LKQ Corp (LKQ) 2012 Q1 法說會逐字稿

Greetings, and welcome to the LKQ Corporation first quarter 2012 results teleconference. (Operator Instructions). As a reminder, this conference is going recorded. It is now my pleasure to introduce your host, Mr. Joe Boutross, Director of Investor Relations. Thank you, Mr. Boutross, you may begin.

Thank, LaTanya. Good morning, everyone, and thank you for joining us today. This morning we released our first quarter 2012 financial results, and updated our full year 2012 guidance.

In the room with me today are Rob Wagman, President and CEO, and John Quinn, Executive VP and CFO. Rob and John have some prepared remarks and then we will open the call up for questions.

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

Before with 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 Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward-looking statements involve risk 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 by with the FCC, and the Press Release we issued this morning, for more information on potential risk. Hopefully everyone has had a chance to look at our 8K, which we filed with the FCC earlier today. As normal we are planning to file our 10Q 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. Diluted earnings per share in Q1 was a record $0.54 an increase of 38% as compared to $0.39 for the first quarter of 2011. Please note that the first quarter 2012 diluted earnings per share included a gain equal to $0.04 per share and resulted from a favorable legal settlement of $.03 per share anda change in fair value of contingent consideration liabilities of $0.01 a chair.

Earnings per share in the first quarter of 2011 included a charge of $0.02 per share as a result of loss on debt extinguishment. Revenue reached a record quarterly high of $1.03 billion in the quarter, an increase of 31.2%, as compared to Q1, 2011.

As we mentioned on our last call, during the first quarter we witnessed a very mild winter which created some head wind for the collision parts side of our business, and we also faced a tough comp for the first quarter of 2011 when the winter weather was very severe. Based on dialogue with some insurance carriers, insurance claim was down 5% to 6% year over year in the first quarter 2012 with some regional carriers reporting claims reductions in the high teens. Despite themild winter and high gas prices the company reported 3.2% total organic growth and 3.6% organic growth for parts and services.

Revenue growth from acquisitions was 28% in the quarter. We are particularly pleased with the organic growth or our recycled, remanufactured, and related products and services revenue. In the quarter sales from those products were organically 8.5% compared to the same period in 2011. We encountered softness in our collision product sales primarily due to the mild winter and the subsequent drop in reported claims.

The continued growth in organic parts and services revenue in 2012 is a result of the increased use by insurers and their direct repair program networks of alternative quality replacement parts to reduce claims cost. Although we are only through one quarter, our channel checks have indicated improved penetration of alternative part usage and it appears we are trending at historical averages about a hundred basis point improvements in alternative part usage. We anticipate these gains to continue for the balance of the year.

Next, I'd like to share some operational statistics. During the quarter we purchased over 59,000 vehicles for dismantling by a wholesale operations which is a 7% increase over Q1 2011. 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 recycled parts operations.

Turning to our self service retail businesses. During the first quarter, we acquired nearly 89,000 lower cost self service and crush only cars as compared to 81,000 in Q1 of 2011 which is a 10% increase. In our heavy duty truck operations, during the first quarter we purchased roughly 1,800 units for resale or parts as compared to 1,000 in Q1, 2011. As you can see in the year-over-year increase in our heavy duty truck procurement, we continue to be excited about the growth prospects and customer demand for this business which posted solid organic growth in the quarter.

Now turning to Euro car parts. During the quarter we opened 9 new branches and we added three additional branches in April bringing our total branch count to 102. I mentioned on our forth quarter call, our entry into Europe via ECP provides exciting growth opportunities both in the UK and eventually continental Europe as well.

As witnessed by our recent branch openings, we continue to execute ECP strategy of aggressive expansion this year. And due to favorable market conditions, and ECP's management's proven ability to effectively and efficiently open branches, we anticipate accelerating new branch openings to 30 in 2012 which is ten more than the 20 we were anticipating on our last call. In addition to the new branch openings I am happy to announce that on March 28th, we launched our collision parts initiative for Euro car parts. The timing of this launch bodes well with the market share growth the independent repair ships are witnessing in the UK, and the premium pressures auto insurance carriers are facing in the UK from certain regulatory offices.

I also want to provide an update on our paint and equipment business. It has now been three quarters since our acquisition of Akzo Nobel's 40 company owned stores. All of the locations targeted for move and integration were completed ahead of target and the systems conversions went to plan as well. We have opened 12 new paint and body outlets since last June, with three of those occurring in Q1 2012. We have an additional five locations budgeted for the balance of 2012, and to be clear, all 17 outlets were added to existing LKQ facilities thereby leveraging existing infrastructure. We are very pleased with the growth of this line and anticipate future growth in both same store sales as well as our Greenfield locations.

Acquisitions during the quarter we acquired four companies. We purchased a light vehicle wholesale salvage operation with four locations in Quebec, Canada, we purpose a self service operation in North Carolina, we purchase a paint distribution business in Ontario, Canada, and finally, a distributor of remanufactured engines based in California. I am quite pleased with the a acquisition pipeline and anticipate continued additions to our north American operations throughout 2012. At this time I'd like to and John Quinn to provide some more details on the financial results of the quarter.

Thanks, Rob. Good morning, and thank you for joining us today. In addition to our normal reporting, as Rob mentioned, we have a few noteworthy items in the financial statements so I'll just walk down the income statement and comment on the items of note.

Starting with revenue our total revenue growth year-over-year for the first quarter was 31.2% or $245 million taking us to $1,032,000,000 revenue for the quarter. The largest driver of this improvement was 28% growth, or $220 million associated with acquisitions of which Euro [inaudible] parts was approximately $158 million.

Our organic growth was 3.2% in total, parts and services gross was 3.6%. Please note that the parts and services growth number includes the revenue associated with the ten new branches opened by DCP since our acquisition. This contributed about 40 basis points of the growth.

I will also point out that we saw organic growth of 1.6% in others revenue. Other revenue is where we recorded scrap and core sales. Total growth for the revenue was 8.5% primarily due to acquisitions. The prices we achieved for scrap were essentially flat year over year.

In Q1 2012, revenue from our self serve business was $83 million, or 8% of LKQ's total revenue. Approximately 33% of this revenue was part sales included in recycled and related products and 67% scrap and core sales included in other revenue. Our reported gross margin of $447 million at 43.4% included a favorable legal settlement of $8.3 million. Without that settlement our gross margin would have been $439 million and the margin 42.6%

Last year we reported a gross margin of 43.7%. So excluding the legal settlement our gross margin fell by 110 basis points year-over-year. ECP accounts for 60 basis points of the year-over-year change. The Axel Nobel acquisition was about 20 basis points.

And you may recall in Q1 2011 we mentioned that our gross margin included the benefit of rising commodity prices equal to the $0.2 earnings per share. We believe that benefit in Q1 2011 for scrap prices accounts for about 50 to 60 basis points. So operationally if you adjust the legal settlement, the acquisitions and the change in scrap, we believe that the gross margin actually improves year-over-year.

Our facility and warehouse distribution SG&A costs were 28.9% in Q1 2012 compared to 28.7% in Q1 2011. Facility and warehouse caused 3.2% compare today 8.9% and this decrease was entirely due to ECP.

Distribution costs were 8.9% this quarter compared to 8.4% in the same quarter of last year. 20 basis points of this increase was ECP and the other 30 basis points was North America.

Selling and G&A expenses, were 11.8% of revenue in Q1 this year compared to 11.4% last year, and effective ECP again essentially accounted for all this increase. During the quarter we reported $200,000 of restructuring acquisition related expenses.

Depreciation and amortization for the quarter increased $4.1 million year over year to $14.9 millionprimarily of a result of acquisitions. The amortization of intangibles and the depreciation associated with ECP being the primary driver of the increase.

Net interest expense of $7.4 million was $1 million higher than the same quarter last year. This increase is mainly due to our higher debt levels but we did see improvement in our average boring cost. Our effective boring rate was 3.03% in Q1 2012, compared to 4.58% in Q1 2011.

You'll note that we didn't have any debt restructure charges this year where as we considered $5.3 million expense in Q1 last year. We are showing a favorable adjustment to the change and contingent considerations liabilityaccount of $1.3 million. This income is related to the ECP contingent consideration but it is primarily a revaluation required under a new GAAP rule offset by accretion. Both these items have little to do with how we view that business which remains as favorable as it did last quarter.

Our tax rate for the quarter is 36.8% compared to 39.2% in Q1 last year. We continue to see some benefit from lower foreign tax rates. On our reported basis diluted earnings per share was $0.54 in Q1 2012 compared to $0.39 in Q1 2011. Last year we had $.02 of cost of loss on debt [inaudible] so adjusted Q1 2011 was closer to $0.41 or $0.42 on an adjusted basis with the rounding.

This year the $0.54 includes $.04 related to a legal settlement and a contingent payment adjustment. So on an adjusted basis Q1 2012 EPS would have been $0.50 again compared to an adjusted $0.42 last year.

Cash flow from operations for the first quarter was $110 million compared $77 million in 2011, and improvement of $33 million. The primary driver of the year-over-year improved cash flow was improved in EBITDA of $32 million. In the first quarter we spent and $21 million in capital expenditures and $25 million in acquisitions.

During the quarter we reduced our net debt by $66 million. We ended Q1 with $897 million of debt and cash and cash equivalents $55 million. These figures compare to the $956 million of debt and the $48 million of cash and equivalent at December 31, 2011.

Availability under a credit facility was $504 million. I mentioned last quarter that the term loan we had arranged last year was drawn on January 31, 2012 and we used those proceeds to partly repay our revolver.

We have $41 million of letters of credit supported by the facility, but those are taken into account of our liquidity of $504 million. With the cash of $55 million on the balance sheet, our total availability is $559 million. At quarter end our debt under the credit facility was 74% fixed and 26% floating.

Turning to guidance, as we stated in the past our guidance excludes any restructuring costs and transactions costs, gains/losses, contingent purchase price adjustments, capital expenditures and cash flow associated with acquisitions. A revised guidance of organic revenue growth for parts and services is 5% to 7%. We dropped this range 50 basis point to reflect a softer Q1 than we had anticipated. A revised net income is $262 million to $282 million which placed $1.75 to $1.88 diluted earnings per share. This incorporates into our guidance the legal settlement from Q1.

We've left unchanged our guidance from cash flow from operations from $250 million to $280 million and our expected capital spending of $100 to $115 million. Give you an update on some of the things that Rob and I considered that could impact the guidance. We included in the internal growth and the earnings guide, the new ECP locations opened to date and planned for the balance of the year.

Rob mentioned that we plan to increase the number of branch openings and I mentioned on the last call that new branch opening are generally unprofitable for a few months. So that step up in development activity could actually be a bit of a drag on 2012 earnings, but we believe it's the right strategic thing to do given the long run. We'll see these locations contributing both dollars and operating margins.

In Q1, internal growth was below our guidance of 5% to 7%. Rob explained that we believe the softness was primarily related to the winter as we had noted in the last call. Particularly compared to the heavy growth we had because of severe weather in Q1 2011 which made for a difficult comparison.

To reach our guidance we're obviously assuming that the rest of the year gets better and we do think there are some tail winds to help us in that regard. In 2011 we saw alternative part usage rates in the industry of 37%. Based on what we're seeing in the market today we believe that in 2012 we'll see that rate increase to at least 38%.

We're also expecting Q4 to be facing an easier comparison in our North American operations and in Q4 we'll begin to report growth for the entire ECP operation as organic, not just the new branches. Just to give you some sense of ECP's growth, last year in Q1, they reported $131 million of revenue compared to $161 million this year. So that's growth of 23% with no acquisitions.

On the down side, we've seen the car part continue to age. While that's great for our mechanical portions of our business, it does impact the collision side. As that aging happens, we may see insurers more likely to total a car than repair it and as the average age of cars repaired rises we may see a dip in the belly of the parts being used. And if for some reason the accident frequency rate does not bounce back to historical rates for miles driven falls due to gas prices, then there could be some risk in these tail winds.

Moving on to scrap prices, these appear to us to be stable at the moment and essentially flat to where they were on mean average or whole of last year. Total other revenue was 13.6% of or total revenue in Q1 this compared to 16.5% in Q1 last year. So our exposure as a percentage of our revenue to commodity prices is smaller. As we've repeatedly pointed out they can cause short term fluctuations.

Rob mentioned our car buying. The average price that we are paying at auction for recycled cars has been fairly stable for several quarters. The supply issues caused the OE production problems and used car prices go higher, we could be impacted for [inaudible] margins but in the longer run as the rate of car production returns to higher levels we could see our car buying improving. Now I'd like to turn the call back to Rob, please, to summarize and then we'll open it up for questions.

Thank you, John. Our results this quarter demonstrate that even with the head winds and external factors that we can't control, such as gas prices and weather, LKQ was able to realize strong revenue and earnings growth. We believe our unique competitive position and the actions we have taken in response to challenging operating environments since our founding, have translated into consistent earnings growth. We will continue to focus on other ways to improve our gross margin, build partnerships that increase the acceptance of alternative parts and identify strategic opportunities that provide results for our shareholders.

Our outlook for 2012 is positive and builds upon the momentum we created during 2011. The strength of our balance sheet has provided us with the capital to financial our organic growth and make strategic acquisitions while our competitors are shrinking their businesses in this current challenging environment. This strength, in our group of over 18,000 valuable employees places LKQ in a solid position to execute our strategy and continue to invest in our network and inventory both domestically and abroad. And with that, LaTanya, we are now prepared to open the call for questions and answers.

Thank you we will now be conducting a question and answer question. (Operator Instructions). One moment please, while we pull for our first question. Our first question comes from Nate Brochmann with William Blair & Company. Please proceed with your question.

Morning, everyone. Great quarter. I want to talk a little bit, obviously, the acquisitions namely ECP are just doing great. Relative to when you picked them up, what's really different in terms of what you've seen and what have you been able to add to really drive that upside relative to expectations?

Yes, it has been performing extremely well. Really, we've just provided them to the ability to expand and keep their heart planned going forward. As mentioned we've done nine locations this year. We'll continue to grow that business. Market conditions there are very good. We find that the competition, while trying to get aggressive to compete with us, we've just been able to grow the business to what we expected we could do. The collision parts side of the business that we launched on March 28th, we're very pleased with that addition.

We expect good things out of that. We had our official ceremony over there when we launched that program. But just over all being able to bring product in market to the aggressive marketing campaign we've been doing over there, just is really going well.

And just to kind of follow up on that what gives you the confidence on the collision parts side that you just launched in terms of the market willing to accept that? If you could just give us a little bit of color in terms of understanding that.

We went over there and we launched an industry forum of repairers and insurance companies in the room. Very well received by everybody in the room. Of course, we estimate the AP usage at under 10% in the marketplace, so plenty of room to grow, Nate. And then, just looking at the total market, we believe it's a $2 billion to $3 billion market push and repair market.

Anecdotally right through, just very well received. It's early days but we are growing the business. Granted, it's low numbers right now, but we do realize its going to be a marathon, not a sprint there. It took years to get the United States to 37 and change and hopefully 38 next year, so we've certainly got room to grow in the UK so we're excited about the opportunity.

Great exciting stuff. I'll get back in line.

Our next question comes from Scot Stemper with Sidoti & Company. Please proceed with the question.

Good morning. You posted very strong growth in the recycled business despite the fact that we had a warmer than expected winter. Can you maybe talk about how you were able to do that and whether it was mechanical side that offset that?

Sure, Scott, it's John Quinn. I'll start and maybe Rob can supplement what I say. Absolutely, the demand for the parts [inaudible] side generally exceeds our availability. Our fill rate is maybe 70%, 75%. So if we combine more cars it's typically the first choice under insurance repair, so if there's any softness it's going to come out of the after market side, on the demand side because the insurance companies will always buy [inaudible] product if is available. So our buying is up, we're buying more cars, we're buying the cars correctly we should be able to continue to grow that business, obviously mechanical is still in very strong demand. The aging car parts probably helps us to that extent. Rob, do you want to supplement?

I would just add to that Scott that obviously with the aging car parts, that John mentioned, mechanical parts are going to have a little bit more shot in the arm here going forward and as I mentioned on the last call, our diversification away from some of that collision side of the business is helping as well so into the cooling products and those other type of products. So that is helping, obviously, the growth of the non-collision side of the business.

All right. As we work our way out of the winter season, could you talk about how April sales are probably looking, particularly for the after market side?

Glad to. We touched upon what we talked about in the prepared remarks. Claims volumes are down, to mid-teens and some of that will carry into Q2, and last year our Q2 comps were 8.4%, likely help from the strong winter of 2011. April is off to a slightly sluggish start and we're really equating that to no back log coming out of the Q1 mild winter. There are some good signs, though, as John mentioned. Higher gas prices in Q1 seem to be abating now a little bit, we're seeing some positive news on miles driven, in February their up 1.8%. Our buying and backlog in the salvage business remains very healthy.

So assuming claims come back we're in great shape. And the stock ration on the after market is at it's all times highs so we're well positioned there. Just one last comment. Certified parts programs. We saw that 300 basis point improvement in the number of certified parts from Q1 to Q2. So our manufacturers are still engaged in the business and still helping us grow the business. So hoping that some of those positive tail winds come through, I think we're in a great position to gain the same store sales growth.

And to the UK with the ECP, since that seems to be one of the reasons for the strong performance in the quarter,can you talk about how they are performing to your initial expectation and maybe just talk about where the sales growth is right now?Maybe just quantify the actual growth rate for revenues at ECP.

Scott, I'll try to answer your question. In terms of the ECP, its performing very much in line with what we expected in today's business. What they brought to the table is the capital to let them open their branches at a faster clip. Their cadence had been more based on the cash flow. We said that we're prepared to invest more. I think to the extent that some of the additional openings are adding to their revenue base, is a positive. And the opening of the collision business I think is probably a little faster than that, I think we probably expected [inaudible]. I'm sorry the other question was?

I'm just referring to what the sales growth looks like at ECP right now.

Sure, I think I mention in my remarks last year in Q1 we estimate they did about $131 million in revenue and this year it's $160 million. So, they've done a 23% increase year-over-year and that's essentially all organic, obviously including additional stores.

Just final question on housekeeping. To confirm your guidance, backing out all charges and gains for the year still about $1.72 to $1.85?

Correct. We added the Q1 legal settlement into the guidance.

Okay. Thank you so much.

I just want to add one more thing to John's comment about ECP. I think our strategy has always been to keep strong management teams in place after an acquisition and we certainly achieved that at ECP and I think that is also another reason why we're meeting our goals and exceeding them slightly because the management team is so engaged.

Got you. Thank you.

Our next comes from Craig Kennison with Robert W. Baird & Company, Inc. Please proceed with the question.

Good morning, Thank you for taking my questions as well. In ECP, are you having any challenges staffing that level of growth with the kind of talented general managers you need in place?

Craig, that was one of my concerns when we originally went to 20 and absolutely not. We are having no problem attracting. That was the biggest [inaudible] to growth was getting the right people on board. We have a Human Resource department that is firing at all cylinders over there and I have weekly phone calls with that team and we are meeting their staffing requirements. Leases are falling into place and that's allowing us to go to the 30, so staffing was our major concern and we are being told no problems whatsoever getting the proper management in the seats.

And you may have partially already addressed this but part of the recipe for success with ECP has to be a good partnership with the estimating software platforms. Where are you at with respect to that? Have you been featured in any of their software packages and might that be a catalyst going forward?

There are two basics estimating systems there as opposed to 3 here in the United States but one of them has almost a 90% market share from what we're told and that's Solara. We are underestimating system our inventory has been mapped. We take our part number and match it to the OE part number. That has been done and it is now available to both insurers and repairers. The other one is a company called Glass Matix we are also on their estimating system and showing our inventory. So now very similar to the United States can see our inventory in writing an estimate.

So can you see when you get an order from that system and whether it's having an impact yet? I'm sure it's early, but is that some data that you'll be able to capture?

We can not. We don't know if the shop absolutely selects our part and we don't get a notice back. The notice we get is forces in the form of a sale. But we do know from insurance companies that will tell us anecdotally that they are selecting our parts and we are starting to see come of that going forward.

And in ECP your primary core market was a mechanical market. What customer overlap do you have in order to sell your collision repair parts?Is it a fairly high overlap?

The collision repair shops will use a fair amount of those mechanical parts as well so we will pick up something there and certain pooling products as well. The mechanical repairer is going to do the radiators and condenser type products as well. It is an overlap with some of the mechanical shops like some of those body shop parts but also the other way around. So there will we some overlap. There's approximately 5,000 body shops in the UK so it is opening up a market to some of our mechanical parts as well.

So are you forced to staff that differently and add collision repair sales people to address that market separately?

What we have done is trained a go-to person in every one of our branches to do that collision repair marketing. All the regional sales managers have been trained already. We've picked out one person from each branch to be the go-to person and we are actively doing that and in the last call I mentioned that we hired an outside marketing director to go after the insurance companies. So, all the marketing efforts are in place now.

Last question, then, given the positive inflection in miles driven and the comment you made about APU being up a 100%,why did you feel the need to shave a little bit off organic growth, given first quarter was pretty good?

To be clear, APU is up 100 basis point. It looks like it's going to trend that way. Really just some of the head winds. The April sluggishness, we're a little concerned when the collision market does come back. We're not sure about fuel prices where they will eventually go, but just coming off of the top quarter with a 3.6% growth. In order to get to upper-end, we'd have to really hit on the high end of that going forward, and it's just enough uncertainty right now in the market place, that made us feel comfortable bringing it down half a point.

Makes sense. Thanks guys.

Our next question comes from Bill Armstrong with CL King & Associates.

Good morning. So, the UK business is mostly mechanical, collisions still pretty small. What's going on in the UK mechanical market that's driving all this growth at ECP?

I think we're seeing a shift towards the independent repair in that marketplace, a lot more comfort level there. Just a shift towards that type of marketplace when it comes to getting away from cars that are out of warranty as well. They're facing an aging car park as well which is making feel more comfortable with the independent repair. So I think there's some of that. I think as we mentioned on the last call, the number one, the former number one, is reorganizing itself and they're probably having a little bit of turmoil over there as well so I think we're taking some market share from our competition as well.

Got it and as you start to really move into the collision side of the business, what's the out-look for starting to do salvage parts? Right now you're just after market I believe.

That's correct, Bill. Our thought was to make sure that the insurance companies would live up to their end of the bargain when they said if we build it they will come. We're are looking at salvage opportunities in the UK right now. Nothing has been to the point where we're ready to announce a deal, I want to be clear on that. But we are looking at opportunities. There is one major challenge that we face in the UK the interchange that we have here in the United States that basically maps a used part to a to a new part has not been fully developed in the UK so we have some work to do there as well. But we want to make sure the after market takes off and we're hopeful it does, we certainly will be looking very closely at the salvage market.

Got it okay. And on a different topic, you know this explosion in Germany of this resin plant that's now potentially causing shortages for manufacturers of a break in fuel lines. Is there any opportunity for you guys to capture some short-term incremental business?

Probably not. Everything we've been reading on the topic, we believe they're going to find an alternative resin to keep production up. We thought we would have had a better chance after the tsunami, or the Thailand floods, and we saw no interruption there. We're not thinking we are going to get any up tick from that. We are watching it closely. These are break lines in fuel tanks lining from what I understand. Not a big market for us in the first place, but we do are have that inventory should it become an issue but we're not anticipating anything at this time.

Got it. Last question. On miles driven on US roadways actually posted year-over-year increases December, January, and February. Is there any way from your perspective to determine why that's turned around especially in light of high fuel prices and what might factors might cause those increases to continue or not to continue going forward?

It was interesting actually one of the biggest markets that had an uptick in miles driven was northeast at 4.3% and that was solely because they could drive because there was no weather. So we think with fuel coming down, it looks like it is going to come down a little bit,hopefully the miles driven will continue to show positive signs. We believe that Q1 was purely related to the fact that there was no weather.

Makes sense. Okay. Thank you.

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

Hi guys this Patrick [Palfry?] sitting in for Scot today. Thanks for taking my question. First you mentioned that you're seeing 100 basis points improvement in alternative parts usage from internal checks. Is there any particular reason that you're seeing this being up is it structural or is it just merely insurance companies looking to keep claims price down?

I think it's this pressure from the insurance companies to drive costs down. It's also the fact that I mentioned that we have a 300 basis point improvement in our certified parts program. So that's certainly adding value as well. This is more parts becoming available in the marketplace. I think it's a combination of availability of product as well as insurance company just driving demand.

Looking at the acceleration within the recycled parts, organic growth, looking at 2 year stack there was a nice acceleration. Do you think you can keep the pace of sales in recycled growth running at this rate?

We feel confident with the backlog we have. Our backlog coming out of Q1 is as good as we've seen it in a while so we have the inventory. We believe the demand will stay there because of the aging car park. We're cautiously optimistic. We're well positioned to continue growth in the recycled parts of the business.

You mentioned you acquired four businesses in the quarter, you wouldn't happen to know sort of what their annual revenue is from those four businesses?

We do. It would be about $46 million.

Okay. Thanks a lot guys.

Our next question comes from Gary Prestopino from Barrington Research Associates, Inc.

John, what tax rate should we be using for the full year? I noticed the tax rate was a little bit lower than we expected?

Sure, the tax rate for the quarter is 36.8 and basically we're going to use around that level for the rest of the year again. There may be some discreet items in the back half of the year that could move it but we built into our accounting that rate.

Dealing with these insurance companies in the UK, are they under the same cost?

Cost pressures?

Yes, cost pressures and all. You're starting out with obviously after market parts and you've got to gradually, or long term, work in [inaudible], but is it the same kind of environment that is in the US?

Actually a little worse, Gary. They have some regulatory government offices that are actually looking into the fact that the premiums are so high in the UK. They are actually probably getting some governmental pressure that we don't see here in the United States. They need to do something and we think the timing of this thing was perfect in light of what we're seeing over there in terms of the regulatory agencies.

Basically, it's UK based insurers that you're dealing with. Is there any cross border?

The only cross border we have is in Canada. Some of these carriers write also in Canada. We see a lot of overlap there, so we are actually seeing some help from our Canadian friends.

Our next question comes from John Lorallo with Merrill Lynch.

First on facility and warehouse expense. Better leverage there than I had expected and John I think you mentioned, you referred today to ECP as a driver there, did I hear that correctly?

On a year over year basis.

Why would ECP help leverage that expense?

Basically they're operating on one national warehouse and then a lot of smaller locations.

Okay. That's helpful.

I'm sorry, John, they demand on a little higher distribution costs, though because they need to get the product [Inaudible].

Okay. That's fair and in then in terms of SG&A. Do you anticipate being able to leverage that even further heading into the second quarter?

Q1 is typically our best revenue quarter for the year, depending on how the seasonality comes on we'll have to see how the revenue plays out. If you look at sequentially we were pretty pleased with the leverage that we got out of the business with the uptick in revenue we were worried would drive those things down. And I don't know that I want to go into specifics on the quarter. If you look at Q4 to Q1 this year, I think you'll see we are getting some leverage out of the business. I know that our management team has been very focused on cost control and we started to see some softness in the weather related product in Q1. We really battened down the hatches there and I think we'll saw some of that effect in the back half of Q1.

Great and if I could sneak one final one in here. I read something recently about a potential law change in Ohio that would essentially allow anyone to buy salvaged vehicles not just licensed buyers. Is this something that could increase auctions prices and are there other states that could follow this?

John, we have a big part in the state of Ohio where you have to be licensed to attend the auctions. There is a move to open the auctions to the public, and that certainly could cause some pressure in auction costs. However, to your second question, there are some states that do have big cards, but the vast majority of the auctions are open to dealers and pretty open. Ohio actually allows what's called bidder brokers as well so we're actually seeing the infiltration of the non-bidders into the auction already, so I don't think we're going to see a huge change, even if that law passes, but certainly opening up the auctions does make it more competitive and would likely raise prices slightly.

Our next question comes from John Lawrence with Stephens, Inc.

Would you just tell us a little bit about ECP and talk about the footprint with the growth expansion? If you look at logistics and how far these are apart any chance of canibalizing in those markets?

Two other locations now John and we're adding 15 to 18 more by the end of the year. And by the way, most of the concentration has been in central and southern England. So, a lot of these branches are moving north towards Scotland. We think that certainly branches in major metropolitan areas can be five miles apart so it's not necessarily canibalization it's just better service to the customer which should allow us an up take in revenue because, as John mentioned in his previous remarks, that delivery time is critical in this side of the business.

So we believe we'll get to roughly 120 locations by the end of this year if all goes to plan. We want to add probably another 20 or 25 next year which would have us at about 150. And then on the last call we talked about these ancillary locations. Not full size branches. Our average branch over there is a 10,000 square foot branch. These would be smaller offshoots in more rural areas that we can get parts to on a less [inaudible] delivery basis but still be able to service the market. That may be another 20 to 25 locations so when it is all said and done we'll be at roughly 175 locations in the UK. Canibalization, when you one 5 miles apart from each other we do move some of the revenue from one branch to the other, but again because of the better service levels we can provide, we do see an uptick in the revenue pretty quickly.

If you look at the parts offering itself on the plan and you compare it to last year, how much would the improvement be comp wise at ECP related to product offering and where would you expect that to go? Not only on it on the base business, on the mechanical side, but as you launch the collision?

John. It's Jonathan speaking. They have a very, very high fulfillment rate on their base business. In the high 90s and one of their competitive names is they are known as a hard to find part store, for the cars. So year-over-year I don't know that there's an been appreciable increase in terms their product offering that would be driving that organic growth. We've invested a couple million dollars in inventory on the collision part side. I would say that is really de minimus in terms of what it contributed to the growth thus far. As Rob mentioned [inaudible]. I think it's probably to early for us to really start giving any kind of numbers and stuff how much that's going to contribute to the growth.

Great and last question, Rob, would you walk us low the timeline of what happens in the auction when you've had those mild winters in the past and what happens to auction prices, say 6, 9 months down the road?

Generally speaking when a is totaled from an insurance company it can take from 45 to 70 days before insurance company gets a properly signed off title and converted to a salvage title. To give you an example an accident today wouldn't be seen at an auction until July, in most cases. We think maybe the mild winter may cause a little bit of stress on the auction poles. We haven't seen that yet, even today, or in April we should be seeing total losses from February using late January early February. So the auctions have been very robust here. We know the auctions are trying to get more cars in through charities and other types of different sources. We're not sure what's going to happen in the summer but we do expect it to be off, the volume, coming off of a soft winter.

As a result prices may in fact increase as salvage becomes less available, however, and the converse to that of course is the [inaudible] coming up which is putting more used cars into the marketplace hopefully soon, as we start to see an uptick so there maybe some offset there. The Manheim index is up 1.6% year-over-year,so obviously there's still pressure in the used car market. So expect to see a competitive market in the summer with a potential lack of salvage coming out of a mild winter.

We have come to the end of our Q&A session. I would like to turn to the call back over to management for closing comments.

Thank you, LaTayna. Thanks, everybody, for joining the call. We appreciate the support and we look forward to speaking to you in another 90 days.

This concludes the conference call. You may disconnect your lines at this time and thank you for your participation.