LKQ Corp (LKQ) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to LKQ Corporation's second quarter 2011 earnings conference call.

I would now like to turn the conference call over to your host, Mr. Joe Boutross, LKQ's Director of Investor Relations. Thank you, sir. You may begin.

Thank you, Jackie. Good morning, everyone, and thank you for joining us today. This morning, we released our second quarter 2011 financial results and provided our updated guidance for 2011.

In the room with me today are Joe Holsten, LKQ's Vice Chairman and Co-Chief Executive Officer, Rob Wagman, President and Co-Chief Executive Officer and John Quinn, Executive Vice President and Chief Financial Officer. Joe, Rob and John have some prepared remarks, and then we will open the call for questions.

In addition to the telephone access for today's call, we are providing an audiocast via the LKQ website. A replay of the audiocast and conference call will be available shortly after the conclusion of this call.

Before we begin with our discussion, I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies.

Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements to reflect events or circumstances arising 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 more information on potential risks. Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. As normal, we are planning to file our 10-Q in the next few days.

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

Thank you, Joe. Good morning, and thank you for joining us on the call today.

We are pleased with the results we reported this morning. Diluted earnings per share from continuing operations in Q2 were $0.32, an increase of 23% as compared to $0.26 for the second quarter of 2010 and in line with our internal expectations for the quarter.

Revenue reached a record $760 million in the quarter, an increase of 30% as compared to Q2 2010. Our second quarter total organic revenue growth was 12.2%. Organic revenue growth for parts and services for the quarter was 8.4%, which reflects increased part sales primarily driven by improved inventory positions and the optimization of our regional distribution network as we continue to integrate newly acquired companies into the system.

Turning to aftermarket, our aftermarket and refurbished revenue increased 23% for the quarter with an organic growth rate of 6.4%. Aftermarket and refurbished revenue from acquisitions grew 16.1%. 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, allowing us to reach the higher end of our traditional in-stock rates.

The above growth rate was obtained despite a drop in miles driven, primarily the result of higher fuel prices. Based on data from the US Department of Transportation, miles driven in April and May were down year over year 2.4% and 1.9% respectively. Next to 2008, the reduction in miles driven for the first half of 2011 annualized is tracking to be the largest drop since 1983.

Despite this headwind we faced in the quarter, I am quite pleased with the organic revenue growth we achieved across all segments of our business and our organization's ability to achieve targeted goals. Although relief from high gas prices does not appear imminent, we continue to maintain our guidance of same-store sales growth of 6% to 8% for the balance of the year.

To counteract the cost of increased fuel cost, we did initiate a fuel surcharge in our recycled operations starting in June. We are also planning additional fees starting in August that will address each part that travels through our internal established distribution networks. Both of these programs should help reduce the impact to our fuel budgeted variances.

In our recycled parts division, demand for LKQ's wholesale parts remained strong during the quarter. Organic revenue growth of recycled parts and services was 11% for the quarter. Recycled parts revenue growth from acquisitions was 14.5%, which includes the impact of our acquired remanufactured engine businesses.

Availability in salvage inventory has remained strong, and we continue to put more recycled inventory on our shelves and maintain a healthy backlog of un-dismantled product at this time. Cost of salvage continues to remain at the high end of our historical averages. However, despite this fact, we realized good sequential Q1 to Q2 2011 improvements in our recycled parts gross margin percentage, aided by our core recovery and fuel surcharge initiatives.

During the quarter, we purchased over 56,000 vehicles for dismantling by our wholesale operations, which is a 9% increase over Q2 2010. As anticipated in our Q1 call, a healthy volume of cars at auction was realized in Q2. With on-hand product and maintenance of our existing rate of vehicle acquisition, we should have sufficient inventory to grow our recycled parts operation.

Finally, I am also pleased to announce that we extended our exclusive licensing agreement with the Ford Motor Company. While our agreement prohibits discussing in specific terms, the new agreement lasts for 42 months, an increase of 12 months from the prior agreement, and the terms are generally comparable to our previous arrangement.

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

Okay. Thanks, Rob.

Turning to our self-service retail businesses, during the second quarter we acquired 91,000 lower cost self-service and crush-only cars, compared to 78,000 in the second quarter of 2010, which is a 17% increase. We did see the cost of these cars increase by about 33% from 1-year-ago levels, but some of that increase is simply due to the higher scrap prices. Overall, we are pleased with the way the self-service business is performing today.

During the quarter, we upgraded and standardized our point-of-sales system in the line of business, and that is giving us better insight into statistics, such as the average part sales, sales by part type and recovery per vehicle. We also have the ability now to post additional fees to our invoices.

In our heavy-duty truck operations, during the second quarter we acquired roughly 1,600 units for resale or parts, as compared to 900 in the second quarter of last year. We continue to build out this business with our goal of establishing a national network over the next few years.

I mentioned previously the initiatives of getting everyone on a single system and improving the coordination among our yards, and that, too, is progressing nicely.

Moving on to our development efforts, during the second quarter our largest transaction was the previously announced acquisition of a North American -- of a US paint distribution business, AkzoNobel. With this deal, we acquired 40 locations across the United States. The majority of the locations have or will be integrated into our existing businesses.

Paint and related products represent about 14% of the typical collision repair bill, so we think there is a lot of upside to grow this market. We've seen various estimates of the size of this market being somewhere from $2 billion to $2.5 billion, so we believe this will be an attractive space for us, as we only have about a 10% market share today.

One aspect to this market is that the gross margins do tend to be lower than our traditional parts business, so we will have an unfavorable mix change at the gross margin line. But, over time, we believe we can lever our distribution and warehouse costs to get some, if not all, of that difference back at the operating income margin line.

We also added to our wheel refinishing business with a small acquisition in Ohio, and we also picked up a small aftermarket distribution business in Ohio as well during the quarter.

We have been busy since the end of the second quarter, having added 4 new deals the last 4 weeks. Since June 30th, we bought Specialized Parts Planet, which operates several wholesale recycled parts yards in Rancho Cordova and Fresno, California. We have purchased 3 wholesale recycled parts yards operating in the Greater Boise, Idaho market. We've added a new wholesale self-service combination yard based in Austin, Texas, and we've -- in North Carolina, we added to our automotive cooling parts distribution business with the acquisition of a specialty distributor in that market.

With respect to our own internal development efforts, we currently have 4 brownfield self-service recycling facilities under development, and 2 full-service facilities have been identified for a conversion to self-service recycling yards over the next year.

On our first-quarter call, I mentioned the development of a wholesale salvage yard in Central Ohio. I am happy to report that operation has opened ahead of schedule and is now fully operational.

We continue to be pleased with the robust pipeline of acquisition opportunities, and based on our working backlog, we expect the second half of the year to be fairly active. I would expect that the back half will have at least a similar number of deals as the first half of the year.

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

Thanks, Joe. 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 Q2, our total organic revenue growth was 12.2%, and we had additional growth of 17.5% from acquisitions. Rob mentioned the Q2 2011 organic growth for parts and services was 8.4%.

Other revenue, which is where we record our scrap commodity sales, was up 67%. 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 scraps and cores. 30% of the increase was a result of acquisitions.

In Q2 2011, revenue from our self-service business was $73.6 million or 9.7% of LKQ's total revenue. Approximately 31% of this revenue was parts sales included in recycled and related products and 69% scrap and core sales included in other revenue.

Our acquisition revenue growth was driven by the 15 deals we did in the last half of 2010 and the 7 deals we've closed through Q2 this year. The Q2 impact on revenue from acquisitions was approximately $102 million.

Gross margin for the second quarter of 2011 was 42.4%, which was down 230 basis points from 44.7% in the same period of 2010. In the last 3 quarters on our calls, we mentioned that this decline was primarily related to higher costs incurred acquiring salvage cars at auction and in the self-service line of business. As we mentioned in the last call, we believe we've hit the anniversary of those impacts and it is becoming less of a factor.

The greatest impact on year-over-year margins is now related to the mix impact primarily associated with the incremental revenue from acquisitions. The largest drivers were the lower margin aluminum furnace operations we acquired in Q3 last year, the reman engine businesses and the AkzoNobel paint transaction. I mentioned in the past that the lower margin furnace business is a permanent change. We only had 1 month of the AkzoNobel business in Q2, so next quarter we'll see 2 more months of gross margin dollars from this business that will also have a slightly negative impact on gross margin percentages.

Finally, I remind you that as other revenue grows, simply as a result of higher commodity prices, we don't maintain the same gross margin percentage on that revenue. While we may make some additional gross margin dollars, we don't always make the same gross margin percentage.

I'd also like to add a few comments on the sequential gross margins. We saw sequential margins, that is Q1 2011 to Q2 2011, decline from 43.7% to 42.4%, a decline of 130 basis points. There are a few reasons for this. Seasonally, we typically expect a decline in Q2 over Q1. Last year, we saw a sequential drop of 220 basis points in margin, so this year's sequential step down of 130 basis points is actually favorable compared to last year.

You may recall in Q1 I mentioned that the gross margin included a $0.02 benefit from rising commodity prices. We didn't have that kind of a gain this quarter, as scrap prices were essentially flat quarter over quarter.

And finally, within the wholesale business we have approximately 1 month of the lower gross margin AkzoNobel business. Although we expect this to continue to be a lower gross margin compared to parts sales, we do believe that over time we'll be gaining operating leverage, so the operating incomes will become more similar.

We continue to see improvements in our facility and warehouse and SG&A expenses. In total, these 2 items fell on a year-over-year quarterly basis from 22.4% of revenue to 21.1%. This improvement is partially a function of the math because the higher commodity prices drive revenue without any corresponding increase in most of these costs, but it also reflects the continued leverage in the business.

Distribution costs saw an increase from 8.8% of revenue to 9.1%. The primary driver of this increase was additional fuel and related shipping costs, as we saw fuel prices hit recent highs during the quarter.

The quarter also included $2.4 million of restructuring expenses primarily associated with lease termination costs from the AkzoNobel transaction.

Our operating income was $78.5 million in Q2 2011, compared to $69.6 million in Q2 last year, an improvement of $8.9 million or 13%.

Net interest expense of $4.7 million was favorable -- excuse me, was $2.5 million favorable to Q2 last year. This is the first full quarter of operating under our new credit facility. During the quarter, our $200 million interest rate swap rolled off and was replaced with $100 million fixed-to-floating hedge on which we're currently paying 2.86% interest.

The year-over-year improvement in interest expense was a result of slightly lower average borrowing levels and improved borrowing costs. Our effective borrowing rate was 3.4% in Q2 2011, compared to 4.9% in Q2 2010.

Other income included a $1.6 million favorable adjustment related to a contingent purchase price adjustment from a prior acquisition.

Our year-to-date tax rate was 38.9%, and in Q2 2010 our year-to-date rate was 38.2%. But, you may recall that last year included some favorable discrete adjustments.

On a reported basis, diluted EPS from continuing operations was $0.32 in Q2 2011, compared to $0.26 in 2010.

Moving to cash flow, cash flow from operations year to date was $101.1 million, compared to $101.2 million in 2010. Although earnings were $13 million higher in 2011, we saw working capital changes negatively impacting cash flow. The largest driver was accounts receivable, which was a use of cash of $25 million, compared to only $1 million used last year.

During the quarter, we spent $52 million in cash on acquisitions, bringing our year-to-date total to $96 million.

We also issued 291,000 shares of stock related to the exercise of stock options and equity compensation, and that resulted in $4.1 million in cash, including related tax benefits.

Debt at the end of the quarter was $586 million, including $574 million under our secured credit facility.

Cash and equivalents were $42 million at quarter end.

As we noted in the press release, we're very pleased that Standard & Poor's raised our credit rating to double-B-plus from double-B, reflecting the Company's increasingly improving credit ratios.

As at quarter end, we had a draw of $328 million in the revolving credit facility and approximately $34 million of letters of credit that are backstopped by the facility, leaving $389 million of availability for future borrowings. Under the terms of our new credit agreement, we are required to make debt repayments on our term loan of a little over $3 million each quarter this year.

Turning to guidance, you'll note in our press release this morning that we raised the low end of our EPS and net income guidance for the year. Our revised EPS guidance is a range of $1.36 to $1.42. The new range for income from continuing operations is $201 million to $211 million.

I wanted to point out that the revised guidance includes the $0.02 we incurred on the debt refinancing in Q1. The guidance also excludes restructuring and integration costs. Based on the acquisitions we've completed to date, we expect to incur approximately $2 million more of these costs in the second half of the year.

I'll just take a moment to discuss a few of the things that could impact us for the rest of the year.

On an external front, fuel costs remain a bit of an unknown. If gas stays at elevated levels, we could see miles driven decline further, and that would lower the number of accidents and, hence, our volumes. As I mentioned earlier, we saw higher fuel costs causing our distribution costs to increase faster than our revenue. We've also seen our shipping rates increase, although these are largely built into our Q2 numbers.

Scrap steel commodity prices were flat Q2 to Q1, and at this point we're not projecting any change.

We've seen the auction environment fairly stable, as we paid approximately $1,870 per vehicle last quarter, which is very similar to the $1,850 we paid in Q2 2010 and the $1,880 we paid in Q3 2010.

On an internal front, Rob spoke to some of our pricing initiatives. I think it's fair to say that those have helped stabilize and slightly improve the margins in the recycling line of business. Those programs are ongoing.

We are continuing our analytics around the aftermarket side of the wholesale business, and we expect to have some initial programs in the aftermarket side ready to roll out this quarter.

And with that, Jackie, we'd like to open the phones for questions, please.

(Operator Instructions)

Tony Cristello, BB&T Capital Markets.

One question I want to just -- maybe a point of clarification. It sounds as if -- if we go from the first quarter now into the second quarter, and we've seen a bit more compression on the gross margin side, I guess I came out of the first quarter thinking that we would see gross margins sort of flatten out. Now, it sounds like we may be at the run rate that we had this quarter in sort of the 42% or 42.5% range for subsequent quarters, at least until the paint and the various wheel smelter operations are fully incorporated. Is that the correct way to be thinking about things now?

Yes, I think it is, Tony. Just some more general comments on margins, what we've got -- what we've done so far and where we -- where I see it going forward might be helpful. We certainly continue to see the impact of the acquired businesses that we have. And the integration period takes time, and we continue to work through those integrations.

The smelter comps, you're correct, will true-up in Q4, but currently they are creating a year-over-year drag. And as Joe mentioned in his remarks, the paint, and then the cooling business as well, do tend to have lower margins because they're much more competitive in nature in the marketplace. So, those will be a little bit of a drag. However, we do believe that over time we'll pick that back up on the operating side.

We have the last quarter of the C for C, Cash for Clunkers, comps impacts, and next quarter we'll return to normal comps with parts of cars we generally purchase, so that's going away.

Just some of the things we have in the works that we also talked about. The additional deviation controls that are launching in August, we expect that to help the aftermarket side of the business where the rest will be locked down similar to what they are in the salvage side of our business. And we're also putting a new enhancement there where, basically, a limited stock deviation lock down will happen as well, so that's happening in August.

We continue to watch the OE pricing, of course. As they raise their prices, we're going to still follow suit and aggressively pursue that. They tend to be in the 1.5% to 2% range increases as we speak.

John mentioned the cost of salvage. Still a little bit of an issue, but hopefully, post Tsunami, with the SAAR rate coming up now, we can get a little bit of a relief in the used car market.

Q2 is also a seasonally downturn for us in the aftermarket business particularly, but both sides of the business are impacted as we slow down into the slower collision period.

Just talking about going forward now, as Joe mentioned and I mentioned, historically some of these businesses that we've purchased now in the cooling and the heating and the paint have been a little bit, historically, lower margins, but we think we'll get the operation margin improvements as we bring them into our system.

The initiatives in place that we have, I feel pretty confident that the salvage margins have bottomed. And likely, with some of the initiatives we have in place with the fuel charges and the other initiatives we have going with deviations, we'll actually see some kind of uptick here in the upcoming quarters.

As far as the aftermarket goes when it comes to margins, you have to adjust for some seasonality, as I mentioned, in Q2, but with some of the things we have in place here with the deviations coming, as well as the pricing that we're monitoring closely with the OEs, I expect to see that has bottomed out as well and some modest uptick here in the next couple of quarters.

I was going to say I'll let John add anything else if he --.

Yes, I think the only other thing I'd pointed out in my prepared remarks, Tony, was the -- obviously, as Rob mentioned, there was the seasonality, and we also -- Q1 did have a couple of cents benefit in there from the commodity -- sequential Q4 to Q1 commodity rise, and so we -- that wasn't repeated. Commodity prices were essentially flat in the quarter, so you lose that benefit.

When you look at the paint business, the engine and the cooling, some of these newer businesses you've acquired -- the paint, I guess, you've already had some exposure with, but I'm just wondering is the maturation phase for these businesses a bit longer than what you would normally have if you were just acquiring your traditional yard, and so maybe the revenue on the upfront side is slower to develop, but then it has a longer tail? I mean, how should we think about the timing on the incremental benefit from these newer acquisitions from different verticals?

Sure. I'll just hit a couple, maybe on the paint front, Tony.

The -- typically, the paints people -- shops will spray a particular brand of paint. The selling cycle tends to be fairly long. There are switching costs associated with the equipment and so forth, and so the sales cycle tends to be much longer. But, there's a lot of stickiness around the customer base, so they'll typically stick with a brand for several years at a time. So, precisely, it's a longer sales cycle.

And the gross margin on that business is likely to stay lower, but we think that -- typically, paint is distributed in 1-liter sized containers. As we start to be able to integrate that onto our trucks and leverage that into our warehouses -- we mentioned the charge for warehousing impairments, if you will. We're exiting leases in terms of the -- some of the facilities that were closed in the AkzoNobel deal. And as we start to get those into our warehouses, we should be able to leverage some of the distribution and facility costs.

We're considering -- hopefully created customer stickiness. We're already into an awful lot of the shops anyway. We're selling our parts and services in there. Just about every one of those shops uses paint, so we'd like to think that we can start to leverage those relationships. And although the operating -- excuse me, the gross margins are lower, you get it back on the operating line over time. That'll take a little bit of time.

Does that answer the question?

Yes, I think so. And I just wanted to make sure, from a timing standpoint, I'm thinking correctly about the additive benefits of the revenue versus the incremental upfront costs with the acquisition, and it seems like you've got more of an upfront headwind, but then you get a much bigger benefit once you have the infrastructure in place.

Yes, I just want to add one thing, Tony. Many of these paint customers are under contract. As John mentioned, with the equipment that they have, they have to sign contracts. So, there is a little bit of a headwind on getting the revenue there as they come out of contract. So, you're right. There will be a little bit of a delay, but the benefits will come at the end.

Yes, I think Joe mentioned the market size as being -- we've seen varied assessments of between $2 billion and $2.5 billion, and we're probably about 10% today. If we think we can get our -- over years, over a number of years, get our market share closer to where we are in the alternative parts market, we could easily improve that dramatically.

Okay. And then -- and maybe just a quick follow up for Joe. When you think about the acquisition opportunities that you foresee, are they going to be consistent with existing runs of operation or do we still anticipate new verticals that you may be able to add? And I'll leave it at that.

No, I think right now, Tony, we're not looking at what I would consider new verticals at the moment in the US market.

We -- certainly, in the late-model salvage, we are focused predominantly on geographical expansions right now, as you saw during the quarter, the Boise, Idaho markets, a total new market entry for us. And our presence in the Fresno, Sacramento markets is somewhat limited, so we were very happy with the addition of geographical expansions there.

In aftermarket products, we'll continue to look at moving faster on the paint transactions than probably aftermarket parts. I think aftermarket products, parts anyway, we would probably consider cold starting markets at this point. And in the U-Pull-It business, again, that would be more focused on geographical expansion.

The brownfields, I mentioned, in -- 3 of those are for new geographical markets, and 1 helped solidify a very important market in East Texas for us.

Craig Kennison, R. W. Baird.

Organic growth, you're guiding to 6% to 8%. The first half was closer to 9%. Maybe just discuss what you see as the factors behind this slowdown or if that's just a function of being conservative.

Yes, Craig, the organic growth -- there was a good backlog in the salvage. Certainly, the C for C comps going away. Really, good comps get a lot more tougher going forward. Q4 actually showing up as 1 less day that we have to contend with, but it really is the miles driven decrease that we saw. We did see some stats from MasterCard on July 4th that the driving was down as well. Really, just with the tougher comps coming, with the C for C gone, as well as just the headwinds in the economy, we just tend to be a little conservative. That 6% to 8% is probably going to be the guidance. And more likely towards the higher end of that guidance, I suspect, but right now we're just concerned about the economy.

And as a reminder, I think in the first half you had 1 additional day in the first quarter?

That's correct.

And then, John, you mentioned you thought your share was maybe 10% in the paint business with an opportunity to get to your corporate average share in other categories. Would you mind giving us a reminder of what you think your share is in a couple of these other major categories, whether it's aftermarket or the wholesale recycling business?

I don't really want to go there on this call, Craig. But, I think the -- to put it into perspective, I think we've seen other companies better than the paint business that are doing circa $400 million. We are probably the number 2 today. Obviously, our goal is to be the number 1 in every market.

And I noted that NSF recently decided to start rating distributors. Will you be participating in that, and do you see that as a material event for you?

We are part of that, Craig. We are on the committee to help establish distributors. We actually view it as a good thing, as we -- quality vendors will bring more credibility to the industry. So, we are part of that as we are actively support their role and their certification programs. We're actively buying their products, so we view that as a good thing for the industry.

John Lovallo, Merrill Lynch.

Could you talk a little bit about the dynamics in the paint manufacturing business? I mean, are there a few big players with sizable market share? I mean, how does that line up?

Yes, there are a few -- one big -- really big company is FinishMaster. They are owned by a publicly traded company out of Canada, Uni-Select. After that, there is a lot of small regional players in the marketplace that tend to be 1 state, a couple states maybe, but for the most part it's small independent distributors in the paint industry.

But, John, was your question about the distributors or the manufacturers?

It was the manufacturers, actually.

Oh, I'm sorry.

Well, most of the paint is produced by a couple of large -- PPG, AkzoNobel, Sherwin-Williams, DuPont, and these are sort of household names, and they operate a model where, typically, they will distribute it through distributorships, like ourselves. So, just to make it clear, we're not manufacturing any paint. We're the distributor. We distribute it for all of those companies that I just mentioned, but maybe Sherwin --.

-- Yes, Sherwin-Williams is the only one, John, that has direct distribution. They have their own company stores. All the other locations -- Akzo did until they sold it to us, so all the other 3 big players that John mentioned are in the distribution -- distributor markets.

That's helpful, thank you.

I've noticed on the past few presentations that there's been a little bit more talk about the potential for international expansion. Is there any update on that front?

Yes, we continue to meet periodically with players from other markets, just increasing our knowledge and to get the pulse on what momentum may exist in terms of market interest and driving higher alternate part utilization rates.

We have an increasing flow of people from China who are looking for partners to -- I would say looking for people with the knowhow to operate on the ground. And of course, they're offering to bring their significant political relationships, in most cases. So, I'd guess there's probably someone to our office about once a quarter now to have discussions with us about the Chinese market. And other than that, where we focus building our knowledge base is in the European arena.

So, yes, we continue to learn, listen and look for opportunities that may be good entry vehicles for us.

And if I can sneak one last one in here. I know claims frequency came down in April. Do you guys have any more recent read on that?

We do not. We do talk to body shops that are saying it's been a little soft. But, other than that, John, it's basically just anecdotal. But, with the miles driven, we suspect that claims volume is probably being hindered a little bit as well.

Sam Darkatsh, Raymond James.

2 or 3 questions here.

First off, I was just trying to make sure if my math reconciles. On the gross margin line, it was sequentially down 130 basis points. And John, you called out the absence of the gain in scrap sequentially, and you had 1 month of the AkzoNobel business. Any way you could help quantify that? I think you might have mentioned a couple of cents impact from the scrap gain. If my math holds, maybe, is that 60 basis points or so of the 130 basis points dropped? I'm just trying to get a sense of --.

Sure. I estimate it's between 70 and 80.

70 and 80? And so, the -- how much of the remainder is the deal mix, deal-related mix, versus the seasonal drop?

I'd say the seasonal drop's the majority of it.

Okay, next question. Based on the acquisitions that you have consummated to date, what do you peg the 2011 total sales from acquisitions, and then total -- in 2012 also, based on, again, the deals you've already announced?

I may have to get back to you on that one, Sam. We had $100 million this quarter of acquisition revenue. I just thought I'd ask him to check for the [lapse in] schedule because Q3 last year we had the smelter acquisition, and that's going to drop off. We did Cross Canada in Q4, and that's going to drop off in Q4. We'll have part of that in Q4, but it mostly drops off, so --.

I'll circle back with you on that, that's fine.

And I guess for the last question, Rob, you don't give quarterly guidance, so if you could help us a little bit with where the primary variances were in the quarter versus your internal plan, how the quarter shook out versus what your original expectations were, that would be helpful.

Yes, as I mentioned, Sam, we were pretty much on our internal number. The top line was good. Bottom line was right where we expected. Again, John mentioned a little bit of the headwind that we received on our distribution costs, but, overall, it was pretty much right on target where we had with the quarter -- where we thought we were going to come in.

Scott Stember, Sidoti & Company.

Yes, could you possibly talk about how things are shaping up so far in the current quarter in July?

Yes, July is traditionally a slower month. As I suspect, many of our customers choose to take some vacation time. This year, no different; a little bit slower than usual, but, again, impacted by seasonality, I suspect. But, we did anticipate and budget appropriately for the month. The 4th of July was an interesting timing. It fell on a Friday and caused a long weekend there, so it started -- we started off on a slow period and ramped up over the course of the month.

And circling back to the aftermarket side of the business, you guys have given some statistics about utilization rates, and at least through March it seems as if the numbers went up dramatically year over year. Have you seen anything industry-wide more current than that?

No. We generally get the APU figures annually from the estimating company, CCC, Mitchell and Audatex. But, we certainly see as robust activity with the insurance industry on promoting alternative parts. And quite frankly, the direct repair facility networks continue to gain strength, and they are the biggest proponents of alternative parts.

So, while we haven't seen any numbers, we suspect it's been strong, and it will continue that way through the balance of the year.

And last question on some of the non-insurance collision pieces of your business, with fleet, car rental companies and now with the government. Could you talk about how those are shaping up?

Yes, we continue to market to the government. It's a slow process, I think, as we're all witnessing from the debt debate. It's taking a little bit of time, but we are -- we're actually working with the government -- our government affairs division to help open up some doors for our government marketing department. So, those continue to march along, but it's a slow process. We do think it's a marathon, not a sprint, and making some progress.

And as far as some of the other items, like fleets, car rental companies, I know you guys were working on that. Can you just talk about that?

We have a team based out of Houston, Texas that is marketing to the fleet with our reman. In particular, we're going after those fleet companies now. Making a little bit of headway; a lot more road ahead of us, though. But, I think we'll continue to knock on those doors, and we'll see some good progress there over the coming quarters.

And just a clarification. You did say that the restructuring charges for this quarter of $2.4 million was related to acquisitions?

Correct. It was primarily associated with the termination of leases around the AkzoNobel transaction. There's a little bit up in Canada as well.

Bill Armstrong, C.L. King & Associates.

The -- most of my questions were answered, but the 36% scrap or other category comps, could -- is it possible to break that out by volume versus price on a year-over-year basis?

Generally, if you just kind of go off the car volumes, Bill, is about as close as we can get. We don't have a precise tonnage number because of the way that it works. But, it's, generally speaking, to the extent that you're -- you see organic growth with respect to car volumes, the scrap will follow. Does that make any sense?

Yes, it does. I had a feeling that might be a little difficult to put your finger on.

You also mentioned exploring alternative salvage solutions outside the auction environment. I was wondering if you could just expand on that a little bit.

Yes, I'd be glad to, Bill. There's been some recent interest by insurance companies to, in particular, look at low-end salvage alternatives to try and save some cost at the auctions. We're participating in a few of those programs where we have self-service, so it's great access to some salvage. It just seems that the interest level has been piqued a little bit lately by some major carriers, actually. These aren't the smaller tier 2 or tier 3s. These are the tier 1s just looking for alternatives outside the auction market and, again, particularly on the lower-end salvage. But, yes, we need access to those cars for our self-service, so we actively engage with them in those communications, and we've won a few of those deals.

Bill, just to follow up, we estimate it's around two-thirds is price and one-third volume.

Two-thirds price, one-third volume. Great, thanks very much.

John Lawrence, Morgan Keegan.

Just real quick, would you talk a little bit about -- Rob, you've talked about over the last couple of quarters about some things, initiatives at the auction process. As you look around the country and some things that you can do to help that spread a little bit, anything going on there? Obviously, you're showing some improvement, and as SAAR comes back up, where do you think that positions you on auction prices?

Yes, we're hoping and anticipating as the SAAR comes up it will get pressure off the used car market and get some of those guys that we believe that have come into our sector of the business to try and get cars to put on their lots. We're encouraged by the Japanese turnaround in terms of production. It's coming up rapidly, and we're anticipating that should give us some relief. And we don't expect -- looking at the Manheim Used Card Index, it's at a high, but it has seemed to have peaked. It at least appears that it's not going any higher. So, hopefully we'll get some pressure, and we'll start seeing that in our cost of goods.

And secondly, you talk about fuel rates better, etc., and more parts. Obviously, the tails of the amount of inventory just continue to grow. Is that correct, as far as the breadth of inventory?

Are you talking product lines?

Yes.

Absolutely, yes. As the cooling acquisition got us into some new products that we didn't have. Of course, the reman engines put us in some new products. So, yes, and, of course, the paint -- we were already in, but we've certainly -- much more in depth there.

I just want to touch on a few things on the paint as well. We have a lot of greenfield opportunities with those -- with the Akzo deal, so we'll be putting in a lot of greenfields. The amount of certified parts, interestingly enough, that a lot of insurance companies demand, I did get some stats from last quarter. There were 600 new parts entries into the certified parts market through CAPA and NSF. And as I mentioned on the last call, John, the -- we are pushing NSF to certify different type parts than CAPA, so we're not getting much duplication. So, it's providing a big upside on the certified parts market as well.

And last question. Truck business -- I mean, volumes are up. Anything there we should take away, and how should we think about that over the next, say, few quarters?

We're in the deal market there and carefully evaluating the -- a few acquisition candidates. And I'm hopeful that in the second half of the year we'll make another couple of additions of new markets to -- and the importance of the additional markets, from my perspective, is to allow us more versatility to go after fleets, especially on fleet disposal. And that's why I'm interested in the footprint predominantly as more of a marketing for fleet disposal from fleet managers.

I think we saw a nice improvement year over year in the operating margins of the truck business. It's still a relatively minor piece of the LKQ puzzle, but the margins are certainly getting to the levels that we had anticipated when we made the decision a few years ago to enter this line of business.

Nate Brochmann, William Blair & Company.

I just wanted to talk a little bit about some of the earlier questions going back to looking at margins and integration and talking about how on the gross side we take a little bit of a near-term hit, but longer term we can get those operating margins back up to par. And I kind of was wondering in terms of the timeline in the process to give us a little bit of a better framework for how that works and what your plans are there.

I'll just start maybe, and Rob can chime in, Nate.

The -- I think what we said is that with respect to a couple of the businesses, there's a mix change that we view as probably a little bit permanent. So, we took a step down with the smelter business that we bought last year. That -- as you know, we bought that to support our wheel refinishing business. We really -- all the furnace does is essentially [densify] the aluminum into [cells], and it gets -- for resale and for easier shipping. So, to the extent that ends up as a bigger component of scrap and other, it's a very low margin business, and that's sort of a permanent step down. And that was actually the number-1 driver when I talked about the mix change accounting for the majority of the year-over-year variance now. That's more or less permanent.

With respect to the paint business, the paint business is a lower gross margin business. As we continue to expand that, we're going to continue to see that be a slightly unfavorable mix at the gross margin line. I think Joe mentioned that, over time, we think that as we rationalize the warehouse and rationalize the distribution that the operating income line should come up on that business to something comparable to where we're at.

On the engine business, that has -- initially has been a little bit lower. There's some bookkeeping issues associated when you buy a company that -- if you've got inventory gains, how to recognize all those. So, there's going to be a little bit of impact on that, but not really all that big. But, over time, the strategy with respect to that business, really, is to get the product into our shops, and it'll end up showing up in the salvage side of the business.

So, in terms of some of the margin improvements that we see coming, I think a lot of that's going to come out through the facilities, the selling and distribution costs, as opposed to gross margins, per se.

Then, with respect to some of the other initiatives that we're taking on the pricing front, I think that we've seen some early success with respect to, for example, the core charge program that we mentioned a couple of quarters ago. We just got the fuel surcharge in June. That seems to be going well. Both those programs are on the salvage side.

Aftermarket, we're just starting. It's early days there. We've been doing some analytics and trying to figure out what we can do there. Rob mentioned, I think, that he's going to -- we're starting some programs around that in Q3. And so, those things will help margins on those fronts.

And maybe just one thing, Nate, on the Akzo transaction, which was the latest one we did, just to give you just what we're looking at as far as timeline of integration. We had 40 locations purchased, and over 30 of them will be relocated over time, so -- and some of these -- the storage of paint requires, basically, paint bunkers to protect the -- any kind of explosion that could possibly occur. So, it takes time to get these things done.

We did get them -- as John has mentioned previously with some of you that the conversion to the system has already been done. So, it'll take time to get everyone integrated, but as it happens we'll start seeing it on the operating line.

And then, just kind of a little bit in terms of that, quote-unquote, over time, as we get the distribution networks kind of more defined and we leverage that and we leverage the facilities, are we talking 1 to 2 years or 3 to 5 years to kind of really see the real benefit on the operating margin side?

I think, generally speaking, it's a shorter period, a couple of years. I don't think anybody has a 5-year plan with respect to -- at least not me. If we can see those sorts of things, we don't build them into our performance. They're not much quicker than that.

Jackie, we probably only have time for about 1 more call I think.

Scot Ciccarelli, RBC Capital Markets.

I guess one of my questions is you guys have been acquiring businesses at a very rapid rate. I guess what I'm trying to figure out is -- and you've talked a little bit about the margin impact, but what about the growth impact? I mean, once you own it for, what is it, 12 months, once it gets factored into the organic growth, does it grow at some kind of exponential rate for a couple of years at that point? And how much of an impact does that have on your reported organic growth rate?

I think it, to some extent, depends on the type of acquisition. And to the extent where we buy a salvage yard in California, for example, you tend to see a little bit of growth there because we can lever our footprint and our distribution and inventory. But, that generally happens within the first year, so it's really caught up in the acquisition growth.

Things like paint where we think we can leverage that into the -- our existing customer base, I would think that that would probably grow at a slightly higher rate than the average over time.

And something like heavy trucks, I mean, you're -- obviously, on the acquisition side, it was up 75%, right? So, I mean, I guess, again, is there any way to kind of ballpark the organic growth from businesses acquired over the last, I don't know, 24 months or something impacting us by 2 points or 3 points on the organic side?

I think some of these get integrated into the business. It's hard to say what the contribution is after 24 months.

Yes, what often happens is that the customers will migrate over to one of other business lines and it does get muddled pretty quick.

And then, my last question is it seems like the aftermarket slowed a bit, at least versus what you've seen for over the last 8 quarters, but the recycle side actually accelerated. Is there anything that kind of impacted the mix there? Was something more attractive, whether it was in pricing or something else that happened, or was it just kind of inventory levels?

No, I think the inventory levels have remained very strong. I think that the aftermarket is more of a pure collision type sale, Scot, and -- whereas the salvage has other opportunities with mechanical and other components. I think we're seeing a little bit of the headwind of the fuel prices there. And people can delay a repair if their fender is damaged, for example, but they can't delay a repair if their engine blows. So, I think we get a little bit of -- more of a headwind on the aftermarket than the salvage side of the business.

Thank you. I'll hand the floor back over to management for any closing comments.

We want to thank everyone for joining us on the call today. We look forward to talking to you in about 90 days. Thanks, everybody.

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