LKQ Corp (LKQ) 2013 Q1 法說會逐字稿

Greetings and welcome to the LKQ Corporation first quarter 2013 earnings call. (Operator Instructions).

It's now my pleasure to introduce your host, Joe Boutross, director of investor relations. Thank you, sir, you may begin.

Thanks, Brenda. Good morning, everyone, and thank you for joining us today. This morning we released our first quarter 2013 financial results. In the room with me today are Rob Wagman, President and Chief Executive Officer, and John Quinn, Executive Vice-President and Chief Financial Operator. Rob and John have some prepared remarks and then we'll open the call for questions.

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

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

Forward-looking statements involve risk and uncertainties, some of which are currently not known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking 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 A-K which we filed with the SEC earlier today. As normal, we're planning to file our 10-Q within 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're pleased with the results we reported this morning. Diluted earnings per share of $0.28 for the first quarter ended March 31, 2013, increased 3.7% from $0.27 for the first quarter of 2012.

As noted in the press release, the first quarter 2013 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 continued consideration liabilities. Earnings per share in the first quarter of 2012 included a gain equal to $0.02 per share that resulted from a favorable legal settlement. Adjusting for these items, diluted earnings per share grew by 16% over the prior year quarter.

I'm proud of our bottom line growth with the first quarter of 2013 producing record earnings. Revenue for the quarter was $1.2 billion, an increase of 15.9%, that's compared to $1.03 billion in the first quarter of 2012. This revenue is the highest quarterly revenue achieved by LKQ since our founding. During the first quarter of 2013, the company delivered strong organic revenue growth for parts and services of 9.6%, despite fewer selling days in both North America and the United Kingdom.

I'm particularly pleased with our North American organic revenue growth for parts and services which grew at 4.7%. Adding back that extra business day, we estimate that our North American organic revenue growth for parts and services would have been 5.9% in the quarter, a quarter that also witnessed high fuel prices and a 1.4% decrease of miles driven for February year over year.

The solid growth in North American organic parts and service revenue for the quarter is primarily a result of a combination of the increased use of alternative parts by insurers and a direct-repair program networks to reduce claims costs, year over year increases in claims frequency related to a more normalized winter pattern and our continued success in gaining market share. During the first quarter we purchased approximately 65,000 vehicles for dismantling by our wholesale operations which is a 10% increase over Q1 2012.

As for volume at the auctions, the outlook for supply remains strong starting out in 2013 with inventory already on hand and a continuation of our current runway for acquiring cars, we should have sufficient inventory to grow our recycled parts operations. In our heavy-duty truck operations, during the first quarter we purchased approximately 2,300 units for resale or parts as compared to nearly 1,800 in Q1 2012, or a 28% increase. Turning to our self service retail businesses, during the first quarter we acquired over 128,000 lower-cost self service and crush-only cars as compared to nearly 89,000 in Q1 of 2012, or a 44% increase.

Please note that a portion of this increase and procurement is related to the additional self-service locations we acquired and developed in 2012. Now turning to Euro car parts. We continue to be impressed with the performance of Euro car parts and its ability to capture market share. In Q1, ECP achieved strong organic revenue growth of 32.1%

With the continued performance in ECP's financial results and the strength of the ECP's management team, I am pleased to announce that we have approved an additional 15 new branches for 2013 that are scheduled to open in the third and fourth quarter of this year. I would also like to update everybody on our collision parts person in the UK. A little over a year ago we launched our collision program in the UK, and today I'm proud to say that we're the leading distributer of after-market alternative collision parts in the UK. In one year, we established trading agreements with every major body shop group in the UK, growing our collision offerings to over 13,000 SKUs and simultaneously we have forged supply relationships with multiple carriers in the UK.

During the quarter we again witnessed strong, double-digit year-over-year growth with our collision parts sales at ECP. Though off of a small base, today I'm pleased to say that the collision sales are an ever-increasing portion of ECP's overall revenue mix. We believe we're positioned well for driving ECP's collision parts sales higher in 2013 and advancing our presence in the $3 billion UK collision parts market. Lastly on operations, on April fourth, the company announced the launch of an intelligent parts solution with CCC Information Services.

The solution applies rule-based search functionality to CCC's one estimating software which provides users access to LKQ's vast after-market parts inventory database. Users of the CCC want estimating for insurance will now be able to search realtime among the industry's most integrated after-market parts database, collecting the best part for every job based on part type, availability, price and ship date.

Simultaneously during this launch with CCC, we began beta testing in five body shops a second phase of this technology which enables shop operators to click to order parts directly. Given the early acceptance of this second phase and its encouraging results, we have expanded the beta test to 20 body shops. Now moving to acquisitions, on April 23, 2013, the company agreed to acquire Sator Beheer. Sator is the market leading distributor of automotive after-market parts in the Netherlands, Belgium, Luxembourg and northern France.

Headquartered in Schiedam, the Netherlands, Sator is the parent company of eight operating subsidiaries. The group has over 800 employees serving a diverse base of more than 6,000 customers and offering a broad product line of over 150,000 SKUs from 11 distribution centers. In 2012 Sator reported revenue of EU $288 million and EBITDA of EU $24 million.

Sator operates primarily in western Europe, an automotive after-market parts unit that is estimated to be $115 billion in size, servicing a car park of approximately 250 million vehicles. Approximately 85% of their 2012 revenue was derived from sales in the Netherlands and Belgium with the remainder in northern France and exports throughout Europe. Their market share is approximately 20% in the primary markets they serve, where industry dynamics are similar to the UK in terms of mandatory insurance, low APU for collision parts and a high acceptance for the APU for mechanical parts.

This strategically significant acquisition further increases LKQ's European footprint and market share and provides a platform for future growth on the continent. Sator should also compliment our existing Euro car parts operation in the UK and allow for the realization of cost savings via purchasing and logistics synergies. The purchase price is expected to be approximately EU $210 million and will be funded by drawing on our revolving credit facility.

The transaction is expected to close May 1, 2013. We've identified synergies primarily in the purchasing area that we should be able to achieve over the next two years which are expected to improve our purchase price to below six times EBITDA. With that said, we're limited in what we can disclose at this time beyond what I've just provided during this call and during Q&A. As mentioned in the Q4 call, on February 21, 2013, the company purchased Auto Climate, Ltd., our first tuck-in acquisition in the United Kingdom. Auto Climate has been fully integrated into ECP and the full range of ECP products is now being offered to Auto Climate's customers.

Also, through purchasing synergies, we have witnessed strong margin improvement in like-for-like products between ECP and Auto Climate. This type of integration in synergy success validates our continued efforts in exploring other tuck-in acquisitions to add to the ECP network and throughout the continent. In addition to Auto Climate, during Q1 we acquired two additional companies, a paint distribution business in Ontario, Canada, and an after-market radiator distributer in Tampa, Florida. At this time I would like to ask John Quinn to provide some more detail on the financial results of the quarter.

Thanks, Rob. Good morning and thanks for joining us today. Hopefully everyone's had a chance to review our press release this morning. We expect to file our form 10-Q with the SEC in the next few days so please watch for that as well.

Before I begin, I would like to point out that we've slightly changed the segment disclosures dealing with revenue. In the past, our revenue growth components were focused around the type of revenue including after-market and recycled parts and services and other revenue. Since our European operations have become a much larger portion of our revenue and because with Sator they'll become proportionately larger still, we have begun to show revenue growth by geographic segment.

In the North American segment, we're combining the growth statistics for after-market and recycled parts and services. We'll continue to break out other revenue where we record scrap and core. We've long maintained that we would like our customers to be indifferent to an after-market recycled, refurbished or an OEM part. We manage our business with that mindset.

Given that these products are frequently being sold to the same customers and carry economic similarities we believe that investors should be indifferent whether we generate revenues through the sale of recycled, refurbished, or after-market parts. Having said that, for the time being we'll continue to provide car purchase volumes, it's only the components of revenue growth that we are combining.

Starting with revenue, our Q1 2013 revenue is $1.2 billion, an increase of $164 million compared to Q1 last year or an increase of 15.9%. Organic growth of 8.2% outstripped our acquisition growth 8%. We also had a negative 0.3% impact from exchange rates. Parts and services revenue grew organically 9.6%.

Within that category, as Rob mentioned, ECP continued to perform strongly with a 32% organic growth. North American parts and service growth was 4.7% but with one less day which we estimated impacted growth negatively at 1.2%. We saw a 23% increase in other revenue where we record scrap and core.

Acquisitions accounted for 24% of the growth while organic growth was negative 1% as our volume increase in the recycle operations were largely offset by lower commodity prices and the discontinuance of operations at one of our aluminum furnaces. In Q1 2013, revenue for our self-serve business was $114 million, or 9.5% of LKQ's total revenue. Approximately 31% of this revenue was parts sales, included in North American parts and services, and 69% scrap and core sales included in other revenue. Our reported gross margin for Q1 2013 was $502 million or 42% of revenue, a decline of 140 basis points from our gross margin percentage at 43.4% in Q1 2012.

The previously discussed gain on legal settlement in Q1 last year accounts for 80 basis points of the decline and the precious metals business we acquired in Q2 2012 accounted for a further 50 basis points of decline. The impact of scrap, mix and all other items accounted for the ten basis points balance of the change. The facility and warehouse costs were 8.4% of revenue in Q1 2013 compared to 8.2% in the same quarter last year. This increase was due to the expansion in North America.

During 2012, we completed the acquisition of eight self-serve operations which incurred greater facility costs as a percentage of revenue compared to our wholesale operations. Additionally we added capacity in our wholesale operations, the revenue for which we expect to be realized in the coming quarters. Distribution costs were 8.7% this quarter compared to 8.9% in the same quarter last year, a decrease of 20 basis points.

This decrease is primarily as a result of lower fuel cost along with the relative increase in the amount of other revenue we reported, as other revenue primarily being scrap, incurs few distribution costs. Selling and GNA expenses were 11.5% of revenue in Q1 this year compared to 11.8%. Primarily this was due to reduction in personnel expenditures as a percent of revenue as we leveraged our general and administrative workforce across a higher revenue base. During the quarter, we recorded $1.5 million of restructuring and acquisition-related expenses primarily incurred for professional fees in conjunction with the acquisitions including Sator.

Depreciation and amortization for the quarter increased to 1.5% of revenue during the first quarter of 2013 compared to 1.4% in Q1 last year. The increase is primarily due to amortization of intangibles and depreciation of property and equipment acquired as a result of the acquisitions we completed last year. Other expenses net increased to $9.8 million in the three months ended March 31, 2013, compared to $5.5 million in the same period last year, an increase of $4.3 million.

Interest expense is $1.2 million higher due to higher debt levels and this year we recorded an expense for these adjustments, a contingent consideration of $800,000 compared to income of $1.3 million last year in the same period. We also had an incremental $1.3 million of foreign currency loss in 2013 compared to the same quarter last year mainly due to weakened pounds Sterling. These expenses were partly offset by improved collection fees for late payments which generated an incremental $400,000 in 2013.

Our effective borrowing rate was 3.1% in Q1 2013 compared to 3% in Q1 2012. Our tax rate for the quarter was 35.8% compared to 36.8% in Q1 last year. We continue to see some benefit from lower tax rates as our international business becomes a larger percentage of the total company. On a reported basis, diluted earnings per share were $0.28 in Q1 2013 compared to $0.27 in 2012. Last year we had $0.02 favorable impact from a legal settlement. In Q1 this year, the acquisition-related expenses and contingent purchase price adjustments round to $0.01.

On an adjusted basis, the diluted earnings per share was $0.29 this year as compared to $0.25 last year, or an improvement of 16%. Cash flow from operations for the first quarter was $106 million compared to $110 million in 2012, a reduction of $4 million. The biggest drivers of this reduction were an additional $25 million increase in accounts receivable as a result of higher sequential revenue growth in Q1 2013 in the timing of cash collections. That use of cash was offset by lower incentive compensation payments in 2013 compared to the same quarter of the prior year.

In the first quarter we spent $21 million in capital expenditures and $13 million in acquisitions. During the quarter we reduced our net debt by $54 million. We ended Q1 with $1.1 billion of debt and cash and cash equivalents were $63 million. As of March 31, 2013, availability in our credit facility was $390 million. At quarter end, our debt under the credit facility was 67% fixed and 33% floating. And turning to guidance.

As we've stated in the past, our guidance excludes any restructuring costs, transactions costs, gains, losses, continued purchase price adjustments, capital expenditures or cash flow associated with acquisition. Our guidance specifically excludes any impact of the Sator transaction we announced this morning or the related financing transaction we're working on. Our revised guidance for organic growth for parts and services is 6.5% to 8.5%.

We increased this range from %5.5 to 7.5% to reflect the slightly stronger Q1 in North America and our intention to restart the ECP branch expansion later this year. Even though we increased revenue guidance for organic growth, we left the balance of the guidance unchanged. Although we're more bullish on organic revenue growth, a few short-term head winds could impact our earnings. We continue to see softness in the Sterling US dollar exchange rate. I mentioned exchange losses of $1.3 million in the quarter.

If the average exchange rate stays near its current level compared to where we had anticipated it would be, we expect the exchange rate differential will continue to negatively impact us over the course of the year. We believe that our competitors are suffering similar impacts on their foreign currency purchases and the ECP team is working to adjust prices to offset that impact but it will take time. In addition to the local earnings pressure the falling Sterling causes, the local currency earnings of ECP will translate into fewer US dollars.

Although we are increasing the number of branches at ECP, we've explained in the past the branches tend to lose money initially and cause an initial drag on earnings. We also anticipate a slight increase in our working capital requirements to accommodate these expansions which will impact our cash flow from operations. We believe that the incremental capital spending required can be accommodated within our guidance range of $100 million to $115 million. Year to date we've seen negative miles driven in the US. Some of this year-over-year reduction may have been weather related as last year's mild winter may have caused higher miles driven, but it also could be a sign of continued economic sluggishness.

In this regard we are simply being cautious until we know more. Scrap was volatile in Q1. We believe that would have minimal impact year-over-year. Unfortunately in April we've seen a general fall in commodity prices and unless they recover in the quarter we would expect to be negatively impacted in Q2. The Manheim index stood at 120.4 at the end of the March as compared to 126.2 a year earlier. We've seen a slight improvement in our car buying, unfortunately the commodity value decreases are probably accounting for most of that reduction.

At this time we do not see margins in Q2 improving appreciably as a result of the reduction in used car prices. If the trend in prices continues for car prices we may see relief later in the year. We shared with you Sator's revenue of EU $288 million or $375 million, in 2012 reported EBITDA of EU $24 million $31 million at the current exchange rate. The reported EBITDA is before customary pro forma adjustments you'd expect in a company own by a private equity firm. We believe the adjusted EBITDA would be a few million Euros higher.

We expect to close the transaction the first week of May. Until we close, we will not be able to completely finalize the purchase accounting adjustments including the amortization of intangibles. We've also disclosed that we're working with our banks to amend and restate our credit facility including an increase in the size of the facility. Until we complete the financings, we're not able to share with you the additional details regarding the financial impact of the acquisition or potential financing changes. However, it is our intention to finance this transaction using longer term fixed rates.

When we adjust Sator's 2012 EBITDA for pro forma adjustments and after we achieve the identified synergies, we anticipate a purchase price below six times EBITDA. These synergies primarily relate to procurement. While we're highly confident that these can be achieved, we believe it may take up to two years to fully implement these and have their impact flow through the inventory and through the income statement.

So we are only expecting modest improvements in the remainder of 2013. Finally I'd like to give everybody a heads-up that because of Sator acquisition we're examining the timing of our Q2 earnings release. We've now confirmed a release date but there is a possibility that we will release on August 1 as opposed to what would be more typical of our timing a week earlier. And we'll confirm that exact timing in July. With that I would like to turn the call back to Rob.

Thank you, John. To summarize, we're pleased with our first quarter performance. In 2012, we were faced with unforeseen challenges in our core North American business. As we entered 2013, these challenges appear to be subsiding which is evident with our first quarter organic revenue growth. Although head winds continue, I'm encouraged by the tailwinds we benefited from in the quarter. In addition, given our success with ECP, we are very excited about the pending acquisition of Sator.

Sator has unparalleled market knowledge with a strong reputation and a high degree of credibility with customers and we believe this transaction presents a great long-term opportunity for the company as we continue our European expansion. ECP continues to provide exciting growth opportunities for the company and we are quite pleased with its performance and the value it's created for our shareholders. We plan to continue to expand our ECP branch count in the UK by adding 15 additional branches in the third and fourth quarter of 2013. Our position in North America is extremely strong relative to alternative parts competitors. LKQ is the only company with a national footprint and the only company of any size that offers a full range of alternative parts to our customers.

Still we're not fully built out and we believe there are opportunities to continue our North American growth both organically and through acquisition. All of these business units supported by our 21,000 plus dedicated employees allowed us to post a solid first quarter which has positioned the company well for the balance of 2013. Brenda, we're now prepared to open the call for Q and A.

(Operator Instructions). Our first question come from the line of Nate Brochmann with William Blair and Company, please proceed with your question.

Good morning everyone, and congratulations on the new acquisition over there in Europe.

Thanks, Nate.

I wanted to talk, two quick questions. One, John, you gave some nice detail on kind of the dip in the gross margins when you exclude the gain or whatever, still a lot of that due to the precious metals business. Can you talk about the overall profitability? I mean, obviously you guys did a lot of acquisitions in the fourth quarter, whether there's any additional mix issues coming from those, or a little bit lower profitability near term and what is the opportunity to kind of maybe get those margins up over the next maybe 12 months or so?

Thanks, Nate. I'll start, and maybe Rob can supplement. You're right, we did a fair number of acquisitions last year, 30 of which, half were in Q4. I would say the metals business is not yet fully integrated. We've started to decant some of our own catalytic converters and starting the process, but the majority of the cats are not going through there yet.

When you look at some of the bigger acquisitions we did particularly up in Canada, I would say those are still, we're still in the implementation phase with respect to those. The facility and warehouses, I talked a little bit about the drag that that created on, as a percentage of revenue, facility and warehouse costs. If you look at the map that we typically publish, you'll see we still have duplicate facilities in multiple locations in Canada so it's going to take a while to get through those. We're still in the implementation phase with respect to a number of the acquisitions where we have overlap facilities.

And I would just add, Nate, one other acquisition I want to highlight is the shredder business that we bought in Q4. We're in the process of bringing our own cars to that shredder and still plenty of capacity to grow there. So early days there but we're very excited about the opportunity that that provides.

So it sounds like all else equal, assuming no extra benefit on the gross margin side for maybe lower used car prices, purchase prices, but it sounds like over the next 12 months we definitely can see some upside just on the overall margin line as everything kind of gets integrated assuming no new deals.

I don't know whether it'll come so much through the gross margin line, I think it's more leveraging the distribution and the warehousing cost.

Okay, that's fair. And then, regarding the acquisition in Europe, obviously again, it sounds like a great foothold in the continent there. Could you talk, and I know it's too early to talk exactly about what the accretion is, but can you talk about the general accretion profile, whether we get anything in '13 without giving exact numbers and what it might be in '14 and can you talk about the base premise of that model, whether it is similar to ECP in terms of more of a branch-based distribution model, and what the percentage currently comes from mechanical versus collision parts there? Thanks.

Sure. Unfortunately due to the confidentiality provisions in our agreement with the sellers we can't disclose too many details until we close which we're scheduled to close on May 1. We're doing, planning on doing a follow-up after that with more updates on some of the questions you asked. However, I can talk about the market dynamics that we're getting into. The main competitors in the marketplace are generally smaller regional players. However, in other countries surrounding there, there are similar-type companies to the Sator operation. Very little of their sales today are in collision sales.

The vast majority of their parts are going to be very similar to ECP in terms of after-market mechanical components. As I mentioned, they have approximately have a 20% market share in the region. There is a higher acceptance of alternative mechanical parts in the marketplace, very similar to the UK. Mandatory insurance, very low alternative part usage, so overtime our plan would be to bring our collision parts program from the UK over to the continent.

80% of Sator revenue is in Belgium and the Netherlands, just the overall marketplace 250 million vehicles, so larger than the US, and parts span in the after market parts market is $115 billion. So really a great opportunity. We plan on using it as our beach head onto the continent and we look to expand and look for students throughout the continent.

Thanks, I'll pass it along and get back in the queue.

Our next question comes from Craig Kennison from Robert W. Baird, please go ahead.

Good morning, thanks for taking my questions as well. Just to follow up on the Sator commentary. Is the model any different than in the UK, where in the UK you acquired 89 stores and expanded to 130 plus? It looks like this model is more based on DCs, you're acquiring 11. Maybe you can help us understand the difference in the model a little bit.

Yeah, I think that's fair, Craig. It's a DC type distribution business where they're selling into the marketplace. Great, certainly great penetration in the marketplace today with a 20% market share. Great upside for us there to keep growing the business. We'll be looking at that model.

Our primary concentration from the beginning would be to focus on the synergies that John and I both spoke about in our prepared remarks. We think that's the greatest opportunity right out of the gate is to focus on the purchasing synergies and look at logistic opportunities as well. So we're going to look to being able to share parts between the UK and our Netherlands operation. So that's where the focus is going to be out of the first year or so.

Regarding the synergies that you mentioned. You mentioned their purchasing synergies so I assume that all of that savings is on the cost side and not really on the revenue side yet.

That's correct.

And then lastly with respect to your phase two test with CCC, I realize it's only five customers, but the click through functionality seems like a meaningful upgrade. What kind of sales lift do you think that could provide and does that drive any of you're assumptions regarding organic growth? Thanks.

Let me talk about the difference between this program and the Mitchell program that we mentioned two quarters ago. The Mitchell program is not fully integrated with the estimating system. This one is. So what we like about this system, phase two of the Mitchell system, was that we fully integrated with the estimating system. CCC's is already integrating meaning the shop doesn't have to leave the estimate platform to see our products. So by staying that system, we think it's going to be a lot more powerful.

The second thing we like about the program is that CCC has the majority of the body shop business in the United States with Mitchell being second and Solare being third. So we have a bigger customer base to focus on with this program. You're right. It is very early days. We only have five shops in initial test, now we're up to 20. We're encouraged by the results. The beta shops have really enjoyed the B-to-B functionality of it, but it really is too early for us to be projecting how well this is going to be received in the marketplace. I think we'll have a better idea after Q2 and Q3.

Thanks and congratulations.

Thanks, Craig.

Our next question comes from the line of Brett Jordan with BB&T Capital Markets. Please proceed with your question.

Good morning, guys. A couple of quick questions, and one, I might have missed this. Did you give the margin impact from the precious metals business in the first quarter?

It's 50 basis points.

Okay, so sort of consistent with last year's run rate, and I guess if you look at that and sort of get a feeling for utilization it doesn't sound like it's fully loaded. Is there an expectation as we get into the anniversary of the acquisition in the middle of this year, sort of a ramp rate at which point it begins to become less impactful?

The reason... they had their own metals business, that has not gone away and it will just continue. What we're really trying to do there is where we get revenue, precious metal revenue, the cars that we're selling. We're really just trying to capture some of the value that is the downstream impact with the refiners. So I don't think you're going to see a dramatic change from that frankly, because they'll continue to do their own processing of third-party metals.

Okay, and a question on Sator. Do you have at least color for us as far as the growth rate in their revenues, that 288 was up from x in the prior year, sort of get a feeling for how that business has been growing prior to the acquisition?

We will, after we close, Brett, we'll be updating everybody on those figures.

Okay, all right. That's great. Thanks a lot.

Thanks, Brett.

Our next question comes from the line of Sam Darkatsh with Raymond James. Please proceed with your question.

This is Josh filling in for Sam. Thanks for taking my questions. Could you talk a little bit about the ECP multiple you ended up paying after the earn-outs and sort of compare and contrast the purchase price for ECP and Sator and the justification for each?

I don't have that off the top of my head. The total consideration was EU$280, excuse me, pounds for ECP. Assuming that the earnouts are fully paid. And the EBITDA, you can actually get the EBITDA. We disclosed that in the Qs, just be careful to add back the changes in consideration.

Thank you. I think after the earnout you were somewhere around eight times when the deal was first announced. I just was wanting to understand the thoughts on the two different...

I don't want to quote a number but it's going to be dramatically less than that.

And the reason for that?

I'm sorry, Josh.

What was the reason for the difference?

At the time of the acquisition you're saying it was around eight times? I don't recall. I'm just saying that if you look at the EBITDA that the ECP is throwing off now, and assume that we've fully paid the consideration, we can work up the number, but it's well under eight times.

I'll come back on that later. And does this reduce your bandwidth any for US acquisitions?

No, it doesn't, Josh. We have teams on both sides of the pond working deals, and the acquisition pipeline actually is still relatively strong. We did push a little bit lighter in North America with us announcing only two deals this quarter. I think that was because of the rush in Q4 to beat the tax deadline. We mentioned we did 15 deals in Q4. A little bit slower in North America, I think just catching up, but the pipeline remains very active on both sides.

Good to hear, thank you.

Our next question comes from the line of Gary Prepotino with Barrington. Please proceed with your question.

Sure, good morning, everyone. Did you say that the Mitchell system that you're working with now is not fully integrated into the estimating system yet, but it will be?

That's correct. It was two phases. The first phase was a B-to-B buy-in. So they actually leave the estimating platform to see our inventory. With CCC they don't have to leave the estimating platform. We mentioned on the last call that Mitchell had a phase two that's supposed to be released in Q3 that will be very similar to CCC's, fully integrated where the shop or the insurance company never has to leave the estimate.

And with both of these and I guess the third estimating in the country as well, you'll be the only recycler that has this capability?

Today, yes. There are plans maybe to open it up in the future, but we are the only ones right now with both companies.

And just a couple of quick questions, how many ECP branches did you end the quarter with?

We were at 132, and then we had one with Auto Climate, so that was 133.

And then in terms of the alternative part usages, usage on the continent, you said it's low. Try to figure there, is it similar to the UK?

Very similar to the UK, Gary. We estimate it's between 5% and 8%. What we've always said is it's many of the same insurance companies writing in the UK also write on the continent. So our hope is that we can piggyback on our relationships in the UK that we have already developed, to launch eventually on the continent as well.

That was my next question, in terms of crossover, I mean, all the major players are writing in the UK as well as the continent on an insurance basis. What about those that are smaller ones that are domiciled in the UK that you may be working with? Do they write on the continent as well?

All the big players do, of course, write both in the UK and the continent. I think it's fair to say that there's regional players in the UK and there will be regional players on the continent as well. So there will be a little bit of difference there. But it's the 80-20 rule here with the big carriers owning the majority of the market share.

I would assume you're working with all the big carriers that are in the UK right now.

Absolutely.

Thanks.

Thanks Gary.

Our next question comes from the line of Scott Stember with Sidoti and Company. Please proceed with your question.

Good morning.

Good morning, Scott.

Can you talk about how the weather impacted the quarter? Obviously we had some extraneous amounts of snow that hit the Northeast. Could you just talk about on a net basis, how it helped you and if there's any lingering impact into the second quarter?

It was a winter that finally arrived. It was pretty interesting when you look at the stats that, really, before February we were actually behind our normal expectation, and then late February and March, the Northeast really got pounded pretty good. Certainly we believe, it certainly didn't hurt, if you want, we certainly believe that it brought enough volume into the marketplace in the collision repair industry. April is very much the plan right now, so we think that has pushed some of that weather in March into April. So it really had some nice late winter weather to help us in late Q1 and early Q2.

And North America, looking at parts and service, I know you're not breaking it out any more but could you just give some high level commentary of how the recycled parts did, namely the mechanical parts, just with some reports of some weakness there over the last, particularly in March?

I don't think we've seen any appreciable change in our mechanical. Keep in mind our mechanical sales are primarily large-ticket items, like engines, transmissions that are not really discretionary in terms of people's ability to time those. When someone's engine blows, they generally have to go and get it fixed. It's primarily just driven off our car buying in Q4. I don't think we've been impacted particularly.

And quite frankly, Scott, with the aging car part in our engine transmission business is very strong right now so we didn't see any impact at all to our mechanical components.

Got you. Last question, just following up on the UK and the collision parts initiative, how many insurers do you have programs with now?

We have relationships with eight insurers today, all in pilot stage, but continuing and growing by the quarter.

Great, that's all I have, thank you.

Our next question comes from the line of Richard Hilgert with Morningstar. Please proceed with your question.

Thanks, good morning everybody.

Good morning.

With this Sator acquisition, you had mentioned this is also in northern France. I was under the impression that France has legislation in place that requires new parts, after-market parts to be used, so, and that was one of the reasons why Europe was going to be a difficulty for you in terms of your strategy going forward. Now it seems like you're more comfortable with the after-market business over there.

Yes, Richard, let me clarify the law there. The law is for collision parts only that have to be OEM parts only. So on the mechanical, the after-market mechanical, there is not that same restriction. So that only applies to collision parts and our collision parts sales on the continent are very low today.

So that didn't hinder us at all. Now, with that being said, France is an interesting country. So I am not sure what our plans will be to expand in France at this point, it's still early days. But we certainly won't be pushing our collision parts into that marketplace. But as far as mechanical parts they're readily acceptable in France.

Now this business sounds like something that is a like a NAPA. Is that characterization fair to say about Sator?

Yes, they distribute mechanical parts, very similar mechanical parts as ECP did.

Okay, and is this the type of operation, would you be considering this type of operation to acquire here in the United States?

We certainly are looking at the hard part industry in all markets. It's an intriguing part of our business. It's a little bit different model than what we operate here today in terms of the way we deliver our products. Those tend to be more hot shot and we tend to be a little bit more once-a-day delivery for our collision and heavy mechanical parts but it's something we'll continue to look at in the States as well.

And when you say hot shot, you mean you deliver on demand.

Yes, they tend to deliver in the UK and at Sator within 30 minutes to 45 minutes. So they'll have a truck waiting just to dispatch immediately once the call comes in.

Okay, very good. Thanks for taking my question.

Thank you, Richard.

Our next question comes from the line of John Lawrence with Stephens. Please proceed with your question.

Good morning, guys.

Hi, John.

Sorry I'm late to the call, but could you give me just a couple, I know you've probably been through this on the acquisition, a little bit of the size of the market that Sator is addressing?

Sure. Let me talk about the western European market first, John. Western Europe is $115 billion US dollar parts, after-market parts market. There over 250 million vehicles on the road there in the western European. 85% of Sator's revenue is in Belgium and the Netherlands, very similar market dynamics as what we've seen in the UK.

Mandatory insurance with very, very low levels of alternative part usage on the collision side. There is a high acceptance of alternative mechanical parts. So that obviously bodes well for us. They have about a 20% market share in the Benelux region, and basically the main competitors are small, regional players. If you get outside of their main markets they operate, there are similar companies to Sator in Germany, France, etc. But really great growth opportunity and plenty of runway left.

And the situation with the ownership, what was the situation for the seller?

Private equity.

It was private equity. And they've had it how long?

Three years, three or four years.

Great, and once again you probably covered it, was there anything unusual in the cost structure in the quarter?

Anything unusual, I'm sorry, John? Anything unusual, what?

In the cost structure, other than just some of the comparisons of the one-time items, etc., was there anything else unusual in the cost structure?

No, just the cost of the car in Q1 last year.

Yes, right.

Yes.

But other than that comparison, nothing else unusual?

No.

And what did you say? What did the cost of the car do in the quarter?

In the quarter our average cost in Q1 2012 we were at about $1,931 per car, John, and this quarter, year over year we're at $1,870, so seeing a little bit of an improvement.

Great, thanks so much, sorry to be late.

Thanks, John.

Since there are no further questions I'd like to turn the floor back over for closing comments.

Thank you, Brenda. I want to thank everyone for joining the call today and we look forward to speaking to you again in a few months to report our Q2 results. Thanks, everybody have a great day.

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