LKQ Corp (LKQ) 2012 Q3 法說會逐字稿

Greetings, and welcome to the LKQ Corporation's third-quarter earnings call. At this time, all participants are in a listen-only phone. A brief question and answer session will follow the formal presentation.

(Operator instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Boutross, Director of Investor Relations. Thanks you sir, you may begin.

Thanks, Christine. Good morning, everyone, and thank you for joining us today. This morning we released our third-quarter 2012 financial results and updated 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 the telephone access for today's call, we are providing an audiocast via the LKQ website. A replay of the audiocast and conference call will be available shortly after the conclusion of this call.

Before we begin our discussion, I'd like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as the result of various factors. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date in which it was made, except which is required by law.

Please refer to our form 10-K and other subsequent documents filed with the SEC, and the press release we issued this morning for more information on potential risks. Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. As normal, we are planning to file our 10-Q in the next few days.

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

Thank you, Joe. Good morning, and thank you for joining us on the call today. We are pleased with the results we reported this morning. Diluted earnings per share of $0.18 for the third quarter ended September 30, 2012, increased 5.9% from $0.17 for the third quarter of 2011. As noted in our press release, the third-quarter 2012 diluted earnings per share included a charge equal to $0.01 for a change in fair value of contingent consideration liabilities and for restructuring and acquisition-related expenses. Without this charge, our EPS would have been $0.19, an increase of 12% over the same period last year.

Revenue for the quarter was $1.02 billion. It increased of 29.7%, as compared to $783.9 million in the third quarter of 2011. I am pleased to say that we achieved this year-over-year revenue growth with one less operating day compared to the third quarter of 2011, and that this revenue reflects the second highest quarterly revenue achieved by LKQ, second only to Q1, 2012.

During the quarter we achieved 5.6% organic growth for parts and services and 1.6% total organic revenue growth. Revenue growth from acquisitions was 28.2% in the quarter. After adjusting our revenue results for one less selling day in the third quarter, organic revenue growth for parts and services would have been approximately 7%. I would like to highlight that our positive total organic growth was accomplished during a period of continued deterioration in scrap prices.

The organic growth in our other revenue category for the quarter was negative 18%, primarily driven by the pricing pressures we faced in the scrap market. I am also pleased with the organic growth for parts and services in the quarter, given that during this period, net losses and loss adjustment expenses from catastrophes were down over 50% year-over-year, according to insurance industry sources.

The continued growth in organic parts and service revenue in 2012 is also a result of the combination of the increased use of alternative parts by insurers and in direct program networks to reduce claims cost in our continued success at gaining market share from the competition. As mentioned on previous calls, we were confident that the historical trend of 100 basis point improvement in alternative part usage would continue in 2012. And today I am pleased to announce that that goal was achieved through the end of the third quarter. According to CCC information services, APU now stands at 38%. Next, I would like to share some operational statistics.

During the third quarter, we purchased over 60,000 vehicles for dismantling by our wholesale operations, which is a 5% increase over Q3, 2011. As for volume at the auctions, supply remains strong throughout Q3, and continues to meet our needs early in Q4. With inventory already on hand and a continuation of our current run rate for acquiring cars, we have a sufficient inventory to grow our recycled parts operations.

Now turning to our self-service retail businesses; during the quarter, we acquired over 106,000 lower cost self-service and crush-only cars, as compared to 90,000 in Q3, 2011, which is an 18% increase year-over-year. I would like to mention that we are starting to see some pricing relief at the auctions. During the quarter, we witnessed a 5% and a 15% sequential drop in the cost of our wholesale salvage in self-service vehicles respectively. Please note that part of that cost reduction is related to the scrap pricing pressure we faced in the quarter. Despite that correlation, I am encouraged by the reduction in the Manheim index and the increased saw rate, which we believe will take some additional pricing pressure off our auction procurement efforts.

In our heavy duty truck operations, during the third quarter, we purchased roughly 2,100 units for resale or parts, as compared to 1,600 in Q3, 2011, which is a 31% increase year-over-year. Turning to Euro Car Parts, we continue to be impressed with the performance of Euro Car Parts and its ability to capture market share and open new store branches. In Q3, Euro Car Parts achieved organic revenue growth of 28%, versus a comparable pre-acquisition period. During the quarter, we opened 10 new branches in the UK, bringing our total branch count to 120. Since the acquisition of ECP in early October 2011, we have opened 31 branches, surpassing the target number of 30 I mentioned on the last call. Given that market conditions in the UK, combined with the continued success of ECP, we have approved an additional 12 new branch openings for the fourth quarter, bringing our total target to 132 branches by year end. I would also like to update everyone on our collision parts program in the UK that we initiated back in late March.

During the quarter, we witnessed strong, double-digit year-over-year growth with our collision part sales at ECP, and I expect this trend to continue into the fourth quarter, based on the numbers we are seeing for early October. Although these numbers are small base, we are encouraged by the acceptance of alternative collision parts in the UK and the accelerated interest and continued dialogue we are witnessing with UK-based insurance carriers. Clearly the continuation of this trend bodes well for ECP's collision part sales as we prepare for 2013.

Lastly on operations, on October 2, the Company announced a new phase one technology integration with Mitchell and their Repair Center Tool Store technology platform in our proprietary electronic ordering system LKQ InTouch. This two-way integration provides shops with greater procurement efficiencies by enabling real-time access to our vast inventory of aftermarket and salvage parts. Parts look up in ordering, which previously required multiple steps and was time consuming, has now been simplified and streamlined into a workflow process that enables shops the ability with one keystroke to place an order with LKQ via Mitchell's Repair Center Workspace, on a real-time basis. This technology advancement is a good illustration of our state of the art operations and our commitment to utilize technology to improve our business.

Now, moving to acquisitions. During the quarter, we acquired two companies. One that operates two self-service yards, one full service yard, and a scrap recycling business in south Florida. And one that operates a wholesale salvage yard, an aftermarket parts distributor, in Missouri. In addition to these two acquisitions, in early October we acquired two Canadian companies; Pro Autobody Parts and BMC Autobody Parts. Pro Autobody Parts operates 12 aftermarket parts distribution locations in 7 Canadian provinces; Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, and Saskatchewan. BMC Autobody Parts operates three aftermarket parts distributions in Quebec.

These two acquisitions have strategically enabled us to serve our customers across all of Canada with our aftermarket product lines. We continue to see attractive acquisition candidates across all of our regions in North America, and I believe our pipeline will support our plan to put additional facilities in key underserved markets. We continue to explore additional product line acquisitions to add to our domestic footprint and product offerings, while simultaneously prospecting other international markets beyond the UK.

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 thank you for joining us today. One item of note, we did split the stock during the quarter so references to earnings per share are on a split adjusted basis.

Starting with revenue, this is our third consecutive quarter reporting revenue in excess of $1 billion. Revenue in Q3 was $1.017 billion, representing a 29.7% growth over the third quarter of last year. Acquisitions drove 28.2% of the growth, representing $221 million. Our total organic growth was 1.6%, and parts and services organic growth was 5.6%. The parts and service growth number includes revenue associated with the new branches opened by ECP since our acquisition and that added 230 basis points to the growth.

Revenue for ECP was $181 million for the quarter. And while we didn't own ECP in Q3 last year, we believe ECP grew 28% over the same quarter last year when they achieved sales of $142 million. Partially offsetting the growth in parts and services was a negative organic revenue change of 17.8% in other revenue. This drop equates to a decline in other revenue of $24 million. Other revenues were -- we record scrapping core sales. This negative organic growth was primarily driven by a fall in scrap prices, particularly scrap steel.

We also had a delay in recognizing approximately $6 million of precious metals revenue, which I will address in a moment. Total growth for other revenue was positive 1.8%, due to acquisitions slightly more than offsetting the fall in scrap pricing. The impact to revenue from foreign exchange was de minimis, but I will remind listeners that beginning in Q4 2012, this number may be a little more volatile with the larger base of foreign revenue coming into play now that we have reached the anniversary of the acquisition of ECP.

In Q3, 2012, revenue for our self-service business was $89.2 million for 8.8% of LKQ's total revenue. Approximately 36% of this revenue was part sales included in recycled and related products and 64% scrap and core sales included in other revenue. A reported gross margin was $410 million, or 40.3% of revenue. For the same quarter last year, we reported a gross margin of 42.6%; so we witnessed the decline of 230 basis points. But we note the decline in our gross margin is probably worth pointing out that our gross margin dollars grew $75 million for 23% improvement year-over-year.

There are a number of things that impacted the gross margin percentage. As we anticipated in the Q2 earnings call, the largest impact is due to lower scrap and core prices, which we estimate to be approximately 100 basis points. We also mentioned last quarter that through an acquisition we began processing additional precious metals ourselves as we try to improve the yields from our scrap cars. But that acquisition would decrease our gross margin percentage. We estimate the impact on margins due to acquisitions was 40 basis points negative.

We incurred an increase in warranty cost of 40 basis points and we add fewer cars under assured disposal and crush-only contracts, which tend to be higher margin, and that added a further 30 basis points to the decline. The balance of the margin change released a number of small items, including mix. Our combined cost for facility and warehouse, distribution and SG&A expenses, were 29.6% of revenue in Q3, 2012, compared to 29.8% in Q3, 2011. Rob and I are pleased to see that we appear to be in the middle average of these costs again as our parts and services revenue grows. These costs fell as a percentage of revenue, despite the drop in commodity revenue from 17.1% of revenue in Q3 last year to only 13.4% this year. As you appreciate our other revenue category, which is predominantly scrap and core sales, requires little support in the way of these costs.

Facility and warehouse costs were 8.5% of revenue compared to 9.2% in Q3 last year. This decrease is primarily due to adding ECP, which has lesser amount of facility and warehouse expenses than our North American operations. Distribution costs are 9.2% this quarter, compared to 8.7% in the same quarter last year. ECP drove 30 basis points at this increase and we saw a 20 basis point increase in North America. Selling and G&A expenses were 11.9% of revenue in Q3 this year and last year. ECP drove a 20 percentage -- excuse me, 20 basis point higher, which we offset in North America, partially through the reduced incentive compensation costs.

During the quarter, we recorded $116,000 of restructuring and acquisition related expenses, as compared to $2.9 million of these costs last year. Depreciation and amortization for the quarter increased $4.4 million to $16.7 million, primarily as a result of acquisitions. The amortization of intangibles and depreciation associated with ECP was the primary driver of the increase.

Net interest expense of $8 million was $3.1 million higher than the same quarter last year. The increase is mainly due to our higher debt levels as we had been funding our acquisitions out of free cash flow and debt. Our effective borrowing rate on our bank debt is 3.1% in Q3, 2012, and was essentially flat to the prior year. We are showing an expense related to the change in continuing consideration liabilities of $1.9 million. This is primarily an accretion on the liabilities we have recorded. Our tax rate for the quarter was 35.1%, compared to 38.5% in Q3 last year. We continue to see some benefit from lower for -- for lower foreign tax rates as we earn more income offshore. In addition, we recorded $1.3 million of discrete tax adjustments, primarily as a result of a reduction in the UK corporate income tax rate.

On a reported basis, diluted earnings per share were $0.18 in Q3, 2012 compared to $0.17 in Q3, 2011, an increase of $0.01 or 6%. In Q3 this year, we had an adjustment to contingent purchase price of reduced earnings per share by $0.01. Last year, Q3 included a similar dollar amount of restructuring costs, but due to rounding would not have changed the EPS reported figure of $0.17. And as we have mentioned, in Q3, 2011, we had little impact from changes to scrap and core prices; whereas this year, we were negatively impacted by approximately $0.02.

A few comments on the nine month's year-to-date cash flow and uses of cash. Cash flow from operations for the first nine months of 2012 was $182 million, compared to $159 million in 2011. So an improvement of $23 million. Year to date EBITDA improved $76 million, though we had $27 million higher cash taxes in 2012, and an increase in cash interest payments of $5 million. Higher [upflows] associated with incentive compensation, prepaid insurance, and other working capital items account for the balance of the change.

Year to date we spent $61 million on capital expenditures. We have also incurred $133 million on acquisitions, of which $13 million was in the third quarter. At September 30, 2012, we had $982 million of debt in cash and cash equivalence or $69 million. These figures compare to the $956 million of debt and $48 million of cash and cash equivalents at December 31, 2011. Availability under credit facility at quarter end was $483 million after taking into account letters of credits drawn against them. With the cash of $69 million in the balance sheet, our total availability was $552 million. At quarter end, our bank debt was 68% fixed and 32% floating.

In turning to guidance, there's been our long-standing practice our guidance excludes any restructuring costs and transaction costs, or gains or losses, contingent purchase price adjustments, capital expenditures or cash flows associated with the acquisitions. I note we have been and continue to include the legal settlements we spoke of in Q1 and Q2 in our guidance. We increased our guidance for organic revenue growth for parts and services from a range of 5.5% to 7% to a new range of 6% to 7%. Year to date, we are at 5.1% organic growth, but there are a number of factors that should increase that rate in Q4.

In Q4, 2012, we have one additional day over Q4, 2011. In Q4, we are going to start reporting all of ECP's growth as organic, and at this point we are assuming a more normal weather pattern than we had in Q1 this year along with an increase in miles driven. A revised income per net income is $265 million to $272 million, which equates to $0.88 to $0.91 diluted earnings per share. We revised our estimated cash flow from operations of $240 million to $270 million. As I mentioned earlier, our capital spending through nine months was $61 million, so we have reduced our capital spending guidance from $100 million to $115 million range to a new range of $90 million to $100 million.

I realize there's a lot happening in the gross margin numbers this quarter and some listeners are going to try to understand how these items we have called out will impact Q4. I'll give you a little color on the things we see today. Which obviously could change in the next two and a half months, but will hopefully give you a sense of what we are seeing.

Scrap prices remain volatile. As the moment they continue to be a drag on the business. We saw scrap prices fall in Q3 and we have seen them fall again in October. If nothing else changes we'd expect to have at least $0.01 of unfavorable impact in our Q4 results from scrap because of the lag between the time we buy cars and the time we scrap them. We have seen a drop in the cost of the cars at auction and in the self-serve business. Some of that improvements unfortunately been offset by the lower scrap, but notwithstanding we are expecting to see improvements in the recycled line of business gross margins over the next few quarters. It isn't clear if that will begin materialize in Q4 this year or early 2013, but the trend does appear to be favorable.

On the cash flow side, Rob mentioned that we're targeting to open up an additional 12 new ECP branches in Q4, 2012, in addition to the 31 we've already completed since acquisition. We'll also be looking to increase our buying of vehicles in the North American segment. Depending on how successful we are, both of these events could lead us to have higher inventory levels than we currently expect, which would obviously negatively impact our cash flow, which should lead us in good shape as we enter the busy Q1, 2013 season.

I think it's fair to say the way that Rob and I have been reviewing the revised guidance is as follows. Since June, we have seen a steady erosion of commodity prices, which is continued through October. We reported that a drop negatively impacted our diluted earnings per share by $0.01 in Q2, $0.02 in Q3, and we could have a further impact of $0.01 in Q4. With that kind of a headwind, we felt the top end of the guidance range was less likely. The updated guidance reflects our reality as it impacts earnings and operating cash flow. And working capital could fluctuate in Q4 depending on the timing inventory builds, but would lower capital spending and strong liquidity if we remain in good position to execute our strategy.

And finally, we believe the fundamentals of the business remain strong. As Rob mentioned, the alternative part usage statistics continue to improve. We continue to experience good organic growth and the business continues to diversify into markets that have great growth opportunities.

With that, I would like to turn the call back to Rob to summarize before we open to questions.

Thank you, John. As we enter the last quarter of 2012 and prepare for 2013, our outlook continues to be positive. I am encouraged by the trends in miles driven, the continued growth in APU, the recent reduction of vehicle pricing at auctions, the strength of Euro Car Parts, and the robust pipeline of acquisition opportunities we are witnessing.

Every day, our group of over 19,000 team members endeavor to overcome the short-term variables that are out of our control by tackling opportunities to drive organic sales, continuously promoting the use of alternative parts, aggressively pursuing market share gains, and implementing operational efficiencies to enhance the productivity of our organization and our customers that, ultimately, will reward our stockholders now and over the long term.

And with that, Christine, we are now prepared to open the call for Q and A.

Thank you we will now be conducting a question and answer session. (Operator instructions) Nate Brockman with William Blair.

Good morning, everyone.

Good morning, Nate.

I wanted to talk -- a couple of things. First on ECP, I mean obviously that business continues to really put up solid and awesome growth. I was wondering if that kind of indicative just of some competitive weakness over there still in terms of market share gains, or is it really blocking and tackling and adding more products.

I think it's probably a combination of both, Nate, to be honest. There are some -- our competitors are seeing some struggling times for them and we are capitalizing on that, but I really believe that the growth has a lot to do with our expansion of those stores. We're being able to go after national customers now, aggressively going after the collision parts side of the business too. I think it's more operational, but clearly there is a component that has to do with struggling competitors. But I think our strategy and the extra 12 stores will further cement that and continue the growth into 2013 and beyond.

Okay, that's great. And maybe just hitting on that point too, obviously looks like there is some acceptance just from the general marketplace on the collision repair. How are the discussions progressing with the insurance carriers? Do you feel like sometime in the next 12 months that we could get some clarity on how they're going to look going forward.

I think that is the right time frame; 12 months. We have long said this is a marathon, not a sprint, and that has proven to be true. We're are trying to create an industry over there, to be honest.

So, the meetings have been very productive, very receptive, and our plan is that if we can get a couple of carriers to jump onboard, we believe it will be a snowball rolling down the hill. We will gather some steam. So, that is the plan and I think in 12 -- within 12 months maybe we should have a very good idea where we stand.

Okay that's great. And then just one last question and then I'll turn it over. But obviously, congratulations on getting the system tie-in with Mitchell. From a competitive standpoint, that seems to be a big differentiator for you, and a really good tie-in to a lot of your end customers there. How are you guys viewing that, in terms of potential gains you could ultimately get out of that.

It's a two-stage process, Nate. This was stage one, phase one. Just a couple of key components to the program I think are worth highlighting. It's real-time data now; previously our inventory was given to them on a disk which was 30 days out. Real-time data is pretty powerful.

We are getting both salvaged and aftermarket parts shown, and not just by plant but by region, so they'll see our entire regional database that will allow the shop to take advantage of the distribution networks we have in place. Of course with the one keystroke to order the parts, that's pretty powerful. I believe the best part it is 24/7. The shop can go on Saturdays and Sundays and run its process. That is phase one and that is completed.

Phase two, I think is going to be the ultimate real test of the program, where it's actually fully integrated into the estimating system, where the shop won't have to move out of one screen at all, so it will be fully integrated. We're being told probably at the earliest of six months to get that level of it done. I think that at that point, that is when we're going to be able to gauge the true power of what the potential uptick on this thing is. But clearly we're moving in the right direction with the technology, and initial feedback from the body shops is they're more than willing to do this if it's effective. I think this will be the first test, and in six months we'll have a really good idea where this thing can go.

That's great. Congratulations.

Thanks, Nate.

John Lawrence with Stevens. Please proceed with your question.

Good morning, guys.

Good morning.

Rob, would you -- if you take a look at ECP overall and you just look out for the next 12 to 18 months, as obviously the entrance has been very successful. How do you look at allocating CapEx dollars? Obviously, you're doing that with some more stores, but longer term, that marketplace, the viability to spend more capitol over there.

I'll start off, and, John, feel free to jump on after, but Nate -- John, we have said that we believe the total store is going to be somewhere around 150 to 175. We believe that number still to be true. In fact, we may actually be able to go a little bit above 175 with those satellite stores to feed the more remote areas. So, the CapEx is planning.

We'll continue to grow and use capital to expand in the UK. We are also looking, obviously, to acquisitions over there as well to help supplement what we have done in the UK already. So, there's likely to be a little bit more CapEx coming down the road in 2013 and '14.

All right. And secondly, if you look at opportunities in the US, you know, coming into the tax year, are you seeing that pipeline continue to be as robust and prices -- What are you seeing with pricing and how badly people want to maybe move out?

Yes. Now, John, what we have announced today with the two and a quarter and the two announced that actually happened in early Q4. We have announced 15 deals, and just looking at the pipeline, I feel very confident that we're going to be able to beat 2011's 21 acquisitions. So the pipeline is as robust as we have ever seen it, and quite frankly, we believe it's going to carry into 2013. Pretty much across all of our product lines, we're seeing a lot of activity and I'll just touch on those short and quickly.

For the aftermarket, with Champa, the Canadian acquisition that we announced today, we're pretty much done in Canada with aftermarket. We'll look at strategic tuck-ins, again, paint/cooling accessory businesses now across the United States and Canada. The self-service, we're still looking to fill in holes in geography. On previous calls I announced that we were working on three greenfields. Those have all become alive. One in Milwaukee, one in Oklahoma City and one in Charlotte. We have now approved three more greenfields in the process. That is going to be the strategy going forward there.

HD, again, continuing to search for strategic locations. The key there is looking for access to good distribution routes to be able to move the product. Europe, as I mentioned we're still in exploratory mode, but again looking for more opportunities on the UK, as well. And finally, full serve green fielding in western Canada, we have announced a greenfield up in Alberta and, again, looking for strategic geography deals much like the one I announced today in South Florida. That was a key market we were missing. So, we believe there's still a lot of market opportunities here in the United States and Canada, as well.

Thanks for that. And just for housekeeping, John, what was the revenue run rate for those that you announced today?

Sure, the acquired revenue is about $15 million trailing and a little bit under $2 million was actually booked in Q3 related to those acquisitions.

$2 million in Q3 and $15 million annual?

Yes, that was the historical run rate. Obviously, we're trying to grow that.

Great, thanks, guys.

John, that was just the Q3 acquisitions. It does not include the Q4 items.

Thanks, guys.

Thank you.

Craig Kennison with Robert W. Baird. Please proceed with your questions.

Good morning. Thanks for taking my questions, as well. The call has been very helpful so far. John, if I could just follow up then, what was the revenue contribution from the acquisitions acquired this quarter?

I don't think we're ready to call that out just yet, Craig. We're still working through a few of the things and they're not entirely on our system yet. We're going to be integrating that in the next 90 days.

That's fair, and then to follow up on the Mitchell question. Rob, can you remind us where you are at with respect to other estimate service providers, and sort of in the context of which phase you're at with respect to integration?

We are working with the other two estimating companies on similar products. To be able to do that and those are continuing. We hopefully will be launching something within the next quarter or Q1 at the latest. With at least one of the other estimating companies.

That's very helpful, and then John back to you. On ECP, tremendous growth, is there any way to put it into buckets? I would imagine you have new stores. You have same store sales growth. You have the impact from adding collision, SKUs. Trying to just get a feel for what the overall growth is based on those buckets.

Yes, the collision is still very small dollars. It's growing though probably 50% faster in terms of the base business. In terms of the total, what you might think of as same store sales, we don't have a good number of that because we don't have the good data before we acquire them and they have been opening stores prior to our acquisition. I did indicate that there was about 230 basis points contribution from the locations we have opened since we have acquired them, though, contributing to our total parts and services organic growth.

That is a helpful metric, and as we go forward and try to measure your overall organic growth, should we anticipate something like that? 230 basis point lift in future quarters related to ECP?

We have been very aggressive opening the locations. This is the second time we have raised the target for 2012. I don't know where we're going to go yet in 2013. I guess we're not really ready to announce that. But obviously, these are going to -- they take about three years to come to full maturation. So obviously, the opening stores in Q4 this year are going give us a fairly good tailwind going into Q1 next year.

And lastly, and sorry, if I missed this. Did you comment at all on the trends you are seeing so far in October?

We have not, Craig. I'm glad to give you an update on that. Really with the exception of the scrap, which we mentioned was likely to cause $0.01 based on today's rates. This is in range of our plan for October, so we are pleased with what we are seeing so far. Of course, ECP continues to be right on target where we -- and slightly exceeding on many cases.

But the most encouraging thing we are seeing in October again is the maintaining of our cost improvements in terms of salvage and self-service acquisition costs. The wild card for Q4 is scrap right now for us, but other than that, we're pretty pleased.

Thanks. And congratulations.

Bret Jordan with BB&T. Please proceed with your question.

Hi. Good morning. A couple of quick questions. And one on the Rhode Island Precious Metals Recovery business. Do you have a feeling for what the -- sort of the roll-out that is going for a 40 bp by gross margin lag to becoming neutral, then ultimately contributing. How does that time frame look?

The base business is processing commodities. In terms of that, the 40 basis points, until we anniversary it, we're going to continue to see that being a drag quite frankly. The reason we bought that business was, we were trying to get a little more out of each car in terms of the precious metals, particularity the catalytic converters. We had been selling the catalytic converters to third parties who were removing the platinum, rhodium, et cetera. We were going to internalize that. And, I mentioned a little bit that the -- we had a delay because, as we start processing them ourselves, there's a revenue recognition delay.

It doesn't impact the growth margin percentage per se, because we consider scrap just part of the overall gross margin. So there's -- in Q3 there is a slight delay. Probably rounds to $0.01 in terms of gross margin dollars that were missing because of the delay in terms of that processing. So, that will come back.

Ultimately, we are hoping to get a little extra margin out of each car and we're processing close to 160,000/170,000 cars a quarter right now. So, our thinking is, even if we can get $1 or $2 more per catalytic converter over time, that is accretive to the margins, but I don't know you'll see it popping out as an item that we'll call out per se. Does that make any sense?

Yes, it does. And one question relative to ECP, the pricing environment of the traditional autoparts over there. Unipart, have they changed their strategy at all, as far as the pricing given some new management, I guess, in the not too distant past.

We have seen a little bit more aggressiveness in the pricing from our competitors, trying to get back market share. But quite frankly we have been able to adjust pretty quickly and maintain our -- keep capturing that revenue and growing that revenue. So, we expect to be a little bit more aggressive in the next coming quarters, for sure.

And then one last question. Also on market share, but I think it's generally domestic market share. Earlier in your prepared remarks, you commented that you continued to gain share. Do you have an idea, on a year-over-year, what your margin -- share increase was? Domestically?

We do know this from insurance industry sources, Brett, that the claim losses are down year-over-year. Roughly, at about 2.4% is what we have been told year to date. So, with us growing at, you know, at 5.6%, it's hard to really quantify, but clearly we are taking market share from our competition. And of course the APU usage increase up 1% has helped, as well.

Great. Appreciate that. Thank you.

Thanks, Brett.

John Lovallo with Bank of America, Merrill Lynch. Please proceed with your question.

Thanks for taking the call. First question is on the receivable securitization facility that was put in place. I'm just curious, is this something that you have had in the past, and you know, is there any -- is it customer payment terms becoming less favorable that made you decide to put this in place, or were there other reasons?

We have not had that in the past. When we put the credit facility in place last year, we added a provision in there to allow us to do this. So, in our credit facility, we have a basket that we were allowed to secure up to $100 million of accounts receivable. And it -- it's nothing to do, really, with our payment terms. It is simply a way of getting some additional capacity, and it created a little bit more than commercial paper rate. So, on the $80 million facility that we have today, we're borrowing at just a little bit over 1% interest rate. So, it's very attractive financing, and just another source of capital.

Okay. That's helpful. Recently I read, and I think it was a piece put out by Mitchell, and they we're saying that OEMs domestically are becoming more a little bit more aggressive on pricing and, in fact, instructing repair shops to actually lower prices to match alternative prices. Are you guys seeing any of this?

We're seeing it regionally, John, where we see some aggressive dealerships. On a national impact, we really haven't seen anything to really worry us. General Motors is probably the biggest one on those types of programs, but they require the dealers to fill out on awful lot of paperwork.

We have talked to dealers that complain about the paperwork they have to fill out, and they have to buy truck loads of product, from what we understand, to be in the program. So, very few dealerships are actually participating. Only the bigger ones, but we haven't seen a major impact at all, actually.

And those programs have been around since 2008 on and off. They are marketing programs that the OEs periodically put in place and then they pull back, and it seems like it's just part of their marketing strategy.

Okay great. If I could sneak one last one in here. Also recently, I heard that France is considering deregulating the repair part market. Now, is this something that you think will go through and something that could be replicated in other countries? And does this give an opportunity for LKQ in continental Europe?

Well, it certainly does. You know, France was probably on the bottom of the list as an opportunity because of that. And the fact that they are not going to mandate, potentially, if it goes through, the use of OEM parts on the repair process certainly makes it much more attractive. And certainly if it gains steam, obviously other European countries may follow suit. Although, we don't see of anyone so restrictive as France. France is probably the most restrictive in terms of alternative parts. If they do overturn that, that will be a real eye opener for us, and an opportunity as well, John.

Great, thanks very much, guys.

Thank you.

Sam Darkatsh with Raymond James. Please proceed with your question.

Good morning, Rob, John, how are you?

Good morning, Sam.

Two questions. If my math holds, I think year-to-date, your wholesale vehicle purchases are up about 10%. I was surprised to see the recycle business on an organic basis only up 3% in the quarter after being up 8% in the second quarter, and your comparison was a little easier. Can you talk about why that number might not have been a little higher?

Sure. There are a couple of things there that affect that. First, one less day actually cost 150 basis point drop by that one day year-over-year. Secondly, the reduction in our secure disposal and crush-only vehicles, where we just destroy cars on behalf of certain customers, that caused a 50% -- 50 basis point decline today.

There is one other thing I did want to mention. Because of the mild winter, I think we saw fewer total losses coming out of Q1 and Q2. And don't forget, it does take 60 to 90 days before those cars hit the auction. So, those went into Q3. So, a little bit tougher buying market in Q3, which we believe has really rectified itself. Looking at the auction volumes now, we are seeing the cars that were totaled in Q2 and early Q3 are now hitting the auctions today. So, we think it is a one quarter blip. But maybe that one day, and the fact that the crush-only car revenue was down really caused that.

And so, I'll just add. You're right, we're up about 10% year-over-year. That includes the impact of the acquisitions obviously, because what we're reporting there is the total number of cars including acquisitions. If you're look year to date on a similar statistic, recycled parts and services is up organically 6.6%. So, if we pull out the acquisitions, and it's kind of a case for organically buying 5% to 8% more cars.

Okay, that is helpful. The second question. I noticed that North American EBITDA in dollars was down pretty sharply year-on-year despite sales being up. I know a lot of that is explained away with the scrap and the difficult margin impact from that. Do you expect that specific relationship and dynamic to continue EBITDA dollars being down, sales being up. How long does that last, and what are your expectations for gross margin here in the fourth quarter.

Sure. It's John, I'll try to take that one, and, Rob, you can supplement. No, we don't expect that. And part of it is as Rob mentioned, there was one less day. But some of the other things that we are seeing, you're right. Scrap was an impact. We don't expect Q4 to be as impacted by scrap as Q3 was. And we talked about 100 basis points and roughly equivalent to $0.02 in Q3, and we said that was probably going to be $0.01. That's not going to be as big a drag in Q4. It's still going to be a drag, but it won't be as big a drag.

In terms of -- we did have a delay, in terms of the precious metals and revenue recognition that we talked about. We started to process about half the cats at that acquisition, so some of that will come back in Q4, but then we may have a delay on some of the other products. Depending on where we move the rest of the cats into that facility, we will take another one quarter hiatus on some of that income at some point. It will either be Q4 this year, or maybe we will take it into early next year, depending on how quickly we can ramp up that facility.

Secured disposal, which Rob mentioned that hitting us about 30 basis points. Those things tend to be a little bit lumpy. Think of these as being for example, like cars from a train wreck. So, we can't predict those very well, when they're going to come. I can tell you in Q4, thus far, we're still expecting them to be down year-over-year. And then the other things. Warranty claims, that will get fixed. We think it is behind us now, but until we actually see how things transpire in this quarter. That is definitely a short-term phenomena.

And then, in terms of the cost of salvage, Rob mentioned that we are buying better at the auctions. Some of that is being eaten up by the scrap. But on a net basis, we do think that ultimately we are going to see our Late Model Recycle business gross margins improve. That may hit us -- may start to show up in Q4. We would expect it, if not in Q4, we'll start to see it in Q1.

So, we should look at a Q4 gross margin closer the 41%-ish range, where we saw in Q2 excluding the settlement gains. Is that how to look at it? Or would it be even better than that perhaps?

Well you know me, I don't like to give exact line item guidance. It will be -- at this point we're anticipating it to improve back.

Okay, thanks much.

Bill Armstrong with CL King. Please proceed with your question.

Good morning Rob and John. Just getting back to the precious metal processing, when will you be you anniversarying that?

We bought that business in June this year. So, it will be about a year. But, as we move the production from third parties over to that facility, it causes a little it of a delay in the recognition of when we can recognize the sale of the metals. Rather than selling the full cats, catalytic converters, to a third party.

We actually have -- it takes about a month to process them and then some time for the smelters to process them. So, we end up with about a quarter delay. So, I would imagine it's probably going to be another six months before we are fully implemented in that.

So, that is a $6 million delay you referenced earlier?

Right. And that will come back in Q4 favorably, but then we may have a delay either this quarter or next as we delay the other half of the business, as we start processing the other half of the cats.

So, then is that why the precious metal processing is a drag on gross margin because of this delay? Because I would think if you were basically getting more dollars out of each car, that should be better for gross margin.

Ultimately it will be better. The base business that we bought, though, is just -- the existing revenue stream with that business is a low gross margin business, frankly.

I see. Okay. And then, kind of housekeeping, on your earnings per share guidance, just, can you remind us what the year-to-date EPS was on a comparable basis excluding the restructuring, the acquisition-related expenses, the fair value of continginal liabilities? Just so we have apples to apples? It looks to me like it's about $0.66.

Let me just make sure I have the right number here. Those two items are -- let me make sure I have this correct -- those two items are a little over $0.01 combined.

On a year to date basis?

Right.

So, Q4 -- if we just back into Q4, that seems like that would be $0.22 to $0.25. Is that -- is my math correct on that?

Yes. We agree with that.

Okay. Great, thanks, guys.

Thank you.

Thanks Bill.

Scott Stember with Sidote.

Good morning. I missed the comments on scrap metal -- The impact of the gross margin, as far as the basis points?

I'm sorry, what was the --

The scrap metal impact on the third quarter from how many basis points?

About 100 basis points.

Okay. Got you. And just going back to the guidance question, you're excluding the -- all extraneous costs but you are including the legal settlement, which is, by my calculation, about $0.04. Is that correct?

Correct

Okay, great. And last, can you just talk about NSF program, how that's going along and progressing and what we can expect out of that in 2013.

Sure, Scott, this is Rob. We're actually seeing some great progress from NSF. Year-over-year, they have added 462 certified parts into the program, 60% growth. And also I'm talking about the certification programs. KAPA actually had 782 new parts entered into the system for 19% growth, and our own internal program, AQRP, we added 888 new parts year-over-year for an 8.5% growth. So, all three of those programs are growing nicely.

The insurance companies are demanding them to increase their usage, and we are certainly working with the manufacturers to make sure we get more and more products in. So we do expect continued growth out of all three of those programs.

Great. All my other questions have been answered already.

I just want to follow up on Bill's question. Bill, I just want to make sure that we are on an apples and apples basis, because you did not mention the light settlement, and so, Scott just pointed out that we were including the light settlement was in Q1. If you include the light settlement, it would then exclude the restructuring and [into] purchase price adjustments, Q4 on our guidance basis would be $0.21 to $0.24. I just want to make sure that everybody on the call understands that.

And Christina, I think we have time for one more call - one more question.

Gary Prestopino with Barrington research.

Good morning. Most of them have been answered. Rob, could you maybe -- with what you are doing right now, early stage alternative parts in the UK. Are have you -- you're obviously targeting multiple insurance companies, I would assume. Is -- Right now are you piloting one or two and would that one you are working with be one of the leading insurance companies in the UK?

We have, Gary, we have several small pilots going on. Probably the number give to the number five different pilots going on, mainly with smaller carriers. The big guys are watching and waiting with interest level, but these are with the smaller carriers at this point.

Mr. Wagman, we have reached the end of the question and answer session. I would now like to turn the floor back over to you for closing comments.

We just want to thank everybody for joining the call today. We look forward to reporting our year-end and Q4 report at the end of February and look forward to hearing from you then. Thanks, everybody. Have a good day.