LKQ Corp (LKQ) 2012 Q4 法說會逐字稿

Greetings. Welcome to the LKQ Corporation fourth-quarter and full-year 2012 earnings call. At this time all participants are in a listen-only mode. 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, LKQ Corporation. Thank you, Mr. Boutross, you may now begin.

Thanks, Rob. Good morning, everyone, and thank you for joining us today. This morning, we released our fourth-quarter and full-year 2012 financial results and provided our full-year 2013 guidance. In the room with me today are Rob Wagman, President and CEO; 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 audio cast via the LKQ website. A replay of the audio cast and conference call will be available shortly after the conclusion of this call.

Before we begin with our discussion, I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies. Forward-looking statements involve 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 statement to reflect events or circumstances arising after the date on which it was made except as required by law.

Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risk. 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 pleased with the results we reported this morning, with both a solid fourth quarter and full-year 2012. Diluted earnings per share in Q4 were $0.21, an increase of 10.5%, as compared to $0.19 for the fourth quarter of 2011. Revenue reached a new quarterly high of $1.07 billion in the quarter, an increase of 13.7% as compared to Q4 2011. Organic revenue growth for parts and services was 8.2% for the quarter. Total organic revenue growth for the quarter was 7.4%. For the full year, our EPS was $0.87, representing an increase of 22.5% from the $0.71 reported in 2011. Please note that both full-year 2012 and 2011 diluted earnings per share included a loss equal to $0.01 per share resulting from restructuring and acquisition-related expenses and the change in fair value of contingent consideration liabilities. Additionally, full-year 2011 diluted earnings per share included a charge of $0.01 per share as a result of a loss of debt extinguishment.

Revenue reached a record $4.1 billion in 2012, an increase of 26% as compared to 2011. Organic revenue growth for parts and services for 2012 was 6%. Total organic revenue growth for the year was 4.1%. I am also pleased with our organic growth considering the mild weather conditions we faced in the first and second quarter, increased fuel prices throughout the year, fluctuations in the scrap market, a reduction in claims volume, and minimal relief from our relatively high vehicle procurement costs during the first half of the year. Despite those headwinds, we continue to grow our business and gain market share in the quarter and for the full year, which we believe is a result of the broadening of our product line offerings for both collision and mechanical repair shops, our efforts to optimize our North American regional distribution network, the ongoing growth in insurance-based direct repair programs, and the continued positive performance of Euro Car Parts.

Next, I would like to talk about other aspects of our Business. During the fourth quarter, we purchased approximately 68,000 vehicles for dismantling via our wholesale operations, which is a 16% increase over Q4 2011. As for volume at the auctions, the outlook for supply remains good starting out in 2013. 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. As mentioned during our last call, we are optimistic about the favorable pricing trends we are witnessing at the auction. This trend played a role in the sequential improvement in our gross margin for the quarter, which John will touch on momentarily.

In our heavy duty truck operations, during the fourth quarter, we purchased over 2,500 units for resale or parts as compared to nearly 1,900 in Q4 2011, or a 37% increase. Overall, the heavy duty truck business performed well in 2012, posting double-digit organic growth for the year. We continue to believe that this business presents a long-term growth opportunity for our shareholders, and we anticipate additional development in this line of business for the Company.

Turning to our self-service retail business, during the fourth quarter, we acquired over 114,000 lower cost self-service and crush only cars, as compared to over 90,000 in Q4 2011, or a 26% increase.

Turning to Euro Car Parts, we continue to be impressed with the performance of Euro Car Parts in its ability to capture market share and open new store branches. In Q4, ECP achieved strong organic revenue growth of 34.1%. During the fourth quarter, we opened 10 new branches and we opened 2 additional branches in January, bringing our total branch count to 132. I would also like to update everyone on our collision parts program in the UK. I am quite pleased with the progress our industry relations team has made since we launched the program in March 2012. At the end of 2012, we had supply relationships with eight carriers in the UK, with eight multi-shop operators. During the quarter, we again witnesses strong double-digit year-over-year growth with our collision part sales at ECP. Though the volume increase is off of a small base, the expansion in carrier and MSO penetration is encouraging. We believe we are positioned well for the driving ECP's collision part sales in 2013 and advancing our presence in the $3 billion UK collision parts market.

Moving on to acquisitions, Q4 and full-year 2012 were most the acquisitive quarter and year respectively since the Company's founding in 1998. This milestone is a testament to our strength in identifying businesses that will allow us to expand our geographic footprint and broaden our product offerings to continue our growth. We are confident of our regional managements teams' ability to effectively integrate these acquired businesses and leverage our existing distribution and sales network to drive organic revenue growth. As mentioned on the Q3 call, in October, we purchased an aftermarket parts distribution that operates 12 locations in seven Canadian provinces and aftermarket parts distribution business that operates three locations in Quebec. During the balance of Q4, we acquired 15 additional companies -- we purchased two self-service businesses in Florida; an aftermarket parts distribution in West Virginia; three paint distributions with locations and Nebraska and Ohio; a bumper and fender distributor in Ontario, Canada; three wholesale salvage businesses with locations in Virginia, Minnesota, and South Carolina; two heavy duty truck aftermarket cooling and radiator businesses with locations in Michigan, Florida, Georgia, and Missouri; two heavy duty truck businesses with locations in Florida and Georgia; and finally, we purchased a self-service business with an adjacent auto shredder in Florida. These acquisitions brought our year-end total to 30.

I would like to briefly highlight two recent acquisitions. In December of 2012, we acquired a self-service yard and an adjacent vehicle shredder in Florida. This acquisition marks the Company's first entry into the vehicle shredding business. Given that some of our car-buying competition are vehicle shredding companies, having a shredder allows us to procure vehicles that we historically would not buy. We believe that by adding these new types of vehicles to our procurement mix, we will lower our average cost per vehicle because we will be increasing our total share of buying at auction.

Also, markets where there's limited shredding capacity, we typically find that we get less revenue per car but by having our own shredder, we reduce the risk of loss revenue and continue on our focus on maximizing the profitability of each of these vehicles we procure. Currently, the shredder is operating at 50% capacity. We anticipate running at full capacity by the end of 2013, with all current and future volume being generated internally with no reliance on third-party sources.

Lastly, on acquisitions, on February 1, 2013, the Company purchased Autoclimate Limited, a UK-based distributor of collision repair parts and products, primarily for automotive climate control systems. Auto climates products, systems, and strong relationships with UK-based insurance carriers and collision repair shops complement ECP's ongoing effort of growing our collision program in the UK. Autoclimate marks our second acquisition in the UK and our first tuck-in acquisition for ECP, further highlighting our confidence in our acquisition growth strategy outside of North America.

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

Thanks, Rob. Good morning and thank you for joining us today. Hopefully everyone has had a chance to review our press release this morning. We expect to file our 10-K with the SEC in the next few days so please watch for that as well. Also as a reminder, we split the stock in September 2012 so any discussions regarding the number of shares, earnings per share, reflect that split. We are commenting today on Q4 and the full year of 2012, as well as giving 2013 guidance so please note that my comments may switch between the quarter and the full years. 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.

In Q4 2012, our total organic revenue growth was 7.4%, and we delivered additional growth of 5.9% from acquisitions. Rob mentioned that the Q4 2012 organic growth for recycled and aftermarket parts and services was 8.2%. Other revenue, which is where we record our scrap and commodity sales, was higher by 19.2%. The majority of this growth was driven by acquisitions, which accounted for 17.3% and change. We saw modest organic growth of 1.9% because higher volumes slightly more than offset the fall we saw in commodity prices. We saw the average price achieved for scrap steel fall about 14% year-over-year.

In Q4 2012, revenue for our self-service business was $89.7 million or 8.4% of LKQ's total revenue. Approximately 35% of this revenue was part sales and it included any recycled and related products and 65% scrap and core sales included in other revenue. Our acquisition [and] revenue growth was driven by the 33 deals we completed since Q3 2011 and excludes ECP, which closed the first day of the quarter in Q4 2011. In Q4 2012, the impact of revenue from acquisitions was $55 million. Gross margin of 41.7% for the fourth quarter of 2012 was flat as compared to the same quarter in 2011. There was little year-over-year change in any of our operating segments. However, within the North American segment, we saw margins in our late model salvage operations improving with the drop in the cost of cars. But that improvement was offset by mix and the lower-margin precious metals business that we acquired in Q2.

Probably worth taking a moment to add a few comments on the sequential gross margins. Growth margins improved 40.3% in Q3 2012 to 41.7% in Q4 2012, an increase of 140 basis points. The primary driver of this increase was the wholesale North American segment and similar to the year-over-year variance, we saw the cost of vehicles decrease more steeply than the drop in scrap prices. There were minor up and downs in the other segments but nothing significant.

Our facility and warehouse distribution and SG&A expenses were 30.3% of revenue in Q4 2012 and Q4 2011. Slightly higher distribution costs as a percent of revenue were offset by lower SG&A costs. This is primarily due to ECP, which tends to run some higher distribution costs. In addition, ECP's distribution costs were higher in Q4 2012 compared to Q4 2011 due to our additional infrastructure to support the new branches and the addition of crash parts to the ECP product lines. The lower SG&A costs were primarily due to compensation-related expenses.

During the fourth quarter of 2012, we recorded $200,000 of restructuring and acquisition-related expenses. In the same quarter last year, we incurred $2.3 million of these expenses as a result of legal, deal, and other restructuring costs related to the acquisitions. Our operating income was $104.3 million in Q4 2012 compared to $90.1 million in 2011, an improvement of $14 million or 16%. Interest expense of $8.4 million was $1.5 million higher in Q4 2011. This increase is due to our higher average debt balances as we incurred debt to fund our acquisitions. And slightly higher average interest rate. Our effective borrowing rate was 3.15% for Q4 2012 compared to 2.84% in Q4 2011. Our year-to-date tax rate was 36.2% as compared to 37.4% in 2011. The lower rate in 2012 was primarily the result of a higher portion of our earnings been attributable to foreign subsidiaries in lower tax jurisdictions than the US.

On a reported basis, diluted earnings per share from continuing operations was $0.21 in Q4 2012 compared to $0.19 in 2011. The impact on EPS of restructuring and acquisition-related costs and income was immaterial in both years. So year-over-year, EPS grew $0.02 in Q4, an increase of 11%. For the full year for 2012, we reported diluted earnings per share of $0.87 compared to $0.71 in 2011, an increase of 23%. In 2012, the $0.87 of EPS included $0.01 of restructuring acquisition costs and contingent consideration adjustments.

2012 also included the previously disclosed legal settlements, which totaled $0.04 over the year. Adjusting for these two categories, 2012 EPS would have been a net $0.84 compared to the reported $0.87. In 2011, we incurred a $0.02 impact from restructuring and debt write-off costs, net of about $0.005 favorable EPS impact in contingent payment adjustments. Without these items, 2011 EPS would have been $0.73. So on an adjusted basis, 2012 $0.84 EPS is $0.11 favorable to the 2011 adjusted of $0.73, for an improvement of 15.1%.

Cash flow from operations for the full-year was $206 million compared to $212 million in 2011, a decline of $6 million. The main reasons for this decline and the decline relative to our earlier expectations were in the area of working capital, particularly in the Q4 inventory and accounts payable. Excluding the impact of acquisitions, during our Q4, our inventories increased $47 million while accounts payable was a use of cash of $7 million. The buying environment for our salvage operations improved in Q4 and we purchased almost 8,000 additional vehicles compared to Q3 2012. As a result, we ended the year with higher inventories than we had earlier expected. Further, as a result of the threatened port strikes, we accelerated our normal seasonal build of aftermarket product in order to protect ourselves. In addition, we saw our European operations reducing their accounts payable in order to capture additional early pay discounts, so whereas with their growth ECP's accounts payable would normally have been a source of cash, in 2012 it was actually a use of cash.

The underlying EBITDA of the business was strong, with full-year EBITDA of $511 million in 2012 compared to $418 million in 2011, an increase of $92 million or 22%. In 2012, we invested $88 million in capital assets, slightly underspending our guidance of $90 million to $100 million. During the year, we spent $265 million in cash from acquisitions, including $132 million in Q4 of 2012. For the year, we issued 3.9 million shares of stock related to the exercise of stock options and equity compensation and that resulted in $33 million in cash including tax-related benefits.

At the end of the year, LKQ's debt was $1.1 billion and cash and cash equivalents were $60 million. Availability under our $1.4 billion credit facility, after taking into account $40 million of letter of credit supported by the facility was $356 million. [For the] cash of $60 million on the balance sheet, our liquidity was [$416] million. Our debt under the credit facility and our asset securitization program was 59% fixed and 41% floating as of year end.

Turning to guidance, I would like to remind listeners that a few items that we exclude from our guidance. The guidance excludes any restructuring costs and transactions costs, gains or losses, capital expenditures, or cash flow associated with the acquisitions. We expect to incur some additional charges and contingent consideration liabilities, which can be either a negative or positive but in any case, we're excluding them from guidance as well. We do not provide guidance quarterly or on specific line items, but I would like to remind investors that in Q1 2013, we will have one fewer day than in Q1 2012. We expect to get that day back in Q3. We would expect our Q1 revenue year-over-year comparisons to be negatively impacted by one fewer selling day. Commodity prices create some variability in our income statement quarter-to-quarter. The mid point of the guidance assumes that commodity prices will be neutral to earnings.

And as our foreign operations grow, foreign exchange could cause additional earnings volatility. Through the first nine months of 2012, there was no foreign exchange impact from our European operations as they were new to the Company. 2013 will be the first full year where we record foreign exchange impact for those operations. In 2012, we reported using an average exchange rate for the British pound of $1.59 whereas the current exchange rate is about $1.52. I'd remind listeners that the legal settlements we had last year positively benefited earnings by $0.02 per share in each of Q1 and Q2. Those earnings are not expected to repeat this year.

We expect our parts and services organic growth to be 5.5% to 7.5%. We are not getting guidance by segment but our internal expectation is the very high growth we have seen in the European segment to lightly slow a bit this year as we are not going to open any new locations until we are sure the existing branches are fully integrated. We still believe there remains a significant opportunity in the UK and we will revisit the branch openings schedule in the second half of the year and expect to update investors at that time.

We have a assumed a more normal weather pattern for 2013 for North America compared with the mild winter and dry summer of 2012. If that comes to pass and unemployment in the US continues to fade, we'd expect to see our North American growth to improve over our 2012 results. Also at the end of 2012, we closed one of our aluminum furnaces. We don't expect any material impact on our earnings as a result of those closure but we expect our sale of aluminum, which is recorded in other revenue, to be about $10 million lower each quarter this year.

Our guidance for net income is $305 million to $330 million, which equates to a $1.09 to $1 [even] diluted earnings per share. Compared to the $0.84 EPS we reported in 2012, after adjusting for the legal settlements and acquisition-related items, our guidance represents an improvement of 19% on the low end of the guidance and 30% if we achieved the high end. We expect to spend in the range of $100 million to $115 million in capital expenditure. This figure is higher than the $88 million in 2012 but we are obviously a much larger Company and we have some carryover spending from 2012 on several Greenfield projects that we started last year.

Cash from our operations is expected to be approximately $300 million. This represents a significant improvement of almost 50% over 2012, mainly due to the higher projected income and our assumptions that Q4 inventory build will not be as large in 2013 and that accounts payable will be a source of cash as opposed to the use of cash that we saw in 2012. One other item regarding cash flow for your modeling. In 2013, we have approximately $72 million of schedule debt repayments and $42 million of payments related to contingent considerations. About $3 million of these payments will be recorded as an outflow in our cash flow from operations. I would like to turn the call back to Rob to summarize before we open the call to questions.

Thank you, John. To summarize, we are pleased with the fourth quarter and our 2012 performance. During 2012, we were challenged with multiple elements that were not in our control, including year-over-year accident infrequency that was down roughly 2%. Paid claims down on average over 3%. Our average price per ton of scrap was down 14%, and according to a recent collision repair shop survey, over 70% of all shops reported flat or negative sales compared to 2011. Despite all those challenges, our Company was able to deliver positive growth across many financial performance metrics.

ECP continues to provide exciting growth opportunities for the Company and we are quite pleased with its performance and the value it has created for our shareholders. We plan to continue to expand our ECP branch count in the UK while simultaneously leveraging their network to drive collision part sales by educating our UK customers on our value proposition of alternative parts and driving APU. In addition, given our success with ECP and our ability to identify growth opportunities outside of North America, the Company continues to explore additional international acquisition targets. As witnessed by our fourth-quarter acquisition and development efforts, we also believe there are opportunities to continue our North American growth. We see strategic tuck-in and Greenfield markets available across all of our businesses. We will continue our efforts to add additional product clients as we execute our one-stop-shop goal for our collision mechanical customers.

All of these business units supported by our 20,000-plus dedicated employees allow us to project solid EPS gains for 2013. The low end of our guidance represents a 19% increase over 2012 results and at the high-end, it would increase our EPS 30% year-over-year. Keep in mind that our 2012 EPS exceeded 2011 EPS by over 23%. So you can see that we expect the continued success we achieved in 2012. Rob, we are now prepared to open the call for Q&A.

Thank you. We will now be conducting a question-and-answer session.

(Operator instructions)

Bret Jordan, BB&T Capital Markets.

Question on the precious metals recovery -- if you look at its impact on the fourth quarter and its ramp rate, could you give us some more color on how that business is spooling up as you get some of the airbags processing?

The question is, what is the revenue?

What was the impact -- the margin impact on the precious metals recovery, because that was expected to be margin dilutive in the early stages

Sorry, Bret, I thought you were asking a revenue question.

It was about 30 bps, net drag on margins.

Okay. And what is the expected ramp rate on that? Is that something that, as we get into the middle of 2013, and anniversary its acquisition, it should be running fairly efficiently? Or will that always be just running at a lower?

It will always be running at a lower margin.

Okay. And then, speaking about margin trends in North America, as you look more to the auto parts business -- and you certainly have done some parts acquisitions in Canada in the recent quarter -- where do you see that margin relative to your traditional North American collision margin?

Which -- the Canadian ones? Is that what you're asking?

Canadian auto parts -- as you are getting more into internal engine parts as opposed to collision panel parts, where -- do you see much margin differential between those two business categories?

The businesses that we bought in Canada were primarily aftermarket collision part distributors.

Okay. So you're not -- okay. Okay.

And we see the margins being very similar to what we see in the United States, Bret.

So nothing changing on that mix, okay.

And then one last question, as you look at the shredding business, and it's 50% capacity, and you are going to (technical difficulty) volume, is it cost-effective to distribute longer distances? Or is it mostly Southeastern volume that is going to go into that shredder?

It is mainly going to be Southeastern volume. We figure about a 300-mile radius, Bret, to be able to cost-effectively haul it in there. And because it is in Florida, we have such a concentration in Florida and southern Georgia, we believe we can fully run this with our own volume and not have to buy anything on the street.

Okay. Great. Thank you.

Craig Kennison, Robert W. Baird.

Good morning. Thanks for taking my questions, as well.

John, I know organic growth is a more complicated number today because of ECP. Could you help us deconstruct that, and let us know what North American organic growth looks like in 2013, based on your guidance? And then what the same-store sales growth rate and ECP is looking like?

Sure; let me put it into perspective for you. Last year, parts and services in North America was 3.6% and ECP on a full-year basis was a little over 50%, the way we were reporting the organic growth. And in Q4, ECP was around 34% organic, of which about 19% was same-store. So what we are thinking is, ECP has got the benefit of all the locations that we opened last year. We are going to take a little bit of a breather there, make sure those are integrating and all the new managers are firing on all cylinders. We understand the crash business and that they are trained up on that. And then we will take a look at that in -- probably in Q2, we'll start looking at it again to see if we get some new locations opened for -- [see] it's up for 2014. Rob can speak to that in the second.

In terms of the North American business, it is our expectation that, if we get some normalized whether -- and last year we had a very mild Q1, and a very dry summer -- we think that those things probably were a bit of a drag on our organic growth. If we see the miles driven continuing to approve, the SAAR rate coming up, and people driving a little bit more, we would expect the North American business to do a little bit better than we did last year on the organic side.

Craig, just to add a little color on the UK -- We still are standing by our projections of 150 to 175, what we call Tier-1 ECP locations; and then additional 25 or so Tier-2, the smaller, more remote markets. With the 12 we did in Q4 originally scheduled for 2013, so we pushed them into 2012. So, as John said, we're going to evaluate this in Q2, but I would expect if we feel comfortable, we will add another 10 in 2013 to fill out -- to get to 142. Again, with still some growth for 2014 and '15 as well.

Do you have a same-store sales metric for ECP?

Yes. It was around 19% in Q4. So yes, they are taking market share.

Absolutely.

And then just as a follow-up -- the way we calculate organic growth is similar exactly how you do it. We think ECP adds 3 to 4 percentage points to growth in 2013, which would imply that your North American business is growing at a slower pace. Is that the right way to look at it? And if so, why would North America growth rates have slowed?

Maybe we can get on the call afterwards to see how your math is. I am not sure -- if you look at the top end of our guidance, even if you use your numbers, you will still see an expansion on our growth for North America continent.

Well, we see expansion, just a slowdown. Maybe we will take it offline.

The next question I have is -- in terms of the acquired revenue in Q4, can you quantify it? And then did you do any deals in Q1 that you could quantify as well?

I do have that, let me just grab it for you -- just a second. The expected revenue out of Q4 acquisitions on an annualized basis, about $150 million. But we already recorded some of that in Q4. So if you are trying to model it, I would use somewhere between $20 million and $25 million a quarter incremental revenue in Q1.

Does that mean you had over $50 million in Q4?

It would be about $16 million in Q4.

$16 million, okay.

And then Q1, did you do any deals that you have not -- that you can quantify for us?

The only one we've announced is the Autoclimate and if you use $20 million to $25 million, you're going to be in that range including that one.

Excellent. Hey, thank you so much.

If I could just go back to your question about the deceleration that we saw in our 2012, I do want to comment on that.

Obviously, this is a bad news/good news story. 2012, of course, we had no winter. We did talk about that. The aging car part in our collision business does work a little bit against us as these cars get older. We are now at 11 years old. People tend to carry less insurance; the car is more likely to total as it gets older, of course. And, quite frankly, the parts we sell for older cars tend to be a little lower price. Miles driven in December were down 3% just in December. Year over year, it was just up 0.3%, so we saw that as a little bit of a headwind as well. Fuel, obviously, increasing, obviously creates a little bit of a drag; and unemployment remains stubbornly high. Those are the bad news for 2012.

The good news for 2013 is that the SAAR rate is increasing. In January, it was at 15.3 million. I just saw a report this morning projecting February to be at 15.7 million. So that means --lot of late-model cars, which will reduce the aging car part; and also those late-model cars all carry full insurance. So we see that as a positive for 2013. The options are strong, obviously as a result of Sandy pumping in quite a few cars into the mix; but again allowing us to buy more cars. And finally, our certification programs, really just incredible growth -- year-over-year increase in certified programs was 14%. So we see a lot of good tailwinds coming into 2013.

Thanks again.

John Lovallo, Bank of America Merrill Lynch.

Things for taking the call.

First question would be on the anticipated margin impact from before the [Q4] acquisitions. Do you expect it to be around corporate average?

John -- it sounds like you may be on a cell -- it's very faint. But I think your question was, do we expect any margin impact on the Q4 acquisitions. Once we get them fully integrated, we expect to be more or less in line with the corporate averages. When you look at what they are, they are aftermarket business, salvage businesses, the truck, so forth, everything tends to run -- it is a good mix of businesses we currently have. So -- it will take a quarter or two to get those integrated, but then we expect them to be a bit more or less at [their] run rate.

Okay, that is helpful can you hear me any better now?

Much better. Thank you.

Okay. Thank you. And in terms of the cars coming in from Hurricane Sandy, do you anticipate most of that still is ahead of us? And what are you thinking in terms of the quality of the reusable parts and potentially the pricing of those vehicles?

Yes, John, they are starting to really start to flow through now. There's a general lag of about 60 days before the titles start coming in. This one was a little bit slower because people's houses were destroyed and that became a priority.

We really see no real impact to our business model. These are flood-damaged cars. Salt water is the worst for parts because it gets into the electrical systems. So they really do not make good parts cars. They actually do a lot of rebuilders on that, which is unfortunate for the buyers, perhaps, but -- the eventual buyer of that car.

But the volume is predicted to be around 250,000 cars. We did purchase about 5,000 cars direct from insurance companies, and from other sources, so we did bring some cars in direct. Most of those cars will be stripped-down for certain parts. We'll stay away from, obviously, the motor and transmission because the salt water does a lot of damage. The benefit to us, though, the availability in that particular market -- basically that New England corridor down into the Mid-Atlantic -- there is such a high availability of salvage. A lot of our competitors are focusing on the builder side of it, which is opening up some really great opportunities from the collision cars; but of course are still happening since Sandy impacted us.

So we actually see it as a slight uptick for us; but the flood cars themselves -- we generally stay away from, on a salt water flood.

That's very helpful.

And if I could just sneak one more in here -- with the delay in tax refunds this year, have you seen any incremental volume at the self-service lots? Potentially, customers trading down?

Interesting our admissions -- we track our admissions at those -- they have been pretty steady; so really no major impact there at all.

Okay, thanks very much, guys.

Nate Brochmann, William Blair & Company.

Wanted to -- sorry to go back to this -- on the North American organic growth rate, a little bit. And I know that there is maybe more math to do and can take it offline -- but just in terms of conceptually, Rob, you gave some of the puts and takes in terms of the positives and negatives; but again, with the easy comps, and obviously the APU rate going up and all the positives that you do have -- and I get that there is still a headwind on unemployment and miles driven -- but with that, I would think that you would've been, in the North American side, still within your historical -- I don't know, maybe the mid single-digit growth range. Is there just a little bit of conservatism, do you think, in that North American range, being -- again, if you assumed just roughly 3% for ECP, that would imply maybe 2.5% to 4.5% for the North American side, which again still feels a little bit low. But is that a little bit of embedded conservatism? If you could just talk about that a little bit, I would appreciate it?

Yes, Nate, we are all working off of a much bigger base now; and quite frankly, adding to the Law of Large Numbers.

Let me talk a little bit about the weather that we faced this year versus last year. It really is a story of extremes. Last year, we had no winter, as we all know; but this year, it has just been -- I use New England as an example. Prior to the blizzard that hit New England, they were well below year-over-year comps for normal snowfall; and then 24 hours, they got 30 inches of snow, which put them over the top. The problem with that is, it shut down New England for about four days; nobody was driving. In fact, I believe the governor ordered people off the roads before the storm actually had hit.

Kansas is another example. Blizzard hit there last week, and again, everyone was off the roads, they were told to stay home. We certainly believe that the weather has been better this year than last year, though we'll take certainly the way we are today versus last year. Really, it is the story of a lot of large numbers now. We hope that the normalized winter will provide an opportunity to increase the same-store sales growth in North America. But the reason why we went with 5.5% to 7.5% was just because of the bigger number.

Okay. And then in terms of, obviously the facility costs were up a little bit and part of that is the expansion from ECP, and I know part of that is building out some of the larger facilities here in North America -- can you talk about -- a little bit just where you are -- you talked about maybe adding 10 more for ECP -- but where you are in terms of the expansion in North America in that category? And whether maybe we'd see a little bit of a leverage this year, or whether there is still investment going on?

I will start and maybe Rob (inaudible). Basically the infrastructures build out. As we grow, though, we do find that, as leases come up, we tend to try to buy or lease larger locations to support the additional growth or higher-sized footprint. So we budgeted to add a number of the locations -- to add additional warehousing capacity. But you are right, we would hope that with -- if the volumes come up, rebounding off of last year, that we should see some leverage in that area.

John covered it, but certainly in terms of the acquisitions and the pipeline where we sit today, we think there is plenty of opportunity still here in North America to keep growing the business, and in the UK as well. So, as we've mentioned in our scripts, Nate, the continent -- we are still doing our research on the continent and we expect to look for possible expansions there as well.

Okay and then just final question -- Rob, you talked about signing up, you said maybe eight carriers in the UK on the collision side. Is that brand new in terms of those relationships? And I assume that you are referring to insurance carriers -- that one is obviously one of the things as you talked about you continue to work through and could be one of the big potential upsides over the next couple of years if they really aggressively adapt that. Could you just explain that a little bit further in terms of where you are at, and maybe who -- in terms of those eight carriers, whether they are just small guys and just starting; or whether they are with any of the big guys? If you could give us a little more color, thanks.

Sure, I would be glad to.

We started this a year ago, as you know, it'll be a year ago next month. We are very pleased with what we have been able to do. The APU usage in the UK is circa 5% versus 37%, 38% here in the United States. So we certainly believe that it is a great growth opportunity.

Those eight carriers are small, medium, and large carriers. They are all in pilot stage, Nate. We haven't done a full rollout yet. They are going to walk before we run. We knew this was going to be a marathon, not a sprint; but we're very encouraged (technical difficulty) great relationships with the carriers and those MSOs that are working with the carriers -- the insurance carriers, to be clear. Those are insurance companies that starting to push our product types into the system.

The Autoclimate was done exactly for that purpose. They already had those relationships with insurance companies on the pooling products. So the Autoclimate will leverage those relationships even deeper. So we are very encouraged with what we have. As I mentioned, we have seen double-digit growth and we do not see that ending anytime soon, quite frankly.

Great, thanks guys.

Scott Stember, Sidoti & Company.

I understand you guys do not give detailed line-by-line guidance for '13, but just looking at the bottom line range, it is assuming a pretty nice ramp up and margin recovery. Could you maybe just talk about, on a high level, what some of the buckets will be that will be driving that, now particularly with the lower margin ECP business being fully integrated?

Yes, a couple of things. And we have seen some improvement in the cost of goods sold associated with the salvage business. Because that takes a while to come through to the income statement. We talked a little bit about the fact that, sequentially in Q4, we saw the margins go up and that was primarily driven by the late-model business in North America. So that is one aspect.

And we talked a minute ago, on Nate's call, question with respect to the leverage. We would hope to get some leverage if the volume [steps] back in North America again, putting more product through the same pipeline. We'd hope to get some leverage out of there, as well. We are continuing to look at our pricing programs. I know we have been talking about this for some time, and we are starting to see a little bit of traction on that on the aftermarkets; and we made some fairly decent progress on the salvage business over the last couple of years and starting to see a little bit of traction on the aftermarket side. So potentially that could improve some things, as well.

And we did a lot of acquisitions last year. Nate asked about facilities. As we bring those facilities where there is duplicate locations in, we should be able to get a little bit of leverage out of the portfolio on those as well.

Got you.

And just last question -- just following up, Rob, about the trends that you have seen with weather, up in the Northeast. Outside of that, with some of the other snowfall that we've seen throughout the country, can you talk about how that is trending to your business right now?

Yes, obviously, Scott, our guidance includes what we have seen in January and February thus far. We expect, hopefully, we have another month of inclement weather coming our way. We obviously prefer smaller storms than businesses that shut down -- it shut down the entire motoring public. But we expect certainly to see hopefully normalized conditions rather than these extreme storms. If we get that, we expect to be obviously in our guidance.

Got you. Thanks a lot. That's all I have.

Gary Prestopino, Barrington.

Hello. Good morning.

Most of the questions have been answered, but Rob, would these pilots that you are having in the UK -- is that for collision and mechanical and aftermarket and salvage parts?

Mainly just collision, aftermarket. As you know, Gary, we do not have salvage products yet in the UK. This would just be aftermarket collision parts. Insurance carriers do write some hard parts, so that is falling into that line of business; and that is where the Autoclimate actually comes in with the cooling products. So mainly focused on collision aftermarket today.

Okay so there is no salvage parts right now in the UK. But that would be obviously an obvious step in the future if this gets adopted?

Absolutely on our radar and 100% correct.

Okay; and then in terms of your accelerated 10 of these branch openings for Euro Car? Q4 -- you pull them from this year back into last year -- was that contemplated at the end of Q3 in the guidance that you gave for Q4 and year-end?

Yes, we announced that on the Q3 call; that was our intention, it was in the guidance, yes.

Thank you.

Bill Armstrong, CL King.

Good morning, Rob and John. Could you tell us what your average price that you paid for the wholesale cars in Q4? And what that was a year ago?

In Q4 2012, it was around $1,800; and a year ago Q4 it was about $1,890.

$1,800 versus $1,890?

Right.

Okay.

So it dropped about 5%.

Anything to call out in terms of price trends of the parts that you're selling? Any actions by the OEMs, perhaps? Competitive actions that might either squeeze or expand margins going forward?

Not really. They tend to increase prices by only 1% to 2% a year. Some product -- older product -- they might put -- they might actually drop it, with some of the increase. But on average, on our product mix -- we look at our product mix; it is usually 1% or 2% per year and obviously we try to match that.

Got it, and then finally -- you mentioned you're closing an aluminum smelter and that is going to reduce revenues by about $10 million per quarter. I was wondering if you could flesh out why you are closing that smelter -- what is the thought process behind that? And what are you going to do now with those aluminum wheels that are no longer being smelted in that facility?

They were buying some product on the open market -- [tractor load is vol]. We have made some systems changes. We can identify our own cores a little bit better -- the higher value cores, we can identify them a little bit better. We have two of these facilities; we have just added another shift to handle the volume. The other one is actually more efficient anyway. And so we think we will still get sufficient cores for our own business. This is really reorder. What we are going to try to avoid is buying cores that we don't need, that we were just melting down and selling at a very low margin. We do not really anticipate much of a margin or operating income impact.

It is more of a play, Bill, just to get out of the open market of having to buy on the market. Now we can supply it internally and not have to worry about fluctuations in the price that cause us to have margin erosion.

So in other words, with two smelters you basically had more capacity than your system needed, and so you were just buying open market parts to basically utilize the capacity?

That is correct.

Yes.

The volume we needed to feed our re-man operations is being satisfied by the one operation.

Okay, understood. All right. Great. Thank you.

John Lawrence, Stephens Inc.

Rob, would you talk about the environment itself -- two mild winters -- you look at acquisition candidates, what is the profile, anything changed there as you look at that group of companies to buy?

The pipeline, John, is surprisingly still active. We know we had a little bit of a rush in Q4 because of the pending tax consequences, but our pipeline is as active as it has ever been still -- in North America, and now we're starting to see opportunities over in the continent of Europe. So our strategy is going to be the same here. We will continue to do the aftermarket tuck-ins. For self serve, really just filling in geographical holes with both acquisitions and Greenfields.

HD -- I announced that we did some strategic tuck-ins already in terms of cooling. We will continue that. We still have plenty of growth opportunity in the HD. The European landscape, I said, we have been spending a year over there, just learning the landscape, learning the laws. We now feel comfortable that with ECP firmly under our belt, we will be pretty -- we are more receptive actually to looking at opportunities now in Europe.

And I will just point to one of the full-service, like Miami. A year ago, in South Florida we had nothing and now we have really filled out that market very nicely. So we will continue to look at the full-serve -- just really strategic tuck-ins. Los Angeles is still one that really bothers me when I look at our map. We have one location in Southern California. We could do a lot more there. So plenty of opportunity still in North America, as well.

Yes, and lastly on that -- as you look at those, the pro-formas don't change; it is still the same returns that we saw two or three years ago, as you look at those group of potential acquisitions?

That is right, John. Some of the yards that we were seeing are possibly a little bit stressed, but we pay less for them.

And you get that same return based on facility closures and combinations and that?

Exactly.

Thanks guys, appreciate it.

Thank you. Ladies and gentlemen, we have reached the end of our allotted time for question-and-answer session today. I will now turn the floor back to Management for closing comments.

Thanks, Rob. I just want to thank everyone for joining the call today, and we look forward to speaking to you in a couple months to report our Q1 earnings. Thanks everybody. Have a great day.

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