LKQ Corp (LKQ) 2009 Q3 法說會逐字稿

Greetings, and welcome to the LKQ Corporation third quarter 2009 financial results conference 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, Sarah Lewensohn, Director of Investor Relations for LKQ Corporation. Thank you. You now -- may now begin.

Thank you. Good morning, everyone. And thank you for joining us today. This morning, we released our third quarter 2009 financial results.

With me today from LKQ Corporation is Joe Holsten, President and Chief Executive Officer; Mark Spears, Executive Vice President and Chief Financial Officer; John Quinn, incoming Chief Financial Officer; and Rob Wagman, Senior VP of Operations, Wholesale Parts. Both Joe and Mark will provide some prepared remarks on our results. And then we will open the call up for questions.

Before we begin with our discussion, I'd like to read the following. The statements made 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 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 statements to reflect events or circumstances arising from the date on which it was made, except as required by law. Please refer to our 2008 Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risk.

And with that, I'm happy to turn the call over to Joe Holsten. Thank you.

Okay. Thanks, Sarah. I think I'll begin by just saying that I am truly pleased with our performance this quarter. In fact, the results reflect very good execution of our business plans. The performance was especially notable, given that it occurred in the third quarter, typically the seasonally weakest quarter of the year, and against the third quarter 2008 that in itself had strong results.

We delivered an earnings per share of $0.22, an increase of approximately 16% when you exclude the impact of the restructuring costs associated with the integration of Keystone and a fixed asset impairment tied to the self-service businesses and assets that we sold to Schnitzer Steel.

Net income was $29.2 million, a 16.3% increase over the $25.1 million earned for the third quarter of 2008. Revenue for the quarter, excluding the other category, grew nearly 9% over the prior year. The aftermarket and refurbished segment led the revenue growth.

As you might recall, on our last call in July I mentioned that we had started to see an increase in the growth rate of aftermarket product sales. This trend held throughout the quarter, and is reflected in the results we report today.

Aftermarket and refurbished organic revenue was up 11.3% for the third quarter over the prior year. A large part of the increase was due to increased inventory on hand. At the start of the year, we deliberately started to build inventory levels in anticipation of growth and the expansion of our quality assurance programs as well as Keyless to support our insurance customers.

While we built inventory to support higher fulfillment rates and push up aftermarket parts sales, it appears that our competitors took the opposite approach and reduced inventory. Last year, as the credit markets tightened, I pointed out that I believed LKQ would benefit relative to our competitors from the strength of our balance sheet. This appears to have been the case. A review we did with the major Taiwanese aftermarket manufacturers indicates that they are experiencing declines in 2009 revenue as compared to 2008. With our growth at over 11%, I believe we are taking market share from our competition.

But inventory alone does not drive aftermarket sales. We also are beginning to see the benefit from the installation of our new salvage yard management system on the desks of the recycled sales reps. Giving the sales reps better tools and information is helping them capture more revenue opportunities. The rollout of the new system is roughly halfway complete, and will continue through 2010.

Finally, I would point out that Miles Driven appears to have stopped its decline, and was up modestly for both July and August. This could translate into an up-tick in claims and repairs.

Turning to our recycled operations, revenue from our recycled products and services businesses increased 4.7% over the prior year. Organic revenue growth of recycled products was 6.6% in the third quarter of 2009 compared to the third quarter of 2008.

However, we had a decline in services revenue related to providing towing and vehicle processing services to certain OEM subcontractors responsible for destroying vehicles. These services can be rather uneven by quarter and by year. The decline in services revenue in Q3 2009 from Q3 2008 was large enough to organically lower total recycled and related products and services revenue to a negative 2.1%.

For 2009, our towing and vehicle processing services revenue was running at approximately only $3.5 million per quarter.

During the third quarter, we purchased nearly 47,000 vehicles for dismantling by our wholesale operations, 14,000 of which were acquired under the Cash for Clunker program. Excluding Cash for Clunker cars, we bought 5% fewer cars than we did in 2008, as the supply of totals was tight in the few selected markets. With good inventory levels on hand, we generated wholesale recycled parts organic revenue growth of 6.6%. The average cost per car acquired, backing out the impact of the Cash for Clunker cars, declined nearly 7% as compared to the third quarter of 2008.

During the quarter, we purchased 94,000 lower-cost self-service and crush-only cars, an increase of 5% over last year's third quarter purchases. We bought 15,000 Cash for Clunker vehicles for our retail operations. Pick-Your-Part accounted for approximately 31,400 vehicles during the quarter compared to 11,600 in Q3 2008. Included in the car count for Q3 2009 are 12,100 vehicles purchased by locations that are now part of discontinued operations.

The average cost of the retail self-service car was 34% lower than the average for the third quarter of 2008, reflecting a significant drop in scrap prices as compared to last year, but was 8% over the average we paid in Q2 2009. We feel that the third quarter 2009 self-service business results performed at an operating level that we would consider more normalized. The scrap prices we received and the costs we paid for cars were more in line with the historical spread prior to the huge run-up in scrap and car prices during the first nine months of 2008.

In terms of commodities' impact on the business, the commodity markets including ferrous and non-ferrous metals and fuel experienced some upward movement during the quarter from levels earlier in the year. The price for car -- crushed car bodies improved sequentially in the third quarter relative to the second quarter by approximately 31%. That trend line, however, appears to have stopped, and has been moving downward since the start of October.

In terms of our insurance programs, insurance companies are increasingly seeking ways to address high claims costs. On our last earnings call, I spoke of some of the initiatives we have underway with insurance companies. For example, we recently signed an agreement with one carrier that gives us access to all of their salvage. This carrier, by using our complete alternative parts services, has attained a 49% alternative part utilization level. With the supply of recycled parts relatively finite, the growth in APU will come from greater use of aftermarket parts.

On the call, I mentioned that we were in the negotiation phase with two carriers to participate in quality assurance programs. A quality assurance program creates a customized universe of aftermarket products, with additional assurances from LKQ. While our insurance-grade aftermarket parts are sold with lifetime guarantees, under these programs we offer additional commitments and tracking mechanisms that provide greater comfort to insurance companies. Each of these programs is uniquely designed for each insurance company, and the carriers know that we will stand behind our products in a way that only a company with $2 billion in sales is able to do.

We executed a quality assurance program agreement with one of the two major auto insurance carriers I referenced last quarter, and are working with them to put the program into place for a quick start in Q4. Negotiations with the other major carrier continue. And we are talking to a number of others about these programs' benefits. I anticipate we will have signed one more carrier into a customized program by the end of 2009 as we direct more attention towards tier two and three carriers.

Keyless, our proprietary electronic parts interface is another program we offer that supports the increased sales of our aftermarket parts. To date, more than 2000 repair facilities have installed the software. Those facilities are able to use Keyless when preparing estimates to identify aftermarket part options and determine their availability in our warehouses. If they choose, they can go a step further and buy it now. The order is typically filled and delivered by the next day. So far, it's been embraced by one of the major insurance carriers and a number of fleet operators, including some major rental car companies. We believe other companies will show interest once we demonstrate the success of Keyless.

While the situation for the vehicle manufacturers in Detroit seems to have stabilized and parts shortages do not appear to be imminent, we are seeing strong interest from insurance companies in our aftermarket parts programs. Keyless is an example of a proprietary program we offer that simplifies the part procurement process and supports their efforts to increase APU rates.

On our last call, I mentioned that in July we purchased a small heavy-duty truck parts recycling business in Maryland, bringing the total number of truck facilities we own to six. In September, we acquired the assets of Superior Collision Parts with two well-established aftermarket parts business in Atlanta and Pittsburgh, and newer operations in Allentown, Pennsylvania, and Columbus, Ohio. We are well into the process of integrating the operations into the local Keystone locations. Superior's annualized revenue was approximately $11 million.

On October the 1st, we acquired Greenleaf from Schnitzer Steel. Under the agreement, we acquired their 17 wholesale operations located across the country. One of the Greenleaf locations will help us to fully enter the Virginia market, as we have attempted to do for some time. A few others provide locations that help us expand in a large market area or offer better facilities than we currently have in place. In the end, we anticipate we will consolidate up to 11 facilities. The acquisition offers us the opportunity to integrate the locations and customer base in our existing regional structure. We are installing our yard management systems in all 17 of the locations so we can quickly bring them into our network and support higher fulfillment rates. This is targeted for completion before year end. Further benefits will come from areas such as removing duplicate overhead, consolidation of routes and our vehicle procurement efforts.

Turning to the heavy-duty truck business, we are progressing with the development of an integrated recycled truck parts and secure disposal business. The business has many similarities to the recycled auto parts business when LKQ first started. An optimal configuration is probably a broad network of ten to 15 locations spread throughout the United States. Currently we have six locations, mainly east of the Mississippi, and are looking for opportunities to enter the West.

The operations continue to move toward becoming a more cohesive unit. We hope shortly to connect all of the locations to a common networked inventory system. Today, inventory is accessible only at the local level. A networked system will enable the locations to generate sales from outside of their stores and increase fulfillment rates.

We have begun to centralize our buying efforts. And while much of the purchasing is done at auctions, we continue to pursue secure disposal services for large national fleet operators. On future calls, I'll continue to provide updates on our progress.

Organizationally, John Quinn joined LKQ earlier this month. And he's already having a positive impact on the Company, currently spending literally time working alongside Mark, and will officially take over as Chief Financial Officer next week. When you meet John, I'm sure you'll agree he has the ability and skills to help move our Company forward. And we welcome him to our family today.

And finally, I want to thank Mark for the tremendous job he's done during his decade at LKQ. We'll miss him, yet certainly wish him well in his future pursuits.

Speaking of Mark, I'd like to turn the call over to him at this point so he can go into more detail on our financial results. And then we'll come back to answer questions.

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

Before I begin, I would like to point out that the eight operations we are divesting or closing in conjunction with the transaction we entered into with Schnitzer Steel have been classified as discontinued operations in our financial statement. What this means is that the results of operations for these eight businesses have been removed from the section of our income statement shown as continuing operations, and presented as one line item labeled as loss or income from discontinued operations net of taxes. All periods presented, which are 2008 and 2009, reflect this accounting treatment.

Looking at our income statement and the related tables, our third quarter revenue was up 2.7% to $494.8 million from $481.6 million in Q3 2008. For the first nine months of 2009, revenue grew 3.3% to $1.492 billion compared to $1.444 billion in the first nine months of 2008.

For the third quarter, organic revenue declined 1.3%, which was primarily related to the effect on our other revenue category caused by the lower level of 2009 commodity prices as compared to the same period in 2008. However, excluding this other revenue category in our income statement, organic revenue growth was 5.5% in the quarter. For the first nine months of 2009, organic revenue declined 1.4%. However, excluding the other revenue category in our income statement, organic revenue growth was 6.1%.

Gross margin for the third quarter of 2009 was 45.5%, which was up from 44% in the same period in 2008. On a 9-month year-to-date basis, the gross margin for 2009 was 45.2% compared to 44.8% the same period in 2008. These improvements are primarily related to our aftermarket and self-service operations.

Our facility and warehouse expense for the quarter increased 2.9% or $1.4 million as compared to 2008. Facility and warehouse expense as a percentage of revenue for the quarter was essentially flat at 9.8% versus 9.7% in 2008. On a 9-month basis, facility and warehouse expense grew $11.9 million or 8.9% over 2008, and as a percentage of revenue was 9.7% compared to 9.2% in 2008. The percentage deterioration for these expenses for the nine months was related to our self-service operations as they run at a higher percentage of revenue for these types of costs, and in particular was primarily due to our acquisition of Pick-Your-Part in late August 2008.

Distribution expenses for the quarter declined by $0.9 million or 1.9% from Q3 2008. As a percentage of revenue, distribution costs decreased to 9.2% in Q3 2009 from 9.7% in the third quarter of 2008. On a 9-month basis, distribution expenses declined by $3.9 million or 2.9% from 2008. And as a percentage of revenue, it was 8.9% compared to 9.5% in 2008. The improvement in percentages of revenue is primarily related to lower fuel pricing in 2009.

Selling, general and administrative expenses grew $5.5 million or 9.1% over the third quarter of 2008, and as a percentage of revenue was 13.3% in Q3 2009 compared to 12.5% in Q3 2008. Expense growth of $2.3 million was related to business acquisitions. On a 9-month basis, SG&A expenses grew by $13.2 million or 7.1% from 2008, and as a percentage of revenue was 13.3% compared to 12.8% in 2008. Expense growth of $9.8 million was related to business acquisitions.

During the quarter we had restructuring expenses of $852,000 as part of operating expenses, all of which are related to the Keystone acquisition. This primarily related to changes in estimated lease buyouts or sublease assumptions on abandoned leased aftermarket facilities.

Our operating income was $56 million in Q3 2009 compared to $48.2 million in Q3 2008. On a 9-month basis, operating income was $171.7 million in 2009 compared to $163.3 million in 2008. Excluding restructuring expenses, we improved operating margins by 100 basis points in the quarter.

In Q3 2009 our self-service facilities improved sequentially on improved scrap steel pricing. The margins on the self-service business improved on the higher and more normalized scrap prices that we saw.

In Q3 2009, total revenue for our self-service business and continuing operations was $44.3 million or 8.9% of total LKQ's revenue. Approximately 42% of this revenue was included in recycled and related products, reflecting part-related sales, and 58% was included in other revenue, comprising core and scrap sales. Back in Q3 2008, our self-service business in continuing operations had revenue of $45.4 million. Approximately 29% of this was included in recycled and related products, reflecting part-related sales, and 71% was included in other revenue.

Looking further down the income statement, we show net interest expense in Q3 2009 of $7.8 million as compared to $8.2 million in Q3 2008. For the first nine months of 2009, net interest expense was $23.1 million compared to $26.9 million in the same period of 2008. These decreases are a result of lower interest rates and lower debt balances, due primarily to scheduled debt payments.

The Q3 2009 pretax income from continuing operations was $48.3 million for the quarter compared to $40 million for the same quarter in 2008. The 9-month pretax income from continuing operations was $148.8 million in 2009 compared to $137.1 million in 2008. Our effective tax rate was 39.1% for the first nine months of 2009 and 39.6% for the first nine months of 2008. Excluding various changes in discrete benefits or reserves, the effective tax rate would have been 39.3% in 2009 compared to 39.1% in 2008.

Looking at the makeup of our discontinued operations in Q3 2009, we recorded an after-tax loss from discontinued operations of $1 million compared to an after-tax income of $1.1 million for the same quarter last year. Within the Q3 2009 loss is a fixed asset impairment of $3.5 million on a pretax basis, or $2.2 million after tax. Without this charge, the net income from discontinued operations in Q3 2009 would have been comparable to Q3 2008.

Our total 2009 net income was $29.2 million for the third quarter compared to $25.1 million for the same quarter in 2008. The 9-month total net income was $90.3 million in 2009 compared to $86.9 million in 2008. Our diluted earnings per share was $0.20 for Q3 2009 compared to $0.18 in Q3 2008. For the nine months of 2009, our diluted earnings per share was $0.63 compared to $0.62 in 2008. However, the impact of restructuring expenses and the fixed asset impairment was $0.02 in Q3 this year. And the impact of restructuring expenses was $0.01 in Q3 2008. Within discontinued operations, excluding the Q3 2009 fixed asset impairment was $0.01 of EPS in Q3 2009, and $0.01 of EPS in Q3 2008 as well.

Our diluted weighted common shares outstanding used for calculating EPS were as follows -- Q3 2009 at 144 million shares versus Q3 2008 at 141.2 million, the first nine months of 2009 at 143.7 million shares versus 140.5 million in 2008.

Shifting our focus to the cash flow table, we generated $135.5 million in cash from operations in the first nine months of 2009. We grew our inventory in the first nine months by close to $24 million, with this growth being primarily related to aftermarket and refurbished products. Capital expenditures for the first nine months of 2009, excluding business acquisitions, were $29 million. Cash used to acquire businesses for the first nine months was $18.6 million. During the first nine months, we issued approximately 1.2 million shares of stock related to the exercise of stock options that resulted in $10.7 million in cash, which includes related tax benefits.

Taking a look at the balance sheet as of September 30, 2009, debt at the end of Q3 2009 was $635.6 million. That included $631.3 million under our secured credit facility. Cash and equivalents were $166 million at the end of September 2009. As of the close of business on October 27, we had approximately $140 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. In October, we agreed to an amendment with our bank group to allow Lehman Commercial Paper to remove itself from its $15 million revolver funding commitment and to resign as the administrative agent. Deutsche Bank has accepted the administrative agent role. Today we have $8.9 million of borrowings under this line. And there are approximately $25.8 million of letters of credit that are back-stopped by this facility, thereby reducing the availability for future borrowings at September 30, 2009 to approximately $65.3 million, which we believe is sufficient for our liquidity needs.

Let's move to our 2009 financial guidance. In light of the current economic environment and its impact on collision repair trend, 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%. Excluding the impact of restructuring expenses or the impact of the fixed asset impairments and gains related to the transaction with Schnitzer, we anticipate our full-year 2009 net income will be in the range of $120 million to $124 million. And earnings per share will be in the range of $0.83 to $0.86.

It is important to note we are talking about total net income. That means net income from continuing operations and discontinued operations. The income associated with the businesses divested or closed in the Schnitzer transaction is included in these numbers and will be lost on a go-forward basis, most in Q4 2009, and the balance with the sale of the two self-serve yards in January.

However, we expect that when Greenleaf is fully integrated, it will more than replace the earnings associated with the divested operations. We previously announced we expect that the net impact from the operations divested and the impact of Greenleaf to be $0.01 dilutive in Q4 this year, but would be $0.02 accretive next year, excluding the effect of restructuring, the fixed asset impairment and any gains associated with the transaction.

We've delivered very good Q3 results. We mentioned that we got a boost from a jump in steel prices in our self-service business in Q3 this year. We have since seen prices soften $20 to $30 per ton, so we expect that business to be a little softer in Q4. Net cash provided by operating activities from continuing and discontinued operations for 2009 is projected to be approximately $150 million. The company estimates 2009 capital expenditures from continuing and discontinued operations related to property and equipment, excluding expenditures of acquiring businesses, will be between $65 million to $70 million. This CapEx guidance is lower than our previous guidance, due primarily to a self-service facility that was closed in October.

Weighted average diluted shares outstanding are anticipated to be approximately $14 million for 2009. Share numbers are estimates, and will be affected by factors such as future stock issuances, the number or options exercised in subsequent periods and changes in stock price.

I will now turn it back to Joe for some closing comments.

Okay, Mark. Again, I'm very pleased with the performance of our business during the quarter. The aftermarket and refurbished business relays excellent organic revenue growth at 11.3%, in part due to strong inventories as well as a cohesive selling structure. Organic revenue growth of 6.6% for recycled products shows we continue to have opportunities for growth here as well. And with the acquisition of Greenleaf, this group will only get stronger. With an insurance industry anxious to reduce costs and an economically strapped American consumer focused on value, I believe our product lines are well positioned for solid growth in the current economic environment.

I'd like to thank you for joining us today and ask Danielle to open up for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions.) Our first question does come from Tony Cristello with BB&T Capital Markets. Please proceed with your question.

Thank you. Good morning.

Good morning, Tony.

Good morning.

One of the things, Joe, you referred to multiple times in the commentary was the level of interaction with the insurance companies wanting to utilize more aftermarket parts. Are -- is this incremental from what we've seen over the last multiple years? Or are you seeing a period now where they're wanting to accelerate that utilization rate given the macro factors that are underway?

Yeah, Tony, I think I would look at this as incremental and in a stronger momentum maybe than what we've seen over the last few years. The -- I think as we've discussed on some of the prior calls, the insurance industry has gone through several years of pretty bleak returns, at least what I read in the public data that's available. I don't know that anyone's really getting increases in their premiums. And so, the battlefield's really in the cost containment side of the equation. We believe our business model's about as ideally suited as it could be to play in that space and to participate. And what we see, an entire industry where the APU is going to be continuing to go up. It's been moving about one basis -- 100 basis points a year. And our first glimpse of the last data from the two or three large data providers for the industry suggests this year that the move could be a couple hundred basis points. So I -- at the moment, we think there could be acceleration.

In those discussions, are you seeing any more of a proactive response out of State Farm?

No.

Okay.

Did you want me to elaborate on that?

Yeah, I doubt -- I figured we haven't talked about that in a while. And I didn't know if anything had changed.

No. As a matter of fact, I think I had indicated we've really reoriented a lot of our focus more toward the tier two and tier three suppliers. I think they're nimble. They can make decisions quickly. It's kind of not getting all your eggs in one basket. We're really putting more of our chips in our marketing efforts toward the smaller insurance carriers right now.

Okay. And the second question that I would ask is, when you look at Greenleaf it seems like there's certainly an opportunity. Have you or could you disclose what the purchase -- your purchase price was for Greenleaf? And then, too, when you look at the yards at Greenleaf, can you sort of compare and contrast those yards with what the traditional LKQ yard would look like, both from a -- maybe just a structural standpoint, as well as what it would look like from a profitability or an EBIT standpoint?

Sure. I'll start on this. I'll probably ask Rob, who's spent quite a bit of time on the integration plan, to participate in this answer as well. We're -- I just want to start off by saying we're really happy with the transaction. We picked up roughly $115 million in revenue. And we've paid a little less than $40 million in consideration for it. And any way you look at it, what we paid for the business, we paid either less than the book value or we paid less than the fair market value of the assets. So just starting off with the transaction as a whole, we're pleased.

In addition to that, while I think (inaudible) over the last few years, that we've never been overly concerned about a competitor replicating our business model. It's always been on my mind that if anyone wanted to do it, picking up Greenleaf's 17 yards sure would have been a good stepping stone to getting it done in the process. So I think we've kind of closed that out as well.

I guess in terms of looking at the Greenleaf yards compared to the LKQ facilities, they're generally smaller. You can do the math -- $115 million in revenue spread over 17 facilities leaves you quite a bit short of the LKQ size of yards. The gross margins of the business run a few hundred basis points less than LKQ's. Our target is by about the third quarter to have kind of eaten through their inventory and just start to reflect more of an LKQ historical gross margin level.

As for sort of the synergy and integration issues, why don't I let Rob speak to that. Because I know that's kind of embedded in your question.

Tony, Greenleaf certainly had a noticeable presence in all of the markets they were in. We just felt they were too geographically dispersed to get the economies of scale that we can now get with LKQ. Some of the benefits we expect to see pretty quickly -- higher fulfill rates just by the sheer increase in inventory available through both -- sales reps from both companies. Greenleaf had developed some preferential relationships with some of the OEs, which will fit nicely into LKQ's relationships with some of the OEs.

The merging of the locations certainly will allow us to gain personnel and distribution synergies. As Joe mentioned, those have already begun. Every one of the Greenleaf locations has already been plugged into the distribution network at LKQ. As of today, we have five locations already converted to our operating system, with two locations actually where we've merged the sales force.

In terms of buying, we think in the terms of volume potentially open to us as we migrate the Greenleaf facilities to LKQ's operating model, they'll fall into our buying matrix and will -- just the sheer number of requests that we can now bring together with the two companies should allow us better buying opportunities as well.

Our conversion schedule, we have it pretty much being done by the end of the year -- our IT conversion. And we really can't move the physical merging of the facilities together until that's accomplished. But we expect by January 1 to have all of the IT conversions done. And then we'll move full forward on bringing physically the facilities together that we mentioned earlier on the call.

Okay, great. So it sounds like there's a lot of opportunity both to leverage existing infrastructure as well as drive incremental profits in their existing network.

Yeah. Just as an example, Tony, I -- the manager from Fort Worth -- the Fort Worth store -- I'll just read a couple of sentences from an E-mail he sent to me a few days ago. He says, Joe, I've already seen a slight increase in the close rate that I attribute to the added inventory. I expect that the slight increase will become even more significant as we convert to LKQ's checkmate system, adding more visibility and ease to purchase parts between the sites. Skip on -- I find the technology and operational innovation to be very impressive. The [wireless] inventory system is fantastic. Inventorying using this system is a cost and time savings. And the barcode scanning to track parts is amazing. Just kind of some unsolicited views from one of the Greenleaf managers 15 days into the deal.

Okay, now that's great. Thanks, guys. I appreciate it.

Thanks, Tony.

Our next question comes from Scot Ciccarelli with RBC Capital Markets. Please proceed with your question.

Thanks. Hey, guys. How are you?

Hey, Scot.

Hey, Scot.

Two quick questions. First, the aftermarket business -- was that impacted at all from the new carrier relationship? Or was that kind of subsequent to the results in the quarter?

No, that's solely results in the quarter. The -- I think you're referring probably to the new -- to the latest quality assurance program we signed. That was really signed after the end of the quarter. And we're actually just into rollout of that right now.

Got it. Okay, that's helpful. And then, can we just flush out the recycled service piece a little bit more? What was the total impact in the third quarter? And maybe more importantly, was there any sizeable impact in the fourth quarter of last year that we should try and account for?

It was about -- it was about a $14 million impact between Q3 and Q3 on the services --

Revenue.

Revenue.

I'm talking about revenue on the services. And like we said, those kind of contracts tend to be a little lumpy quarter to quarter. You know, we're running on average right now about $3.5 million in revenue in 2009 for those type of service agreements. But we don't really have a big bulge in there when you start looking at '09. And we think that'll continue at that level up into 2010 plus.

Q4 was a little lumpy as well. I don't have in front of me the exact number. But, yeah, I think you might see a decline. It would maybe be like a $7 million decline when you do Q4 to Q4 of that type of revenue. Again we expect, like I said, to be running $3 million, $3.5 million a quarter in Q4 as well on those type of agreements.

Okay. And so, when you guys are providing your 68% organic growth for recycled and aftermarket, we're excluding that segment of the business, I'm assuming.

Yes.

Okay.

The 6.6%, yeah, exactly. You'll have the same kind of thing. You'll -- because it's less of a drop Q4 to Q4, we would expect the recycling -- the total recycling including the services to be in the positive range.

Okay, got it. All right, that's very helpful. That's all I had. Thanks, guys.

All right, Scot. Thank you.

And our next question comes from Sam Darkatsh with Raymond James. Please proceed with your question.

Good morning, Joe, Mark, John. How are you?

Good morning, Sam.

Hello.

Good morning.

A couple of housekeeping -- the $40 million in consideration, Joe, is that net of the divested businesses? Or is that just the purchase price of Greenleaf? I'm -- I just -- I tried to reconcile the cash on hand now versus the cash at the end of September. And it looks like it was a $27 -- $26 million deal. So I was just trying to reconcile the two.

We paid a little less than $40 million for the Greenleaf business. And then Greenleaf paid us consideration for the --

About $18 million.

For the self-service, yeah.

For what we sold in Q4. There'll be some more consideration in January, of course, when we sell the other two yards.

Got you. And then, do you have a net impact of Cash for Clunkers all in, Mark?

The net impact for Cash and Clunkers? No. I mean, we're feeding them into our business. Are you saying like how much that'll increase our earnings if there wasn't a Cash for Clunker program?

What was the impact in Q3, or the overall impact ultimately, once everything's said and done if you have--?

Well, I mean to be honest, most of the wholesale cars Joe mentioned that were Cash for Clunkers really started coming in more in September. So I'm not that sure they did a whole lot on the wholesale side. Self-serve started coming in a little sooner. But we still have -- nothing came in in July. They started coming in in August.

I think, Sam, you probably need to look at the Clunker cars as being kind of substitute vehicles as opposed to incremental vehicles. The quality of the cars ended up being significantly greater than anybody in the market had anticipated. And while they certainly won't generate the same amount of revenue per car as a typical car that you would see at our wholesale yards, they're certainly kind of more like about 50% of a car. So operationally I'm looking at these as being cars that are substituted for the normal auction cars, which kind of helps us I think in the auction environment during the quarter.

And my final question -- the crushed auto body steel prices look like in fourth quarter, at least on the -- on the market prices, look like they switched back to inflation pretty sharply on a year-on-year basis. At what point does that begin to hit your results? Is there a quarter lag? Or would we see a fairly sharp growth year on year in that other segment in Q4?

Oh, you're saying Q4 pricing '09 to Q4 pricing '08?

Q4 to Q4. That's correct.

Right.

At least with the services that I look at for the steel crushed auto body prices, it looks like Q4 is where we start to lap very low year-on-year prices. And so the negative should turn into a positive ultimately. I'm just trying to figure out when that would hit your income statement.

Well, if you're going Q4 to Q4, we probably expect $40 more in Q4 '09 per ton. But then back in Q4 in '08 it was awful dang low. We had some really low months there. So Q4 '09 is going to have higher scrap pricing than Q4 '08 from what we can see. It's going to be down a little bit -- somewhat, like I mentioned, $20 to $30 a ton from Q3.

Yeah, we saw it move down in October. And it -- we're anticipating another reduction in November.

Okay. Thank you much.

Thanks, Sam.

Our next question comes from Craig Kennison with Robert W. Baird. Please proceed with your question.

Good morning. And congratulations to your team.

Thanks. Thanks, Craig.

On the Greenleaf revenue -- $115 million -- any way to quantify how much of that revenue was benefiting from rising steel prices and what it might be on a normalized basis?

Well, it would certainly be a little lower, because '09 had lower scrap prices. I mean, it started coming up a little bit in July and August. And their year end was August. Yeah, I don't have how much revenue would go up because of scrap prices. You're talking about in Q4 next year?

I -- maybe what you're trying to get at, Craig, they're all wholesale cars. They are no -- there's no self-service component. Say Greenleaf may have been buying a slightly less expensive car than the LKQ facilities. If you remember some of our early slides, we would indicate that 90% of our revenue was typically parts and 10% and less was cores and scrap and other byproducts. I would think that the Greenleaf yard revenue mix would be pretty similar to that. It couldn't be too far off of it.

And with respect to the aftermarket opportunity in those locations, is there an opportunity for you to layer in additional revenues by adding aftermarket? Or is that already something you've done in those markets?

Well, certainly it would be a new -- it would and will be a new product line that the -- will be available to the Greenleaf reps. And to the extent Greenleaf had customers who were not doing business with LKQ's sales organization, certainly there's a greater product line offering to offer to our customers.

Thanks. With respect to the Clunker cars that you purchased, do you have a sense for what a discount you were able to achieve by buying those cars through that program on a per-car basis?

Well, that's tough to answer. There are probably two answers to that, Craig. One, about 50% of what we're buying is -- we'll end up with about 40,000 units. And about half of those are going to go to the self-service yards. And those cars are costing our self-service yard managers probably 15% to 20% more than what they're paying for cars off the street. But it's our view that they're worth it, because they have significant part -- everything on the cars are good, except for the crush-only vehicles. And there aren't that many of them. So not only are they driving higher parts sales at the self-service yards, it's actually attracting an expanded customer base. And we're seeing new customers coming into the U-Pull-It yards who operate independent garages. And they're buying parts in our self-service yards.

At the wholesale yards, we typically paid the $1,400, $1,500 range for cars at the wholesale operations. And our managers are buying these cars for between $300 and $350. They're going to break for, I don't know, $1,500 on average. Some will go well over $2,000. But I'm just going to pick an average of $1,500 for today.

But I think that's probably about as much color as I can put on that for right now.

Okay.

The -- I will remind you that obviously there's no motor to sell in these units. So there is a little bit of a takeaway.

Understood. Well, listen, thank you. And, Mark, I just wanted to say it's been a pleasure to work with you for the last seven years. And I wish you well.

Thanks.

Our next question comes from John Lawrence with Morgan Keegan. Please proceed with your question.

Good morning, guys.

Hi, John.

Hi, John.

Yeah, just real quick, Joe, to follow on Tony's first question about the industry, now that -- as you pointed out, the OEs have sort of -- that part distribution service doesn't seem as at risk as it once was. What are the real issues -- I mean, the price differential has always been there between your product and what they're doing. What are some of the other issues that are on the table as far as -- is it routes, is it distribution -- other than just price that get hung up in these negotiations?

You're referring to why the quality assurance programs take a lengthy period of time to pull together?

Yes.

That -- you want a shot at that, Rob? You're probably more involved in those than I have been.

Yeah. John, I think it's an industry that is conservative and just want to dot their I's and cross their T's. And there's a lot of negotiations. These quality assurance programs are specifically designed and tailored for our customers based upon the process that they use to estimate a car. So every one's different. So we really need to sit down and work through the details of how it's going to be applied to that carrier.

So they -- obviously, they understand and have understood the price differential for a long time. It's just how to execute the plan?

Exactly. Exactly, yeah. They certainly understand the price differentiations that are attainable. It's just working through all the details on how it's going to apply to their particular situation.

Great. And the last question, just back on the Greenleaf -- Joe, you mentioned third quarter their inventory is out. So most of that couple of pennies would be in the second half is basically where you picked up that accretion.

Yeah, I think that's a fair -- a fair assessment, John.

Great. Thanks. Same thing, Mark. Thanks for all your help.

Thanks.

Our next question comes from Tom Hayes with Piper Jaffray. Please proceed with your question.

Hey, good morning. Thank you. Joe, you laid out some nice details on signing the carriers, one additional carrier signed in Q4 and thoughts on signing another in this quarter as well. I was just wondering your thoughts on the timing as far as converting those businesses over to you guys?

Well, I think it'll be very gradual. You know these have pretty long rollouts. There are visits required to a significant number of repair shops. And these are not -- they're not quick rollouts. Let me just leave it at that. These are quarters to roll these things out. And you have compliances. Let's face it, some insurance carriers get out a pretty big stick in their DRP programs. And they're really in the shop's face if they're not complying with whatever requirements the insurance carriers may have. And other carriers are kind of lax in terms of their enforcement of even their most basic of alternate part usage programs.

Okay. And then, I guess over the last two quarters you've seen some nice expansion of gross margin the 45.5% range. Just wondering your thoughts on that level going forward, if that remains sustainable as far as what should be expected?

Well, I think in the recycled parts business we should continue to see, I think, pretty good results over the next year to kind of the recent levels. We've -- I think we've enjoyed a fairly good buying year. The self-service business obviously has been a little bit of a roller coaster the last year, as I think Mark indicated and I did. And my script was a belief that if we look at the third quarter in and of itself, and if you were to kind of go back say to second and third quarter of 2007, I think you'd see pretty much the same relationship in kind of what we're paying for cars and the amount we're getting for scrap. Just the spread in that environment is pretty much back to what we were seeing in 2007.

And then, certainly in the aftermarket parts, we've picked up some gains in our aftermarket margins, I think part of that coming from the fact that we've added to our product lines what we refer to as a value-line product that's probably benefited us slightly. So I would see aftermarket margins being pretty steady into 2010 as well.

Great. Thank you.

I think we'll do one more question. I know a lot of you probably have other calls to get on. So why don't we do one more question and call it a call.

Our next question comes from Nate Brochmann with William Blair & Company. Please proceed.

Good morning, everyone. Great quarter.

Thanks, Nate.

Hey, Joe, you kind of laid out a bunch of really nice tailwinds that it appears heading into 2010, whether it's with the insurance programs, some of the -- more of the benefits of the greater integration with Keystone and getting the greater aftermarket growth, as well as now with Greenleaf. I mean, it really sounds like there's a lot of reason for optimism. And I know that there's a lot of variables and too early to give guidance. But it kind of sounds like that there's a lot of potential for the growth rate to maybe be above average heading into 2010. And I just wanted to get your thoughts on that.

Well, we'll be able to put a little more color on that in 90 days. We are into our budgeting process. And as a matter of fact, Monday morning we officially kicked off budget review season. So it'll be our first opportunity along with John and Rob and myself over the next four to six weeks, and get a lot of really great feedback from our line management in terms of what they're seeing in the marketplace. Yeah, I agree that it certainly feels like we've got a little wind behind us right now. But I'd really like to get, I think, direct feedback from our line management and our sales organization before we start moving kind of our guidance around.

Fair enough. And, Mark, congratulations.

Thanks.

Thanks.

All right, I'd like to thank everyone for joining the call today, your interest in LKQ. And I look forward to covering our Q4 results and our 2010 guidance I guess in about four months.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.