LKQ Corp (LKQ) 2011 Q4 法說會逐字稿

Greetings, and welcome to the LKQ Corporation fourth quarter and full year 2011 results conference call. (Operator Instructions). It is now my pleasure to introduce your host, Joe Boutross, Director Investor Relations for LKQ Corporation. Thank you, Mr. Boutross. You may begin.

Thanks, Kevin. Good morning everyone, and thank you for joining us today. This morning we released our fourth quarter and full year 2011 financial results and provided our full year 2012 guidance.

In the room with me today are Rob Wagman, President and Chief Executive Officer and John Quinn, Executive Vice President and Chief Financial Officer. Rob and John have some prepared remarks and then we will open the call for questions.

In addition to a 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 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 and 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 currently not 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 reflects 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-K in the next few days. And with that I am happy to turn the call over to Mr. Rob Wagman.

Thank you, Joe. 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 solid fourth quarter and full year 2011.

Diluted earnings per share from continuing operations in Q4 was a record $0.38, an increase of 35.7% as compared to 28% for the fourth quarter of 2010. Revenue reached a new quarterly high of $940 million in the quarter, an increase of 39.4% as compared to Q4 2010. Organic revenue growth for the quarter was 6.4%. As we reminded everyone on the prior calls Q4 had one fewer day compared to the prior year, so a slight decline in this figure was anticipated.

For the full year our EPS from continuing operations was $1.42, up significantly from $1.15 in 2010 representing an increase of 23.5%. Revenue reached a record $3.3 billion in 2011, an increase of 32% as compared to 2010. Total organic revenue growth for the year was 10.7%.

Organic revenue growth for parts and services for 2011 was 7.9% which was at the higher end of our guidance. The continued organic parts and service growth in 2011 is a result of the broadening of our product line offerings, our efforts to optimize our regional distribution network and an increased use by insurers in their DIP networks of alternative quality replacement parts to reduce claim costs. In the fourth quarter we witnessed a sequential 90 basis points compression in gross margin primarily related to commodity pricing and the impact of the Euro Car Parts acquisition both of which John mentioned during our third quarter call.

Next I would like to talk about other aspects of our business. Organic revenue growth of recycled parts and services and aftermarket parts was 5.6% for the quarter including the one fewer selling day. During the fourth quarter we purchased over 58,000 vehicles for dismantling by our wholesale operations which is an 18% increase over Q4, 2010.

As for volume at the auctions, the outlook for supply remains good starting out in 2012. With inventory already on hand and a continuation of our current run rate for acquiring cars, we should have sufficient inventory to grow our recycle parts operation. As mentioned during previous calls, we continue to be focused on the improvement of parts pricing to offset the downward pressure from historically high auction prices on our gross margin.

Turning to our self service retail business, during the fourth quarter we acquired over 90,000 lower-cost, self-service and crush-only vehicles as compared to 77,000 in Q4 of 2010 which is an 18% increase. In our heavy-duty truck operations, during the fourth quarter we purchased roughly 1,900 units for resale or parts as compared to 1,200 in Q4 2010. Overall, the business is performing well and continues to present a long-term growth opportunity for the Company.

Finally, I want to mention the addition of warehouse capacity in Taiwan. We are now receiving product into our build-to-suit facility that will provide some key advantage to our strategy here in the United States. This leased facility will allows us to buy product direct from the vendors in lesser volumes than full container loads. We will then be able to consolidate this product at our Taiwan facility and send full container loads directly to our US facilities where it has been determined we need the stock.

This consolidation will allow us to reduce our touchpoints in the United States thereby reducing excess handling cost. This facility will also allow us to realize an improved fill rates by keeping additional safety stock on hand at this location. By buying in bulk and storing in Taiwan we can more effectively respond to spike in sales to readily replenish any facility in the United States.

Moving to acquisitions. On October 3, 2011 we announced the acquisition of Euro Car Parts, the largest automotive aftermarket parts distributor in the United Kingdom. Today over 140 days since we announced this landmark acquisition and our entry into Europe, I am pleased to announce that Euro Car Parts is progressing in line with expectations. Given the market opportunities in the UK and the attractive unit economics of ECPs locations, we anticipate ramping up our total branch openings for 2012 to roughly 20. During the first quarter of the year we have already added eight new ECP stores.

Also, we have hired a Director of Insurance Marketing for ECP and we have actively begun our marketing efforts to the insurance carriers in the UK. Along side these marketing efforts we have simultaneously increased our collision product inventory and identified space at ECP's national distribution center to accommodate future collision parts demand. Our part number data has been successfully mapped to the [OE] part numbers and provided to the leading estimating company in the UK, and our products will soon be in a position to be displayed to both insurers and repairers alike.

Let me also touch on North American acquisition from our development efforts in the quarter. We purchased a classic vehicle restoration parts and accessory distribution business in Georgia, we purchased a wholesale salvage business in Idaho and we also purchased a heavy duty truck operation in Colorado. I am quite pleased with the acquisition pipeline we are witnessing, and anticipate continued additions to our North American operations throughout 2012.

In addition to our recent performance, we also issued guidance for the full year of 2012. We expect that revenue from parts and services will grow organically in 2012 at the rate of 5.5% to 7.5%. Based on current conditions and excluding restructuring expenses and any gains or losses related to acquisitions or divestitures, we anticipate full year 2012 income from continuing operations will be in the range of $258 million to $278 million and diluted earnings per share from continuing operations will be in the range of $1.71 to $1.85.

Cash flow from operations for 2012 is projected to be in the range of $250 million to $280 million. We estimate capital expenditures related to property and equipment will be between $110 million to $115 million.

And looking at our guidance for 2012, I want to point out that our EPS range is wider than what we have historically projected. The range was modified to accommodate for some softness we were seeing in our collisions parts business at the start of 2012. We believe this dynamic is directly reflective of the mild winter we have encountered throughout most of the United States, clearly a short-term phenomenon in relationship to our long-term business strategy.

In addition, the first quarter of 2012 has tougher comps for the first quarter of 2011 which as was one of the most severe winters on record. Despite the softness, our non collision heavy-duty truck remanufacturing and ECP businesses are performing as expected.

Lastly, on November 7, 2011 the Board of Directors elected Joe Holsten as Chairman of the Board of Directors. Prior to his election as Chairman of the Board, Joe was the Company CEO since our founding in 1998. On behalf of the LKQ team and our fellow stockholders, I want to thank Joe for his dedication and leadership and friendship during his tenure as CEO, congratulate him on his well earned new roll at LKQ. At this time, I would like to ask John Quinn to provide some more detail on the financial results of the quarter.

Thanks, Rob. Good morning, and thanks for joining us today. Hopefully everyone has had a chance to review our press release this morning as Joe mentioned we expect to file our 10-K with the SEC in the next few days. Please watch for that as well.

I would like to point out that we expanded the disclosures in the press release by breaking out the United Kingdom operations in a bit of detail in a new segment that we are referring to as Europe. While that segment shares a lot of economic characteristics with the North American segment, we thought investors would be interested in hearing how those operations are developing. So you will note that in our press release and when we file our 10-Q and other SEC filings, we show two reportable segments, North America and Europe.

I also wanted to point out that we've added a new line to the income statement called change in fair value of contingent consideration liabilities. This line discloses changes in the contingent purchase price associated with acquisitions previously included in other income and expense.

Rob has already given you a breakdown of the major year-over-year revenue changes, so I will supplement what he said with a few other data points. For Q4 our total organic revenue growth was 6.4% and we delivered additional growth of 33.1% from acquisitions. Rob mentioned that the Q4 2011 organic growth for recycled and aftermarket was 5.6%.

Other revenue, which is where we record our scrap commodity sales, was up 22%. Approximately half 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. 11% of the increase was a result of acquisitions.

In Q4 2011 revenue from our self-service business was $73 million or 7.7% of LKQ's total revenue. Approximately 33% of this revenue was part sales included in recycled and related products, 67% scrap and core sales included in other revenue.

Our acquisition revenue growth was driven by the eight deals we completed in Q4 2010 and the 21 deals we executed in 2011. In Q4 the impact to revenue from acquisitions was $223 million, of which $138 million was accounted for by the Euro Car Parts transaction.

Gross margin for the fourth quarter of 2011 was 41.7% which was down 100 basis points from the 42.7% in the same period of 2010.

On last quarter's call I indicated two things that could impact the margin in Q4 2011. One was that ECP margins, Euro Car Parts that is, will be a bit lower than the North American operations and that has impacted our margins by about 60 basis points.

I also mentioned that if scrap prices fell we could see a few cents of EPS impact that would show up in the gross margin. So although scrap prices were higher year-over-year, because they fell sequentially in Q4 2011 they did impact our Q4 2011 margin. We believe that the scrap price changes accounted for the balance of the decline in gross margin not explained by ECP.

It's probably worth taking a moment just to add a few comments on the sequential gross margins. Gross margins decreased from 42.6% in Q3 2011 to 41.7% in Q4 2011, a drop of 90 basis points. The explanation here is very similar to the year-over-year explanation. Euro Car Parts operations were about 60 basis points of that impact and we believe the drop in the commodity prices accounted for much the balance.

Our facility and warehouse distribution SG&A expenses were 30.3% of revenue in Q4 2010 and in Q4 2011. Unfortunately, we didn't get better leverage here given the revenue increase because distribution costs were up about 30 basis points on higher fuel and freight costs, while the rest of the costs were down by about the same amount as a percentage of revenue.

During the quarter we reported $2.3 million of restructuring and acquisition-related expenses. These were roughly split among the items related to the North American acquisitions and the legal and other costs related to the Euro Car Parts acquisition.

Operating income was $90.1 million in Q4 2011 compared to $73.1 million in 2010, an improvement of $17 million, or 23%.

Net interest expense of $6.5 million was $200,000 favorable to Q4 2010. This improvement is due to lower interest rates being paid as a result of our new credit facility and lower swap costs almost entirely being offset by higher borrowing levels as we funded our 2011 acquisitions through debt. Our effective borrowing rate was 2.84% in Q4 2011 compared to 4.53% in Q4 2010.

Our year-to-date tax rate was 37.4%. You will notice the Q4 tax rate was 33.3%. This lower Q4 rate included a number of favorable items during the quarter as a result of changes in tax reserves and valuation allowances, as well as the benefit of a lower rate in the UK as foreign income becomes a larger percentage of our total.

On a reported basis, diluted earnings per share from continuing operations was $0.38 in Q4 2011 compared to $0.28 in 2010. The impact on EPS of restructuring costs and cost we wrote off in conjunction with the ECP acquisition was approximately $0.01 after-tax. Excluding these two items from our EPS, EPS from continuing operations was $0.39 for the quarter, an improvement of 39% over the reported $0.28 for the same period last year which also excluded restructuring expenses.

For the full year of 2011 we reported EPS from continuing operations of $1.42 compared to $1.15 in 2010, an increase of 23%.

In 2011 we incurred $0.03 of restructuring costs, $0.02 of debt write-off costs, and $0.01 favorable EPS impact from contingent payment adjustments. In 2010 these items rounded to less than $0.01. So on an adjusted basis, 2011 EPS was $1.46 compared to $1.15 in 2010, or an increase of 27%.

Cash flow from operations for the full year 2011 was $212 million compared to $159 million in 2010, an improvement of $53 million and in excess of our guidance of approximately $195 million. The primary driver of year-over-year improved cash flow was improvement in net income of $41 million which included $13 million of additional depreciation and amortization.

The rest of the items impacting cash flow more or less net to zero with the equity based compensation and debt write-off add-backs to income of $15.5 million almost equaling the net increase of $14.9 million in working capital from receivables, inventory, prepaid expenses, less obviously the increase in accounts payable.

During the year we spent $487 million in cash and acquisitions, the largest being the Euro Car Parts deal in Q4 which accounted for $294 million.

Through the year we issued 1.5 million shares of stock related to the [expo] stock options and equity compensation, and that resulted in $20 million in cash including related tax benefits.

At the end of the year LKQ's debt was $956 million, and cash and equivalents were $48 million. Availability under our $1.4 billion credit facility was $454 million, including a then undrawn term loan of $200 million. We drew down that term loan on January 31, 2012 and used those proceeds to partly repay our revolver. We have $35 million of letters of credit supported by the facility, but those are taken into account in our liquidity of $454 million. With the cash of $48 million on the balance sheet, our total availability was $502 million.

We added five interest rate swaps during the quarter. Our debt under the credit facility as of year-end was 69% fixed and 31% floating.

Turning to guidance. I just wanted to remind everybody and make it clear what we have included and excluded from our guidance.

As we have always done our guidance excludes any restructuring or transaction costs, gains or losses, capital expenditures or cash flows associated with acquisitions. With the ECP acquisition we expect to incur some additional changes in contingent consideration liabilities which is why we broke those out in the Q4 income statement. I remind everybody that these can be either negative or positive, but in any case we're excluding them from our guidance as well.

Rob noted that we expect our parts and services organic revenue growth to be 5.5% to 7.5%.

Our guidance for income from continuing operations is $258 million to $278 million which equates to $1.72 to $1.85 diluted earnings per share from continuing operations, and we expect to spend in the range of $100 million to $115 million for capital expenditures. This figure is higher than the $86 million we spent in 2011, but obviously we are a much larger company and we have some carryover spending from 2011 on several Greenfield projects that we started last year.

Cash flow from operations is expected to be in the range of $250 million to $280 million, assuming that net income flows through to cash and there are no major changes in the way our working capital grows relative to sales.

Just take a moment to discuss some of the things Rob and I considered when establishing the guidance. We don't provide quarterly guidance, but I will just point out that Q1 2011 we benefited from fairly very severe weather which drove up the number of accidents, and approximately a $0.02 contribution from rising commodity prices.

This year we're seeing a mild winter, commodity prices are flattish to Q4 2011 but prices are actually about 5% to 10% lower than Q1 last year. So that will impact other revenue on a year-over-year basis. And scrap prices at the moment are marginally lower than they were on average for the whole of last year.

In 2011 our other revenue grew over 2010 in part because our other revenue category grew as commodity prices rose. The guidance assumes stable auction commodity prices compared to today's level.

If that assumption holds true, you should expect to see other revenue grow compared to Q4 2011 more in line with the volume of cars we buy, but if prices fluctuate you will see an impact on that revenue line. Other revenue where we record scrap and core revenue, dropped from 17% of total revenue in Q3 to only 13% in Q4, primarily because of the ECP transaction. So our exposure to commodity prices is being diluted, about as we have repeatedly pointed out, they can cause some short-term fluctuation.

We are seeing negative year-over-year [mile driven] comparisons and there seems to be some threat of higher gas prices returning. But having said that, we did note that the miles driven actually increased in December 2011, the last month we have seen reported after falling for nine consecutive months. The guidance assumes the [economy] gets modestly better later this year and the miles driven trend stabilizes and starts to improve. With that, I would like to turn the call back to Rob to summarize before we open to questions.

Thanks, John. To summarize, we were very pleased with the fourth quarter and our performance throughout 2011. Despite milder than anticipated weather conditions which are not in our control, we are excited about the opportunities that are firmly in our control for 2012 and beyond.

Our entry into Europe via ECP provides exciting growing opportunities both in the UK, and eventually, continental Europe as well. We will continue to execute ECP strategy of aggressive expansion this year, and in fact, accelerate new store openings.

Here in North America, we believe their are ample opportunities to continue our growth across all business units. Strategic tuck-in and Greenfield markets are available in our full and self-serve businesses. Our reman engine platform is now sufficient to support our growth objectives for the foreseeable future. We will continue our efforts to add additional product lines as we execute upon our one-stop-shop goal for our collision and mechanical customers.

And finally, I expect our [HD] division to grow as well as we add strategic geographic locations to better meet the demand of our expanding customer base. All of these business units supported by our 17,000-plus dedicated employees, allows us to project solid EPS gains for 2012. The low end of our guidance represents a 21% increase over our 2011 results, and at the high end we would increase EPS 30% year-over-year. Keep in mind that our EPS in 2011 exceeded 2010's EPS by 23%.

So you can see that we expect to continue the success we achieved in 2011. Kevin, we're now prepared to open the call for Q&A.

Thank you. (Operator Instructions). Our first question is coming from Sam Darkatsh from Raymond James. Please proceed with your question.

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

Good morning, Sam.

This is [Josh] filling in for Sam today. A couple of questions about your outlook for 2012. Just want to get a handle of where we stand after you have had Euro Car in the business for a little bit. What do you expect for gross margins to look like in the year, especially given that there was some softness in the quarter here?

Sure, Josh. It's John Quinn speaking. I've always said that if you look at our margins from a sequential point of view it's probably easiest to understand.

So Euro Car Parts was in Q4 for the full quarter. There is a couple of cent impact from falling commodity prices in Q4 over Q3 that probably compress the margins a little bit in Q4. So our expectation is that if you take that out, that barring any changes in scrap prices or car costs, is where we're expecting to come out in Q1 and going forward.

As I mentioned on the comments, right now scrap prices are pretty flattish to Q4, so we don't anticipate anything hitting us there. And car prices at the auctions are -- really been running fairly consistent for the last couple of quarters, so we don't anticipate anything there. Obviously, in the later half the year as some of the pricing programs that we're working on hopefully start to take another little bite at the apple, we may see some improvement in the back half of the year.

Okay. That helps. And a similar question. You mentioned there were some unique items in the tax rate for the fourth quarter along with the Euro Car effect. What would you say your new normalized tax rate is going to be going forward with the Euro Car in the mix?

Sure. We're not providing a specific guidance with respect to tax rate, but what we do see is that from budgeting purposes, we're using somewhere in the 37% to 37.5% range. Q4 had some true-ups in valuation reserves and that sort of thing. You normally see that in Q4.

Having said that, we do expect over time if the international operations grow faster than the domestic ones, over time you should see the tax rates drift down. The tax rate in the UK is obviously lower than here.

Okay. Thank you very much.

Thank you.

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

This is [well] -- first on ECP. Can you tell us what guidance assumes regarding the contribution from ECP? I think in the past you had thought maybe $0.15 to $0.18 for the full year, assuming you did not achieve the earn outs.

Yes. Again, we're not giving segment guidance per se. I think what Rob indicated was that the transaction has been progressing in line really what we gave previously, though.

That's correct. We think it's going to be in that range of the $0.15 to $0.18. We're not going to update that at this time.

That's fair. And then just digging in again on ECP. How many stores do you have today? Can you remind of that number? I think you said you wanted to add 20 to that base, which is a big number.

And then I'm interested in what you think that UK market can support long-term in terms of the number of stores that you operate.

Sure. When we came together with ECP in October there were 89 stores. We have added eight in this quarter already and there was one added in December. So we're at 98 locations. We think the right number is going to be somewhere around 120, Craig, to fully develop the network.

So what we think we will be at 20 by the end of this year. As far as what the overall market, 120 seems to be the number.

What we will also do is open some satellite stores. They won't be full branch stores to support sort of the remote areas of the UK. So I think when it's all said and done, we could be in the 135 range.

135. That's helpful. And then talk about a little bit the SG&A, or just operating costs impact of that very rapid growth on the P&L.

Let me just point out a few things. If you look at the sequential or the year-over-year, you can see there's a little bit of flux going on in the income statement.

When you look at total facility and warehouse distribution and SG&A, the UK operations are actually very similar to the domestic operations or the North American operations, except you will see there's a little bit of a flop. The European operations have lower facility and warehouse cost as a percent of revenue and they have higher SG&A costs. So you can see that in the income statement that we prepare year-over-year, but we think it's going to be very similar to what we see here domestically.

Over time we should see some leverage coming through some of that just as we do here. Putting more products through the same warehouses as we are able to start to ramp up some of the collision work. I'm talking longer term here.

And in terms of putting in new stores, generally speaking they do lose money for a couple of months. But within the first year they start to turn a profit.

Thanks. And then with respect to ECP and the organic growth. The parts and service organic growth number you share with us is a North American number correct, and does not include ECP?

That's correct.

What do you think the organic growth rate is or what would you comp -- what would a good expectation for comps be in that particular business given how rapidly you're growing it?

On the last call, Craig, we mentioned that we thought it would be in the high teens for organic growth and we're sticking with that. At that time we projected 10 to 12 locations, so it might be a little bit higher with the acceleration we are a doing, but it's going to be in the high teens.

That's comps plus including stores?

That's correct.

Okay. And then last question. You made four deals in the fourth quarter, one of which was ECP. The revenue contribution from the other three, can you give us a sense of what the annual revenue contribution would have been?

When we -- I will look it up.

Okay.

Maybe we should go on to another call and I will respond in a second. Is that --

Thank you.

Thank you. Our next question is coming from John Lavallo from Merrill Lynch. Please proceed with your question.

Hey, guys. Thanks for taking the call. First question is, historically I think we've thought about margin expansion in the 50 to 75 basis point range. ECP now seems to -- at least temporarily if not structurally, lowered the gross margin. The question would be is there enough leverage in the other operating expenses to still achieve that 50 to 75 basis points?

We are confident, John that we will continue to be -- that is our goal. As we've mentioned on previous call, it tends to be a little lumpy depending upon the acquisitions. Having done 21 acquisitions last year, we tend to see a little bit of a roller coaster ride in getting those numbers. But we certainly are standing by those predictions go forward.

Okay. Great. Next question. It looks like your payable base spiked in the quarter. Was there anything behind that? Am I missing something?

I don't think there was anything unusual. Maybe the ECP -- well, the ECP has longer payment terms than us. I guess that would be the right answer.

Okay. Helpful. And if I could sneak one more in here. There's some recent data out of Polk that suggests that first time buyers of vehicles, or the new vehicle buyer is holding a vehicle up to six years. I guess the question is -- I mean that gets into where your sweet spot is, and I'm wondering is there a difference in alternative parts usage between a new vehicle owner versus a second-hand buyer?

No. There isn't. As long as there's insurance on that car, certainly on the collision side of the business, the insurance company is making that decision, John. So no impact whatsoever.

Obviously, as a brand new car comes off the assembly line most insurance companies are a little reluctant to write alternative parts in the first year. As the car ages it obviously ramps up. But no difference between first and second time owners.

Great Thanks very much, guys.

You're welcome.

Craig, just to follow up on your question. The other acquisitions are about $20 million of annualized revenue.

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

Thank you. Good morning.

Hey, Tony. How are you?

Good. First question I had was with all these acquisitions you've made between the engines and ECP and everything, is there now a more normalized cadence of revenue swings throughout the year? I mean I know the third quarter used to be the most volatile, but I would assume that ECP given the nature of their business may actually have a little better quarter in the third quarter than your traditional business. I just was trying to see how this may flow now on a more normalized basis.

Well, Tony, I certainly think that as we continue to grow and diversify our business we are certainly less susceptible to winter and weather conditions, actually. So I think you're going to start to see our revenue more normalized across the quarters, but certainly here in North America we will still certainly see Q1 as being the largest impact.

But certainly ECP, the reman engine which is more consistent, they actually have a little bit of a spike in the summer with the really hot weather. So I think we will see a little bit more normalization, but Q1 will still continue to be our best quarter. Because even ECP is a little bit tied to the weather with cold weather. Certainly their sales of mechanical parts, rotating electric parts, definitely ramp up in the winter months.

Okay. And how has their winter been? Has it been off to the same start that yours has been here domestically?

It was a little soft, but then they got a little bit of blast here in late January, early February. So they had a nice little pick -- Europe you may have seen on the news, obviously got our winter this year. They had some really cold spells over there. So it's a little slow start, but they definitely got some tailwind in late January, early February.

Okay. And if we look at the detail that you provided in the EBITDA segment, it looks like the EBITDA on the Euro Car side is just under 9%, which is certainly below the core LKQ. I'm just wondering how much of that is opportunity to make up over time, and what would be the biggest areas that you could attack to improve that overall EBITDA?

Sure. Tony, I will just comment and then maybe Rob can add something. On that segment disclosure we allocated the restructuring costs and the deal costs back to the European segment. So that is probably a little bit suppressed from what an otherwise normal EBITDA margin would be. I think we did talk at the time of the deal that the European operations, or ECP, has a little bit lower margin. Part of that we think is because they are growing so quickly. And as I mentioned, they do lose money on the initial store openings for a little while. So if they were to stop the growth rate, I think that some of that would just naturally come back and you would start to see conversion towards the margin.

We think the collision parts may have a little bit higher margin than the normal hard parts market that right now is comprising the majority of their revenue. So I think over time you will see convergence to a mean, if you will, but it's going to take awhile quite frankly. Rob, do you have?

Yes. I was going to add to that, Tony. That the collision parts market is similar what we have got here in the states. So our concept is getting more products on the same truck.

We are encouraged by that deal. As we add collision parts there that we are not adding delivery trucks. We're putting it on our existing distribution.

So we hope to drive more revenue with the same expenses, and certainly we will see that pull through on the bottom line. But as John mentioned, it will take time.

Initial signs on the collision market, we pretty much started our process in late December, hired a manager to start marketing to the collision repair shops; and just from January to December we had 21% increase. Granted on a small number, but as we get ready to launch here in late March and April on the estimating systems, we expect to see that ramp-up pretty quickly and start to pull through on the bottom line.

Okay. And one other question maybe pertaining to what you're doing over in Taiwan. That facility, is it dedicated to procurement or sourcing product for the US, or is some of that end up over in Europe? And then two, how much of your product was coming in at a less than container load? I guess what I'm trying to gets at how big of an opportunity from a cost save does this present?

Yes. Let me answer your first question; is yes. This will absolutely help the UK, probably even as much as if it not more than the United States as they're starting to get up and running as their demand will be a lot lower than LKQ's.

To your second question. We weren't shipping less than container loads to the United States, but what we had to do -- for example in Chicago, we would bring all the containers into Chicago, break the containers out and then send them out to the remote branches. Off of Chicago it was going to Iowa, Missouri, Wisconsin and Minnesota, for example.

So now what we have the ability to do is we'll take all that product into our Taiwan facility, break it down in Taiwan and then load the containers directly to the Iowas, the Wisconsins, et cetera. So it will be much less touch point. So really not a financial impact to be gained here, but more of an efficiency that the parts will get there quicker to the locations and less touchpoints here in the United States.

More important parts that I like about this deal is that it's allowing us to put safety stock there. A lot of our manufacturers, Tony, are smaller in nature, and we have to buy limited amounts and we always funnel that through existing other vendors that we bought from. Now we can buy directly from those people, and our in-stock fill rates we're expecting to go slightly higher as a results of this. So less touchpoints, better fill rates.

And finally the last thing I would add to this, is that I think it's going to give us a major competitive advantage over our competition in that they don't have the ability to do this. Because of the fill rates going up, we'll be in better condition than any one of those competitors we have.

Okay. That's great. And, John, maybe interest expense. How should we think about that for the year? And I'll drop off.

Sure. Obviously the fact that the envelope -- the cash flow guidance of $250 million to $280 million minus the capital expenditures. So barring any acquisitions, we're going to have positive free cash flow.

So the balance would drift down, but we've got about 69% fixed interest expense already with the swaps. and we aren't really forecasting a dramatic move in the LIBOR. So I'm not really anticipating the overall interest rate to change a lot. It's really going to depend on if we do any acquisitions, how much debt we're able to pay off.

Okay. Thank you.

Or if it ends up growing.

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

Good morning, everyone.

Good morning, Nate.

Morning.

I wanted to ask a little bit further in terms of the pricing initiatives. Obviously it seems like you're making a little bit of headway. Sounds like maybe some more even towards the end of the year. Just wondering if you can elaborate now that we're into that a little bit in terms of where you've seen the greatest traction and where you still see the greatest opportunity.

Sure. We will continue to work on this. I like to use a baseball analogy.

We're probably in the third inning of a nine inning game here. As we mentioned on previously calls, Nate, our core retrieval program has been very, very successful. Not only is it helping us to generate some revenue, but it's also generating product for our remanufacturing division. So we'll continue to work on that and push that program as we add product lines as well.

We talked about deviation controls in the past and their ability to keep our reps tied to a certain sales price and those continue to grow as well. One of the initiatives we did last year that paid dividends is we encouraged our managers to sell deeper in inventory, deeper into the vehicles. So getting more value out of the same salvage that we once had.

As I mentioned on the last call, we felt pretty confident that our margins had bottomed out in Q3 and they have. It appears they have. Again, when you take out the ECP and the commodity debt, we are making some progress there.

In terms of where the benefits lie in the future, continue to work on price maximization. We're working on algorithms now, so see price points where we can touch our price points. I think that might be perhaps our biggest opportunity as we look at supply and demand algorithms to raise prices across all product lines, actually. So we will continue those efforts as well as working on system enhancements that make our reps better decision makers as we continue.

Okay. That's helpful. And then can you give a little bit of update in terms of back here in the US, in terms of your facility updates, in terms of co-locating facilities, facility upgrades, where we are with that CapEx cycle?

Sure. I'll talk about where we are in terms of doing those, and John can jump in with financially the impact.

We have always had a strategy here in the United States of upgrading our warehouse, particularly in the aftermarket side of the business. It's a continual process, and every year we do budget bigger warehouses and consolidating of warehouses.

We're certainly done with the consolidation and integration of the keystone LKQ warehouses. That's all been done. But as we continue to grow we continue to upgrade our warehouses.

So every year I would say we have anywhere between 15 and 20 projects of upgrading warehouse capacity. With the Akzo, acquisition we did last May, we had to do some upgrading of warehouses there as well to accommodate for the paint storage. So we will continue to do that for the foreseeable future as we continue to grow.

You also had a little bit of question about the salvage side of the business and what we're doing in that respect as well. We've started to do some interesting consolidation of some of our product lines. For example, in Leominster, Massachusetts we split one of our full service yards in half to make one side full-service the other half self-service. So getting some synergies there as well.

We've also started what we call and in between yard. Traditionally on the self-service it's a lower dollar car, and of course, our full-service tends to be a much higher dollar high car. But there is a car in middle between those two numbers there that we're looking at opportunities in that side of the business as well.

And some of those operations have been shared now. Co-mingling with a full-serve yard or self-serve yard. So we will continue that process as well. John, anything you want to add on the financial side for the CapEx?

I don't think so. I think it's just normal in terms the CapEx spend. Every year we have some of these expenditures, and I think that's just built into our normal guidance here.

Okay. And then just one housekeeping question. Do guys have the capability to tell us what organic growth would have been on a same day basis if we took out the one less day this quarter versus a year ago?

Not really.

Okay.

The way we counted there are 63 days.

Got it. Okay. Thanks, guys.

Thanks, Nate.

Thank you. Our next question is coming from Scott Stember from Sidoti & Company. Please proceed with your question.

Good morning.

Good morning, Scott.

Good morning.

You talked about the weather and the impact it had on the business. Could you maybe just frame it out the fourth quarter versus what you're seeing in the first quarter, just the magnitude.?

Sure. I figured we were going to get this question today. As I thought about how I would answer it, Scott, I thought the best way was probably to answer this question is to really reflect upon our strategy since early 2004. At that time we made a conscious effort as a company to reduce our exposure to the salvage and commodity markets by entering the aftermarket parts industry.

We fast forward seven years, and as a result of our efforts to add additional product lines, we find nearly 50% of our budget of revenue this year will be derived from non collision type sources. So we have really worked our way away from the exposure we have in terms of weather. So not only have we successfully reduced our exposure to the commodity markets, I think we have done a good job of insulating ourselves from the anomalies of a winter like we're having today.

With that said, we certainly would prefer a much more robust winter and it's more mild than we care to see, especially when you compare the comps. Last year was one of the worst records on history for winter and this year is one of our softest.

But we have some data to answer your question about what we are seeing in terms -- what the mildness is happening in Q1. We certainly deal with the estimating companies that follow and track the insurance industry. Our intelligence there tells us that claims are down roughly 4% to 5% year-over-year through January.

But as I said earlier, despite the fact that all this slower weather -- normal weather, our non collision divisions, specifically heavy duty truck, reman, self-serve and ECP are performing very well. So we're confident once we get the more normalized spring weather, our collision related sales will be back on plan.

To give you some indication of where we are have in January, despite the warmer weather we actually did have -- in the strong comps year-over-year -- we did realize same-store sales growth in January. So while it's been a factor, it's not been to the point where we're ready to obviously be concerned about the fact that Q1 is not going to be made. We think we were diversified enough that we can mitigate the warmer weather.

While there was an impact in the fourth quarter, it seems like the first quarter would probably have a little bit more -- just given the fact that most of the winter is in the first quarter.

Correct. But again, with these non collision divisions that we have now, they're doing very well. So they're making up any softness that we're seeing.

Great. And on the aftermarket side, could you talk about the NSF testing program that you have and what stage that's in and how it's affecting your aftermarket sales?

Sure. What we are seeing in the certification programs, let me give you an update on that.

AQRP, which is really where our NSF program is today, we've increased from year-over-year a total of 9,900 parts, an increase of 5%. CAPA, as we predicted with a little bit of competition from NSF, their certified parts are up 10%. Coming in at 4,300, and NSF, of course, which now is in the certification business, has doubled year-over-year to come up to 850 parts.

So certainly we believe that the impact that's going to have is when insurance companies that only write certified parts, the more parts in the program the better. I referred to those estimating companies earlier when I talked about claim count. They reported year-over-year -- one reported a 40 basis point improvement in alternative parts and the other reported a 50 basis point improvement.

So we are still making progress and whittling away at the OE market share. And I would like to remind everybody of course, State Farm, the largest insurance company in the country, is still on the sideline, not writing alternative parts. So we believe that these alternative parts are going to be beneficial and will continue to eat away at the OE market share.

Great. And then last question. With ECP you talked about how you are tackling -- growing the collision side of the business. Could you just remind us again the percentage of APU right now from your ECP business and what the opportunity is there?

Absolutely. Yes. We believe through our intelligence that the alternative part usage is less than 10%. We believe also through our research that we have done with the estimating companies, it is about a $6 billion collision repair market. The replacement parts in that industry will be somewhere between $2.5 billion to $3 billion, so plenty of opportunity there to grow. Our initial response as we have hired this new gentlemen to go market to the insurance companies has been very receptive to our introduction here. Again, late March, early April.

Excellent. That is all I have. Thank you.

Thank you, Scott.

Operator, I think we have time for one more call.

We certainly do. Our final question is coming from Scot Ciccarelli from RBC Capital Markets. Please proceed with your question.

Hey, guys. It's, Scot Ciccarelli.

Hi, Scot.

Hi, Scot.

You guys have been, obviously, on a toward acquisition pass here. With all the different businesses that you have acquired -- because you have gotten a little bit out of what you have historically done, obviously. Are there any segments that stick out? Where maybe you haven't gotten the synergies that you expected when you first made the deal? I am just wondering if maybe there is a common denominator regarding what has worked and what hasn't.

I think the answer to that question is, no, we haven't had any really tough surprises on integration. We are getting these companies very quickly converted to our systems, integrated into the distribution network. So, no. I would have to say that overall we have been very pleased and really wouldn't change much on that.

Of course, the ECP deal there was really very little integration involved there. So our first European deal didn't really have much to worry about in that respect in integration.

Here in North America, really no surprises as we worked through these deals regardless of the product line we are doing.

Interesting. And then you referenced this regarding alternative part usage in the last question, I believe. But if the economy gets a little bit better, it seems like we are starting to head that way. Do you think that changes the appetite for alternative part usage, either from the consumer level or at the insurance company level at all?

I actually don't because last year the insurance industry had there second worst catastrophe experience in the last 20 years, I believe. I went back 15 years, but I believe it was actually 20 years, next to 2005 with Hurricane Katrina. So they are still under enormous pressure to get cost out of the business.

The industry data we have seen is that the insurance market is going to get much more competitive in terms of premium dollars, so I think they will continue to slug it out. And as they continue to fight for premium dollars, they will be looking under every stone, looking for opportunities.

Perhaps, maybe, if a person gets a new car, if the SAR rate was to go up dramatically, there might be a little bit of a decline initially just because of newer cars coming into the market place. But as far as the insurance industry goes, I don't think there will be any downturn whatsoever in their appetite for alternative parts.

Thanks. And then my last question is regarding the aftermarket business. Is the majority of your aftermarket segment collision at this stage, or is there a lot of mechanical in there?

It is getting diversified more and more. Today though, the majority is collision, although we are entering into the cooling business more and more which is more of the mechanical side.

But of course at ECP, most of their revenue is going to be on the mechanical side as opposed to collision side at this point.

Got it. Alright. Thanks a lot, guys.

Thanks, Scot.

Thank you. That does conclude the question-and-answer session. I would like to turn the floor back over to management for closing comments.

Thanks, Kevin. We want to be respectful of everyone's time, so we look forward to speaking again in 60 days when we announce the Q1 results at that time. Thanks for joining the call today and have a great day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.