brought that up because we did see a period of time in late November and December where some of our ferrous markets-- there were no buyers. And that certainly went away at the end of the year. We have active demand for both ferrous and nonferrous commodities today.

Okay. Thank you very much, guys.

Thank you. This concludes our call. We appreciate you listening to and joining us for our fourth quarter and full year 2008 results. And we'll be back with you at some point in late April, early May to talk about the first quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.