LKQ Corp (LKQ) 2009 Q4 法說會逐字稿

Greetings and welcome to the LKQ Corporation's fourth quarter and full year 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, Ms. Sarah Lewensohn, Director of Investor Relations for LKQ Corporation. Thank you. Ms. Lewensohn, you may begin.

Good morning everyone and thank you for joining us today. This morning we released our fourth quarter and full year 2009 financial results. With me today from LKQ Corporation is Joe Holsten, President and Chief Executive Officer; John Quinn, Executive Vice President and Chief Financial Officer; and Rob Wagman, Senior Vice President of Operations, Wholesale Parts Division. Both Joe and John will provide some prepared remarks on our results and then we will open the call up for questions. In addition to those that are listening by telephone, we are 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. 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 statement to reflect events or circumstances arising after 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 risks.

With that, I'm happy to turn the call over to Mr. Joe Holsten.

Thanks, Sarah. Good morning. Thanks for joining us today. I'd like to begin by saying how pleased we are with the results we reported this morning. As you can see, we delivered a strong fourth quarter and overall a very solid year. If you think back to the environment that existed a year ago, I believe the results are even more impressive.

Before we get into specifics, I'd like to put our results into perspective. At the start of 2009, there was a great deal of uncertainty for most businesses, including ours. Unemployment was rising. Miles driven continued to register declines. Many auto insurance companies reported fewer claims. On the surface, the reduction in claims might be seen as a positive for insurance carriers. Declines of renewal rates and lower average premiums as consumers chose less coverage on their older cars did not bode well for the insurance industry. The auto industry was also under considerable stress. At the time, General Motors and Chrysler were planning for bankruptcy. Dealer franchise agreements were being cancelled. And, even for those dealerships that were able to keep their franchises, many were struggling to keep their credit lines in place so they could remain open.

In the face of all of this, we said we believed that the environment was good for alternative parts and we were going to continue to invest in and expand our business, despite a terrible economy. Our original guidance was for organic revenue growth for parts and services of 6% to 8%, and we got right in the middle. We planned to grow EPS to between $0.80 and $0.86, and on almost any measure we exceeded the top end of that goal. Cash flow from operations came in at $164 million, well over our initial guidance of approximately $145 million.

During 2009, we continued to implement our strategy of creating one source for aftermarket, recycled, and refurbished collision products that provide true options to new OEM replacement parts for insurers, body shops, fleet managers, and consumers. We started the year with a redesigned regional organization focused around our wholesale product lines. The new structure provided clearer direction and goals for the operating units and led to a sharper focus on the needs of our customers. We invested in our business and sold both new and expanded warehouse space by building inventories and adding new product lines, and we continued to stress better sales skills and the cross-selling of all types of alternative parts -- aftermarket, recycled, and refurbished -- as a priority for our sales team. Many of our investments in technology are in part to create better selling efficiencies. These efforts supported our growth and led to the achievement of important milestones in the history of LKQ -- over $2 billion in annual revenue for the first time.

Turning to the results of our business for the fourth quarter of 2009, we reported diluted earnings per share of $0.25 from continuing operations, an increase of 150% over the prior year's $0.10. Revenue for the quarter from parts and services grew by $73 million or 17.3% over the prior year. For the full year of 2009, diluted earnings per share from continuing operations was $0.88, an increase of 28% over the prior year. On a full year basis, organic revenue growth from parts and services was 7%. Demand for wholesale, alternative repair parts, aftermarket, recycled, and refurbished was strong. We are tracking industry data for changes in the use of alternative parts. The mid year data consolidated by both Mitchell and CCC indicated alternative part usage is up, most likely at a faster pace than the historical 1 point per year growth rate that has occurred for the past decade. However, until we see the full year numbers from these agencies, we will not know the true industry growth rate.

Organic revenue growth for aftermarket and refurbished parts was 14.9% for the quarter and 8.9% for the year. Building out our aftermarket inventory was a key initiative during the year. We expanded the breadth and depth of the parts, reassigning some parts to different locations based on demand trends and improved on-shelf fulfillment rates. Sales may also have been helped by increased repairs as a result of higher used car values and resulting fewer total losses. On the recycling side, we saw organic revenue growth of 2.4% in the quarter. We mentioned on last quarter's call that this category would be impacted by a drop in towing and service revenue. Without that revenue decline, the revenue growth would have been a healthier 7.4%. During the quarter, we purchased nearly 41,000 vehicles for dismantling by our wholesale operations.

Starting in Q4, and continuing into January, availability of salvage vehicles was tighter than we have seen in recent years, so we are carefully monitoring our purchases and looking for additional sources of vehicles outside the auctions. Included in the 41,000 cars we bought were 5,500 Cash for Clunkers for our wholesale operations. By now, we have harvested and crushed out most of the clunkers we bought. Although the vehicles were lower in cost, they averaged less revenue per car than the typical wholesale car that we buy.

We believe that our parts supply programs differentiate our aftermarket recycled and refurbished product from the competition. Our customers tell us they are looking for ways to control repair costs without compromising quality. They appreciate that our programs can make it easier to use alternative parts. We customize parts programs to provide our customers with a broader selection of aftermarket parts as well as providing tracking ability from the repaired car back to our vendor. I've mentioned Keyless before when talking about our programs. This leads to availability of alternative parts with the estimating system. The software makes it easier for a repair shop to consider part availability and cycle time when determining what part they want to use for a job. More than 2,000 repair shops now have access to Keyless and their use of the system is growing. In January, it generated 120,000 estimates that were linked to our inventory.

Our self serve operations rebounded to near normalized levels compared to the impact we felt from the collapse in the commodity markets in the fourth quarter of last year. Scrap prices we received and the cost we paid for cars were more in line with historical spreads from periods before the run-up in scrap prices. During the fourth quarter, we purchased 66,000 lower cost self service and crush only cars, including about 5,000 Cash for Clunkers. Average costs of the self service cars we bought was 7% higher than the average for the fourth quarter of 2008.

We made a number of important acquisitions during the fourth quarter. The largest was Greenleaf Auto Recyclers, which we talked about briefly on our previous earnings call. The integration of this business is progressing well and on schedule. All of the facilities have been converted to LKQ's operating systems, and have access to our aftermarket and refurbished inventory, as well as recycled products. The integration of Greenleaf with LKQ is on schedule to meet the financial targets we set for 2010 when we first announced the transaction. [Allied] Truck in Fresno, California was also acquired during the quarter. It provides our heavy duty truck network with the critical distribution point on the West Coast. And finally, the purchase of Capital Auto Parts, a wholesale recycled parts business in Albuquerque, New Mexico, offers us access to New Mexico and the opportunity to expand in the Southwest.

With the addition of Allied Truck, we now have seven distribution points in our heavy duty truck network. While the economic environment continues to weigh on the business, we are using this time to network the operations in a seamless organization. The installation of a common network inventory system which is currently in progress will enhance the benefits of cooperative vehicle procurement and pricing tools. Additionally, we're in the process of identifying best practices and creating standard operating, inventory, and pricing practices, which should further improve the financial performance of this business segment. It's exciting to us to group identify sales opportunities that individually would not have been possible.

I'll now turn this discussion over to John so he can provide more detail on our financial results, and then I will wrap up with some summary comments.

Thanks, Joe and good morning everybody. As Joe mentioned, we're very pleased with the way that the business performed in Q4. Hopefully everyone has had the chance to look at our 8-K, which we filed with the SEC earlier today. There's a lot going on in the income statement that relates to the accounting of the Schnitzer transaction, so I'll be pointing those items out so you can make adjustments to get back to a more normalized income statement. We mentioned last quarter that eight operations we divested are closed in conjunction with this transaction and classified as discontinued operations in our financial statements. There is also eight businesses that have been removed from the section of our income statement shown as continuing operations and presented as a one line item labeled Loss of Income From Discontinued Operations. All periods presented reflect this accounting treatment.

Our revenue for the fourth quarter increased $91.1 million to $555.9 million compared to $464.8 million for the same period last year, an increase of 19.6%. On a full year basis, 2009 revenue was $2.048 billion compared to $1.909 billion in 2008, an increase of $139.4 million or 7.3%. For Q4, our organic growth was 12.1% and acquisitions accounted for 7.5% of growth. Within the organic growth figure, other revenue, which is where we record our scrap commodity sales, was up 34% as commodity prices were higher on a year-over-year basis. So if we exclude the improvement in other revenue, the organic growth for the balance of the business was 9.8%, and I think that's the real story here. We saw solid growth in our salvage parts operations and our aftermarket sales were particularly strong.

Our acquisition revenue growth was dominated by the acquisition of Greenleaf, which was completed October 1, 2009. This transaction accounted for approximately 5% of the acquisition related revenue growth. For the full year, we saw organic growth of 1.9%, but parts and service organic growth was a full 7%.

Gross margin for the fourth quarter of 2009 was 45.5%, which was up from 42.3% in the same period 2008, and on a full year basis the gross margin for 2009 was 45.3% compared to 44.2% in the same period 2008. These improvements are primarily related to our self service operations as commodity prices stabilized in 2009 compared to the dramatic drop we experienced in Q4 2008. We also benefited from steadily improving aftermarket margins. Our facility and warehouse expense for the quarter increased 14.4% or $7 million as compared to the same quarter 2008. Approximately $4.2 million of the growth was related to business acquisitions. In addition, we incurred $1 million charge in the quarter related to future rents on some abandoned facilities.

Facility and warehouse expense as a percentage of revenue in the quarter showed an improvement at 10.1% versus 10.5% in 2008. On a full year basis, facility and warehouse expense grew $18.9 million or 10.4% over 2008, with $16.8 million of the growth related to business acquisitions. As a percentage of revenue, facility and warehouse expense was 9.8% compared to 9.5% in 2008. The percentage deterioration for these expenses for the full year was related to our self service operations, as they run at a higher percentage of revenue for these types of costs, and in particular it was primarily due to our acquisition of Pick-Your-Part in Q3 2008.

Distribution expenses for the quarter increased $6.3 million or 14.6% from Q4 2008, with $2.7 million of the growth related to business acquisitions. The remaining growth is primarily wages, rate, truck rents, and maintenance due to increased part sales. As a percentage of revenue, distribution cost actually improved to 8.9% in Q4 2009 to 9.3% in Q4 2008. On a full year basis, distribution expenses increased by $2.3 million or 1.3% from 2008, with $6.6 million in growth related to business acquisitions. While we saw other cost categories increase, these were offset by a decline of $10.6 million in fuel costs. As a percentage of revenue, distribution expenses fell to 8.9% compared to 9.4% in 2008.

Selling, general and administrative expenses grew $13.5 million or 21% over the fourth quarter 2008, with $3.8 million of the growth related to business acquisitions. As a percentage of revenue, selling, general, and administrative expenses was 14% in Q4, compared to 13.9% in the same period of 2008. With the dramatic revenue growth, we would have liked to have seen a little better leverage here, but the quarter's costs were impacted by increased bonus accruals of about $3.6 million related to year-over-year improvement in results and increased professional, legal, and settlement costs of about $2.2 million that we incurred in the quarter. For the full year, SG&A expense grew by $26.7 million or 10.7% over 2008, with $13.1 million of the growth related to business acquisitions. As a percent each of revenue, selling, general, and administrative expenses was $13.5 million compared to $13.1 million in 2008. During the quarter, we had restructuring expenses of $644,000 as part of the operating expenses, essentially all of which were related to the Greenleaf acquisition, primarily severance costs. Our operating income was $59.7 million in Q4 2009 compared to $30.0 million in Q4 2008, and for the year, operating income was $231.4 million compared to $193.3 million in 2008.

In Q4 2009, our self service facilities' operating income and their margins continued to improve sequentially. In Q4 2009, revenue from our self service business and continuing operations was $44.6 million or 8% of total revenue. Approximately 43% of this revenue was part sales included in recycling and related parts revenue, and 57% scrap and core sales which is included in other revenue. For the full year of 2009, total revenue for our self serve business in continuing operations was $161.7 million or 7.9% of revenue. The split on this revenue was approximately 46% parts, included in recycled and related parts, and 54% was scrap and core sales included in other revenue. Back in Q4 2008, our self serve business had revenue of $32.8 million in continuing operations. For the full year of 2008, they had $155.7 million in revenue in continuing operations.

Net interest expense for Q4 2009 was $7.8 million compared to $8.6 million in the same quarter last year. For the year, net interest expense was $30.9 million compared to $35.5 million in the same period 2008. These decreases are the result of lower interest rates and lower debt balances primarily due to scheduled debt repayments. Note that included in other income and expense is a $4.3 million gain on bargain purchase price related to the Greenleaf acquisition. Under the accounting rules, what used to be considered negative goodwill is now taken directly to income statement in the period recognized. The Q4 2009 pretax income from continuing operations was $56.5 million for the quarter, compared to $22 million for the same quarter of 2008.

For the year, pretax income from continuing operations was $205.3 million in 2009, compared to $159.1 million in 2008. Our effective tax rate was 38.1% for 2009 compared to 39% for 2008. Excluding various changes in discrete benefits and reserves, the effective tax rate would have been 39.5% for 2009.

We have a couple items below the income from continuing operations line and we've broken those out in financial tables included in the press release. For the quarter, the total income related to discontinued operations was $0.7 million, including an aftertax loss of $1.8 million on discontinued operations, which included $2.3 million of restructuring expenses on an aftertax basis, and the earnings of the businesses sold. There's also a gain on sale of Discontinued Operations of $2.5 million on an aftertax basis for the operations sold in Q4 2009. For the full year 2009, the total gain on discontinued operations was $0.4 million, including $2.3 million restructuring expenses on an aftertax basis incurred in Q4, a $2.2 million fixed asset impairment on an aftertax basis incurred in Q3 of 2009, and these were offset by the earnings throughout the year on the businesses sold and the aftertax gain on the sale of discontinued operations of $2.5 million reported in Q4.

Our Q4 2009 net income was $37.2 million compared to $13 million for the same quarter of 2008. For the full year, net income was $127 million compared to $99.9 million in 2008. Our fully diluted EPS was $0.26 for Q4 2009 compared to $0.09 in Q4 2008. For the year, our fully diluted EPS was $0.89 for 2009, compared to $0.71 in 2008.

To summarize the impact of the restructuring expenses and the gain on bargain purchase of Greenleaf on net income and EPS from continuing operations, restructuring cost and gain on bargain purchase of Greenleaf totaled a net positive $4 million on an aftertax basis or $0.03 of diluted EPS for the quarter. For the full year, they had an impact on income of $2.8 million or $0.02 on diluted EPS. So if we adjust for these items, the fully diluted EPS from continuing operations would have been $0.23 for Q4 and $0.86 for the year.

Our fully diluted weighted common shares outstanding used for EPS calculations were as follows. Q4 2009, 144.6 million. Q4 2008, 142.4 million. And for the year, 144 million for 2009, and 141 million for 2008.

With respect to our 2009 cash flow, we generated $164 million in cash from operations during the year. We grew inventory $20.4 million, this growth being primarily related to aftermarket and refurbished products. Capital expenditures were $55.9 million in 2009, excluding business acquisitions. We spent $65.2 million on acquisitions and we received proceeds from asset sales of $18.5 million. The proceeds were primarily related to the sale of certain self service yards to Schnitzer.

During the year, we issued approximately 2 million shares of stock related to the exercise of stock options, and that resulted in $17.9 million in cash, which includes related tax benefits. Debt at the end of the year was $603 million, including $595.7 million under our secured credit facility. Cash and equivalents were $108.9 million at 12/31/09. In addition to our mandatory scheduled debt payments, in the fourth quarter we prepaid $22.4 million of term loan payments that were scheduled for 2010. And we also paid off the September 30, 2009 revolver balance of $8.9 million. Given our strong cash flow and the negative carry for having cash on the balance sheet, this seemed to make sense.

Earlier this month, we prepaid the final scheduled 2010 payment of $7.5 million, required under the term loan for this year. As of the close of business on February 23rd, we have approximately $145 million of cash and equivalents. Today we have no draw on our $100 million revolving credit facility and approximately $23.9 million of letters of credit that are backstopped by the facility, leaving $76.1 million availability for future borrowings. Combined with our cash balances, the fact that we have prepaid our mandatory term loan payments for 2010, we believe we have adequate liquidity.

Moving to 2010 guidance, as Joe indicated earlier, the economic environment, while improving, remains choppy. But we anticipate annual organic revenue growth for 2010 for parts and services, which excludes the other revenue category, to grow at a rate between 6% and 8%. Excluding the impact of restructuring charges, impairments, or gains or losses for the acquisitions or divestitures we anticipate our full year 2010 net income from continuing operations will be in the range of $145 million to $155 million and fully diluted earnings per share to be in the $1 to $1.06 range. Net cash provided by operating activities in 2010 is projected to be approximately $160 million. We expect to continue to grow inventory and working capital to support the sales growth, and cash taxes are expected to grow a little faster than income. The Company estimates 2010 capital expenditures related to property and equipment, excluding expenditures of acquired businesses, will be between $85 million and $95 million. This figure includes some carry-over spending from projects that were delayed in Q4 2009.

With that, I'd like to turn it back to Joe for closing comments.

Thanks, John. I began our call today with a reminder of some of the overall market conditions that existed at the beginning of 2009. While there has been improvement, many of those conditions are still broadly present today. An ugly environment for employment and consumer disposable income, an insurance industry under pressure to keep market share and to manage severity, an auto industry under stress in terms of sales and now quality for selected manufacturers, weakened auto dealerships, and tight credit markets, which impact out competitors' inventory levels. Since buying Keystone, we've been laying the groundwork and executing on our business plans to be the number one provider of alternative collision parts. Our results this year reflect our success. But I believe we are only beginning to realize the benefits from creating a wholesale parts group that offers a full breadth of options to the professional auto repair industry.

Our outlook for 2010 is positive and builds upon the momentum we created during 2009. The strong earnings and cash flow we generated last year, results [in Q], and an even stronger position to execute our strategy and continue to invest in our network and inventory. We are now open to Q&A, please.

Thank you, sir. (Operator Instructions). Our first question today comes from the line of John [Lavella] with Banc of America-Merrill Lynch. Please proceed with your question.

Hey, guys. Thanks for taking my call.

Hey, John.

Couple quick questions for you here. In terms of Allstate's decision to use Co-Parts as a provider -- do you guys anticipate any impact in the buying environment?

No, I don't think we would. We attend about 280 auctions per week and quite frankly the auction company's pretty irrelevant to us. We buy from everybody.

Okay. Fair enough. In terms of operating margin expansion, certainly integrating Greenleaf will be helpful. What other opportunities do you guys see, particularly at the cost of goods sold line? Could you talk about that?

Actually, I probably see more opportunities for expansion of operating margins, probably below the line. I think historically our gross margins have been relatively consistent, and I think it's typically expressed a business model that's not really based on improving our gross margins, but really based on improving our operating income margins and, broadly, the largest thing to happen there is quite frankly is just pushing more volume through the system we have in place today. The other system's having a lot of fixed or semifixed costs, and just purely increasing our volumes and deliveries, leveraging network and sales organization. Historically, I think if we go back over five years, we've seen operating income margin improvements ranging from 50 to 75 basis points. That's been our target and remains our target over the next several years.

Okay. Fair enough. I mean, just getting back to the cost of goods sold, in terms of buying strategies, things of that nature, are there other things you can do to leverage that?

I think we're always certainly on the aftermarket side of the business -- we're always in negotiations with new suppliers to seek out equivalent quality or improved quality product at the same or lower prices than what we've paid historically, and we will continue those efforts. Probably I would say our focus in the next year or two will probably be more in the area of discounts, managing discounts very tightly with our customers, and that's where I think if we have some room to grow our gross margins is probably in managing that aspect of our business better.

Great. If I could sneak one more quick one in. Your allowance for doubtful accounts has kind of crept up since the first quarter of 2008. Is that something that's kind of business mix related or what would attribute that to.

I think it's just normal fluctuations.

Thank you very much, guys.

Thank you. Our next question comes from the line of Tony Cristello with BB&T Capital Markets. Please proceed with your question.

Thanks, good morning, gentlemen.

Hi, Tony.

One question, Joe. You touched on the supply at the auction being a little bit tighter. Is that a function of total loss? Is it a function of fewer claims? Is it a function of fewer vehicles in the park? Or is it a combination of all? Can you shed any color on that?

Yes, the fourth quarter, the volumes we saw at the auctions were probably lower than what we had seen historically. Some of that's seasonal. Even compared to last year, I think it was a little light and I think you have to attribute that just to the total losses. I would probably link that to used car prices more than anything else. The Cash for Clunkers program did strip a lot of product out of the market that ordinarily would have been in the market on the used car lots. And I think every data point I have seen suggests that used car prices spiked in the second half of the year. We would expect that to normalize I think during 2010. We are beginning to see the usual seasonal improvement in the volume of product at the auctions, but we're also seeing pricing moving up pretty rapidly.

Did that have an impact on gross margin for you in the quarter? Obviously you put up a solid gross margin number, but could there have been a possible drag just as the price at auction has increased to you?

I don't think so. Because most of what was going to our cost of goods line in the fourth quarter would have been what we bought during the third quarter, and our third quarter buying was one of our lowest average cost quarters in the history of the Company.

Okay. So from an inventory standpoint, and/or fill rate standpoint, you still believe or feel that you're pretty confident that that's not going to be an issue as we go through the balance of this seasonally strong period?

Yes, well, certainly we're in very good shape on our aftermarket products. The fill rates there have improved nicely over the last 12 months. The recycled product, not in stock percentages as an average per plant, are among the lowest we've seen. But I'll just say we remain vigilant to closely monitor the buying process. Couple of our markets are a little tighter on buying salvage right now than what we would like to see. We think that will probably correct itself here in the winter months as volumes spike in the first quarter. The other unknown here is how many competitors have really been out of the auction market for five or six months. We are aware of many competitors who loaded their yards up with Cash for Clunker cars, and quite frankly they were away from the salvage auction pools for almost 0.5 year. At some point those competitors are back in the pools, having really bought nothing out of the pool for a while. So I think those buyers coming in the market could create a temporary blip in the salvage cost for us.

Okay. And then maybe if I could just ask a question on the AQRP. Any update on how that's progressing, any new additional participants that have been added? And then how are you targeting that from a growth standpoint as we progress through this year? And is this in any way going to help with the noise that's surrounding this rebar and everything else that's going on with that aftermarket piece of business?

We decided that we're not going to be disclosing more details about our part supply programs in the future. We believe they give us a competitive advantage, especially in light of as you said noise on the rebar issue. We feel that our activity with our customers has increased dramatically concerning future programs. So it's fair to say that our activity with our customers is up greatly relating to programs and services we can offer them directly. So we think it's a positive that there's some objectivity with the carriers to create new programs for us, with us.

One last follow-up. When you look at what Allstate did in signing an exclusivity, is there an opportunity then in this side of the business to see exclusivity given the broad range of parts that you have and access to parts that you have? Or is that something that still remains rare?

We continue to push our one stop shop concept with customers. We're calling it a bundling concept where we can supply all their alternative parts. So it is an opportunity for sure as people look to consolidate the amount of people they call, the amount of vendors they have to deal with. So we believe that's a very positive trend for us as well.

Thanks, guys.

Maybe perhaps instead of focusing on exclusivity, I would couch it as we're highly focused on always being the first call.

Thank you.

Thank you. Our next question comes from the line of Sam Darkatsh with Raymond James. Please proceed with your question.

Good morning, Joe, John, how are you? Couple questions. Just broad-based. You mentioned the Mitchell data showing the upswing in alternative part usage and it seems as though your organic growth throughout 2009 accelerated, and yet your guidance is suggesting 6% to 8% organic growth in 2010, which is a bit of a deceleration on the growth side. Is that conservatism? Are you seeing something perhaps in the second half that gives you a little bit of pause? Because I'm guessing the recent demand trends and snow in Q1 is going to continue to give you some pretty healthy growth rates at least in the first half. Can you give a sense of what your thinking is for organic growth and the drivers of that 6% to 8%?

Well, certainly 2009 was pretty lumpy, as you go back to the quarters. So we felt at this point to stick with the results we had averaged during 2009 was probably a reasonable way to present our business plans. I will say that the year started stronger pace than that in January. February, quite frankly, the weather's been so severe that it's actually resulted in some business closures for two or three days. But the business is certainly off to a stronger start than what we budgeted.

Okay. Talk about the acquisition pipeline? And John, you mentioned the liquidity, but what are the chances of a deal of some size coming about in the next six to nine months or so?

It's interesting. I guess I'd say from the date that President Obama made his initial announcement of his budget package, indicating that capital gains rates were going up, seemed like Walter Hanley's phone started to ring the very next day. I would say we're working the best backlog of late model salvage yard acquisitions we've been working for some time. But that also means that these are modest deals. I think that's okay. Those have been the bread and butter of our acquisition growth plan. I think we closed 85 transactions in 10 years. The business has really developed a unique skill set for rapid integrations of acquired businesses. So personally I'd love to see businesses that are in the $5 million to $10 million revenue range that have a lot of growth upside. We are seeing good opportunities in late model salvage. We will target two to three deals in the heavy duty truck market in 2010.

In the self serve area, we have a couple greenfields in progress right now, one in Georgia and one in North Carolina. They're moving along well. We're about ready to begin one in Texas, and that business line will continue to target greenfields as a way to grow our business. We've looked at the Mexico market recently. We've been very impressed that some of the insurance drivers that have successfully propelled the alternative parts industry in the United States are alive and well and being practiced aggressively in markets in Mexico. So we're also entertaining expansion into a couple of northern Mexican markets as well. However, the capital allocation priority clear and away is into the US and Canadian markets.

Thank you. The other couple questions, real quick. CapEx in 2010, I know you mentioned there was a little bit of carry-forward, but it seems a little heavy. Of the $85 million to $95 million, if you could give some specificity as to where some of that capital is headed? And then finally, you may have mentioned this in your prepared remarks, but the self service retail vehicles processed, if you had that number, that would be great.

Sure. Capital, I'll take that one maybe. We have a number of fairly large projects around the country where we've just outgrown the facilities, frankly. So we're investing in some facilities in New York, some of our bigger facilities. There's some spending on the IT associated with some of the projects that we're doing in that area. And obviously there's some carry-over from Q4. We were a little bit under last year but we had projected some of this would carry over.

Sam, in terms of volumes into the self service yards, I think we gave $66,000 as the number for the quarter, which would include both clunker cars and any crush only cars.

Thanks much, gentlemen.

Okay, Sam. Thanks.

Thank you. Our next question comes from the line of Nate Brochmann with William Blair & Company. Please proceed with your question.

Good morning, everyone.

Hi, Nate.

Just wanted to ask a detail question. I assume that didn't really come up so it's not a big deal, but in terms of some of the problems with Toyota, has that had any carry-through to you in terms of any inventory risk?

We don't sell the accelerator pedal or accelerator systems, and the brakes were the other issue, I think. And we don't sell braking systems or pads, whatever the specific unit was. So we would have nothing on our books or on our general ledger for any of the product that's being recalled.

There wouldn't be any flow-through in terms of -- as consumer demand maybe for that type of vehicle wanes a little bit, temporarily, in terms of whether that might have any impact on a broader basis for you?

I don't think so. As best we can tell, I think the used vehicle pricing market for Toyota has actually held up pretty strongly. I was surprised by that. But our last checking on that, which was yesterday morning, I don't think there's been a lot of movement yet.

Okay. That's good to know. And then just wanted to push you a little bit, Joe, on the opportunity for some margin improvement. You talked about the general range that you looked for historically. I would think with Keystone being on a better platform at this point, that there would be some broader opportunity for some margin improvement throughout the organization in terms of maybe better leverage in terms of more cohesive buying power, et cetera. I was just wondering if there was some possibility for a few extra tweaks, maybe not the first half of this year, but later this year?

You're focused on the gross margin?

No, more on the operating margin side.

Oh, operating margin. I don't know. I don't feel compelled to give something stronger than the 50 to 75 basis point range. It's kind of been the sweet spot of the Company. Keep in mind that we are acquiring businesses all the time, frequently when they come into the network initially, they're slightly dilutive to our margins and may take a few years before we get them to the run rate margins of the business. I mentioned our strategy on self service operations. Typically the greenfield and greenfield operations typically lose money for the first three to five quarters, and today's accounting standards don't allow you to put that in the balance sheet like you could a number of years back. It's certainly a strong focus of management -- always looking for new systems, new best practices, routing systems. We are constantly looking for ways to reinvent and improve ourselves. So I would love to see something higher than 75 basis points, you bet, and I'll commit to you we're working our butts off to do that. But that's as far as I am prepared to go today.

Fair enough, Joe. Thank you very much.

Thank you. Our next question comes from the line of Craig Kennison with Robert W. Baird. Please proceed with your question.

Good morning and congratulations.

Thanks, Craig, good morning.

So you mentioned Mexico as an international opportunity. Has the Board had a chance to review opportunities in Europe, and if so, where does that sit, given all of the opportunities you have both in the US and outside the US?

We'll update the Board probably at our May meeting on the European markets as we see them. We continue to invest both our own time and to retain some consulting assistance in the European market to better understand. The insurance market, the legal situation, the status of policies, the consumer interest, and how those variables may be different by the different countries with larger car [parks], and I think we're rapidly coming to some conclusions on the market. Certainly it's hard to ignore a market of that size, but as I said upfront, certainly the primary focus in 2010's on the domestic market. We do believe that the increase in capital gains that we all know is coming in 2011 is I think going to create a one-off opportunity. And we certainly don't want to miss a single good quality transaction in the United States because of having someone working on a deal in some place in Europe.

That's helpful. And then I understand your desire not to reveal competitive information about your aftermarket programs, but could you just give us a sense for the revenue associated with any bumpers that you're not selling currently? Is it material?

I think you mean rebars?

Yes.

Okay.

It is not material, Craig. It's less than 0.5% of our overall revenue, and one thing I think we've got to keep in mind is that there are substitutes available. We sell recycled. We have quite an extensive line of already tested products. So the revenue exposure is very minimal.

Thanks. And lastly, John, I'd be interested in your perspective as somewhat of a newcomer to the business for opportunities you may see that you've had a chance to share with the Company?

Well, I think the main thing that we're looking at is just in terms of market share per individual MSA, where are we relative to what we think the capacity or the ability to sell into those markets are. We're still working on that analysis, but I think those markets identify potential new greenfield sites as Joe mentioned. And those are some of the bigger opportunities, I think just to grow our -- leverage the footprint that we have and to expand into some new geographical markets within the business.

Thank you.

Thanks, Craig.

Thank you. Our next question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Hi, guys, how are you? Quick question, regarding the service revenue that you exclude from the recycling calculation, can you just tell us what it was this year and what it was last year in dollars?

Last year, in 2009, it was around $12 million. I don't have the number in front of me for the prior year, but I think it's safe to say that Q4 we had about $2 million to $3 million in that category. And we expect it to be in that neighborhood next year per quarter.

Okay. And then I know you don't want to discuss specifics about the AQRP program, but any impact from the Ford settlement? There was suggestions before that that could wind up helping you on a couple different levels, certainly psychologically with some of your customers. Without being specific, can you talk about the impact that has had?

Yes. The Ford [patented] program is what you're talking about?

Yes.

There are about a couple hundred parts that are in that program. It's not -- we have 60,000 SKUs so it's not a major impact whatsoever to the overall revenue. It obviously has provided us to have some exclusivity with our customers and a portion of the manufacturers as well. In the grand scheme of things, it's a small amount of SKUs that are affected by the whole process.

And then the last quickie is was there any benefit to the organic growth from the facilities you closed? I'm assuming you're able to keep some of that business, but just ran through a different facility -- so the reverse cannibalization if you will, if there was any impact there?

Are you referring to the operations in the Schnitzer transaction?

Yes, that's correct.

We sold our self service operations and we essentially exited those businesses in those markets.

Okay. So it was just the self serve you got rid of. Okay. I got it. Thanks, guys.

Thank you, Scot. I think we have time for one more and a lot of you probably have another call to get on, so we'll take one final question.

Certainly, sir. Ladies and gentlemen, our next question comes from the line of Scott Stember with Sidoti & Company. Please proceed with your question.

Good morning.

Good morning, Scott.

You talked about the number of vehicles that you bought at auction on the wholesale side. Sounds like it was down slightly versus a year ago. Could you talk about a price that you paid for these vehicles?

Looking sequentially, I mentioned that the third quarter of this year was probably one of the lowest quarters we've ever experienced in our cost of cars. So our cost for the fourth quarter, still pretty low cost, was up around 24% over the third quarter. If we're looking to quarter on quarter from a year ago, the cost was actually still down, down around 10% from a year ago.

And the volume you said was down modestly year-over-year?

Year-over-year for the fourth quarter alone we were just up very, very slightly. And that was probably -- that would have been almost solely due to probably the clunker cars.

Got you. Just last, could you just maybe just take a step back and talk about how the trucks part businesses are really starting to evolve right now? You've had about 1.5 to two years of making acquisitions there. Can you talk about where you stand and how you plan to attack that business?

The main work that we've been doing so far has been on identifying and selecting a common inventory management system to be used, and we are in the midst of converting our seven facilities onto that system right now. I think we completed four of the seven. And in conjunction with that, our operating management in the field has been working on coming up with the nitty gritty of standard inventory, parts description, of the nitty gritty of standard inventory, parts description. It sounds silly, but everything that comes with an engine would be [different] with every truck recycler in the United States. So have you to define when you buy an engine, what all do you get. So a lot of the work we've been doing has been on standard part descriptions and how they're entered in the system, developing a common inventory management system, and the next step will be to develop common pricing, because the pricing is varying between the markets.

So exciting thing is when that's completed, salespeople across the country just like they do in the auto side of the business is going to have visibility to the entire part network throughout LKQ. That will not only include parts but also whole trucks. We do sell some whole trucks. We think the system will be pretty powerful for the export buyers in particular, who today -- an export buyer typically comes into Houston and they get on a plane and they fly to Chicago and they fly to the West Coast and they stop at half a dozen truck yards before they fill their shopping list. So certainly our hope is that with these -- the foreign buyers that we'll get them to one of our facilities, and they can save themselves a lot of travel time around the country and get what they expect. So we continue to feel that the dynamics of the business will play out very attractively for our shareholders.

Great. That's all I have. Thank you.

Okay. I appreciate that. I'd like to thank everybody for joining the call today and we'll be back with you about 60 days to overview our first quarter. Thanks again.

Thank you.

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