LKQ Corp (LKQ) 2010 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the LKQ Corporation's first-quarter 2010 earnings 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, Ms. Lewensohn, you may begin.

Thanks, Katie.

Good morning, everyone, and thank you for joining us today. This morning, we released our first-quarter 2010 financial results. And with us today from LKQ Corporation is Joe Holsten, President and Chief Executive Officer, John Quinn, EVP and Chief Financial Officer, and Rob Wagman, Senior VP of Operations, Wholesale Parts Division.

Both Joe and John will provide prepared remarks on our results and then we will open the call up for questions. 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 and the results 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. So please refer to our 2009 Form 10-K and our other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risks.

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

Okay. Thanks, Sarah. Good morning and thanks for joining us today.

As you can see from the results we reported this morning we delivered a strong first quarter. Diluted earnings per share from continuing operations was $0.36, an increase of more than 60% as compared to $0.22 for the first quarter of 2009.

Revenue for the first quarter reached $604 million, benefiting from acquisitions, the largest contributor being Greenleaf, increased aftermarket parts sales and higher commodity prices. The organic revenue growth for the Company as a whole was 10.7%.

Despite challenges from the weather in many markets of the country and declines in miles driven, we benefited from a continued increase in alternative parts demand. Insurers continue to focus on increasing their alternative parts usage rate as a means to control claims costs. Recently, CCC published their annual Crash Course publication. The industry's average use of alternative parts for collision repairs increased by almost 300 basis points to 35% for 2009 from 32% in 2008, sharply accelerating from the decade-long trend we have seen of 100-basis-point-per-year increases.

And if the metrics for the fourth quarter of 2009 hold, APU will increase in 2010 beyond the 35% level, possibly another one to two points. Reflecting the increase in APU, demand for LKQ's wholesale parts remained strong during the quarter.

Our first quarter organic revenue from the sale of parts and services increased 5.6%, even with reductions in miles driven of 1.6% in January and 2.9% in February. During the first quarter, sales of our aftermarket and refurbished parts realized the greatest benefit. With the uptick in used car values over the past few quarters, cars that would've been considered total losses in early 2009 likely became candidates for repairs with aftermarket parts. Additionally, an aging vehicle population bodes well for higher usage of aftermarket products.

Aftermarket and refurbished revenue increased 10.9% with an organic growth rate of 9%. We also realized higher fulfillment rates as compared with the first quarter of 2009, a benefit from our efforts last year to deliberately expand the aftermarket inventory and put more parts in our warehouses. We are continuing that effort into 2010 as we continue to increase the footprint and cubic footage of our warehousing.

Organic revenue growth of recycled parts and services was also up during the first quarter but only slightly. During our two recent quarterly calls, I reported that the Cash-for-Clunkers or C-for-C cars would likely produce lower parts sales on a per-car basis than the typical salvage car processed at our late-model wholesale dismantling operation. We believe that the majority of the impacts of these lower-dollar sales hit in our Q1.

You will recall that under the C-for-C government guidelines we are not allowed to sell the engines from the Clunker cars. And those of you who have followed LKQ also know that the engine is the part type that generates the most revenue for our company. Under the Clunker program, these engines end up in our revenue mix as scrap and, accordingly, in the other revenue category.

We also cautioned in our last call that the Clunker cars, being of significantly less cost than our normal cars, could end up generating a lower level of revenue per car as the parts would sell for lesser amounts than our normal wholesale salvage vehicles. In fact, this did happen. In evaluating the actual sales to date on Clunker cars, coupled with the remaining projected revenue, we believe that the typical Clunker car ultimately produces about $2,500 less in parts revenue than our typical car. While a portion of the Clunker cars were incremental to our volume, the majority end up replacing a wholesale car, and we believe the brunt of the impact of this revenue loss impacted our first quarter.

During the first quarter, we purchased almost 47,000 vehicles for dismantling by our wholesale operation, which is a 13% increase over Q1 2009. During our 2009 year-end conference call about 60 days ago, I noted that the Q1 buying environment was difficult. Those conditions continued through the quarter as we saw a more competitive market for salvage than we've seen in the past, and we increased our normal bid prices.

To attempt to sustain our traditional gross margin dollars per car, we also implemented selected price increases on our parts. So far, in the second quarter, we are buying at levels that meet our targeted volumes and are building a backlog for dismantling during the summer. Parts demand has allowed us to maintain pricing levels and to continue to implement selected price increases.

We continue to meet with insurers around the US to discuss ways that LKQ can assist them and help increase the use of alternative parts. We remain convinced that our parts programs are a way for LKQ to differentiate our product line and to solidify our relationships with our customers while helping insurers lower their claims costs.

In conjunction with the parts supply programs, we are using technology to provide more accurate estimating information and strengthen our ties with collision shops. For the quarter, we generated more than 300,000 estimates through Keyless, an increase of 17% from the volume we handled in the fourth quarter of last year.

Turning to our self-serve retail operations, during the first quarter we purchased around 67,000 lower-cost self-service and crush-only cars. While the average cost per car was up year-over-year, it was still below the peak prices that we experienced back in 2008. In the first quarter of 2010, per-ton prices for crushed car bodies and other ferrous metals reached the highest levels that we have seen since 2008. As we head into the end of April, it appears that the market for scrap metals is softening and prices appear to be moving back down slightly. And we are responding to the price changes by working to lower our acquisition costs.

During the quarter, we acquired a tire recycling business based in Connecticut. Its revenues come from the sale of used tires to tire resellers. While the transaction was relatively small, I think it will be important to all of our businesses. Last year we recovered almost 1.9 million tires. With that much volume, we believe this is an opportunity for us to vertically integrate the operations and keep those tire sales in-house.

We also opened two start-up facilities for our self-service operations, one in Savannah, Georgia, and the other in Durham, North Carolina. The addition of these two stores brings the number of self-service retail facilities to 34.

Moving focus to our heavy duty truck operations, we continue to make progress on our integration efforts. We are nearing completion of the network-wide installation of a new enterprise operating system, developing best practices, synchronizing buying and selling and developing cooperative pricing tools and telco systems. We've purchased approximately 700 units for resale or parts during the quarter.

Also during the first quarter, we opened a startup heavy duty truck location in Monterrey, Mexico, that we believe will offer new revenue opportunities and sales leads for our other truck locations.

I would now like to turn the presentation over to John so he can provide more detail on our financial results, and then we will open up the call for your questions.

Thanks, Joe, and good morning everybody.

As Joe mentioned, we're very pleased with the way that the business performed in Q1. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. You will note a new table in the 8-K where we presented the growth rates for the various revenue categories. And as normal, we are planning to file our 10-Q in the next few days.

Our revenue for the first quarter increased $92.6 million to $603.5 million compared to $510.9 million for the same period last year, an increase of 18.1%. For Q1, our organic growth was 10.7%, and acquisitions accounted for 6.7% of the growth.

You'll note in this morning's 8-K that we also broke out the impact of foreign exchange, which contributed .007 to our overall revenue growth. The FX component has historically been immaterial, but with the Canadian operations growing and the Canadian dollar being strong, we decided to call this out separately.

The organic growth figure for other revenue, which is where we record our scrap commodity sales, was up 64% as commodity prices were higher on a year-over-year basis and we saw increased volumes partially as a result of the Cash-for-Clunkers.

So for the bulk of our business, that is the parts and service revenue, the organic growth was 5.6%. As Joe mentioned, we continue to see very strong organic growth in the aftermarket side of 9%, offset by a more complex environment on the salvage side.

Our acquisition revenue growth was driven primarily by the acquisition of Greenleaf, which was completed in October of 2009, and this transaction accounted for approximately 5% of acquisition-related revenue growth.

And before I go into some of the details, I just want to highlight that the operating income margin rose from 11.9% a year ago to 14.9% this quarter. Speaking high-level, the top three reasons we see driving this improvement are our aftermarket margins, which benefited from our purchasing initiatives in 2009 and our focus on controlling sales discounts; the self-serve margins, which have benefited from the recovery of the scrap prices; and the operating leverage that comes as a result of higher volumes and higher scrap prices as the scrap prices tend not to have high overheads associated with them.

Gross margin for the first quarter of 2010 was 46.9%, which was up from 44.9% in the same period 2009. The improvement is primarily related to the steadily improving aftermarket margins and our self-service operations as commodity prices stabled in 2009 and continued to improve in Q1 2010. Keep in mind that the Q1 2009 ferrous prices were heavily depressed from the market collapse in Q4 2008.

Our facility and warehouse expense for the quarter increased 18.1% or $8.8 million as compared to the same quarter of 2009. Approximately $3.6 million of the growth was related to business acquisitions. Facility and warehouse expense as a percentage of revenue for the quarter was flat year-over-year at 9.6%, which showed about a 50-basis-points improvement sequentially over Q4 2009.

Distribution expenses for the quarter increased $6.9 million or 15.6% from Q1 2009 with $2 million of the growth being related to business acquisitions, the remaining growth, primarily fuel and freight increase, totaling about $3.3 million and labor of about $1.5 million. As a percentage of revenue, distribution costs actually improved to 8.5% from Q1 2010 to 8.7% -- excuse me, from 8.7% in Q1 2009, and they are down sequentially around 40 basis points.

Selling, general and administration expenses grew $8.7 million or 13.1% over the first quarter of 2009 with $2.4 million of the growth related to business acquisitions. As a percentage of revenue, selling, general and administration expenses were 12.4% in Q1 2010 compared to 13% in the same period last year. Sequentially, these costs actually fell by $2.9 million, mainly due to some of the unusual costs in Q4 that I mentioned on our last call that were not repeated this quarter.

During the quarter, we had restructuring expenses of only $80,000 as part of the operating expenses. Essentially all of these are related to the Greenleaf acquisition.

Our operating income was $89.9 million in Q1 2010 compared to $60.9 million in Q1 2009, an improvement of $29 million or 47.6%.

In Q1 2010, our self-service facility operating income and their margins continued to improve. In Q1 2010, revenue for the self-serve business and continuing operations was $51 million or 8.5% of LKQ's total revenue. Approximately 38% of this revenue was parts sales included in recycled and recycled related parts and 62% was scrap and core sales that is included in other revenue.

Net interest expense for Q1 2010 was $7.3 million compared to $7.6 million in the same quarter last year. The decrease is primarily due to lower average debt balances.

In Q1 2010, pretax income from continuing ops was $52 million for the quarter compared to $32 million for the same quarter in 2009.

Our effective tax rate was 37.2% for the quarter 2010 compared to 40% in Q1 2009. Q1 2010 quarter benefited by a discrete state tax item that dropped the rate for the quarter and benefited us about $0.01 per share.

Below the income from continuing operation lines is $224 million of income and a gain in sales of $1.7 million related to the discontinued ops. These items relate to the sale of our two self-service yards made in conjunction with the larger Schnitzer Steel transaction, which we previously disclosed. These items accounted for about $0.01 of the discontinued operations EPS. Diluted EPS from continuing operations for the quarter was $0.36 in 2010 compared to $0.22 in 2009.

We experienced strong cash flow in Q1 2010 with $88.1 million compared to $39.5 million in Q1 2009. There are two main drivers of our strong cash flow. First of all, we had much higher net income. And because of the timing of tax payments, we did not have to make any tax payments on the income in Q1.

Secondly, we saw relative improvements in working capital, particularly inventory. Last year, we saw a $25 million increase in our inventory from year-end through the first quarter, whereas this year it grew only $4 million. There are two reasons for the lower increase in inventory. Last year, in order to support our revenue growth, we expanded our aftermarket inventories. This year, we entered the year with our aftermarket inventories in good shape so we didn't have to increase them as much. And on the salvage side because of the tighter buying market, we did not build as much inventory of salvaged cars. So while this is good from a cash flow point of view, it leaves us with a bit of a challenge on the high end of our guidance going into Q2.

Capital expenditures were $10.9 million in the first quarter, excluding business acquisitions. We spent $3.7 million on acquisitions and received proceeds from asset sales of $12.1 million. The proceeds are primarily related to the aforementioned sale of the two self-service yards to Schnitzer.

During the quarter, we issued approximately 680,000 shares of stock related to the exercise of stock options, that resulted in $6.7 million in cash including the related tax benefits.

Debt at the end of the quarter was $596.6 million, including $589.5 million under our secured credit facility. Cash and cash equivalents were $193.5 million at quarter-end.

As I mentioned on the last call, in Q1, we prepaid the final 2010 mandatory term loan payment. So we have no further scheduled term loan repayments for the balance of the year. On April 14, 2010, our $50 million floating-to-fixed interest rate hedge rolled off. We have not replaced that, and so we should see the benefit of lower interest rate on that tranche starting in the second quarter.

We have also been very pleased to have received an upgrade from Moody's. On April 16th, we were upgraded to Ba2, and on April 26th S&P upgraded the family to BB and our term loan debt to BBB-.

Today, we have no draw on our $100 million revolving credit facility and approximately $20 million of letters of credit that are backed up by the facility, leaving $80 million available for future borrowings. Combined with our cash balances and the fact that we prepaid the mandatory term loan payments for 2010, we believe we have adequate liquidity.

Moving to 2010 guidance, in our press release, we indicated a higher range for EPS of $1.06 to $1.12, up from our earlier guidance of $1.00 to $1.06 for EPS from continuing operations excluding any restructuring charges, gains or losses on divestitures or acquisitions.

I'm sure that some of you are asking yourselves if the top end of the range could be higher after such a strong Q1. Well let me explain our thinking. On the potential downside, Q1 was favorably impacted by rising commodity price environments. As I've explained in the past, when we buy cars for either our salvage or our self-serve operations, the price we've paid typically reflects the value of the scrap steel at the time of the purchase.

In a rising price environment, we benefit from that lag, and in the falling price environment, we give back a little. The commodity prices were higher in Q1 than in any time since 2008. And if they fall, we would be negatively impacted.

Secondly, in Q1, we saw a difficult buying environment for salvage vehicles. Our organic growth of 5.6% plus the 0.8% FX impact is towards the low end of our revenue guidance of 6% to 8% organic growth for parts and services. Joe mentioned that lately we've seen the buying environment improve a bit, but the point here is that if it remains tight that could create pressure on our wholesale salvage margins or volume.

And finally, we expect some pressure on our aftermarket margins. There have been announced freight increases and the price of fuels rise which should begin to hit our costs of goods sold and distribution expenses in the next couple months. In addition, we normally see a seasonal pressure on these margins as we hit the summer months.

Obviously, there are other risks as detailed in our filings, but setting those aside for the moment, if all the negative I just touched on happened, then we could see ourselves at the lower end of our guidance.

But on the upside, we picked up $0.01 over our original guidance as a result of tax benefits I mentioned earlier. If commodity prices don't fall or do so slowly, then we'll be able to adjust our buying and maintain our spreads relative to scrap prices. The buying environment for auction vehicles continues to improve and we'll be able to drive additional volume through the yards without sacrificing gross margin dollars.

In addition, as Joe mentioned, with tight supply, we're working actively to reduce discounts and raise prices. To the extent that we are successful driving these efforts, we could see gross margin dollar improvements in the salvage side of the business, and we may be able to mitigate the aftermarket cost increases we see.

So if all of these positives come together, then I'd expect to see ourselves at the top end or exceeding the revised guidance. We'd expect to give everyone an update on this in the next quarterly call.

You will also note that we moved our cash flow guidance from approximately $160 million to in excess of $160 million. That is mainly because of the higher expected income. We reiterated the guidance ranges for capital expenditures related to property and equipment, excluding expenditures of acquired businesses to between $85 million and $95 million.

With that, I'll turn the call back to Joe.

Okay. John and Sarah, I think we're ready to go to Q&A if the operator would open the lines up, please.

(Operator instructions.)

Our first question is from John Lovallo with Bank of America-Merrill Lynch. Please proceed with your question.

A couple questions for you here, I was wondering if you could talk a little bit more about the tire recycling business. I mean, it seems like a real natural fit. I was wondering if you can maybe talk about some of the industry characteristics, whether it's a fragmented industry and maybe to mention the size of the opportunity.

Yes, a very, very fragmented business. Obviously, as you know, John, we do sell quite a few of our tires to retail customers already. But a significant number of tires that are generated both from our wholesale operations and our self-serve operations are typically being purchased by jobbers or kind of street gypsies, the way I look at it. These tires ultimately -- well the better ones end up being sold to resellers of tires. So the main focus here for us is quite simply just to cut the middle people out in this process.

We also think that the business we have acquired, their business model, has I think a very good understanding of the reseller market. I think they have good underpinnings in terms of understanding possible export opportunities for tires and then probably a clearer vision of how we can cost effectively dispose of tires that really don't have any remaining value in the food chain. For example, today, they dispose of their tires in a tire-derived fuel plant in New England.

So our business model will be to have the former owner of the tire recycling business we acquired to essentially replicate his business model in probably eight to ten of our regional areas. Our thinking was -- I'll just kind of throw loose numbers, as there's no real homework behind this, but 1 million tires -- 1.9 million tires in the operation, if we can either improve the yield or reduce our costs by even a $1 a tire, that's almost $0.01 a share after we can kind of roll a program out across the country.

So I wouldn't look at this so much as us getting into a used tire business as something that we're going to be acquiring numerous tire recyclers. This was more an internalization of one of our current products to increase the value or reduce disposal costs of the tires that we generate ourselves.

Okay, that's very helpful. And then in terms of the recycle side of the business, I understand the Cash-for-Clunkers impact. What was this kind of the service component impact on the quarter?

Sure. It's John speaking. For total wholesale, we reported 5.6% organic growth. It would've been 6.2% without the service.

Got it. Okay. Thank you. As far as -- sorry, go ahead.

I was just going to say that that's becoming sort of immaterial on a go-forward basis I think.

Okay, perfect. And finally, knowing that you paid down the mandatory payments this year, your debt payments, do you have any plans for further debt payments this year?

Nothing planned. Obviously, we've got -- our balance sheet is in good shape. It would really depend on what the best use of our capital is.

Okay, great. Thanks very much, guys.

Thank you.

Thanks, John.

Thank you. Katie?

Thank you. Our next is from Craig Kennison with Robert W. Baird & Company. Please proceed with your question.

Good morning, and thanks for taking my questions. You mentioned a potential to raise prices. What are you seeing from the OEMs? Is there a -- are they providing an umbrella, so to speak, for you to raise price?

Actually, Craig, I'd say the majority, not all but probably the main focus, on our price increases are probably more on the mechanical parts, where we don't feel they have that kind of OE ceiling, if you will, on our pricing. That's not to say that we're not pushing selective price increases on crash parts [as well.]. But I'd say the significant number of the efforts on price increases are on mechanical parts.

In terms of OE pricing, John took a look at that, and I think he came up with, what, about a couple percent increase.

Yes, 2, 3%.

2% to 3% general price increases over the last year from the OEs on crash parts.

Thank you. And Joe, what are you seeing on the fulfillment rate side? Is the access to inventory becoming a problem when it comes to your fulfillment rate and recycling?

Well we'll kind of split that question up. I'll talk briefly just to the self-serves, and then I'll ask Rob to address that on the wholesale market.

The U-Pull-It businesses, they -- our volumes are up kind of sequentially and year-over-year kind of 3%, 3.5%. So we're reasonably pleased with that. I think the harsh winter in some markets really pulled down the number of U-Pull-It cars coming into the market. And heading into the second quarter with admittedly kind of stronger pricing, the volumes have started to tick up a little bit more.

So yes, at least for the U-Pull-It yards, I think we're in pretty good shape for hitting our targeted volumes for the balance of the year. And, as we said, assuming that scrap prices don't move around substantially, as long as their pretty level, we manage our way very effectively in terms of capturing the spreads and sustaining pretty good margins.

And in the wholesale auctions, Craig, what we saw was really consistent volumes at the pools. They're maintaining levels that we expected. You've got to keep in mind that the cars on the auction today are probably from two months ago because of the type of lag that they have.

So the prices remain strong, as Joe mentioned in his presentation. However, as we mentioned also, we're budget -- buying at the budgeted levels for the last month, month and a half. So we are beginning to buy the vehicles. The parts demand had been strong, as witnessed by the APU usage numbers that we released earlier. So that is allowing us to maintain our prices and, in some cases, as Joe mentioned, slight upticks in our pricing model to get stronger pricing.

One of the things that we really believe is affecting the competition in the auctions is the used car market. With fewer new cars being built, there's pressure on the used car market side. And we really see some infiltration into our auction -- our normal auction environment by the used car dealers. But we attended the industry event where they had one of the wholesale auctions present, and he said that they're seeing a trend towards the rental cars starting to open up their purchasing.

So we're hoping to see the used car market open up a little bit and take pressure off of our auction environment. So things are looking good in terms of -- if those things happen, it should be a little bit better at the auctions for us on the wholesale side.

Last question for now, APU, Joe, what do you think is driving that and why do you believe it'll continue to grow in 2010?

Well there's a side of me, I'd like to be arrogant and say it's us, but that's really never been our style to I guess self-promote. But I do think that the systems that we're bringing to the table is allowing better utilization of products.

You know, Craig, I think I go back to the traditional things. The insurance industry, no one's gotten an increase in their premiums for the last three years. And if anything, car premiums are coming down. With the economy being tough, the number of three- and four-car families, the number of families that have more cars than drivers, that's come off. Last year was the first year where more cars came out of service than went into service, and that's -- every time that happens, that's another car insurance premium that's not going into the insurance carriers' pockets.

We've talked in the past about the poor investment returns that insurance carriers suffered for -- like all of us, for a couple of years, and all the little things with really no consolidation in the insurance industry. I mean, nobody is going out of business. It's the same insurance carriers out fighting for a smaller pool of insured policies right now in a declining price environment. And the only way the carriers can really compete is, we think, on cost. And that's pushing the carriers to look for better management of their severity, their claims costs, and LKQ is I think one of the keys to how they achieve that.

We've talked in the past, as well, about our views of the aftermarket manufacturing industry and the fact that they've become better in terms of their ability to bring product to the market with better quality, better fit, better finish. And each year, the industry continues to get better. And they -- I believe that just the aftermarket industry's ability to put more product and more SKUs into the warehouses is facilitating this overall improvement.

We know of one insurance carrier who's broken the 50% threshold in terms of APU. Clearly we don't believe that every insurance carrier is going to break the 50% threshold anytime soon. But it's very encouraging to see kind of some breakout numbers from some of the carriers.

Congratulations.

Thanks, Craig.

Our next question is from Sam Darkatsh with Raymond James. Please proceed with your question.

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

Hi, Sam.

Good morning.

Good morning.

A couple questions here, first off, I noticed you're greenfielding some locations now in self-service and heavy-duty truck. Were there kind of one-off opportunities, or is this going to be an increasing trend? And if it is an increasing trend, are you seeing municipalities kind of ease up on some of the prior restrictions on opening up these kinds of locations?

We have -- historically, we've targeted to have a couple of -- one to two greenfield self-serves in progress each year. The two we have in this case, the Savannah operation we were able to acquire property adjacent to our late-model wholesale yard. We like to run the self-serves on a side-by-side basis with our wholesale operations where we can make that fit. So being able to pick up additional property, it was a very natural step for us to go ahead and open up the used part yard in the Savannah market.

In North Carolina, we acquired a business there. We were able to, if you will, kind of tuck into our existing wholesale operations. We had a U-Pull-It yard in nearby Raleigh. And one of the things we see in the U-Pull-It is that when you're able to cluster the yards and markets like we have in Tampa, and you've seen those obviously -- I mean, we have four yards clustered in Tampa -- then you start to get the benefit of sharing your management, your advertising costs. The power of clustering the yards is very attractive. So we opened a yard in the Durham market because we had the surplus real estate.

We have two additional yards that we will be working on the balance of the year. I'm not sure that we'll have them ready to open by the end of the calendar year, but certainly by Q1 of next year they should be in operation.

As for the municipalities, I would probably agree with I think where you were maybe leading the question a little bit, that with the tough economy and the unemployment rates where they are, that yes, I think municipalities are possibly a little more interested in talking to anybody who's walking through the door with job creation. And certainly, legally, the U-Pull-It yards, while municipalities may not find that the most attractive industry they want to add into their portfolio, certainly it's a needed service in large metropolitan areas and certainly the facilities we provide and the screenage and -- they're attractive facilities compared to some of the eyesores that historically have operated in that business.

Talk also about the cadence of demand that you saw in March and April, if you could, unless I missed it. I apologize if I did.

The cadence of demand?

Just how March and April looked like versus January and February where the weather was a bit difficult.

Demand has been strong. We've kept -- the requests have kept strong. The insurance demand has been strong, as Joe just mentioned. Carriers are reaching out to us more and more in an effort to increase their AP usage. The aftermarket results have been very favorable as we see this trend towards higher AP usage in the industry. So as we mentioned in Joe's presentation that, if things go well, we've seen (inaudible) in 2010. So we expect the demand to be as strong as it has been.

And last question, next couple of quarters, what should we be expecting for overall recycled growth, organically?

Well we're sticking with the original guidance we put out. We said 6% to 8% overall guidance for the year, and obviously we came up a smidgen short on that. We think the Cash-for-Clunkers cars contributed significantly to that, and a piece of the revenue growth for recycled parts is really buried down in the other category. But we're sticking with the 6% to 8% guidance for the year that we initially put out 60 days ago.

Thanks much.

Next question?

Our next question is from Tony Cristello with BB&T Capital Markets. Please proceed with your question.

Thanks. Good morning.

Hey, Tony.

Joe, maybe if you could give me a little bit more color on this sort of auction environment because it seems like throughout the macro downturn it appeared that volumes at auction were somewhat robust and you didn't seem to have too much of a problem in procurement of vehicles. And now, over the last few months, there definitely seems to have been a little shift in that pattern.

And I'm just wondering is that just a function of ACVs creating fewer total losses and wouldn't that intuitively result then in greater demand for repair and, thus, your ability to pay up a little bit more? Or is the mix of vehicle for what you're looking for just not there?

I think the volume of product at the auctions is fine. I don't think we have any problems there. The issue I think we're focused on is we've been able to sustain very consistent gross margins for the 11 years we've been at this. And the competitive pressures for the products at the auction the last probably four to six months have moved up from what we were seeing over the last several years. Various reasons possible for that. As Rob indicated, we think that the all-time high pricing of used cars and the lack of used car volume is pushing people into our space looking at cars, most likely for rebuilt cars.

It's been my belief that the Clunker program is possibly causing some of the higher pricing competition right now. If you keep in mind the number of yards gorged on Clunker cars, and the yards that did that probably were not at the salvage auction pools between the months of September and possibly January or February as they worked down their backlog.

So we -- it is our belief that we have some number of competitors who possibly haven't bought a Ford Focus for six months and now they're back at the auction buying and they have a lot of cash in hand because of all the scrap that they've earned from the Clunker program.

So we're very disciplined. We've always talked about the fact that we think our procurement discipline is one of the key differentiators and our operating model and our business model. And we're staying disciplined in this market attempting to sustain at least the gross margin dollars that we have historically enjoyed.

Do you think that the aftermarket piece of your business, there's the ability to have a substitution effect in that, if you don't have that recycled, you're now able to cross-sell at a higher level, and that's sort of allowing that number to sort of continue to edge higher and continue to do well relative to what you're seeing on the recycle side?

And then the second part of that question is -- I don't remember if it was you or John that noted -- but the June quarter is one of the seasonably strongest quarters for the recycle side of the business, and it sounds like, going into it, you're, from an inventory standpoint, not quite where you'd like to be, especially from a mechanical parts standpoint?

In terms of the substitution effect, yes, I don't think we have any raw data that we can -- would be able to confirm your contention. But it's certainly our belief that, the reason we got into the aftermarket parts business in the first place was the view that there are certain recycled parts that literally fly off the shelf when we're able to secure them at the salvage auction pools and that the aftermarket industry provides somewhat of a limitless supply of those products.

So intuitively, it just makes sense that, if we were buying slightly less than what we had budgeted during the first quarter in recycled, that we were able to meet our customer demand, in many instances, because of having both product offerings, meaning recycled as well as the aftermarket products.

In terms of the June quarter, yes, I guess I probably have a slightly different view. Our very [cotton] demand quarter has also been Q1, and that's true for both -- I think that's true for both our crash parts as well as our mechanical parts. Frequently, when we get into the summer months, July, August, I think we see demand for motors, the kind of the heat factor in some of the southern markets will -- seems to end up in a number of failures and kind of the power train components.

We headed into the second quarter with slightly less backlog at the recycled parts businesses than we would've preferred. As Rob indicated, right now, we're buying and we've been buying at a pace for about the last five to six weeks where we've been adding to our backlog slightly each week.

And I guess when you look at one of the sort of themes here is this APU and the greater utilization and obviously, on the aftermarket parts, the organic growth being relatively strong, there's a lot of chatter in the industry. And I mean, you talked a little bit about it on the last call with rebar and what's going on in the news, this sort of incident that has kind of come to view with the CIC.

And I'm just curious if you had any commentary or could provide a little color on sort of what happened there and sort of what was the premise because I guess in my mind I was under the impression it was a relatively small issue and it had sort of been laid to rest, and now it seems like it's not going away. And I'm just curious what your stance or your approach to is in this situation.

It's Rob. As we reported last quarter, we did do the crash testing, that originally started the debate back to November. And just out of an abundance of caution, we quarantined those products that hadn't been tested.

Just to give you an update on that, we are still running those through -- the remaining through the tests and we expect to have that done by the end of this quarter. So we'll fully have tested all those rebars that were quarantined.

As far as our concern that you mentioned at CIC, our concern from the beginning and always has been -- this goes back to November actually when this first broke -- is the need for accurate testing. And we've asked for all testing to be relevant and accurate and to really portray accident conditions. We've done some testing on our own that has provided some different results. So our desire is just to get relevant pertinent information in the hands of the industry participants so they can make informed decisions. That's our goal. We just want the tests to be legitimate and out there and be fair so people can make those decisions.

But there is really good news that came out of this whole thing, I believe, is that we have not only a new certifier but a whole new docket of certifiable parts now that are coming into the marketplace, and those are bumper reinforcements, absorbers, bumper brackets and [floor] supports that are going to start to be certified. In fact, some of them are already hitting the market.

So I think the silver lining to all of this is that those carriers and the vast majority of them will only write a certified safety part will now have access to a lot more parts. So I think that's going to have a positive impact on their AP usage even further that there's going to be a whole new line of parts available for them.

So that's the push we're pushing not only CAPA but also the new certifier to get these parts on the market so we can make them available to the collision [and] repair industry.

Okay. That's very helpful. Thank you.

Thanks a lot, Tony.

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

Good morning, everyone.

Hi, Nate.

Good morning.

Hey, John, I was just wondering if you could update us a little bit on some of your cost-saving initiatives that I know that you were looking into heading into this year and whether you've identified any specific areas or further opportunities to kind of improve that area?

Yes. I wouldn't describe them as specific initiatives. I think it's really more of just continuous improvement, if you will. We talked about, with some of the -- we're co-locating some in warehouses now, which allows us to reduce warehousing expense, warehousing staff. We're [spec'ing] our trucks nowadays that they can carry both aftermarket and recycled products. And so as we swap out those things, we're able to utilize one route instead of two going to each customer.

Those kinds of activities, co-locating call centers, the push towards utilizing phone systems that allow us to more economically handle the calls in the bigger call centers. At one time, we had a philosophy that sales had to be close to the warehouse. I think we're learning that they can be further apart.

So it's those sorts of activities really that we're focusing on. And it's not revolutionary, it's more evolutionary. I think over time, as we do that, as we increase the volumes, we just see some margin expansion potential, but it's nothing that we haven't been doing in the past. We talked about consistently improving our margins as we grow volume. I would put it more in that category.

Okay, thanks for that.

And Joe, I kind of wanted to talk a little bit in terms of some of the opportunities on the acquisition front versus some more of the greenfields, wondering whether there's a couple more tuck-ins here and there or whether there's anything maybe a little bit bigger on the horizon that you might be looking at or different areas.

Yes, I'd characterize our acquisition activity right now as being about as robust as it's ever been. Obviously, we were disappointed with exactly what got signed in the first quarter. But if you've followed the Company over the years, the deal flow is lumpy. You go a quarter or two with very low and then a half a dozen things hit all at once. And that's probably why I expect this year, as well, that we'll have one or two queries that'll be fairly slow, and then we'll probably put a half a dozen transactions on the board pretty close together.

The transactions we're looking at right now really involve just about every business line we're in. There are aftermarket transactions that we're investigating, self-service operations that are under review and of course kind of our traditional bread-and-butter recycled parts businesses.

As mentioned on former calls, it would be our goal to put in about three new heavy-duty truck markets during 2010. One of those we're doing through a greenfield in North Carolina, so we would expect to post a couple of acquisitions in the heavy-duty truck field as well.

Over all, I think the deal market in the US I believe is kind of opening up right now and we've said on prior calls that we would expect, as the year progresses, and the 2011 tax law changes become more clarity to what those will be, I would expect even more momentum.

You probably know the players around us in terms of deals of size and there are a few out there that kind of touch the edges of what we do. And certainly we're -- as I said, we've got our eyes open and we're looking at all sorts of opportunities right now.

Great. Sounds good. Thanks for the color.

Okay, thanks, Nate.

Thank you.

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

Good morning. This is [Austin] sitting in for Scot today. My question relates to the revenue in the other segments. You mentioned a couple factors at work there resulting in the large year-over-year increase, both the higher scrap steel prices and also the inclusion of the Clunker engines in other rather than recycled.

Is there any way that you could quantify or help us understand the impact of those two factors?

It's John speaking. I don't know that we have a precise [lip] between the two, if you're looking for price volume. Scrap steel went up year-over-year about 83%, which is very favorable obviously, and our revenue grew about 70%. So within that revenue category, there is not all -- it includes core revenue, which maybe doesn't go up quite as quickly as -- or is not as sensitive to commodity prices.

But I don't know if that really answers your question.

Okay. And with respect to the Clunker cars, did you work through the majority of those in the first quarter or will there be any impact going forward?

Yes, I couldn't say that 100% of them are out of the system. I would venture to say at our self-service yards that they're pretty much through the system at this point. But some of the products and parts from the Clunker cars are still in inventory. So there is still product -- I'd venture to say that we probably have processed 100% of the Clunker cars, but there is still some inventory that we'll be working through over the next quarter or two. But certainly, the majority of the revenue to be derived from the Clunker cars, we believe, hit in late Q4 and Q1.

Okay. Thanks, guys.

Our next question is from Rod Lache with Deutsche Bank. Please proceed with your question.

Good morning, guys. It's actually Dan in for Rod today. Thanks for taking my questions. Most of them have been answered.

I wanted to know if you had any sense for what the overall Do-It-For-Me collision repair market did in 2009, if there was any type of year-over-year published on that?

I don't think --.

Dan, I think we'd be speculating on that. I mean, our -- we don't really watch that market all that closely, since the majority of our revenues are from the professional repair shop. We looked at all the big-box retailers reports, and I would think it was up like a couple percent or so, but --.

I was just trying to get a sense of if your share grew. I mean, APU was up. Just wondering what kind of the overall market did. I would've thought it might've been down because of less miles driven, but yes, no need to speculate on that.

My other question had to do with margins, just trying to get a sense for -- the gross margin was higher than I've seen it before. Is there any way to quantify, you know, even estimate the impact of the lag factor in the steel prices that hit that gross margin. I'm just trying to get a sense for was there a kind of meaningful uptick in gross margins that will be going forward or was that mostly a lag effect in steel price?

I think I called out that there was a combination of things. Aftermarket margins steadily improved through our procurement programs and our focus on pricing discounts, controlling discounts last year. On the salvage side, on the self-serve side in particular, that was largely driven by the commodity.

I think we've explained in the past that when things go -- when prices rise, we gain a little bit, and when they go down, we give it back. We estimate that it's around probably a $0.02 impact. It was as a result of the rising tide, if you will.

Okay, that's very helpful. And you mentioned that you've seen steel prices, scrap steel prices, soften a little bit. Do you have any sense of why that is? Has demand softened or just did inventories get filled up quicker than people expected?

Dan, we're basing that comment off the discussion with some of the shredders for May pricing. April pricing stayed consistent with -- has actually maybe even been up a little bit from March. But the May pricing we know is going to come off. We don't think it's coming off materially.

And my understanding is probably going to happen is a softening of demand from the export markets right now. In particular I think the Chinese are out of the market at the moment and as I believe is Turkey.

Okay, great. That answers my questions. Thanks a lot.

Thanks, Dan.

And we're kind of running up on 11 o'clock, so I think we'll go ahead and call it a call. Just a quick recap, great quarter for the Company, I'm very pleased with it. As John indicated, really good strength in our wholesale parts business, especially on the aftermarket side. And that's really the story for the quarter, coupled with a good assist on the scrap. And appreciate your joining us today and we'll report back to you in approximately 90 days on our second quarter results. Thanks, everybody.

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