LKQ Corp (LKQ) 2009 Q1 法說會逐字稿

Greetings and welcome to the LKQ Corporation first-quarter 2009 financial results conference call. At this time, all participants are in 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, Sarah Lewensohn, Director of Investor Relations for LKQ Corporation. Thank you. You may begin.

Thanks Brian. Good morning everyone and thank you for joining us today. We are holding this conference call to discuss this first-quarter 2009 financial results that were released this morning.

And 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 for questions. In addition to those that are listening by telephone, we're providing an audiocast via the LKQ website. Both forms will have replays available shortly after the conclusion of the call.

Before we begin with our discussion, I would like to read the following. Statements made on 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 or strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us.

Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made expect as required by law.

Please refer to our 2008 Form 10-K and our other subsequent documents filed with the SEC and the press release we issued this morning for more information on the potential risks. And with that, I would like to turn this over to Mr. Joe Holsten.

Good morning. Thanks again for joining us today. I will begin with some general comments about the business and some recent events and talk about some of our various business activities. I will turn the call over to Mark so he can provide greater detail regarding the financial results that were provided the earnings release that we issued this morning.

As I reflect on the first quarter, I am quite pleased with the results we were able to achieve especially given the current economic environment. We achieved a number of milestones I would like to point out.

Most significantly, our sales of recycled parts grew 9.9% organically for the quarter. Our aftermarket sales achieved organic growth of 2.4%, halting the declines we saw in the back half of 2008 and against a relatively tough comparison with the first quarter of 2008.

Our self-service facilities ended the quarter with an operating profit. While the profit was modest when compared to prior year's margins, the quarterly performance marked a substantive turnaround from our Q4 loss at these facilities.

Ferrous prices, related commodity prices appeared to hit bottom in December 2008 and January 2009 and appear to have now stabilized. And finally, we reached a settlement with Ford Motor Company on the design patent litigation dispute and have entered into an exclusive agreement to distribute limited part types in the US.

Just to go into the Ford settlement into a little bit more detail, as you know we were in dispute with Ford over design patent, in particular for collision repair parts for the Ford F-150 and the Ford Mustang. The settlement we reached grants LKQ the right to be the exclusive distributor of non-original equipment aftermarket parts that correspond to all Ford collision repair parts that are covered by design patents in exchange for a royalty payment to Ford.

Let me point out the exclusive rights cover collision repair parts for all of Ford's models for which there are design patents, not just those applicable to the F-150 or the Mustang. This agreement has a term through September 30, 2011 and applies only to sales in the United States.

Related to this, we also entered into agreements with the manufacturers who were part of the patents dispute to distribute US-bound non-OE collision repair aftermarket parts that correspond to the Ford design patents only to LKQ. We we are pleased with the resolution.

Not only does it stop the related legal disputes that we had with Ford, but we believe it gives us the ability to grow our revenue over time as we become the only licensed supplier of Ford design patented new non-OE aftermarket collision repair parts in the United States. Mark will provide some additional numbers and details related to the Ford agreement in just a few moments.

In terms of industry trends, the metrics that most impact our revenue we believe remain mixed. Unemployment levels remain on the rise and miles driven for the first two months of the year were down about 1.9%, continuing the trend from last year but at a more moderate pace. The average daily travel for February increased 2.7% over the prior year. So drivers are traveling less than last year but when they do drive, the trips are getting longer.

Insurance collision claims continued to decline, running at rates approximately 4 to 5% below last year. But the incidences of total losses are up 0.5% in part due to lower used car values and obviously providing a more lucrative auction environment for our Company.

While used car prices have trended downward for much of the last two quarters, we've recently seen this trend reverse. Other industry data suggests that the average age of vehicles on the road is now approaching 10 years which we believe to be a positive for the demand for our mechanical parts.

In our numerous discussions with our insurance partners, they remain concerned about the current environment. Auto dealership closures and the threat of bankruptcy from one or more of the auto companies based in Detroit are generating worries that some new OEM repair parts may not be available when they are needed.

Part shortages could lead to a longer repair time and greater repair costs and providing the customer with a rental car is a meaningful portion of the total claim cost. If there are interruptions in the supply chain, there may be opportunities for LKQ. So we are watching this closely.

Let's turn to our results and some various statistics for a moment. Revenue for the quarter was $518 million, a 5.3% increase as compared to the first quarter of 2008 and we generated dilutive earnings per share after restructuring costs of $0.23 for the quarter compared to $0.22 for the same period last year.

Reported total revenue because of the large fluctuation in scrap and core prices from last year's level obscured the true performance of our primary business of distributing replacement parts. Organic revenue growth, excluding the other revenue category, was 5.1%.

Excluding the other revenue category, our total revenue for our primary businesses, recycled parts and services and aftermarket related and refurbishing, was $469 million; a 9.1% growth for the quarter as compared to $430 million in the first quarter of 2008. Other revenue declined 21.4% primarily as a result of lower scrap metal and commodity prices.

With year-over-year revenue growth of 21.1% for the recycled parts and services category and 2.4% for the aftermarket other new and refurbished product category, our integrated model of the two businesses is taking hold. Our purchases of cars for the wholesale recycled parts operation totaled 41,700 units during the quarter, a 6.4% increase from the nearly 39,200 we acquired in the first quarter of last year.

The quantity of salvaged cars we purchase varies from quarter to quarter and reflects our production backlog and inventory levels which today are in good shape. Wholesale vehicles we acquired from the salvage auctions accounted for approximately 97% of the total incoming wholesale product flow.

The average acquisition cost was down 14% over the prior year's first quarter, incorporating lower scrap values embedded into the actual prices paid. During the quarter, we purchased 81,700 lower-cost self-service and crash-only cars as compared to 56,100 in the prior year.

The first quarter 2009 total includes approximately 31,700 vehicles that were purchased for the Pick-Your-Part acquisition that we completed in late August. There was a continued reluctance from some of the self-service car sellers to accept the lower prices (inaudible) dramatically lower commodity prices.

Even with the large drop in the other revenue category, we were able to generate gross margins in the quarter that were close to those achieved in Q1 2008 and an operating income very close to the amount generated in Q1 '08. Net income for the quarter was up 4.6% to $32.3 million from $30.9 million for the prior year.

I would like to discuss some aspects of our progress and integration right now. With the Prelude system which is the operating system we use to support our aftermarket business, now available on the desktops of the LKQ salvage sales force, we started to see the benefits of being the first called by a body shop when it begins to search for collision parts.

The conversions of the remaining LKQ businesses is slated for later in 2009. During the quarter, we consolidated or relocated three aftermarket locations in Pittsburgh, Charleston and Hattiesburg.

In addition, we shut down three bumper refurbishing operations in (inaudible) and Grand Rapids, Michigan; and Nashville, Tennessee. As we head into the second quarter, we still have a large New Jersey aftermarket location to be converted to Prelude. Once we complete it, we will close the nearby operation and move it into this facility as well.

The review of the sales volume and production capacity of the remaining 55 bumper, wheel and light refurbishing locations is continuing and we believe we may have an opportunity to close several more bumper refurbishing operations. Shuttle runs and other services are being consolidated to help both product lines.

The reorganization of the regions that we announced on our last call and it merged the Keystone and LKQ businesses under a common management; seems to be paying off by continuing to identify opportunities like shared delivery runs. For example, in the more rural areas of Kansas, Southern Illinois and Ontario; we have combined routes to deliver both aftermarket and recycled parts from the same delivery truck.

We expect to continue the consolidation for a number of years. Over time as leases expire in approximately 20 key market areas, we hope to consolidate the aftermarket and salvage operations into common footprints. Currently we have such projects underway in Detroit, Indianapolis, Houston and Montreal.

In terms of acquisitions, during the quarter we acquired a heavy-duty recycle truck parts business based in Tampa, Florida and a wholesale salvage recycling business in Durham, North Carolina and one in Montreal, Quebec. These new locations generated approximately $18 million of combined historical annual revenue.

In our truck business, the heavy-duty truck business, we believe that operations continue to gain traction. I continue to believe that the heavy-duty recycled truck parts market provides a logical growth opportunity for LKQ.

The fragmentation of small, privately-owned companies has made it difficult for anyone in the industry to reach scale to develop and support the systems like those we use for our car part sales that create a competitive advantage. For an industry with lots of owner-operators, we believe the use of recycled truck parts offers a strong value proposition to its cost conscious customers.

The five different locations are beginning to organize into one unit with common systems and common operating processes to further enhance the financial performance of these acquired businesses. We have been cross-pollinating the business with LKQ salvage manages to get the benefit of the operating talent we have developed in the car side of the salvage business.

During the quarter, we started our second significant secure disposal service for a large national fleet operator. At this point, I would like to turn the call over to Mark to give you more details on the financial results for the quarter.

Good morning everyone. As we did last quarter, we included a few additional tables that we believe are helpful as you evaluate our results.

Looking at our income statement and the related tables, our first quarter revenue was up 5.3% to $518 million from $491.9 million in Q1 2008. Our organic revenue growth for all revenue was a negative 0.5% for the quarter.

Excluding the other revenue category in our income statement, however, organic revenue growth was 5.1%. Joe mentioned that we settled the patent litigation with Ford. To put this in perspective in 2008, we generated approximately $135 million in parts revenue on approximately 5700 SKUs of new non-OE collision repair aftermarket parts covering all Ford brands.

Approximately $10 million of this was over some 200 SKUs and was related to parts that Ford indicated are covered by valid patent designs. So as you can see today, there is not a material amount of revenue that comes under this agreement.

Over time, we expect this revenue to grow as we are the only licensed provider of these parts in the US. The effective royalty payments at the 2008 revenue level is immaterial.

We are bound by a confidentiality agreement with Ford, so we are not able to give any really further detail of this agreement. Moving on to our statements of income.

Gross margin for the first quarter of 2009 was 45% and fairly close to the 45.4% in the first quarter of 2008. Our self-service facilities were primarily responsible for the small decline in 2009.

Our facility and warehouse expense for the quarter increased 13.8% or $6.2 million as compared to Q1 2008. Facility and warehouse expense as a percentage of revenue for the quarter was 9.8% versus 9% in Q1 2008.

The percentage deterioration in the quarter was related to our self-service operations as they run at a higher percentage of revenue for these types of costs. In particular, it was all primarily due to our acquisition of Pick-Your-Part on August 25, 2008.

Distribution expenses for Q1 2009 declined by $227,000 in Q1 2008 as a percentage of revenue distribution cost decreased to 8.6% in Q1 2009 from 9.1% in Q1 2008. Selling, general and administrative expenses were $3 million or 4.7% over Q1 2008.

[In] this growth was entirely related to business acquisitions. SG&A as a percentage of revenue was 13% in Q1 2009 which was comparable to Q1 2008.

During the quarter, we had restructuring expenses of $803,000 as part of operating expenses, all of which are related to the Keystone acquisition. Over 50% of this was related to severance of Keystone personnel with the balance primarily related to consolidating three aftermarket operations and closing out three bumper remanufacturing locations.

Our operating income was fairly comparable to the prior year with $61.4 million in Q1 2009 compared to $61.5 million in Q1 2008 despite a significant drop in operating income related to our self-service facilities. In Q1 2009, our self-service facilities did generate operating come which was certainly a turnaround from the operating loss of $11.8 million in the fourth quarter of 2008, but significantly lower than the profit level in Q1 2008.

Historically, the self-service facilities have operated at a higher operating margin than our other facilities. In Q1 2009, total revenue for our self-service operations was $45.1 million or 8.7% of LKQ's total revenue.

Approximately 48% of this revenue was included in recycled and related products and services, reflecting (inaudible) related sales and 52% was included in other revenue, comprising core and scrap sales. Revenue for the first quarter of 2008 was $40.9 million or 8.3% of total revenue.

Approximately 30% of this was included in recycled and related products and services, reflecting part related sales and 70% was included in other revenue. And remember that the Pick-Your-Part business, or PYP as we call it, was not owned by LKQ in Q1 of 2008.

We generated the following statistics when comparing Q1 2009 to Q1 2008 for our self-service businesses excluding the PYP business that we acquired in late August 2008. Self-service cars procured in Q1 2009 on average cost 19% less than those secured in Q1 2008.

Average scrap prices received per ton dropped 44% from that received in Q1 2008. We procured 20% fewer self-service cars in Q1 2009 compared to Q1 2008.

PYP would have had similar price trends but we did not own them in Q1 2008. Our acquisition of PYP increased the size of our self-service operations. Today PYP now represents close to 42% of our self-service operations and accordingly they magnified the negative impact of the trends.

While our volumes are still not where they need to be, we are moving in the right direction. We very much like the self-service business. Historically it has performed well and we expect it to return to more normal trends later in the year.

We had net interest expense in Q1 2009 of $7.6 million as compared to $10.3 million in Q1 2008. This decrease is primarily a result of lower interest rates. The Q1 2009 pretax income increased 4.6% to $53.8 million from $51.5 million in Q1 2008.

Our effective tax rate was 40% for the first quarter of 2009 and 2008. Net income for the quarter increased to 4.6% to $32.3 million from $30.9 million in Q1 2008.

Our diluted earnings per share increased to $0.23 for Q1 2009 from $0.22 in Q1 2008 despite the lower operating income of our self-service operations. Our diluted weighted common shares outstanding used for calculation EPS were as follows -- Q1 2009 at 142.8 million shares versus Q1 2008 at 139.7 million.

Shifting our focus to the cash flow table, we generated $39.5 million in cash from operations in Q1 2009. We grew our inventory in Q1 by close to $25 million, with this growth being related to aftermarket and refurbished product.

This growth is attributable to inventory levels we feel we need in order to take advantage of pressure on the insurance carriers to use more alternative parts along with the increased usage we expect to see from fleet and rental car companies. Capital expenditures for the first quarter excluding business acquisitions were $6.9 million.

Cash used to acquire businesses for the quarter was $15.8 million. Taking a look at the balance sheet as of March 31, 2009 you will see we had debt of $638.6 million that included $634.5 million under our secured credit facility. Cash and equivalents were $92.8 million at the end of March 2009.

As of April 28, we had approximately $74 million in cash and equivalents. As many of you know, we have a revolving credit facility of $115 million provided under our secured credit facility.

Today we have borrowed $7.9 million under this line and there are approximately $25.3 million of letters of credit that are backstopped by this line, reducing the availability for future borrowings to approximately $81.8 million. As we previously reported in an 8-K filing with the SEC, Lehman Commercial Paper Inc. which accounts for $15 million of the 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 $66.8 million. However, we do not feel this $15 million is significant to our liquidity needs.

Let's move to our 2009 financial guidance. As Joe indicated earlier, in light of the current economic environment and its impact on collision repair trends, we anticipate our annual 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 $114.5 million to $123.5 million and earnings per share will be in the range of $0.80 to $0.86. We delivered very good first quarter results and normal historical trends show this is usually our strongest quarter quarter in the year.

Consistent with our experience in prior years in this industry and consistent with the revenue trend we have witnessed so far in April compared to the Q1 levels, we believe the second quarter of 2009 will show lower net income and diluted earnings per share than what we reported for the first quarter of 2009. Net cash provided by operating activities for 2009 is projected to be approximately $145 million.

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 which are included in this are expected to be under $15 million.

Weighted average diluted shares outstanding are anticipated to be within a range of approximately 143 to $144 million 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 stock price. I would like to turn it back to Joe for some closing comments.

Thanks Mark. Before we go to questions, I would like to make just a few more comments and share our outlook for the businesses and the industries in which they operate, in particular to focus on the strength of our business model.

While we remain at a macro level in a period of economic uncertainty, our business -- the sale and distribution of alternative collision and mechanical parts for both cars and light and heavy-duty trucks -- we believe demonstrated during the quarter its ability to resist recessionary trends in several ways. First, insurance carriers are looking to expand their writing of alternative parts as a way to contain increasing costs.

With little ability to increase premium rates, offset increasing vehicle repair costs and the impacts of lower investment income, the insurance carriers are looking at all options to continue to lower costs. They continue to seek more alternative parts usage in order to lower repair costs and improve cycle time, both critical to their performance.

Further, they are concerned about the potential interruption of parts deliveries from OEMs as a result of dealership closings, potential bankruptcies and instances of out-of-stock inventory. Second we believe our ever-expanding product offerings such as [value aligned] aftermarket products and paint and body supplies along with our growing revenue tools such as keyless and other connectivity and coordination between our recycled sales team and the aftermarket sales team will expand our revenue growth opportunity.

Third, despite some increases in used car pricing, we still see a good supply of reasonably priced parts cars to purchase at the salvage pools and that is reflected in the prices we are actually paying for these parts cars. And fourth, while many consumers appear to be choosing to repair only the necessary parts to make their cars roadworthy, I do believe that there are repairs that are being deferred and will ultimately be completed to fix the cosmetic sections of these damaged cars.

And finally, our balance sheet remains strong and provides us with the flexibility to grow our operations. Our leverage is less than 2.8 times EBITDA.

We have liquidity of the quarter-end in excess of $150 million. Maintenance capital spending is roughly only $15 million per year and we have sufficient cash flow to fund our organic growth.

While the current economic environment is posing challenges for many, we're well-capitalized to take advantage of the opportunities that we believe are likely to come on the horizon over the next several years. And with that, Ryan, I think we would like to open for questions.

(Operator Instructions) Tony Cristello, BB&T.

Good morning gentlemen. First question I had was when you look at what is going on in the aftermarket side of the business, and you went from sort of down almost negative 2 in the fourth quarter and it looks like organic growth almost is up [2.4] this quarter, so a nice sequential improvement there.

I'm assuming one, this was the toughest comparison year-over-year. Can you sort of give us some color on was this a sequential acceleration as the quarter progressed? Did you start off at a level of aftermarket business that was sort of at this runrate and maintained? As we move forward and you sort of anniversary some easing comparisons as the year progresses and then along with what you talked about your going to a single screen for recycled and aftermarket, should we expect continued positive growth in the aftermarket in spite of what's going on with the macro backdrop?

I'll start maybe just by looking maybe what's happened in the industry in the quarter. I would say we started out the quarter fairly strong. January and early February was stronger than the back half of the quarter.

I would say that we probably had some good weather assist, especially on some of the Great Lakes -- traditional Rust Belt New England markets. On a more macro level, the one thing I would point out that I think has helped the business and the industry overall is the fact that the latest data that has come out of -- both estimating companies Mitchell and CCC, both of those put out reports within the last 30 days that would suggest alternative part usage gained another 1 point to 2 points of market share on the collision crashed parts.

So in terms of going into balance of the year, obviously we have put out same-store sales growth guidance of 6 to 8%. We are a little short of that for the first quarter.

So I think somewhat implied in those numbers would be a belief that as we get into the second half of the year -- and as you pointed out, maybe the comparison gets slightly easier on aftermarket parts, that we might see a little more acceleration from the first quarter.

Has April in general been as good as the last quarter or maybe a little bit better given what you just commented about Mitchell and CCC and some of the other trends that might be going on?

No, April has been one of our tougher months and is starting 2009 no different than it has kind of prior years. The April revenues are off from both March and Q1 levels and like I said, that is something we have seen pretty much every year we have been in the business. And then we get kind of a steadying effect and a little acceleration later in the quarter.

When you made the comments about in some locations going to the screen view of recycled and aftermarket parts on the same screen, what percentage would you say of your locations now have that ability and is there a delta or a noticeable difference between those that have been converted versus non-converted and what you are seeing from a sales perspective?

Well 100% of the LKQ operations would now have that capability. I think the issue is really more of continued training and familiarity with the systems. Because of the fluidness of moving between screens and invoicing, salespeople take the path of least resistance unfortunately.

I think we've got pretty good metrics in place now that we can identify the salespeople who are not effective in converting sales opportunities into aftermarket parts sales. It's just kind of that tedious part of management of identifying people who aren't performing, counseling, coaching, training, and ultimately making termination decisions for people who can't get with the program.

Okay, great. Thanks guys. I'll let someone else take it.

Sam Darkatsh, Raymond James.

This is actually Jeff calling in for Sam. My first question -- well first of all, can you remind us at what point last year did you really start to see improvements in fill rates on the recycled side?

I would say the improvements in our sell rates on the recycled side were very gradual throughout the year. And I think I had indicated on our last call if we just looked at kind of the typical LKQ recycled plant as we got into the end of the year, seeing (inaudible) [stocks] down to the 30% level was getting to be pretty normal.

And prior to last year, what was normal, maybe 40%?

No, we were in the 30s for sure, but probably more 33 to 35% range.

The data we have gotten from Adessa has made it look like used vehicle prices were significantly higher in Q1 sequentially. But it sounds from what you have given us like you did a good job actually getting -- actually buying cheaper in Q1. Can you talk a little bit about what you think allowed you to do what and what the trends are going forward?

The number we mentioned, the 14%, that is a quarter one to 2000 to quarter one 2009 comparison. So we should keep that in mind as a starting point.

And I would say that the majority of that reduction quite frankly is just a pass-through of the reduction in scrap metal prices. I can't sit here and tell you that our gross margins have improved dramatically in the recycled side of the business.

So I think this is more of a reflection of the scrap metals market than anything else. We are quite happy with our buying discipline as evidenced in the improvement in the not-in-stocks and certainly with the ability I think of our buyers and scouts to continue to bring down what we are paying for vehicles yet maintain our revenues and maintain our gross margins.

Are you comfortable that you can keep the fill rates up in the mid to high 30s or do you think we will see a reversal to kind of historical levels?

No, I think they are not-in-stocks. I cannot see any reason we should not be able to maintain the levels we are at right now.

Next question. I just have one question on the Ford settlement and that is is there any material legal expense that goes away given the (technical difficulty) settlement?

Well what goes away is certainly the uncertainty of exactly what those legal costs might have been had we continued with the trial and the appeals which certainly would have followed on both the F-150 and the Mustang cases. I think it was clear that there was at least one court case and one to two additional appeals that we would have been financing and expensing over the next couple of years.

I think that in addition to curbing the legal expenses and eliminating kind of the uncertainty of the outcome of the litigation, there are kind of intangible benefits that come with the settlement. We believe that CAPA should begin the process of recertifying the parts that have patents. CAPA has been decertifying parts when they became aware that there was a patent on a part.

So over time, that's going to increase the number of parts that we and our industry will be able to sell. Another intangible I think is that the manufacturers will regain confidence in the United States as a good market.

They had grown concerned about the litigation on patents. One of the manufacturers actually had two attorneys on staff and all they did was review parts, part by part to form a decision as to whether or not they should manufacture those parts.

You know, we're hopeful that this is a good step in the right direction toward forging a healthier working relationship with Ford. We have we think strong working relationships with a number of OE's and we would hope that this positions us to improve our working relationship with Ford.

And finally, there are those insurance carriers who do not use aftermarket parts or have restrictions on the aftermarket parts that they use. And although speculative on our behalf, we believe that the settlement of this suit should remove at least one of what could be several barriers. But it certainly removes one of the barriers of insurance carriers using more aftermarket products.

Just one more question for me and sticking with aftermarket parts. Now that we are a couple of quarters into the big drop in commodity prices, have you started to see any benefit from lower procurement costs of aftermarket parts especially given lower freight and steel costs?

Yes, I would say that those came into our pricing negotiations right around the year-end, maybe early into the first quarter. So certainly those benefits would be embedded in the product that's been moving into inventory during the first quarter.

The steel cost change was really pretty nominal because most of the manufacturers had been absorbing the run-up in steel prices in 2008. The majority of them ate I would say a significant amount of that run-up where they had purchase contracts in place that protected them against the increases. And then certainly there has been a reduction in the cost of the shipping lanes. That was more I would say probably more of a Q4 event than a 2009 event.

Obviously nothing happened in the last 60 days. So that would be baked in our guidance as that comes through, anything we negotiated.

Craig Kennison, Robert W. Baird.

Congratulations on a really nice quarter on several fronts. I wanted just to follow up on the Ford issue with respect to State Farm. We ask this question a lot, but any progress with respect to State Farm?

No, I will just say that we have met during the quarter -- either met personally or a number phone discussions with the majority of the leading insurance carriers, meaning anyone with a market share of 4 or 5% or better. And the focus from them quite frankly was not so much on the Ford settlement. They were all pleased to see that that had been accomplished.

But far more focus on their behalf on concerns about supply disruptions and what sort of safety stock we had in place, how long it took us to gear up and how long it would take the manufacturers to gear up if there were a marked improvement from one of the major carriers who has restrictions on aftermarket part utilization to relax those. I could comment on any [form].

Obviously State Farm is the one that seems most apparent to all of us. But there are other carriers who use only CAPA parts today and there are possibilities that those carriers would consider removing their CAPA-only restriction should there be material disruptions in the supply chain.

Do you see a need to commit additional working capital to inventory in preparation for that?

Actually we carried a stronger inventory in the first quarter than would have been normal, preparing for I will say the possibility.

Then you have had some success on the value-priced, non-CAPA certified aftermarket parts. Can you just discuss how that has progressed?

We've been very happy with it. It's probably about a $40 million product line for us at the moment.

We'll have to see what the seasonality is of the parts sales to really have a better triangulation on what that figure is. But certainly it's a product line that gets us back I think in sales mode with some of the rebuilders.

They would be kind of one of the larger clients and maybe one of the differences between LKQ's action operations and the Keystone operations, if you would go back a couple of years, Keystone has really focused on the A accounts.

They were not that focused on what we would call the C and D accounts, kind of the incidental shop purchase and action was a little bit more focused on that group. And certainly I think the value line product gives us an entry to those C and D shops.

Thank you. Then with respect to the acquisition pipeline, could be just discuss what's available today, whether prices have come down meaningfully and what your capital needs would be if you wanted to pursue those?

We are increasing our activity level in the acquisition front as we speak. Coming off the heels of the $800 million dollar Keystone integration, we thought it prudent to be somewhat on the sidelines and with some of the gyrations in the scrap market over the last three to four quarters, it was probably not a great market to be buying businesses anyway. But we are I will say rengaging at a higher level.

Our focus will be on acquisitions in the late-model salvage business. Probably like to see a couple more heavy-duty truck deals come our way during the balance of the year. And our focus will be on new geographical market entries.

We will continue with probably a couple of additional greenfield developments over the next 12 months. We will be targeting lower multiples. I think a year, year and a half ago we were probably talking about multiples that ranged from five times EBITDA to seven times EBITDA.

Certainly we would like to bring those down a couple points. It remains to be seen whether the market will be accommodating at offers at those levels.

But we think we are -- not a lot of buyers out there, so it will be our intent to negotiate hard and I think the Company is well-positioned. We've essentially -- with the direction of our Board, we have come through this time with the view of keeping our powder dry and anticipating the possibility that there could be opportunities that we really didn't think of. So we're looking forward to the next few quarters to get back in deeper discussions with people.

Tom Hayes, Piper Jaffray & Co.

Thank you. Joe, just quick -- I was wondering if you could just provide some commentary regarding the heavy-duty truck acquisitions kind of versus your expectations. And then I guess just kind of a second one on that line of thought is when do you think that segment will become significant enough to provide some separate breakout as far as revenue numbers?

I'll let Mark answer the back half of that question. The impact on the economy on the heavy-duty truck has probably been a little tougher than I would've expected. And part of that I think is probably coming with the strength of the dollar compared to our entry point into the heavy-duty truck.

So the total revenues of the acquired businesses, probably a little short, not significantly short but a little short of what our pro forma modeling would've been at the outset. I think we make up for that over time. I don't see any kind of flaws in our strategic logic for moving into the business.

(inaudible) of the ability to sustain the gross margins that we had expected and I think a lot of that is coming out of the fact that the acquisition market and -- the salvage acquisition market has been pretty good. The number of fleet operators due to the soft economy who are making decisions to take trucks out of service has been a pretty surprising level.

I am very convinced that our model to provide a national secure disposal service is going to be very attractive to large fleet operators. And as I commented in my [canned] remarks up front, we just saw our second kind of national deal come on board during the first quarter to capture a significant volume of a national fleet operator.

Our [network is not that complete]. We've got nice strength through the central corridor of the United States. So our next focus will be something on the right and the left coast and that will make a significant impact on our ability to reduce freight costs where we are successful in getting national secure salvage disposal deals.

You asked kind of what percentage of our revenue was heavy trucks and how long before it gets significant. I mean, we a $2 billion company and we're kind of talking about the deals we have done.

Obviously it's still a pretty small significant percentage. It kind of probably depends as we continue to grow them. I guess what I'm saying, the next 24 months, it's not going to be a major percentage of our $2 billion revenue. There's just no way. The math wouldn't work.

Just one quick follow-up. Mark, I think you had mentioned as far as April trends, you expected I think you said net income and EPS to be lower versus 1Q. Does that imply that total revenue would be below Q1 and is that total sales or organic sales?

That would really be total. The thing that messes those trends up if you go back historically is we do acquisitions. We have done some acquisitions as we mentioned this quarter but they were kind of weighted in the first part of the quarter.

So you're not going to see a big up and down unless we do another deal in Q2. So Q2 is always seasonally down if you strip out acquisition effect. And so it would be the organic -- organic on a sequential basis now. We're not saying Q2 to Q2. (multiple speakers) sequentially it's going to be a lower quarter.

It always is unless we go buy a big company in Q2 which we have done before. So it's more of a sequential is we're talking about here. As Joe indicated, April is a little slower than we would have liked, but it's kind of hard. You've only got three weeks down here out of a 13 week quarter.

We're coming up on 11:30. I think we can probably get one more call in and then to be respectful of your time, we will close it up.

Bill Armstrong, CL King and Associates.

Thank you. I guess the first question is just a point of clarification. The 14% reduction in the cost per car, are we talking about just wholesale?

Yes, that is for the late model, wholesale vehicles.

March and April, I guess we have seen the miles driven through February. I think you guys may get some data that maybe most of the people don't that might be more recent. Have you seen anything after February for either March or April for total miles driven?

No, February is the last data point we have anything official on.

That comes out at the Department of Transportation.

We see the same thing you do.

Okay, okay. I thought maybe you had some other sources just from within --

We haven't found one yet.

Could you discuss what kind of volumes you are seeing these days at the auctions?

During the quarter, very healthy. Of the auctions we attended, most weeks we were seeing 54,000, 55,000 vehicles.

One of the trends we noticed during the quarter was the salvage pools were running the same vehicles through the auctions two, three, four or five times. We have a very standard rule that -- punishable by death if you violate it.

We don't bump bid on vehicles that go through the auction the second time. If anything, we take our bid down. But volumes we're very strong in the quarter. Last couple of weeks, they have eased up a little bit.

Then my last question has to do -- getting back to the heavy-duty truck business. You said fleet operators are taking a lot of trucks out of service. Are they cannibalizing these trucks for parts or are they just sending them straight to the auctions to dispose of them?

They're really doing an assortment of things. Yes, there is cannibalization going on, in some cases fairly significant.

Most of these trucks -- it's kind of the industry whether they're garbage trucks or cement trucks, you can probably always run of those about one more year and that's what a lot of companies are doing. They've extended their fleet life by one to two years.

We think that should bode well for demand for our used parts along the way. But cannibalization is going on. The interactions with companies like us for just kind of negotiated sales I think are much higher than what we would have been seeing a year ago. I really don't know that I could make a comment on the auction houses on heavy-duty trucks, what their volumes have been, whether they're up or down.

With overall freight tonnage way down, how does that play into your thinking about doing more acquisitions in this space?

Well I think in the -- we're kind of long-term players. I think our desire to have a national capability here remains unchanged. Let's face it.

Any store you go into, almost anything you buy got there on a truck and it's hard to imagine that changing in the next decade or a couple of decades. So we are committed and if the short-term freight tonnage is down or miles are down, hopefully that just helps us get into the market at a lower cost of entry.

Is your truck business focused mostly on your basic freight hauling tractor, the Class 8 type trucks or some of the specialty vocational type trucks like garbage trucks and cement mixers, things like that?

It's really both. I would say right now we're weighted a little heavier towards the more specialty type equipment.

I would like to call it a call. We've kept you a few minutes past and look forward to talking to you. My guess is we'll probably [start] our next earnings call to be the last Thursday of July. So we will talk to you then.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.