LKQ Corp (LKQ) 2010 Q4 法說會逐字稿

Good morning, everyone, and welcome to the LKQ Corporation's fourth-quarter 2010 earnings conference call. I would now like to turn the conference over to your host, Mr. John Quinn, Executive Vice President and CFO.

Good morning everyone, and thank you for joining us today. This morning we released our fourth-quarter 2010 financial results and provided our guidance for 2011. Before we get into the call details, I'll just take a moment to reiterate a few of the major changes here at the Company.

In December, we announced that Joe Holsten had been elected Vice President of our Board of Directors and was appointed Co-Chief Executive Officer. Joe, who has led the Company since 1998, has indicated his intention to resign as an officer of the Company at year-end; however, we'll be fortunate to have him as a consultant for a further five years, and he intends to continue his role on our Board of Directors. We also announced that Robert Wagman has been promoted to the position of President and Co-Chief Executive Officer. Rob has been with the Company since 1998 in a number of increasingly responsible roles, most recently as our Senior VP of Operations running the wholesale division.

In addition to the announcements regarding Joe and Rob, in June last year, we disclosed that Frank Erlain, our Vice President and Controller, will be retiring this quarter. On behalf of the Company as well as personally, I want to thank Frank for his efforts over the past 13 years, and I'm also pleased to announce that Michael Clark will be appointed as Frank's successor. Michael is currently our assistant controller and has been with the Company since 2008, so he's a natural fit for the position. Both Joe and Rob are here today, and each of us has some prepared remarks, and then we will open up the call for questions. In addition to the telephone access for today's call, we're providing an audio cast via the LKQ website. Both forms will have replays available shortly after conclusion of the call.

Before we begin with our discussion, I'd like to remind everyone that 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 statements include -- 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 form 10-K and other subsequent documents filed with the SEC, and the Press Release we issued this morning, for information on potential risks.

And with that, I'm happy turn the call over to Mr. Robert Wagman.

Thank you, John.

Good morning, and thank you for joining us on the call today. We are very pleased with the results we reported this morning, with both a strong fourth quarter and full year. Diluted earnings per share from continuing operations in Q4 was $0.28, an increase of 12%, as compared to $0.25 for the fourth quarter of 2009. However, excluding the gain on bargain purchase and restructuring expenses, Q4 2009 earnings would have been $0.23, resulting in an adjusted year-over-year increase of 22%. Revenue reached a record of $674 million in the quarter, an increase of 21%, as compared to Q4 last year. Organic revenue growth for the quarter was 10.4%, which reflects increased part sales and higher commodity prices.

For the full year, our EPS from continuing operations was $1.15, up significantly from $0.88 in 2009, or $0.86 when adjusted for the items I just mentioned. This morning, we also issued our guidance for the full year of 2011. We expect that revenue from parts and services will grow organically in 2011 at a rate of 6% to 8%, which is in-line with 2010 actuals. Based on current conditions, and excluding restructuring expenses and any gains or losses related to acquisitions or divestitures, we anticipate full-year 2011 income from continuing operations will be in the range of $194 million to $208 million, and diluted earnings per share from continuing operations will be in the range of $1.31 to $1.39.

Net cash provided by operating activities for 2011 is projected to be approximately $195 million. We estimate capital expenditures related to property and equipment will be between $85 million to $95 million. The latest data available to us indicates that collision repair shops continue to increase their use of alternative parts when repairing vehicles, and that the alternative part usage rate increased to 37% in 2010. This indicates a continued commitment by insurers and their DRP networks to work at holding down claims costs with the use of alternative quality replacement parts.

As mentioned in past quarters, NSF, the administrator of our AQRP program, and a nationally-recognized standards and certification firm, previously announced a new automotive aftermarket collision parts certification program. NSF's efforts should expand the universe of certified aftermarket parts and part types, and reinforce the use of aftermarket parts in the collision-repair industry. To-date, NSF has certified over 300 unique parts. Alternative part availability should increase as these newly certified parts eventually work their way through the manufacturing process, and ultimately into the estimating systems and our inventories.

Furthermore, the US Department of Transportation reported that November 2010 miles driven were up 1.1% from November of 2009, which should lead to increased demand for our range of products. Demand for LKQ's wholesale parts remained strong during the quarter. Our fourth quarter organic revenue from the sale of all parts and services increased 7%. For the full year, we finished at an organic growth rate of 6.6%, which was in the target range we set at the beginning of the year.

Turning to aftermarket refurbished. Aftermarket refurbished revenue increased 16.8% for the quarter, with an organic growth rate of 7.7%. This healthy growth rate can be partially attributed to the availability of more certified parts entering the system, as well as the maintenance of generally robust inventory levels.

In our wholesale recycled division, organic revenue growth of recycled parts and services was up 6.1% for the quarter. Availability of salvage inventory has been good, and we continue to put more recycled inventory on our shelves to sell, but the prices we have to pay continue to be above the historical average. During the fourth quarter, we purchased over 49,000 vehicles for dismantling by our wholesale operations, which is a 22% increase over Q4 2009. However, the 2009 total includes about 5,500 Cash For Clunker cars, which yielded a lower revenue per car than our typical late-model salvage vehicle.

As for volume at the auctions, the outlook for supply remains good starting out in 2011. With inventory already on-hand, and a continuation of our current run rate for acquiring cars, we should have sufficient inventory to grow our recycled parts operations. We continue to be focused on the improvement of parts pricing to offset the downward pressure from high auction prices on our gross margin. We are moving towards managing our pricing on a national basis, as well as creating pricing specialists for our different product types. In addition, we are implementing better disciplines for mechanical part core charges and recoveries. We are seeing some initial promising results from both of these initiatives.

I'd like to turn the call over to Joe to talk about other aspects of our business, and our most recent acquisitions.

Thanks Rob.

Turning to our self-service retail operations, during the fourth quarter, we purchased roughly 77,000 lower-cost, self-service and crush-only cars. The pricing dynamics within the self-service business were generally favorable to the Company throughout the fourth quarter. However, we've recently seen car costs rise above the Q4 levels, and at a faster pace than ferrous scrap metal pricing. Similar to our late-model business, we continue to seek opportunities that are self-serve operations to increase our price point.

Shifting to our heavy duty truck operations, we purchased roughly 1,200 units for resale or parts during the quarter. We remain focused on expanding our network, as well as rounding out our marketing and sales training in this area. In addition, we're bringing all of our heavy-truck operations under a single IT platform, along with the development of an interchange to facilitate parts identification between operations. Recently, we have been encouraged by a pick-up in activity in our export markets.

We enjoyed another robust quarter for acquisitions, with a total of eight deals. These included a wholesale recycled products business in Arkansas, and a self-service business with two facilities in southern California. These are in addition to the previously-announced acquisitions across Canada. A leading Canadian aftermarket parts distributor, and PROFormance Powertrain, an engine remanufacturing business, in addition to four other businesses. 2011 has also started-off on a strong note with the acquisition of four additional companies, including ATK Vege, an engine remanufacturing business headquartered in Texas.

Additionally, an aftermarket distributor of heating and cooling products located in the Midwest, a heavy duty truck recycling business located in Texas, and a recycled parts business in Milwaukee, Wisconsin. Combined, the acquisitions of ATK and PROFormance provide LKQ with a significant foothold in the engine remanufacturing market and, we believe, provides some key competitive advantages in regards to the fill of cores from our recycled parts facilities, as well as our ability to predict future demand to build the right products to meet that demand. The trailing annual revenue for the eight Q4 acquisitions and the four acquisitions already closed in 2011, comes to just under $240 million and is included in our 2011 guidance.

To our own internal development efforts, we opened a new tire recycling facility in Tampa, Florida during the quarter. This is part of the continued expansion strategy of this product offering, resulting from our 2010 acquisition of a tire recycling business. In addition, we currently have several self-service recycling facilities under development, which we expect to open later this year.

At this time, I'd like to ask John Quinn to provide some more detail on the financial results of the quarter.

Thanks, Joe.

Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today and, as normal, we're planning to file our 10-K in the next few days. Rob has already given you a breakdown of the year-over-year revenue changes, so I'll just supplement what he said with a few other data points.

For Q4, our total organic revenue growth was 10.4%, and we had additional growth of 10.7% from acquisitions. Rob mentioned that the fourth quarter organic growth for parts and services was 7%. Other revenue, which is where we record our scrap and commodity sales, was up 64.2%. Approximately 37% of this was organic growth, as commodity prices were higher on a year-over-year basis, and because we had higher volumes of scrap and cores, and 27% of the increase was a result of acquisitions.

In Q4 2010, revenue for our self-service business was $56 million or 8.3% of LKQ's total revenue. Approximately 32% of this revenue was parts sales, and included in the recycled and related products, and 68% was scrap and core sales included in other revenue. Our acquisition revenue growth was driven by the 20 deals we did last year, with Q4 being particularly impacted by the previously-announced acquisitions across Canada, a cooling products company called SPI, and aluminum -- Heartland Aluminum.

You'll recall that the Greenleaf transaction rolled-off at the end of Q3, as it was completed in October 2009. Joe mentioned that the trailing revenue of the acquisitions completed in Q4 2010, and thus far in 2011, was $240 million. A little over $20 million of that revenue is already in the 2010 numbers, and some of it will end up being eliminated on consolidation. So, I'd expect the impact for 2011 from these acquisitions will be in the $200 million to $220 million-dollar range. Gross margin for the fourth quarter 2010 was 42.7%, which is down 280 basis points from 45.5% in the same period of 2009. Similar to last quarter, this decline was primarily related to the higher costs incurred acquiring salvage vehicles at auction, and in the self-service line of business.

One comment on the sequential margins. When we announced some of the Q3 acquisitions last September, we mentioned that the margins in the scrap aluminum sales associated with the Heartland Aluminum acquisition would be at a lower than normal margin. You've seen that impact in Q4. Our margin declined sequentially from 43% in Q3 2010, to the 42.7% we saw in Q4. The main driver of that decline was the impact of the Heartland revenue, and without that deal, we would have comparable sequential margins. On our gross margin, percentage was down year-over-year. We did see some offsetting improvements in each of our facility and warehouse distribution and SG&A expenses. In total, these three items fell from 33% of revenue to 30.3%, more than offsetting the gross margin decline.

Our facility and warehouse expense for the quarter increased $7.9 million, or 14.1%, as compared to the same quarter of 2009. Approximately $6 million of the growth was related to business acquisitions. Facility and warehouse expense as a percent of revenue for the quarter showed an improvement of -- to 9.5% from 10.1% last year. Distribution expenses for the quarter increased $9.3 million, or 18.8% in Q4 2009, with $4 million of that growth related to business acquisitions. The remaining growth is primarily fuel of $1.4 million, labor of $1.1 million, $2.3 million of volume-related items such as freight and truck rentals. As a percent of revenue, distribution costs were a 20 basis point improvement, to 8.7%.

Selling, general and administrative expenses grew to $3.8 million, or 4.8% over the fourth quarter 2009, with $5 million of the growth related to business acquisitions. We also had higher labor costs to support the increased business at about $1.7 million, offset by lower legal and claims cost of $1.5 million, and other expenses of $1.4 million. As a percent of revenue, SG&A expenses were 12.1% in Q4 2010, compared to 14% in the same period of 2009. Our operating income of $73.1 million in Q4 2010, compared to $57.9 million in Q4 of last year, an improvement of $13.4 million, or 22%. Net interest expense of $6.7 million was $1.1 million better than the fourth quarter of last year, primarily due to lower borrowing costs. Our effective borrowing rate was 4.53% in Q4 2010, compared to 5.02% in Q4 2009.

I think Rob has gone over these numbers, but last year in Q4, our income from continued operations included a $4.3 million, or $0.02 per share pre- and after-tax gain on bargain purchase prices. Excluding the $4.3 million gain, last year's Q4 income from continuing operations was $32.2 million. In Q4 2010, our income from continuing operations was $41.3 million, an improvement of 28%, excluding the gain on bargain purchases last year. On a reported basis, diluted EPS from continuing operations for the quarter was $0.28 in 2010, compared to $0.25 in 2009, an improvement of 12%. Excluding the $0.02 gain in last year's numbers for the bargain purchase price, the improvement was $0.05, or 22%. Cash flow from operations for the year was $159 million, compared to $164 million in 2009.

Although we beat our original guidance for the year for net income, we ended-up with higher investments in inventory than we had anticipated, particularly in Q4. Excluding inventory from acquired businesses, during 2010, we increased inventories by $68 million, including the $24 million investment in Q4. Last quarter, we mentioned that we intended to accelerate our normal seasonal build, which we did. In fact, we built it at a little higher than we planned at that time, and hence the inventory increase. This inventory build, combined with the inventories acquired from the acquisitions, left us in good shape as we enter our busy winter season. Capital expenditures for the quarter were $24.5 million, bringing our year-to-date total to $61 million.

We underspent our Q3 guidance by a few million, mainly due to the timing of some of the bigger projects. Rob mentioned our CapEx guidance of $85 million to $95 million for 2011 capital expenditures. This figure includes some carryover from 2010, but we're also budgeting for the additional Greenfield projects that Joe mentioned. Approximately 25% of this capital spending is for replacement items, with the balance being used to support our growth. During the quarter, we spent $73 million in cash on acquisitions, bringing the full year total to $144 million. In addition, we issued 690,000 shares valued at $14.9 million, in conjunction with acquisitions. Total acquisition consideration for the year was $170 million.

During the quarter, we issued 985,000 shares of stock related to the exercise of stock options, that resulted in $10.9 million of cash, including related tax benefits. Debt at the end of the quarter was $601 million, including $590 million under our secured credit facility. Cash and equivalents were $96 million at quarter-end. Today, we have no draw on our $100 million revolving credit facility, and approximately $27 million of letters of credit that are backed [stocked] by the facility, leaving $73 million availability for future borrowings.

As Rob mentioned, we believe the business performed very much in-line with our expectations in Q4, but before I turn the call back to Joe, I think it's worthwhile just to summarize a few of the financial highlights for the year. We saw revenue up 21%, approaching the $2.5 billion revenue mark after hitting the $2 billion milestone only a year earlier. Our EBITDA grew from $274 million to $340 million, a 24% increase, and we saw operating income margins improve 80 basis points to 12.1%, and our operating income increased from $231 million to $298 million, a 29% improvement. We've exited 2010 with our inventories in good shape, almost $100 million of available cash, and our leverage ratios continuing to show meaningful improvement, leaving us with the flexibility to continue our growth in 2011.

With that, I'll turn it back to Joe.

Okay, thank you.

Thank you.

(Operator Instructions)One moment please while we pull for questions.

Our first question comes from the line of John Lovallo with Bank of America Merrill Lynch.Please proceed with your question.

Hello. A couple of questions here. First one, what are the primary drivers, would you say, of the higher pricing at the auctions? I mean is it supply, or is it just used vehicle pricing? How would you characterize that?

I think I would characterize that predominately from used car pricing. The Manheim index continues to hit I think, new all-time highs right up to last month. I think John's kind of done some correlation work himself, and probably the strongest predictor that we can lay out in terms of salvage auction pool prices is purely what we've seen in used car prices. The quantity is rising. The volume of product is pretty robust.

I guess on the self-serve side John, the prices are also correlated with scrap pricing. Those vehicles are being bought mainly for the scrap, and so they tend to go up, higher correlation on the lower priced vehicles with the scrap, but at the auctions we believe it's mostly the used car business.

Great. That's helpful. And, in terms of your acquisition priorities in 2011, are you guys still looking to, for four more truck facilities?

Yes, I think a good pace for us is kind of one every other quarter, and then just to be opportunistic I assume there will be another drop down but, I would expect we'd probably close three heavy truck transactions in 2011.

Great. And the final question. In the latest Mitchell report, they kind of rehashed the Ford statement about the inferiority of non-OEM structural parts, but they also kind of made mention that Ford was indicating that recycled OEM parts in general are inferior. Is this issue starting to heat up again, or is this just kind of old news being rehashed?

John, this is Rob. I think it's old needs news being rehashed here. We take it very seriously of course, their allegations. We have done multiple crash testing on our parts. We continue to put new certified parts into the system, which we think is a benefit for everybody, and, we will continue to test our products.

As far as the used parts go, I think that's a little bit of a stretch, because we're taking parts off of cars that were on the road. So, if-- I don't think we can get a better tested product than one that has been on the road before. So, I just think it's a tack that they're going to use to protect their market share.

Great. Thanks very much guys.

Thanks John.

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

First, the question I wanted to ask, a couple-- First, when you look at the acquisitions, and you've made a bunch of them here in the last, let's call it four or five months, how should we think about the assimilation; one, the cost associated or dragged up-front with those; and then two, when we look out, what's your ability to then grow off of the base of these acquisitions and not just adding this as incremental revenue, but using it as a vertical to expand your business in touch points?

Sure.It's John speaking, Tony. The -- there's are a couple of dynamics with respect to the acquisitions. The Heartland Aluminum, I think we indicated that's going to be sort of lower margin business. The reason we bought that was, we really wanted the cores to support the wheels growth business.

We sell a lot of re-manufactured or refurbished aluminum wheels. That's going to grow with the organically -- with the business. I don't see that it having a huge improvement in terms of synergies, other than we were able to get the additional volume growth coming through that.

The other acquisitions are going to take some time, obviously, to get in terms of executing the synergy, so they're going to come in probably with a little bit lower margin initially, but then we should be able to grow them organically at the same rate as the rest of the business, frankly. That is the intention. Does that answer your question?

It does, and I guess I just want to sort of touch on, then, when you look at sort of some of the newer verticals, engine remanufacturing for one, it seems like you've made a couple of, you know, acquisitions that give you a nice footprint. And, maybe, can you talk a little bit about the nuances of that business, and sort of what that brings to the table from a growth perspective, down the road?

On the reman side Tony, just to give you a little bit of background on the size of the markets, we believe the market size is about $1 billion from reports we've seen, with about $750 million of that being in the non-OE, $0.25 billion being with the OEs and under warranty.We have an additional capacity in our reman division for heads, reman engine heads, that is about a $400 million business. For us, when we combined the two acquisitions we've done, plus what we've sold in the year through our own network of brokering and selling that product, sold about 65,000 units in 2010 combined.

We have the capacity to grow to 92,000 units with additional shifts and no additional building. So, we could ramp up capacity pretty quick.

On the reman head side, we have capacity to do 31,000 reman heads and we only produced half that amount, so we're well-positioned to move quickly. And, I want to stress, those figures do not include the used part market, that is strictly the reman.

As for market opportunity, I mentioned a little bit about the $1 billion opportunity, 35% of that industry is controlled by the mom and pop machine shops, and the other 40% is in the aftermarket, in the market we're playing in right now. So, with the other 25% being OE.

But, the biggest bang for the buck, I think we get from this is, with the production of all of our units and our full serve units-- full serve locations, when we sell a unit, which is almost one for one, we sell as many engines as we-- as cars we dismantle, we are getting a core back and being able to feed that reman operation. So, it's pretty powerful, not only do we have the stock feed, but we're taking cores out of the marketplace. And, then secondly, because of our demand, we're getting so many calls on this stuff, we tend to notice pockets of problems well before other people may have that opportunity, and we get a jumpstart on the reman opportunity. So, it's allowed us to be very proactive in our base business.

I would just add one other comment, Tony. A lot of the transactions here, over the last five to six months, in addition to the product line expansion, continue to represent, you know, geographical diversity for the company. Which I always think is one of the strengths of our company, is how diverse we are in terms of our business presence. The last five to six months a number of our deals have really been oriented toward just geographical expansion.

The Norfolk, Virginia transaction a couple quarters back was a totally new market for us. The Cross Canada transaction, John, listened to somewhere around probably eight Canadian markets that we were not serving at all.

And, of course, the Little Rock transaction recently is a market that we were serving, but we were serving that market from about a four hour distance, so, it was not really very robust or responsive service. So, the geographical expansions have always been really nice deals for us, really into the sweet spot of the company because it helps us leverage our inventory and our distribution systems quite effectively, frequently working with the same insurance partners who we've been enjoying a working relationship with for the last decade.

That's very helpful. I appreciate it, guys. Thank you.

Okay, Tony. Thanks.

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

Good morning gentlemen, and, Joe and Rob, both of you if I haven't said it publicly already, congratulations to you both on your decisions.

Thank you.

Thanks, Sam.

A couple of things; two or three questions here. First off, could you talk a little bit more about your pricing initiatives? I know you've been -- you've been beginning to disclose some of these thoughts the last quarter or two, the national standardization, the pricing specialists. At what point do we begin to see, or is it measurable from a holistic standpoint, what you're doing from a pricing standpoint? And, how should we look at gross margins over the next few quarters?

Let me talk first, Sam, about what we're doing. I think that will be helpful, and John can answer the other part, half of your question.

But, as far as the national pricing, this has really been facilitated by our operating system that now allows us to see across multiple regions instantly. So, it has allowed us to go from regional pricing, where we had a regional pricer, pricing multiple product lines across a computer screen in just a region. The new ability we have now is a product line specialist. So, for example, a compressor, one person can change prices across the whole country, just making it much more effective and allowing us to get these price changes in much more quickly.

The other thing that's important as we continue to grow our IT resources, is the cross-information going from our aftermarket business to our salvage business. We are sharing data readily that is also allowing us to make quicker moves. But, I think the most important thing we've done is made a dedicated pricing department that is going to push through these changes much quicker. They're looking at algorithms and different trends that allow us to make the pricing changes quicker.

And, the last thing I would mention that what we're doing on pricing and I think it's pretty important, is the deviation progress. We monitor our sales reps from wandering off the reservation, so to speak, and getting too aggressive with the pricing, and we've turned that -- we've been able to lock them down with our new computer system and have much more controls.

Sure, maybe I'll just supplement a little bit of what Rob said. Obviously, I think Rob is primarily talking about the salvage operations. On the aftermarket, we tend to be more of a price taker there, with referencing the OE prices. We're seeing the OE's raising prices on our mix of products about probably 2.5% to 3% over the last year.

In terms of margins, how we should think about margins going forward, I'd start off by maybe just reminding everybody that in Q1 last year, we did have a little bit of a benefit from a rising commodity price environment. I think we talked about $0.02 a share that did come through. We're not going to be able to repeat that obviously in Q1.

Other things, though, that if you think about gross margin, things that are driving that typically are changes in scrap prices. We're assuming on our guidance that scrap prices remain basically were they were in Q4. Since that time we have seen a little uptick and a little downtick, we're probably back to roughly where we were. We don't really see much movement with respect to that in the balance of the year, at least at this juncture.

And salvage costs is the other thing that can drive margins. Right now, prices have been pretty stable, maybe a little bit of an uptick from Q4, but again, the guidance was built sort of on the status of the auction prices that we saw in Q4. There's a little bit of a-- we talked a little bit about a mixed change because of the additional scrap revenue coming through in the acquisitions, maybe coming in a little bit later.

And, the pricing things that Robert is talking about, those things building tests and how the pricing can be impacted. It takes time; just you test it, you see if it works, and go back and forth.So, those kinds of improvements I wouldn't expect to see starting to come through until later in the year.

But, I was talking about gross margin. In terms of operating income margin, you saw almost a 300 basis point improvement in our SG&A through facility and distribution and warehousing costs year over year. Some of that has becoming about simply because of the same things that are driving our gross margin. Compression, the additional commodity sales, has actually helped those margins, because you don't really need a lot of extra warehousing or SG&A to run those sorts of things.

So, I think some of those things are also going to continue to improve to the extent that some of the -- to the extent we see higher commodity prices. We're going to see improvements in those margins. So, net, net, hopefully at the operating income margin, it pans out favorably.

Thank you. Two more quick questions. With respect to aftermarket, the segment in particular, you're going to have somewhat easier comparisons in 2011, and I'm guessing also the higher used car values are going to ultimately help out demand in that business. Should we factor in double-digit organic growth in aftermarket in 2011?

I don't know if we are going to get that granular with our guidance. Last year our total organic growth came in a little bit under 7% for the combined. I think we saw our guidance this year is 68% organic growth. How much of that will come out -- I guess if I had to bet I would say a little bit probably more on the aftermarket side than the salvage side.But, hopefully we have kind of anniversaried the price increases that we saw at the auctions with respect to the salvage side.

And last question, the -- typically you directionally talk about the early quarter cadence of demand, and we've seen some pretty hellacious storms, at least in January.What are you looking like from a demand standpoint early in 2011?

You did nail the weather. It was-- we had quite a bit of closures, from Texas to Boston. It was in both January and February, actually. January, we had closures from Atlanta up the East Coast.

But in January, the numbers are in. The month was pretty much in line with our expectations despite those closings, so we are pleased with January. As far as February, goes we had the Texas and up through the Midwest, a lot of closures there as well, but while the numbers are not in the books yet, we are turning well toward the later part of the month. So, demand has been good and we've been able to meet that demand.

Thank you much.

Thanks.

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

Good morning, and thanks for taking my questions as well. First question really has to do with the broader collision repair market. Do you have a sense for where that market was, and where it is today, and how much it is contracted? We know that APU was up and that you're taking shares, so some of those trends may be masking a broader decline in the collision repair market. So, I guess, I'm wondering, is there is some cyclicality that your success is masking?

Well, there's certainly a lot of-- businesses, acquisitions in that industry. The DRPs are getting stronger and stronger, Craig. I just saw a report that the percentage of collision repair is going through DRP networks is top 35%, which doesn't include Geico or Progressive, so it's much higher than that actually.

So, I think we're seeing some of the mom and pops go away, but as far as actual collision activity, we do watch an annual report, and it's been pretty steady. And certainly, the weather this year in January and February should provide them good opportunities into the spring. So, a little bit more of a consolidation in the industry, but the industry seems to be holding its own, not too much of a decline.

And, then John, you made a point about G&A, and having some benefit from rising other revenue which is not necessarily recurring because there is really no G&A associated with those revenue dollars, but you still made a lot of progress on that line. Is that something you think is more sustainable as you scale?

We're obviously -- you know, I think I've spoken in the past that the -- nothing being revolutionary but more incremental in terms of some of the things we're trying to do. We're trying to consolidate our accounting into a shared services facility in Nashville, and those sorts of things.

Some of the technology that we're doing, allowing cross-selling, those sorts of things. We'd like to see some additional leverage coming out of that. I think in terms of the numbers in Q4 that we saw, in Q4 last year we had a few unusual things. There's nothing really unusual in Q4 2010, so I think that's kind of a good jumping-off point.

Are there additional, as you sort of layer in some of these, these costs, for example, your pricing teams that you talk about on the national scale. Is there a cost to that, that we need the factor in, or is there a just fundamentally a net benefit?

I think it's relatively diminished.Given the kind of revenue growth that we are forecasting with this acquisition, I think the pricing game is going to be a rounder, frankly.

And then lastly, just at the gross margin level, obviously you are seeing some pressure due to higher auction prices, but -- and that tends to be a cyclical number as well, if we saw a drop in, let's say, the Manheim Index, would you expect that to start to flow through to gross margin?

Yes. I would think it would take some time to flow through the system.

A few quarters.

It would take a few quarters to flow through the system, but I think we would see some improvement.

Great. Well, congratulations, Joe and Rob, on your new roles.

Thank you.

Thanks, Craig.

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

I guess my first question is -- I guess I'm trying to figure out a little bit better, but the main benefit of national pricing. I mean, it's interesting to look at a lot of retailers for example. A lot of those companies are trying to get more granular or localized in their pricing because it enables them to capture more margin in certain markets, while potentially avoiding being less competitive in certain other markets. So, I guess I understand the desire to support your margins with, let's call it higher pricing, national pricing, whatever we want to call it, but could this actually work against you from a market share perspective?

I don't think so, Scot. The benefit here is, you remember we're not just selling a compressor for example, there's multiple compressors depending on the make and model. And, by getting product specialist, I think, we believe, that they'll be able to act much more quickly to trends in the industry as opposed trying to price across multiple spectrums, they can concentrate and drill down a lot easier to get to the right price. So, I don't see any downside to doing this. I think it'll be much more effective and it will allow us to monitor our pricing much more quickly, and act -- react quicker to any kind of change in the OE marketplace.

Just a fighting point, Scot; the work is going to be done nationally but that does not mean that regional pricing decisions would still not be encouraged in the company. So, I look at this more as bringing far more discipline to the process than what we've accomplished over the last number of years.

Okay. Thank you very much. That's helpful. I guess my second question is really on the acquisition side.

The simple law of larger numbers says that, you know, it gets harder and harder for acquisitive type companies to keep growing at the same rate as they had been if acquisitions had been a major source of their revenue growth, the way I think it has been with your company. So, you've obviously been very aggressive over the last , let's call it, 12 months plus; you know, at what point do you think it really starts to get more difficult to kind of maintain that acquisition pipeline to keep the same type of percentage growth, I guess, coming in the

I think we got -- continue to have significant amounts of blue sky and open runway. Last year we talked about having a couple of years we'd string together of $200 million in transactions. Generally, I don't think the market itself -- that we would get that done, and we're easily surpassing those numbers. And, I am convinced that we'll quite comfortably put a couple hundred million dollars of transactions on the board this year, and in 2012.

The issues of the capital gains taxes are going to be right back in everybody's face about a year from now. I continue to think we have, you know, several years of open road with a good acquisition environment, and things that create a lot of value, not just for our shareholders, but quite frankly for our customers.

Got it.Thanks a lot guys.

Thank you.

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

Hello, gentleman, and congratulations, there, Joe and Rob.

Thanks, Nate.

Thank you, Nate.

I wanted to follow-up just a little bit more specific, on-- Joe, in your opening comments, you know, you talked about how you are seeing the higher steel prices come through in terms of the other category. But, that hasn't been quite enough to offset the higher prices that you were seeing at auctions that we saw through that gross profit margin compression that we already talked about a little bit.

But, can you talk about the spread a little bit more between those two? I mean, was it truly that, you know, you didn't quite get the entire increase back on the total net number?

Yes. The fourth quarter of 2010, that was about as good as life gets to be in this business, because as you identified, managing the spread is really the critical factor. And, throughout the fourth quarter of 2010, we were always in a situation where we were selling scrap for more money than we had anticipated two to three months earlier, when we actually bought the car. And I am referring strictly to our U-Pull-It, our self-service business, at this point. So, that's about as good as life gets.

As we've moved into the first quarter, that relationship has evened out quite a bit. As a matter of fact, as we've moved into the February timeframe, we have seen the actual cost for salvage -- for end-of-life vehicles is at the highest level that we have seen this year, and right up through last week. At the same time, scrap pricing, at least for now, appears to have peaked, probably in the first couple weeks of January, and has traded back down, I'll say, close to 10% for the numbers that we're looking at for March.

This is obviously nothing like the situation we confronted in 2008 when scrap prices were in a freefall. This is a very manageable situation, and the business will do fine. But, in terms of any sort of windfall like we saw in the first quarter of 2009, I'm sorry 2010, or even a little bit in the fourth quarter, I wouldn't expect that to reoccur in Q1 of this year.

Okay, but the dramatic benefit -- I mean, there wasn't much of a "dramatic benefit" then in the fourth quarter in terms of expecting a wild swing in gross margins just from that issue alone?

Absolutely not.

Perfect.And, then, talking a little bit more from a higher strategic position, Joe, you talked about the acquisition pipeline remaining strong, and clearly you guys have done a great job in 2010 on the acquisition front, and they've been across a wide variety of different services. I was wondering if you could just talk a little bit more specifically in terms of, you know, a little bit more refined in terms of the specific areas, in terms of whether it's geographical coverage in the core business or whether it's more of the ancillary acquisition surrounding that in terms of where the targets are?

Well, the most interesting transaction for us has been and will continue to be, an acquisition that's in our, kind of our bread and butter, late-model automotive parts. And, that would represent either a geographical expansion of totally new markets for us, or an extension into a market that we may serve but, I always use the word, underserve.

A great example of that was the Denver market. We built about a $3 million business in Denver. We were servicing the accounts from Topeka, Kansas. We opened a facility in Denver, the middle of last year, and we will see kind of hyper growth in our Denver operations, and probably for a good five-year period.

The same thing in Seattle, small acquisition in Seattle, a market we were serving from Portland, Oregon. But now with real estate, we are investing in the facilities there in the first half of 2011, and again, we would expect to see hyper growth in our greater Seattle market. So, that's the sweet spot of our transaction focus, and it will continue to be, because there are a significant number of markets that were underrepresented in, or don't have a presence at all.

And, If I could add just one thing, Nate, to Joe's comments, that one of the things that allowed us to really survive the storms and all of the shutdowns was the fact that we are so diverse, not in product lines, but also in geographic locations, that when some locations closed, we were able to still keep running in neighboring markets. So, we'll continued to fill out the North American platform.

And, I think the summary of point there is that there's still a long way to go in terms of building out your underserved markets and still establishing some new beachheads in a few areas that you're still not there.

We think so, too.

Great. Fabulous. Thank you.

Thanks, Nate.

Why don't we do one final question, I know most of you have other calls to get on here at the hour, so if we could do one final question, and then we'll call it a call.

Our final question comes from the line of John Lawrence with Morgan Keegan. Please proceed with your question.

Just real quick, Joe, would you follow up a little bit with the auction price comment, and talk a little bit about, obviously the alternative channel has grown I guess to 37, which is the largest increase we've seen in some time. Is a lot of that -- how much does that have to do with the breadth of product versus the number of players buying your product? Can you sort of separate that?

And then a little bit about how has the mix changed, with the fleet getting older, to the types of parts you are buying?And, back to that pricing question, is the tail, or those incremental parts, do you still have that same spread that you had, say, five years ago?

I'll start with the auction environment question and then I'll ask Rob to respond to that balance of the question, John. The -- throughout 2010, each quarter we were tending to see, kind of, year over year, significant increases in the cost of salvage for our late-model wholesale businesses. And, it would appear, that into the fourth quarter of this year, is when those year-on-year comparisons have evened out.

As a matter of fact, with a look at the fourth quarter of 2010; our average cost of salvages for the wholesale operations actually dropped about three percentage points from where we were in Q3. So, we'll see how Q1 unfolds.

But, at least at the moment, we feel that we've probably kind of topped out on the cost of salvage for cars. We've reoriented our thinking there a little bit to, I think, keep our focus more on the gross margin dollars, maybe, as opposed to the gross margin percentages. As at the end of the day, the real key to the business and the profitability, and for the company and our shareholders, is really the gross margin dollars that we produce from each car that runs through our dismantling phase. Said differently, we'd rather deliver a $1,000 door than a $700 door.

Okay.

And as for the APU trends, John, you're right that we had a 200 basis-point increase from '09 to '10. I think there's couple factors causing that. You're right; there are more aftermarket certified programs. That's certainly not hurting the availability of product and therefore the use.

There is still tremendous insurance company pressure to keep costs down, and they're fighting for the same policyholder. There are not more policyholders necessarily becoming available so it's getting quite competitive. Even though we are paying more for salvage, as we mentioned before, the auctions are robust and there is plenty of inventory available.

One thing we don't talk a lot about, which is probably a good time to talk about and the effective AP usage, is our reman division when it comes to collision parts; headlamps, bumpers, and wheels; our fill rates are up on that product as we buy more companies and have more access to products, we are filling more and more of those product lines, so that is also contributing to the APU increases that we're seeing.

As for the age of vehicle and the impact you asked about, certainly, as cars get older, the mechanical components become much more desirable. And, to answer -- to tie that into your pricing question, obviously as demand gets stronger we can obviously address that with pricing as necessary. As cars get older, we're less likely to sell sheet metal on those vehicles. People might be less likely to carry full coverage, but certainly the mechanical components offer a great opportunity for us.

Congratulation guys. Thanks so much for your help.

Thank you. We appreciate it. We'll call it a call, and look forward to talking to all of you in about 60 days from today to update you on our progress in the first quarter. Thanks again.

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