LKQ Corp (LKQ) 2013 Q2 法說會逐字稿

Greetings, and welcome to the LKQ Corporation second-quarter 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 for LKQ. Thank you, Mr. Boutross, you may begin.

Great, thanks, Kevin. Good morning, everyone, and thank you for joining us today. This morning we released our second-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 Officer. Rob and John have some prepared remarks, and then we will open the call up for questions.

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

Before we begin with our discussion, I would like to remind everyone that the statements made on 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 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 10K 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 8K, which we filed with the SEC earlier today. As normal, we are planning to file our 10K in the next few days.

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

Thanks, 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 $0.25 for the second quarter ended June 30, 2013 increased 19% from $0.21 for the second quarter of 2012. As noted in the press release, the second quarter of 2013 and 2012 diluted earnings per share included losses totaling $0.01 per share resulting from restructuring- and acquisition-related expenses, the change in fair value of contingent consideration liabilities, and in 2013 only, a loss of debt extinguishment. Earnings per share in the second quarter of 2012 also included a gain equal to $0.02 per share that resulted from a favorable legal settlement. Adjusting for these items in the quarter, diluted earnings per share would have been $0.26, which represents growth of 30% over the prior-year quarter. I am also pleased with this growth considering the climb in scrap prices we witnessed in the quarter, which impacted EPS by roughly $0.01.

Revenue for the quarter was a record $1.25 billion, an increase of 24.4% as compared to $1.01 billion in the second quarter of 2012. Net income for the second quarter of 2013 was $76 million, an increase of 18.3% as compared to $64 million for the same period of 2012. During the second quarter of 2013, the Company delivered strong organic revenue growth for parts and services of 13.1%. I am particularly pleased with our North American organic revenue growth for parts and services, which increased 7.3%. The solid growth in North American organic parts and service revenue for the quarter is primarily a result of a combination of increased use of alternative parts by insurers, and a direct repair program networks to reduce claims costs, year-over-year increase in accident frequency related to a more normalized weather patterns, the continued expansion of our regional footprint, and the depth of our product offerings.

During the second quarter, we purchased approximately 71,000 vehicles for dismantling by our wholesale operations, which is a 6% increase over Q2 2012. As for volume at the auctions, the outlook for supply remains strong, and the pricing dynamics we are witnessing are attractive, with Q2 vehicle pricing down over 3% year over year. 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 second quarter we purchased approximately 2,000 units for parts, as compared to nearly 1,700 in Q2 2012, or an increase of 18%. In our self-service retail business, during the second quarter we acquired over 135,000 lower-cost self-service and crush-only cars, as compared to over 107,000 in Q2 of 2012, or a 26% increase.

Turning to Euro Car Parts in our European operations, we continue to be extremely pleased with the performance of Euro Car Parts and its ability to capture market share. In Q2, ECP achieved organic revenue growth of 37.8%, and for branches open more than 12 months, the organic growth was 25%. Please note that ECP had two extra selling days in the quarter, year over year. As mentioned on prior calls, we have approved 15 additional ECP branches to be opened in 2013, and we are currently on track to hit that target. Of those 15, one is scheduled to open in August, five are scheduled to open by the end of September, with the remaining nine scheduled to open in the fourth quarter.

Now turning to ECP's collisions program. During the quarter, we again witnessed strong double-digit year-over-year growth of over 80% with collision parts sales at ECP. Though off of a small base, collision sales are an ever-increasing portion of ECP's overall revenue mix. The carrier relationships we've established continue to gain traction, and today I am happy to report that ECP has reached an agreement with a leading insurer to act as the sole supplier to their entire body shop network in northern Ireland. In addition to this northern Ireland win, we have also reached an exclusive agreement in principle to supply collision parts to the [owned] network of one of the largest insurance companies in the UK, and we hope to have this agreement formalized by the end of the year.

On May 1, 2013, the Company announced that it finalized its acquisition of Sator Beheer. Sator is a market-leading distributor of automotive after-market parts in the Netherlands, Belgium, Luxembourg and northern France. We continue to believe that Sator represents a good first step for establishing a beachhead for LKQ into continental Europe. Though still early in the process, I am pleased with the initial results we are witnessing of the purchasing synergies between Sator and ECP. The savings are progressing in line with achieving the previously announced timing and financial metrics of those synergies.

Lastly, on operation, I want to update everyone on the progress of our intelligent parts solution initiative with CCC Information Services, and the parts procurement enhancement we began testing early in the quarter with 20 shops. Today I am happy to report that this enhancement is being fully integrated into CCC ONEs total repair platform, and is now available to approximately 600 users of the CCC ONE control optimized and innovate product packages. In total, this user base represents over 4,000 shops. We anticipate the parts procurement enhancement to be fully available and integrated into all 4,000 of these shops by the end of 2013.

With the program, shops can view our after-market and salvage products in real time. At this time, they can use the program to electronically order after-market parts, and we expect electronic ordering of recycled products by Q4. The early pilot results have validated that many in the industry are ready for a more efficient process to locate and purchase the parts necessary to complete quality and timely repairs. Together with CCC, we are the first and currently the only supplier position to take advantage of this opportunity.

Moving on to acquisitions -- in addition to Sator, during Q2 we acquired six additional companies. An after-market radiator distributor with locations in Ohio, California and Florida. Another after-market radiator distributor with locations in South Carolina and Florida. A distributor of automotive cooling products and radiators in Georgia. A self-service salvage yard in Illinois. A wholesale salvage yard in Ontario, Canada, and finally a wholesale salvage business with locations in West Virginia and Pennsylvania.

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

Thanks, Rob. Good morning, and thank you for joining us today. As this is our first quarterly call with our new [bond] investors participating, I would like to welcome them to the call. We appreciate your support, along with our equity and banking partners. I will make a brief mention that financing transactions we completed during the quarter, but since we had a conference call devoted to those transactions and the Sator acquisition, I will limit my comments in that area unless someone has specific questions later.

Hopefully everyone has had a chance to review our press release this morning. We expect to file our Form 10Q with the SEC in the next few days, so please watch for that as well.

Beginning with revenue, our Q2 2013 revenue of $1.252 billion was an increase of $245 million compared to Q2 last year, or an increase of 24%. It is a bit of a milestone, as it is the first time our quarterly revenue annualized to more than $5 billion. Our total organic growth of 10.8% was supplemented by 14.1% acquisition growth, and we had about a 0.5% negative impact from foreign currency. Parts and services revenue grew organically to 13.1%, and within that category, as Rob mentioned, our European operations continued to perform strongly with 37.8% organic growth. The North American parts and services organic growth was a strong 7.3%.

We saw other revenue increase by $23 million, a 17% increase. We record scrap and core revenue in other revenue. Acquisitions increased other revenue by $28 million. Our organic growth in this line was $5 million negative. The main driver of the negative growth was similar to last quarter, as our volume increases in our recycled and self-serve operations were largely offset by lower commodity prices and the discontinuance of operations at one of our aluminum furnaces.

Other revenue remains an important component to the Company because of its absolute size and its contribution to the profitability of our recycling and self-service businesses. However, it's worth noting that as a percentage of our total revenue, it has been trending downwards as commodity prices have fallen and we have been growing faster in lines of businesses that do not have a significant scrap and core component. By way of example, other revenue was 17.6% of our revenue in Q2 2011; it was 13.4% in Q2 2012, and it was down to 12.6% of revenue in Q2 2013. We will continue to experience short-term impacts from fluctuating commodity prices, but if revenue trends continue, we expect those fluctuations will become less significant to the overall Business over time.

In Q2 2013, revenue from our self-serve business was $110 million or 8.8% of LKQ's total revenue. Approximately 33% of this revenue was parts sales included in North American parts and services, and 67% scrap and core sales included in other revenue. Our reported gross margin for Q2 2013 was $510 million or 40.7% of revenue, a decline of 120 basis points from our gross margin percentage at 41.9% in Q2 2012. The previously discussed gain on legal settlement in Q2 last year accounts for 80 basis points of the decline. The precious metals business we acquired part way into Q2 2012 accounted for a further 20 basis points of the decline.

And I had mentioned on a prior call that we anticipated Sator to impact margins negatively, and that was the case. We attribute 50 basis points of the year-over-year decline to Sator. Recall that we only owned Sator for two months in Q2, so that impact will be slightly more pronounced in Q3 this year. We do anticipate that over the next seven quarters, we will see some improvement in Sator's gross margin as we continue to achieve our anticipated synergies.

The three items I just mentioned equate to a total decline in gross margin of 150 basis points. Those items were slightly offset by improvements we saw in the North American-based business. Most noticeable of those changes was an improvement in the salvage recycling business as a result of lower car costs.

Facility and warehouse costs were flat at 8.2% of revenue in Q2 2013 and in the same quarter last year. North American operations were approximately 30 basis points higher due to the acquisition of eight self-serve operations completed in 2012, which incur greater facility costs as a percentage of revenue compared to our wholesale operations. This increase was offset by the expanded size of our European operations, which tend to have lower warehouse costs.

Distribution costs were 8.5% this quarter compared to 9.1% in the same quarter last year, a decrease of 60 basis points. Sator has lower distribution costs, and that acquisition drove 20 basis points in the improvement. We continue to see some leverage in the UK operations as we benefit from the distribution network being spread over a [long procure] footprint. In North America, we saw a reduction of these costs of approximately 20 basis points, mainly driven by lower fuel cost.

Selling and G&A expenses decreased from 12.1% of revenue in Q2 last year, to 11.7% in Q2 this year. Half of this decline was due to Sator, which has a higher sales per customer and, therefore, lower selling expense. The balance is primarily due to a reduction in personnel expenditures of the percentage of revenue as we lever our selling, general and administration workforce across the higher revenue base.

In total, facility and warehouse distribution, selling, and [distribute] (technical difficulty) general and administrative, costs were 29.4% of revenue in Q2 2012, as compared to 28.4% of revenue in Q2 2013, an improvement of 100 basis points. I mentioned that Sator accounts for approximately 40 basis points of that change, so excluding that acquisition, we appear to be getting some true operating leverage in these costs in the rest of the Business. This leverage is particularly apparent when one considers that other revenue tends to require limited amounts of these cost has been decreasing as a total portion of our revenue. During Q2 this year, we recorded $3.7 million of restructuring- and acquisition-related expenses primarily incurred in conjunction with the Sator acquisition. In the same quarter of 2012, we incurred $2.2 million of expenses, half of which was restructuring of our bumper refurbishing business, and the balance related to earlier acquisitions.

Depreciation and amortization was 1.5% of revenue during Q2 this year and last. Other expenses net increased to $14.9 million in the three months ended June 30, 2013, as compared to $7.4 million for the same period last year, an increase of $7.5 million. Interest expense was $5.1 million higher due to higher debt levels, combined with higher interest rates on our senior notes. In addition, in Q2 this year we had a loss of $2.8 million related to the write-off of fees from prior credit facility, and a small portion of the cost incurred in conjunction with this quarter's financings. Expenses in Q2 2013 related to adjustments in contingent -- consideration were $200,000 compared to $1.2 million last year in the same period.

Our effective borrowing rate for the quarter was 3.82% excluding the write-off of debt issuance costs. Our effective interest rate will be marginally higher next year, as the quarter will include the full effect of the refinancing. Our effective tax rate for the quarter was 35% compared to 36.8% in Q2 of last year. We continue to see some benefit from lower foreign tax rates, as our international business becomes a larger percentage of the total Company.

On a recorded basis, diluted earnings per share were $0.25 in Q2 2013 compared to $0.21 in Q2 2012. Over the last year, we had $0.02 favorable impact from the legal settlement. The combination of acquisition-related expenses and contingent [purchase price] adjustments, and the loss on debt extinguishment this year, impacted earnings per share by $0.01 in Q2, in both 2012 and 2013. On an adjusted basis, the diluted earnings per share was $0.26 this year as compared to $0.20 last year, or an improvement of 30%.

Switching to the year-to-date numbers for our cash flow; net cash provided by operating activities totaled $210 million for the six months ended June 30, 2013, compared to $121 million in the first six months of 2012. During the first half of 2013, our EBITDA increased by $34 million compared to the prior-year period. While we generated greater pretax income during the first half of 2013 compared to the first half of 2012, we reduced our cash payments for income taxes to $54 million for the six months ended June 30, 2013 from $71 million in the prior year.

Cash payments for incentive compensation were $14 million lower during the six months ended June 30, 2013. Cash outflows for primary working capital accounts totaled $42 million in the first six months of this year, as compared to $50 million in the same period in 2012. Other operating cash flows exceeded the prior year, primarily due to the timing of payments of various accrued liabilities such as value-added tax and interest.

Capital spending was $40 million year to date compared to $42 million through six months last year. We have spent $309 million on acquisitions, the largest being Sator, which accounted for $273 million of the total. Year to date, we increased our net debt by $156 million. We ended Q2 with $1.4 billion of debt, and cash and cash equivalents were $162 million. As of June 30, 2013, availability under our credit facility was $1.1 billion, which, together with our cash balances, provides us with adequate liquidity at this time.

Turning to guidance, as we've stated in the past, our guidance excludes any restructuring costs and transactions costs, gains, losses, contingent purchase price adjustments, capital expenditures, or cash flow associated with acquisitions. Our revised guidance for organic revenue growth from parts and services is 8.5% to 10.5%. We increased this range from 6.5% to 8.5% to reflect the stronger Q2 we reported this morning. We increased our net income guidance to a range of $313 million to $333 million. Earnings per share has been increased from the previous levels of $1 to $1.09 to a revised guidance of $1.03 to $1.10, and we left the balance of the guidance unchanged.

I will provide some color on some of the things that could impact guidance over the rest of the year, and then we should have time for some questions. For the growth of our international operations, we are seeing a greater impact from exchange rates for a number of reasons. A weaker sterling or euro could negatively impact our earnings, but obviously a gain there would help us. We saw in the US a sequential tick up -- uptick, excuse me, in miles driven in the quarter, bringing the year-to-date figure flat. It doesn't appear that people are materially increasing their driving, although if the economy improves, we would expect that to increase.

Scrap was volatile during the quarter; we believe it had minimal impact year over year. Rob mentioned that we estimated that falling scrap prices impacted by $0.01 this year. I would remind listeners that we had a similar impact from scrap in Q2 2012. We saw a slight increase in July in scrap steel prices, and we're expecting that to carry into August.

The Manheim Index stood at 119.7 at the end of June, as compared to 123.4 a year earlier. While we're buying different vehicles than those referenced by the Manheim, our car costs tend to be somewhat correlated to that index. I mentioned on the Q1 call that we have seen an improvement in our car buying, and, in fact, it has continued into Q2. Commodity value decreases are probably still accounting for much of that year-over-year reduction in our car cost. Notwithstanding, we did see a slight improvement in our domestic margin as a result of improved car costs. If the trends in costs continues with stable commodity prices, we may see additional improvement in North American gross margins.

With that, I will turn the call back to Rob.

Thanks, John. To summarize, we are pleased with our second-quarter performance. As we enter the back half of 2013, I am optimistic about the year. I am encouraged by the current tailwinds of lower fuel prices, the increase in miles driven, continued APU growth, the recent reduction in vehicle pricing we are witnessing, and the breadth of development opportunities that exist in our key market segments.

I am equally proud of how our group of over 23,000 valuable employees attacked the headwinds we faced in 2012, which subsequently positioned us well to capture and achieve the success we witnessed in the first half of 2013. We believe our unique competitive position, both in North America and Europe, continues to translate into consistent earnings growth for our shareholders, which has allowed us to increase our organic growth, net income and diluted EPS guidance for 2013.

Kevin, we are now prepared to open the call for question and answers.

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

(Operator Instructions)

The first question is from Bret Jordan from BB&T Capital Markets.

A couple of quick questions, and one of them is, as we look at the impact from the precious metals recovery business, that seems to be getting better. I think we were running a 50-basis point impact and it's now 20. Could you give us a little color on the trajectory of that? And is that something that is of diminishing impact going forward? And then I'll hit you with a second question to follow.

Sure, Bret, it's John, I think we acquired that business part way through the year last year so really some of that step down is just because it's only a partial quarter impact. That is basically built into our numbers and we've anniversaried it, so I don't anticipate needing to call that out in future quarters. We are still implementing the strategy there, which is to process more of our catalytic converters through that facility. We've implemented some cutting operations particularly on the East Coast. So we are starting to gain a little bit of traction there. But I think the full roll out's probably in another year.

That's correct, Bret this is Rob. We plan on eventually bringing all of our own catalytic converters into that process, and as John mentioned, that will happen over the next couple of quarters.

Okay great, and then a question on the CCC. Is that a margin impact in addition to a volume impact? Is there anything that changes there as you go to an electronic ordering format? Either lower overhead on your side of the business from an order input standpoint, or is there any impact beyond what we've seen to be obvious volume improvement?

Short-term, no margin impact, but potentially long-term. If this thing takes off Bret and the shops do most of the ordering themselves, we may be able to leverage that with a reduction in overhead costs. But short-term it is really just making it easy for the shops to do business with us.

Thank you, nice quarter.

Thanks.

Next question is from Rob Lache from Deutsche Bank.

Good morning, it's Dan Galves for Rob Lache. I just wanted to ask for a little more color on the agreements you've signed or are intending to sign in UK with insurance carriers. You said they were exclusive agreements, so I guess the first question is, you would be the only supplier of alternative parts to these body shop networks? And the second question is, how aggressive are these particular insurance carriers planning to be in terms of driving alternative parts usage within their network, and how would they do that?

The first question, yes this is exclusive. Right now we believe the AP usage in the UK is circa 3% to 7% depending on who you talk to. But it's a great opportunity here. As I said we will be the exclusive supplier on both of these contracts. The Northern Ireland market, we previously reported the entire UK market is about a $3 billion opportunity. Northern Ireland is over $100 million opportunity, except we just started. That deal that was recently signed. We do expect some good potential work out of that. What's also important to us is that these carriers that we're talking with also do write on the continent, so we do plan on leveraging that in time with our Sator acquisition.

How to they intend to drive the alternative parts usage in their body shops? Are they going to be auditing them or what is the plan there?

They actually own these body shops, so they will be doing auditing and controlling that process completely so, they will be very much and definitely involved with that process with us.

Okay great. Just a follow-up. I am interested in how quickly you think that this could move. Maybe you can give some color on the process of over time, like how quickly can your suppliers in Asia develop the aftermarket parts for the cars that are sold in the UK? Is there commonality between the parts in the US and the UK? I guess just what is the process of going about expanding the offering of aftermarket parts in Europe?

Dan there is very little overlap between the US and the UK and the continent. This is a separate group of cars that our Taiwan vendors and Chinese vendors will work with us to develop the products. There is no sign that they will not support us completely.

Just to give you some kind of an idea in the US, we had just in our certified programs, the year-over-year increase in certified parts was 22.17%. They have been very supportive of our needs to keep growing certified products here in the states, as well as in Europe, particularly the UK right now, so no issues there at all very responsive to our needs.

Okay great, and just one housekeeping. Cognizant of the FX changes you are experiencing, John, how does that convert to EBITDA? At what percentage does that convert on a similar basis to your European EBITDA margin?

We disclosed the segment EBITDA for Europe. It's a little bit complicated in so much as some of their product that they buy is, for example, in the UK they buy some product in US dollars and they buy some product in the euro, as well as sterling. So it's a little bit complicated, but essentially it's the EBITDA of the European operations that is vulnerable.

Okay great, thank you.

Gary Prestopino from Barrington Research.

Just a quick question on the tax rate and then some follow-ups. What tax rate should we use for modeling for the back half of the year and what are you looking for, for a full-year tax rate, John?

35 plus or minus a little bit depending on -- sometimes there are some discrete items, and obviously it's going to depend on how quickly the European operations were relative to the US ones.

Okay. And then on the new agreement that you have in Northern Ireland and the one you are working with, I guess that's a UK. Is that strictly just after market on the alternative parts or are there recycled parts included in that agreement.

Strictly after market at this time, Gary.

But the goal would be to also?

Absolutely, we continue to evaluate the prospects of entering the salvage market. We have challenged insurance companies there to adopt our aftermarket parts first programs and we are starting to see that effect. We are still looking at the salvage opportunity as we speak.

Then lastly with the ECC intelligence parts solution, you said it's going to roll out to 4,000 shops? Is that their best high-end shops? Because I would assume CCC has a heck of a lot more shops under their estimating system than 4,000.

They definitely do. They have about 60% market share of the Body Shop business. But yes they are targeting certain shops for this program and they do tend to be their better shops.

Okay, thank you.

Our next question is from Craig Kennison with Robert W Baird.

Good morning Rob, John, and Joe thanks for the information on the call. I wanted to follow-up on the collision opportunity in Europe. Could you give us a sense for how broad your portfolio of SKUs is today relative to what you think it can be once you get your partners lined up?

Right now we're carrying about 13,000 different SKUs in the marketplace Craig. We are continually growing that [initially] as new products come on the market. We are replicating them in Taiwan and bringing them over to our warehouses in the UK. We believe there is certainly substantial more growth to be done there and we continue to work in that respect.

Is every ECP store now turned on for collision parts, and are they all performing equally? Are you able to run some experiments to see whether some opportunities are maybe better than others?

All the parts are stored in a national distribution center, pretty much in the central part of the UK. So, every one of the branches has access. Every one of the branches has a trained specialist (technical difficulty) on collision parts now, and I think that is why we're seeing this 80% year-over-year growth.

More SKUs coming in every quarter and just better penetration in the marketplace. We do have a way of measuring and we do benchmark them against their sister branches and we do, obviously, push them to reach certain goals.

Thank you, and then with respect to this CCC opportunity, is there an opportunity for LKQ to invest dollars in training to accelerate adoption of that at all?

There certainly are. We are -- our Vice President of Insurance Operations meets with CCC regularly. We are actually going out into the marketplace with them to do joint training. So we are very involved in that process and we have actually committed resources substantial resources to this program.

And lastly on gross margin John, it fell a little bit year-over-year. I'm guessing that is largely mix and a little bit of the scrap issue but what do think the sustainable margin rate would be at the gross level?

Craig, I think we've talked in the past that our view is excluding seasonality that unless something changes, things tend to stay the way they are in the short-term. We probably did get a little bit of negative impact in Q2 because of falling scrap prices. We did see a little bit of benefit coming through in the car costs on the domestic side as I mentioned, the demand items coming down Rob mentioned we are buying a little bit better year-over-year. So we are starting to see that theory, if you will, evidence of it coming through in the financials.

We do have a downtick coming with Sator in the short run, because they will be fully -- we will have them for a full month next quarter -- a full quarter next quarter, and we only had them for two months. So I would expect to see a little sequential decline as a result of having them on board for the full quarter. MST as I mentioned is anniversaried now, so I don't anticipate any impact from that, may get a little bit sequential impact having the absence of a decline in the scrap prices may help us a little bit in the next quarter.

Thanks and congratulations.

Scott Stember from Sidoti and Company.

Good morning. Just going back to the collision accounts that you have signed, or the exclusive's that you talked about in the UK and up in Northern Ireland. Were these two accounts at one time as part of your pilot program, and could you tell us where the pilot program stands, as far as the number of people in it?

Yes they were both in the pilot program, Scott. At the time we had eight pilots going on. These two will make -- go to full program status. We still have the remaining six in pilot status. As we have said in previous calls we had hoped that once we started getting people over the wall, this would be a domino effect so we will see how that works out in the future. But full six left in the pilot.

And just maybe going back over to the continent with Sator, could you talk about how the initial reaction has been with insurers on the continent? It sounds as if we could see a little bit quicker adoption over there, since some of these carriers already are represented in the UK?

Yes, we have specifically obviously been trying to focus on the synergies and getting the cultures in line. But our Vice President of Operations -- excuse me our Vice President of Insurance work is planning on going over this quarter to start our initial conversations with those insurance companies. As I mentioned with the two that we have signed, one signed and one soon to be signed, they do write on the continent. So we so plan on obviously piggy backing those relationships. But we will be sending a team over there this coming quarter.

Okay and just last an obligatory question on State Farm, can you talk about anything that you have heard recently that would basically be off of what we've expected so far which is nothing?

They are still moving forward. We did talk about on earlier calls about a program they were doing with OE parts. We still think that's a good sign that they are looking for alternatives. But unfortunately nothing new to report on the aftermarket side.

That's all I have, thank you.

Nate Brochmann from William Blair.

Good morning guys, great quarter.

Thanks Nate.

Just a bunch of little questions on a lot of the other topics that have kind of been bantered about. But in terms of the exclusive arrangements in Europe, or up in the UK and Ireland. Could you talk in terms of a little bit just the functionality of that market in terms of what percentage, if you have a rough number of all the body shops over there are insurance company owned?

It is pretty small, Nate, but they do push a lot of their volume through those owned networks. In Northern Ireland this particular insurance company owns 16 repair shops and they will push the majority of their business through those shops whenever possible.

So, in terms of the insurance work like that, that particular carrier does up in that region, even though they don't push probably 100% through their own shops, they can still influence beyond that, obviously, right?

Absolutely. They will have their estimators, they are called engineers over there. They will have their engineers use these products, so that we have been approved now.

So, while that might not be exclusive to those non insurance carrier owned shops, they are still, obviously, a good opportunity to push more through there?

Absolutely.

Okay, great. And then on the CCC deal, I totally understand why that might not impact margins upfront. But over time do you think that, that could help part of the pricing initiative, in terms of there being a little bit more static pricing, discounts being absolutely set? And, if so, could you talk about how that might work on the recycled side, given the fact there is a little bit more squishiness in terms of set pricing, given hours of work and whatnot?

I don't think we are anticipating any major impact on pricing at this time. I think Rob mentioned that over time it may allow us to leverage some of the selling costs, because people -- you may end up needing -- we are still paying the commission to our sales reps. But over time you may need fewer sales reps because they don't have -- they can just be problem solvers, as opposed to handling the plain vanilla transaction that's going electronically. Over time you may see some impact on that. We are not anticipating any real change in pricing at this juncture.

Okay. Fair enough, and then in terms of coming back to North America, obviously really nice to see the acceleration there. And I know part of that was just helped by buying more cars, and part was a little more normal weather patterns. But obviously you continue to do a good job pushing out broader product availability. It sounds like you did some stuff on the radiator side; could you talk about just terms of the full portfolio, whether it is radiators or getting it more into transmissions? How much further you think there is to go still on not only the geographical build out but also just broader product availability?

Nate I think there is plenty of opportunity left, what we call ancillary product lines that touch our business and touch the body shop and mechanical repair. You mentioned transmissions, absolutely. We man transmissions as an opportunity. We still are the number two provider of paint materials in the US, so we think there is a great opportunity there. You mentioned cooling. Heavy-duty truck cooling is another line that we are going to look at some more. There are plenty of businesses that touch the segment that we still have opportunities in for sure.

Great thanks for the additional color.

The next question is from John Lovallo for Merrill Lynch.

Hey guys thanks for taking the call.

Thanks John.

The first question is on the strong growth in North America on the organic side. Was part of that attributable to the very hot summer we've had? Are you guys seeing increased demand for some of the mechanical parts that may have come under pressure because of the heat?

It certainly didn't hurt John. Obviously any extreme weather tends to do well for us. Obviously, snow and ice is good for us, but extreme heat will cause a lot of engine failure over time. So really hard to gauge, specifically is it tied to heat or is it tied to the fact that these -- there is an older model year car in the United States. The average model year car is well over 11 years now, so that may have some impact on it too, but certainly extreme weather conditions are never a bad thing for our business.

That's helpful thank you, and then in terms of the outlook you guys brought the revenue and net income outlook up. You kept the cash flow unchanged, is there any reasoning for that? I mean is there any working capital headwinds that you are expecting in addition to what you were thinking about before?

Just perhaps a little bit more inventory build in the back half of the year. We had some lower tax payments earlier in the year, depending on how those come out for the balance of the year. It is mainly just working capital swings. Nothing -- I wouldn't take anything out away from that.

Okay great, the final question is on the six acquisitions outside of Sator. Do you have a trailing 12 month revenue number for us?

We do. In the quarter, the total acquisitions revenue trailing was about $400 million and just to help you with your modeling a little bit, so that would be $100 million a quarter. Within the Q2 we reported $72 million of that $100 million. So in Q3 we'd expect the carryover impact from Q2 acquisitions to be about an incremental $28 million in Q3.

Great thanks very much, guys.

Bill Armstrong from CL King and Associates.

Good morning. I wanted to drill down a little bit on the big organic growth in the UK, 37.8%. Did I hear you say earlier that 25% of that was same-store?

Yes, that's correct.

Okay, and there were two extra business days?

Two extra selling days in the quarter, yes.

So if we adjust for that, what would the same-store sales have been?

We are doing the math now. Roughly 20%.

Okay, so even making those adjustments, you still had a really strong quarter. I mean is that from these supply arrangements you've been talking about, or were there other things going on that helped that number?

It is a combination of things Bill. One is that you do get -- it takes about three years for these new locations to build up. So some of this is what you're seeing is locations that they opened prior to our acquisition, and then the aggressive opening program that we instituted once we opened them. You are also seeing the impact a little bit of some of the new product lines that we've added in terms for collision for example. It's just growing faster than this -- it's still very small, but it's growing faster than the business as a whole.

Okay and then my other question regarded interest expense. That $12.5 million, was there any -- were there any nonrecurring items within that $12.5 million?

No, but again for modeling, keep in mind we only had that facility in place essentially for two months. So you should anticipate that the interest expense (inaudible) the bond in particular for an extra month it is probably going to increase interest in Q3. My guess is -- we estimate somewhere between $2 million and $3 million.

So maybe about a $15 million quarterly run rate for modeling?

That is rough -- that's in line with what we are thinking.

Okay great thank you.

Obviously, barring any major acquisitions are in it.

Right, right based on what we've got right now.

Exactly.

Thank you.

Thanks Bill.

John Lawrence from Stephens.

Thanks, good morning guys.

Good morning John.

Yes, Rob would you comment a little bit on North America a little bit and put it in the context of fill rates. When you talk about depth of coverage and regional, and what did the pilot tell you about fill rates on an electronic basis going forward?

Fill rates remained strong, John. Salvage is in our mid- 70's. After market is in the mid- 90's, and maintaining very good. As far as the connection to the CCC pilot, I think what you're referring to is, it is live real time inventory. So, these shops are seeing the inventory. It's updated constantly so they can get a real accurate picture of the inventory. It is 24/7 as well, so if they happen to be open on Saturdays, or Sundays, or late at night because of a hail storm perhaps, they can see the inventory. So it really certainly has helped to make that possible --

It's a major change.

And as you know we have regional distribution. So we certainly -- they are seeing all that inventory in that entire region within 24 hours. It's very live, and after market is really providing an opportunity for us today.

So, we can certainly move that rate up a little bit over time?

Which rate? The fill rate?

The fill rate overall.

I think it will remain pretty steady with the inventory we have in place now.

We measure fill rate by if the customer calls, are we able to get them the product within 24 hours. So this is not necessarily going to change that percentage. I think some of the benefits you see is the customer saves time, and making it easier for them. Because they are ordering it and not going through one of our people, there is maybe one less area for error. So we anticipate a little bit of improvement in some of our return rates for example. So we may see some efficiencies down the road. But the pilot was positive from our perspective, and we are very happy to be able to roll this out.

It is possible the shops may realize some overhead savings too, because they may be able to have the estimator also do the ordering as well at the same time. So there may be some benefits for them on top of the fact that they are more efficient.

Right and second question is, if you look at the overall distribution network, both in the UK and the continent, how does all that flow together? And what's the plans say from Wembley and some of those other facilities in leverage points going forward?

We're going to continue to build out the footprint. We talked of earlier about additional branch openings in the UK. We've targeted 15 for the balance of this year. That will take us up to circa 147. We think the right number is probably somewhere 175 to 200 for what we consider a full branch, and then there will be some satellite opportunities in addition to that. Over time as we grow that, we're going to have to look at the infrastructure associated with that regional hubs and the two main central hubs. Because obviously we have been growing that business so quickly, we may end up adding capacity there.

Right.

We are looking at projects right now just to understand exactly if there is any opportunities to rationalize any of the warehousing and the distribution logistics between the UK operations and some of the continental operations. Obviously, they carry a lot of similar product and you can get product across the channel on a ferry within a couple of hours. So it's almost like they're one remote location in terms of that. So, we are examining some of that. It is much too early days, though, to make any predictions exactly as to where that's going to come out.

And John, I just wanted to add that we are already having daily delivery back-and-forth from the UK to [Skanam], the Netherlands.

Great. Congratulations. Good quarter see you guys thanks.

The next question is coming from James Albertine from Stifel.

Great thanks for taking the question, let me add my congratulations, as well. A lot of great questions have already been asked but wanted to focus on two M&A related questions. First you gave great color intra quarter on the Sator acquisition, and you had an outlook as of the beginning of May as to when you thought that, or how that business would mature over time. I just wanted to get a sense, obviously we've only got two months behind us now since that conversation, but any learnings that you picked up incrementally that make you feel better or worse about that trajectory that you laid out in May? And then a quick follow-up on the US deal. Thanks.

Yes, Jamie we are very pleased with the acquisition. As we've mentioned our previous calls, the primary focus has been on synergies and purchasing synergies. The teams are in lock step on that. The other goal was to get the distribution between the two facilities up and running. We've accomplished that, as well, so. We were very pleased with the targets that we were hitting already, and well on pace to hit the timeline that we originally set out a couple of months ago. So, really, no surprises at all, as far as what we wanted to get done and where we are heading.

Great and then very quickly on the US side, you guys majored in M&A and minored in meteorology, I guess. Buying radiator companies in front of a hot summer like this is nothing short of being a prophet. I wanted to get a sense, as the market is recovering, though, what you are seeing in terms of the quality and quantity of deals out there. But perhaps more importantly, are you seeing any difference from a valuation perspective as the market is recovering overall?

We honestly did expect a little bit of a lighter year this year because of the tax implications that ended in 2012, capital gains. It has not slowed down. Our M&A team is as busy as they have ever been. We've announced 11 deals to date now. We knew 30 was going -- well actually we did 30 deals. We didn't expect to 30 deals this year. If you just extrapolate, we're heading on a pace of 22.

Really in line, slightly ahead of where we expected. I didn't expect it to be as robust as it is, but it's across all of our divisions, too. Heavy truck. As you saw, there was quite a mix in those seven acquisitions we announced today of cooling, after market -- into the aftermarket division, self-service and full-service. So, all of our product lines still remain active with acquisition candidates, and I expect that to continue for the balance of the year.

In terms of valuation, in many cases a lot of the companies we are buying are family-owned businesses that are coming to some kind of family event and we have not changed our valuation metrics. Many of these companies, we are the only company buying them, so it's really -- we are competing against somebody continuing to run the business, or if they retire. And so, we haven't really had to change our valuation metrics on many of these smaller deals that we do.

Great thanks for the detail and best of luck in the second half.

We would like to be respectful of everyone's time, so, call the call. Thank you all for joining the call. We look forward to updating you on our Q3 performance in October. Thanks everybody.

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