LKQ Corp (LKQ) 2013 Q4 法說會逐字稿

Greetings, and welcome to the fourth-quarter and full-year 2013 earnings call for LKQ Corporation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joe Boutross, Director of Investor Relations.

Thanks, Rob. Good morning, everyone. Thank you for joining us today. This morning we released our fourth-quarter and full-year 2013 financial results, and provided our full-year 2014 guidance. In the room with me today are Rob Wagman, President and Chief Executive Officer; and John Quinn, Executive Vice President and Chief Financial Officer. Rob and John have some prepared remarks, and then we will open the call for questions.

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

Before we begin with our discussion, I would like to remind everyone that statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as 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 risks. Hopefully, everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. As normal, we are planning to file our 10-K in the next few days.

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

Thank you, Joe. Good morning, and thank you for joining us on the call today. Revenue reached a new quarterly high of $1.32 billion in the quarter, an increase of 23.3% as compared to Q4 2012. Net income for the fourth quarter was $77.9 million, and diluted earnings per share were $0.26, a 23.8% increase over the $0.21 reported for the fourth quarter in 2012. Organic revenue growth for parts and services was 9.9% for the quarter. Total organic revenue growth for the quarter was 7.7%.

For the full year, our EPS was $1.02, representing an increase of 17.2% from the $0.87 reported in 2012. Our reported earnings in both years had some special items that I'd like to highlight to help in your evaluation of the year-over-year results. Please note, 2013 diluted earnings per share included charges equal to $0.04 per share resulting from restructuring and acquisition-related expenses, a loss on debt extinguishment, and the change in the fair value of contingent consideration liabilities, all of which we exclude when setting our EPS guidance.

Additionally, full-year 2012 diluted earnings per share included a $0.04 per share gain from a settlement of our previously disclosed lawsuit, and a $0.01 per share loss related to restructuring and acquisition-related expenses, and the change in fair value of contingent consideration.

So all things considered, I am really pleased with the year-over-year growth.

Revenue reached a record $5.1 billion in 2013, an increase of 23% as compared to 2012. Net income for the full year was $311.6 million compared with $261.2 million for the prior year, an increase of 19.3%. Organic revenue growth for parts and services for 2013 was a strong 11%. Total organic revenue growth for the year was 9.3%.

During the fourth quarter, we purchased over 70,000 vehicles for dismantling by our wholesale operations, bringing our full-year 2013 vehicle procurement to approximately 281,000, which is a 7% increase over 2012. As noted in previous calls, in 2012 we aligned the reporting structure of our heavy-duty truck salvage with the geographic reporting structure of our wholesale operations, so the aforementioned procurement numbers include the units we purchased for our 26 heavy-duty truck salvage yards.

As we enter 2014, the volume at the auctions is robust, and the outlook for supply remains steady. Despite the flat pricing dynamic in the quarter, the pricing relief we are witnessing early in Q1 is an encouraging trend into 2014, a year that many industry observers have projected as softening in the used car market, which we believe will translate into pricing relief at our salvage auctions. For full-year 2013, we witnessed a drop of approximately 3% in our average vehicle cost compared to 2012.

In our self-service retail business during the fourth quarter, we acquired over 120,000 low-cost self-service and crush-only cars, bringing our full-year 2013 self-service procurement to approximately 513,000 units, which is a 23% increase over 2012.

And lastly on North America, during the quarter we continued to make significant progress with the Intelligent Parts Solution initiative with CCC Information Services. CCC ONE's Total Repair Platform is now available to approximately 4200 users of the CCC ONE Control, Optimize, and Innovate product packages, up from 2000 users in Q3.

Though off a small base, the revenue and number of purchase orders processed through the CCC platform both grew sequentially, 197% and 175%, respectively, during the quarter. Clearly, the trend towards shops adopting this feature within the CCC platform is gaining traction.

Now turning to our European operations. We continue to be extremely pleased with the performance of Euro Car Parts and its ability to increase market share. In Q4, ECP achieved organic revenue growth of 25%. For branches open more than 12 months, ECP's organic revenue growth was 19% during the fourth quarter. For full-year 2013, ECP had organic revenue growth of 32%. And for branches open more than 12 months, organic revenue growth was 21%.

With this type of continued financial performance and the impressive track record of ECP's management team to effectively open, grow, and gain market share, I am pleased to announce that we have approved an additional 20 new ECP branches for 2014.

Now a quick update on ECP's collision program. During the quarter, we again witnessed strong double-digit year-over-year growth of approximately 80% with our collision parts sales at ECP. I am also pleased with the growth in our collision parts offering in the fourth quarter, which today stands at over 19,000 SKUs, which represents an increase of 26% year-over-year.

In addition, during the fourth quarter ECP added five additional insurers into their pilot program, bringing our total carrier relationships to 13. Many pilot program participants continue to appreciate the value proposition of ECP's collisions offerings, and continue to increase their collision parts spend monthly.

During Q1 of this year, one of the two insurance companies we signed in 2013 extended their agreement for three years. In addition, based on recent dialogue, I expect that in 2014 we will become the key supplier to many of those 11 pilot programs remaining.

For our continental European operations at Sator, we have approved the opening of an additional distribution center in France that will allow us to serve a significant additional hard parts customer base in Southeastern France. We expect to be operational by mid-Q2 of this year, and are excited about the opportunities this market provides.

Also, I continue to be pleased with the purchasing synergies we are witnessing in Sator, and I am confident that we are on target to reach the metrics we indicated when we announced the acquisition.

Now moving on to acquisitions and development initiatives. On January 3, 2014, the Company completed its previously announced acquisition of Keystone Automotive Operations, a leading distributor and marketer of specialty aftermarket equipment and accessories in North America. Keystone markets products to serve six category segments: truck and off-road; speed and performance; recreational vehicle; towing; wheels, tires, and performance handling; and miscellaneous accessories.

Within those categories, Keystone carries approximately 150,000 stocking units and has access to about 300,000 total SKUs. SEMA, the Specialty Equipment Market Association, estimates the total US vehicle specialty market to be approximately $31 billion. Excluding certain products that Keystone doesn't currently distribute in meaningful volumes, such as tires, we believe that Keystone's addressable market today is approximately $5 billion; and little, if any, of this overlaps with our existing business, so Keystone provides us with material additional segments to address.

With all the acquisitions, we look for strong management teams who want to stay with the Company and help us further grow the business. And with Keystone, we clearly have the right management team in place. Though we have only owned Keystone since January, their management team has moved rapidly on synergy and cost-saving initiatives. And today I am pleased to report that they have already integrated 10 of their cross-docks into existing LKQ and Keystone aftermarket collision warehouses.

During Q4 of 2013, we also acquired three additional companies: in an aftermarket, parts, and remanufactured bumper distributor in Wisconsin; a new and refurbished wheel business in New York; and a self-service operation in Indiana. Clearly, our ability to identify and execute effective acquisitions is cornerstone to our strategy, and 2013 was no exception, a year in which we added 20 new businesses to the LKQ portfolio.

And now a quick update on ACM Parts, our Australian joint venture, with the largest insurer in the market, Suncorp Insurance. ACM Parts is on track to begin dismantling and selling recycled auto parts from the first wave of Suncorp's salvaged vehicles in early Q2 2014. In addition, ACM Parts had received its first shipment of aftermarket parts for use in an Australian-specific certification program operated by NSF, an independent testing organization. We expect the certified aftermarket parts catalog to increase in size over the coming quarters, and we'll have a significant certified part offering for our Australian body shop partners by Q4 of 2014.

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

Thanks, Rob. Good morning, and thank you for joining us today. Before I began with my prepared remarks, I wanted to comment on a topic of discussion regarding LKQ over the past few months, namely unfounded allegations made regarding the quality of our accounting practices. The management of LKQ and our Board of Directors, auditors, and other constituents, take seriously any allegation of accounting irregularities or ethical complaints made against the Company or any member of management.

We have a comprehensive compliance program to ensure that the financial statements signed by Rob, Michael, our Board, and me are in compliance with GAAP. We operate a whistleblower hotline where we encourage employees to come forth with any concerns. We review, at least quarterly with our audit committee, any complaints regarding accounting or auditing matters. We have a talented internal audit department that reviews our systems and controls, that has direct access to the audit committee.

We involve numerous independent advisers, such as valuation firms and outside legal counsel, in the preparation of our financial reports. Our banking partners, underwriters, and other constituents regularly perform due diligence on the Company, the management, and our books and records. In addition, our external auditors, Deloitte & Touche, provide an independent assessment of the financial statements and of the quality of our internal control procedures.

The Company, our auditors, and our audit committee have reviewed each and every allegation ever asserted regarding our accounting practices. As I speak today, I can confirm there are no outstanding or unresolved matters. I can also confirm that although there have been inquiries, as one would expect in any large public company, there has never been a complaint found to have any material substance, or resulted in a change in our books and records.

I'll also note that Deloitte has always issued clean auditor opinions, both with respect to our compliance with GAAP and the effectiveness of our internal control over financial reporting.

Within the next few days, we will be filing or Form 10-K with the SEC. While I take my responsibility for those statements very seriously, I rest well knowing professionalism, integrity, and character of the people involved in the preparation and verification of those documents.

Of course, our shareholders, bondholders, banks, employees, and other constituents should expect nothing less of us. With the integrity of our Company well-established, in my opinion, the more important thing is how we can continue to create shareholder value.

So, with that said, I want to share with you some of the success we've had in Q4 2013 and some of the plans we have for the current year.

Beginning with revenue, our Q4 2013 revenue of $1.317 billion was an increase of $249 million compared to Q4 last year, or an increase of 23%. It's obviously difficult to quantify exactly the impact of having Christmas holiday fall on a Wednesday compared to a Tuesday in 2012. Our sense is that, overall, it probably had a slight negative impact on sales, but was helpful to our cash flow.

For Q4, our total organic revenue growth was 7.7%, and we delivered an additional growth of 15.8% from acquisitions. Rob mentioned that in Q4 2013 organic growth for parts and services was 9.9%. Within that, we saw North American operations grow organically 5.9%, while the European segment grew 25.2%. We completed three acquisitions in Q4 2013, bringing our full-year count to 20 transactions.

Total change in other revenue, which is where we record our scrap commodity sales, was a slightly negative 0.3%. That was mainly due to the negative organic growth of 5.7%, driven by the closure of one of our furnaces that was processing excess aluminum wheels. The average price we received for scrap steel was higher by about 2% year-over-year -- $229 a ton this year, versus $225 a ton in Q4 2012.

Other revenue was 11.1% of total revenue compared to 13.8% for the same period last year, and has continued the trend of becoming a lower percentage of, and less significant to, our total revenue, although it is still susceptible to commodity price swings.

In Q4 2013, revenue for our self-serve business was $101 million, or 7.7% of LKQ's total revenue. Approximately 32% of this revenue was parts sales included in North American parts and services, and 68% scrap and core sales included in other revenue.

Our gross margin for Q4 2013 was $546 million or 41.4% of revenue, a decline of approximately 30 basis points from our gross margin percentage in Q4 2012. Acquisitions in the European segment were the primary cause for this change, with Sator causing approximately 70 basis points of the decline, and the paint companies in the UK adding a further 20 basis points of decline.

We saw net improvements in the other lines of business, and a favorable mix, which offset all but 30 basis points of the impact from those acquisitions.

Facility and warehouse costs were 8.6% of revenue in Q4 2013, a 20 basis point improvement over the 8.8% in Q4 last year. Our European operations are driving this figure lower, as they become a larger portion of the total revenue base.

Distribution costs were 8.5% this quarter as compared to 9.2% in the same quarter last year, an improvement of 70 basis points. Sator has lowered distribution costs, and that acquisition drove 30 basis points of the improvement. In North America and the UK, we saw the benefits of higher revenue in leveraging these costs. We also saw lower fuel costs contributing about 10 basis points of this improvement.

Selling and G&A expenses decreased from 12.3% of revenue in Q4 last year to 12.2% in Q4 this year. Again, this improvement is primarily related to Sator, which has higher sales per customer, and, therefore, SG&A expense. In total, facility and warehouse, distribution, selling, general and administrative costs were 29.3% of revenue in Q4 2013 compared to 30.3% of revenue in Q4 2012, an improvement of 100 basis points.

Sator accounts for approximately 60 basis points of that change. I mentioned on our last quarterly call that excluding the impacts from acquisitions, we appear to be getting leverage in these costs in North America, and we continue to see that leverage coming through in Q4 2013's figures.

During Q4 2013, we recorded $2.8 million of restructuring and acquisition-related expenses. These were primarily related to a tuck-in acquisition we completed in the Netherlands. Depreciation and amortization was 1.8% of revenue during Q4 this year as compared to 1.6% of revenue in Q4 2012. Depreciation and amortization grew from $17.1 million in Q4 2012 to $23.1 million in Q4 2013, an increase of 35%.

It's worth taking a moment to note that this figure is growing faster than revenue primarily because the amortization of intangibles associated with our acquisition program. When we complete an acquisition, we are required to identify and then amortize intangibles, such as the value of customer relationships. These are non-cash charges which impact our net income and earnings per share, but are not related to future needs for capital asset investments.

Other expenses, net, increased to $15.2 million in the three months ended December 31, 2013, compared to the $7.7 million in the same period last year, an increase of $7.5 million. Interest expense was $6 million higher due to higher debt levels, combined with higher interest rates on our senior notes.

Expenses in Q4 2013 related to adjustments to contingent consideration were $739,000 compared to income of $144,000 last year in the same period. Our effective borrowing rate for the quarter was 4.5%. Our effective tax rate for the quarter was 34.3% compared to 35.6% in Q4 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 reported basis, diluted earnings per share was $0.26 in Q4 2013 compared to $0.21 in Q4 2012, an improvement of 24%. The combination of acquisition-related expenses and contingent purchase price adjustments impacted EPS by less than $0.01 for Q4 in both 2012 and 2013.

Switching to our year-to-date cash flow, net cash provided by operating activities totaled $428 million for 2013 compared to $206 million in 2012. Obviously, a key driver of the year-over-year improvement was our higher net income. We also had favorable working capital movements, including the lower cash payments for income taxes of $36 million due to prepayments made in 2012. Cash payments for incentive compensation were $14 million lower during 2013.

You may recall that in Q4 2012 we had an inventory build, partly in anticipation of port disruptions, which we did not repeat in 2013. The timing of inventory and other payments, particularly at year end in 2013, gave us a favorable working capital benefit which exceeded our expectations.

Capital spending was $90 million in 2013, only $2 million higher than the $88 million in 2012. Some of the projects we anticipated for completion in 2013 will be carried over to 2014, as I'll mention in a moment when discussing guidance. We spent $408 million on acquisitions, the largest being Sator, which accounted for $273 million of the total. On the cash flow statement, you will note that we also show a $9 million investment in an unconsolidated subsidiary related to our Australian joint venture.

We ended 2013 with $1.3 billion of debt; and cash and cash equivalents were $150 million. As of December 31, 2013, availability under our credit facility and accounts receivable facility was $1.2 billion. In early January, we used some of the balance sheet cash and borrowing capacity to finance Keystone Automotive Operations acquisition. On a pro forma basis, availability after that transaction was approximately $700 million.

Turning to guidance -- as we've stated in the past, our guidance excludes any restructuring costs and transactions costs, gains, losses, continued purchase price adjustments, capital expenditures, or cash flow associated with acquisitions.

Our guidance for 2014 for organic revenue growth in parts and services is 8% to 10%. We are expecting North America to continue to perform much like we saw last year. Europe's growth will likely abate slightly as the new ECP locations will not be as impactful as those that contributed to last year's growth. In addition, in May 2014, we will reach the anniversary of Sator; and in August, the anniversary of the UK paint deals. These lines will not be growing at the same rate that our core ECP business has been growing.

So, while we remain bullish on the ECP growth story, it will be slightly diluted by other, slowly-growing lines of businesses as they reach their one-year anniversary.

Our net income and earnings per share guidance ranges are $400 million to $430 million, and $1.30 to $1.40, respectively. Our guidance for capital expenditures is $110 million to $140 million. This guidance is higher than the $90 million we reported in 2013, primarily because we are that much bigger a company, and we do have some carryover projects from 2013 that are still in the development stage. We still believe the majority of the spending is associated with our growth, as opposed to being replacement projects.

We are projecting cash flow from operations of approximately $375 million. Obviously, this level would be lower than the $428 million generated in 2013. As we've seen in 2012 and 2013, working capital movements can cause this number to fluctuate at year-end in ways that are sometimes difficult to project. In 2012, working capital changes were less favorable than we had expected; and in 2013, they were more favorable. Our 2014 projection assumes what we consider normal movements.

We don't provide quarterly guidance for specific line items, but I do want to give the analyst community of a few data points to assist with modeling. On the December 6, 2013, call we discussed the then-pending Keystone Automotive Operations acquisition that subsequently closed on January 4 this year. As a reminder, we expect that acquisition will generate approximately $700 million of revenue in 2014. Gross margins are expected be in the low 30% range, and approximately 10% EBITDA margins.

We are still working through the opening balance sheets and the identification of the intangible assets. But you should anticipate that our depreciation and amortization will continue to rise disproportionally to our other costs, simply due to an increase in amortization of the intangible assets for Keystone, along with the carryover impact of the acquisitions we completed 2013. Obviously these are non-cash charges (technical difficulty), but we have included an estimate of them in our guidance.

We previously disclosed our joint venture in Australia. We expect that this operation will incur initial startup losses that must be expensed. Because of the JV and the accounting rules, we're not able to tax effect those losses at this time. We are anticipating those losses to be approximately $0.02 per share this year. This loss is built into our guidance. And we expect that by the time we exit 2015, this operation will no longer be generating losses.

We expect that the tax rate will be in the 34.5% to 35% range. There will be some variability in this rate depending upon the mix of foreign earnings. We forecast minimal discrete items in 2014.

I noted above that other revenue, which includes scrap and core sales, has been falling as a percent of our revenue. Notwithstanding, commodity prices create some variability in our income statement quarter-to-quarter. We assume that the majority of our commodity prices will be flat to Q4 2013. Unfortunately, in the last few weeks we have seen prices drifting lower; and thus far, Q1 prices are about 3% lower than the Q4 2013 levels. But, hopefully, this will be a short-term issue.

As our foreign operations grow, foreign exchange could cause additional volatility. The pound sterling is high level, and that Canadian dollar has been under pressure. We are taking steps to counter the impact from the weak Canadian dollar. The high sterling would be a concern if it fell, because our US dollar earnings would decline.

The Manheim Index remains high. In Q4 2013, it was essentially flat to Q3 2013, and was down year-over-year by less than 1%. We remain optimistic that as new car production continues to recover, used car prices will begin to fall; but, obviously, we haven't seen that come through yet in a meaningful way.

A couple of debt and debt-related and cash flow items. We expect to have approximately $42 million in mandatory debt repayments in 2014. In addition, we have continued purchase price adjustments of approximately $52 million, which we would expect to process in the first half of 2014. As reminder, the bond we issued last year increased our average borrowing rate after May 2013. Unless we see an increase in LIBOR, or further refinancings or a large acquisition, we're not expecting our Q4 effective interest rate of 4.5% to materially change in 2014.

I have one final item to mention. There are a number of tranches of restricted stock units for Section 16 officers vesting this week. I believe that most of the Section 16 officers have 10b5-1 plans in place that call for automatic selling of a portion of those shares to pay the related taxes. So we will be filing Form 4-S with the SEC, disclosing those sales, in the next few days.

And with that, I'll turn the call back to Rob.

Thanks, John. To summarize, we are pleased with our fourth-quarter and full-year 2013 performance. I am proud of the achievements we made in 2013, and confident that the strategic framework we have in place for our operating segments has positioned the Company well for continued growth in 2014 and beyond.

As we enter the new year, the trends in our North American business are favorable. New vehicle sales hit 15.6 million in 2013, up nearly 8% from 2012.

During 2013, vehicles in operation reached the highest point on record since Q3 2008. This trend, combined with an improving employment landscape, should lead to an increased driving during peak times, which would bode well for our North American collision business and for our recently-acquired Keystone business.

As I am sure everyone is aware, this winter has posed some unique challenges for all businesses, and we were unfortunately not exempt from the negative impacts of the winter in North America. As a company, we witnessed a number of days in multiple key US and Canadian markets where we were forced to close due to extreme weather conditions. From Texas to Maine, many cities declared state of emergencies, forcing motorists off the roads. While this has caused some headwinds for Q1, we are optimistic that there is a backlog of work that will make its way through the bays of repairers throughout the course of 2014. In fact, last week was the first week of the year where we had no weather disruptions, and we posted our highest revenue week ever.

As part of our growth and diversification strategy, Europe continues to provide exciting opportunities for the Company. And we are quite pleased with the performance of this segment so far, and the value it has created for our stockholders. We plan to expand our ECB branch count in the UK, and continue to focus on driving collision parts sales through their existing network, while simultaneously leveraging ECP's purchasing power with Sator in an attempt to maximize the synergies and cost savings that exist between their respective suppliers and product mix.

And lastly, with our development efforts, we will continue to focus on our core North American collision business by looking to add additional salvage locations and product-specific aftermarket businesses. We will also continue to explore aftermarket mechanical parts businesses that will serve as a foothold for operations in other European markets. We have never wavered from this acquisition strategy, and are pleased with the pipeline of opportunities for the Company.

In closing, I am proud of the hard work and dedication of our 25,000-plus employees delivered for the Company; our stockholders; and, most importantly, our customers in 2013. I am equally proud of our team's commitment and laser focus on delivering that same level of success and continued growth in 2014. This focus allows us to project solid EPS gains for 2014. At the low end of our guidance, it represents a 23% increase over 2013 adjusted results; and at the high end, we would increase EPS of 32% year-over-year.

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

(Operator Instructions). Craig Kennison, Robert W Baird.

Maybe I could start with the weather issue. I think a lot of people would have expected that, given the harsh weather and the accident frequency increase, we would see more volume in Q4 and Q1. I'm guessing people don't factor in the lost selling days. But given what Coparts said about volumes being so high recently, shouldn't we expect that to start to flow through in the back half of Q1, and then into Q2?

I think that's fair, Craig. Obviously, there is a backlog at the shops. I did listen to the Copart call as well, and I think that backlog at the salvage auctions bodes well for us, too, in terms of buying. They'll be plenty of salvage available. And generally speaking, when there's more salvage available, we can buy a little bit of better rates.

Let me just talk about the quarter so far. We did phase quite a bit of disruption from the weather, with major cities basically shut down. We had two deal with our own distribution concerns, but we also faced many customers that were closed due to the weather. We are certain there's a backlog at the shops, just from our data that we have with our customers. And we do expect that to work through the back half of the quarter, and into other quarters as well throughout the course of the year.

And then shifting into Europe, I'm sure there's a large investor base that is interested in your progress there. What's the pipeline look like, Rob? Are you more focused on executing what you've got, or are there opportunities that you think could happen in 2014?

We're focused on both, Craig. Both, on obviously execution, but we do have people over on our side doing some M&A work, and the pipeline looks good. It takes time, a relationship-driven acquisitions, where we have to get to know the companies, make sure we're getting the best in the marketplace. But I do anticipate more acquisitions in that marketplace. And whether it be 2014 or 2015, I'm not sure, but certainly the pipeline looks very good there.

And then one more, and I'll get back in the queue. But John, I appreciate your comments on the accounting and the discipline behind that. Can you confirm whether we should expect to see an unqualified opinion in the 10-K, and whether goodwill is carried at an appropriate level, based on how you've carried it in past 10-Ks?

Yes, I don't want to speak for Deloitte, because they haven't obviously issued their opinion yet, but I expect a clean opinion with no goodwill impairment issues whatsoever. We completed our goodwill testing, as we do every year, in Q4, and cleared that hurdle handsomely.

Thank you. I'll get back in the queue.

James Albertine, Stifel.

On the -- just wanted to get a sense for, given the Keystone acquisition -- you came in, at the end of the day, toward the lower end of your full-year guidance. I wanted to understand if that was more timing-related or expense-driven, or if there was something else in there that was more of a pressure than you anticipated toward the end of the year?

Keystone didn't really impact it, I don't think at all, really, because we obviously completed that in January. I think we had talked a little bit about the timing of Christmas. We weren't sure whether that was going to hurt us. Our sense is, things both in North America and in Europe really slowed down in the back two weeks of December, frankly. I don't know that I would want to blame necessarily anything on that, but our sense is that that probably did hurt the sales a little bit in Q4.

Okay, appreciate that. And then if I could ask one more just on gross margin. It looks like, while down year-over-year -- and you attributed, I think, some of that pressure certainly to Sator and some international growth. However, it looks like the degradation actually has improved, if you will. I'm trying to get a sense for how you're looking at gross margin trajectory going forward, and how that contributes to your expectations for FY14.

Good question. In the quarter, we're down about -- year-over-year in the quarter, we're down about 30 basis points. Sator and the paint deals are probably about 90 basis points negative. And we saw the rest of the businesses actually get some slight improvement, mostly in North America, so probably about 60 bps there offsetting that.

So we do feel like we're continuing to get a little bit of traction in the North American business on margin. Nothing dramatic yet, because we really haven't seen cost of goods sold come down in terms of the commodity prices -- excuse me, in terms of the car prices. And commodities have not been our friend. They weren't our friend, really, last year, throughout the whole year. They were volatile year-over-year. They ended up slightly negative on the whole year.

In terms of going forward, I'd just caution everybody, don't forget that Keystone Automotive is going to drag down margins again. We said that probably low 30% gross margins on that business. If you do the math, we're coming up with circa 110 to 120 basis points negative impact to the entire Company. Failing that, you are just going to see the seasonality. Scrap, as I mentioned, is down right now. We think that's a short-term phenomenon. Turkey pulled out of the market earlier this year, which was I think partly driven by the political unrest there.

So, hopefully, that springs back, and we'll be at least a neutral, which is what we're projecting for the year. And then the rest of the gross margin, I don't really anticipate dramatic changes; unless, as I've always said -- unless something changes -- which is commodity prices go up, or we see some improvement in the cost of goods sold associated with the salvage business.

That's very helpful. Thanks for the color.

John Lovallo, Bank of America Merrill Lynch.

John, we certainly appreciate the comments that you made about some of the accounting allegations. I guess from where we're sitting, the two questions that we're hearing from investors -- the two points of concern, I think -- are, one, are you seeing any additional pricing pressure from OEMs versus past years? Or, really, would you characterize the price matching programs as regional, spotty, and really nothing new?

Yes, I think I'll let Rob handle that one.

Thanks, John. John, the OEM price match is definitely regional and spotty, and they have been around for many years. GM, in that recent report, was highlighted, so we actually got some stats for the call. There are roughly 6000 parts in that program. GM offers over 300,000 different SKUs, and less than 10% of their dealers even participate in the program. Apparently, you have to get truckload shipments in order to participate.

And then what we did, we also pulled our data since 2009 on all GM parts sold. We looked at all parts, and our top five parts sold. And in fact, the sales are actually in line with our overall performance of roughly about 6.6%. For the parts that are sold just in collision in North America, our growth was roughly 6.6%. And that's right in line, so this program doesn't appear to be hurting us. Like I said, the numbers are in line with other manufacturers. We do see a little bit of regional spotty attempts to apply this. But with 10% of the dealer network participating, it's really not a factor to our numbers.

That's very helpful, thank you. And then the second question would be on just the number of ECP stores that you think are needed to cover the UK market. The way we're thinking about it, at least, is the UK market is, call it, 15% of the US market. And if you look at the number of AutoZone, GPC, O'Reilly type stores, it's probably 15,000 to 20,000 in the US. So, 15% of that, you're somewhere around 3000 stores. And maybe you haircut that a bit, because there's a smaller DIY market and your stores tend to be bigger. But is it fair to assume that there's still room for more stores in the UK?

There is. As we announced, 20 new stores have been approved for this year. Which, by the way, we expect to get them all done by Q2, so we'll have those 20 stores in, which will put our total at 165 if we get those 20 done. We believe -- you've got to remember, the UK is roughly the size of Oregon, so it's much more compact and the people are squeezed into a much smaller area, so it allows us to reach a much greater penetration with a smaller number of stores.

We believe the right number, when it's all said and done -- we have been saying pretty consistently that it's about 175 to 200. We're leaning towards the 200 number, John, because basically we want to be within 5 miles of the population base we're trying to serve; so, 200 in the UK. Of course, we look at Ireland as another opportunity which we haven't touched yet, as well. Northern Ireland we are in, but not Southern Ireland. So there's plenty of opportunity left, and those would be the full ECP branches that we talked about.

We did talk about it some more remote areas, we're calling ECP light branches, for example. Maybe half the size, with half the inventory, but be able to service a more remote area. We think another 25 of those. So 200 full branches, another 25 ECP light branches, so we still have at least a couple of years of buildout left, probably closer to three.

Great. That's very helpful, guys. Thank you.

Nate Brochmann, William Blair.

Wanted to talk a little bit more specifically, John, if we could -- and, clearly, we can add some of these numbers up. But I know that not all the accounting is finalized on the amortization for Keystone [2]. But can you give us a rough sense, now that it's closed and that you have some numbers behind you, what we should expect in overall accretion for this year?

You're talking from Keystone?

Yes, Keystone 2.

Yes, we haven't disclosed any specific number associated with that. I want to hold off doing that until we get the other numbers finalized. But I think if you take the EBITDA and use a fairly heavy rate for the depreciation and amortization, and then apply a 4.5% interest. And then, remember, that business is all in the US, or primarily in the US, so it's going to be a full 39% tax rate. You can probably come up with a pretty close number to what we're thinking, in terms of pro forma, Nate.

Okay, fair enough. And then second question is -- obviously, you guys are doing great in terms of the topline growth, and certainly the acquisition part of the story continues to increase the overall expense level a little bit. But could you give us a sense of, maybe on a few of the internal programs, or what you guys are looking on the overall expense side, to let some of that accretion maybe from the past deals flow through, even as we continue to do maybe a few more tuck-ins here and there, just in terms of a sense of where we are on the opportunity to limit a little bit of that expense growth going forward.

I'll start, and maybe, Rob, you can join in. Obviously, we continue to look at the transportation network. And the strategy has always been to try to fill in the holes and shrink the average distance that the parts move. And we've done a lot of work on that recently, re-tendering some of those transportation links. We continue to look at opportunities, when warehouses come available, to see if we can co-locate facilities. And obviously we're talking with the new Keystone Operations to see if there's any opportunities to co-locate those. I think, as an example, I think Rob talked to some of the -- was it nine?

10.

10 cross-docks that we've currently managed to co-locate. It's an evolution that just -- we don't want to run out and replace warehouses before the leases are up, obviously. But as their leases get expired, we try to see if we can co-locate facilities. Over time, I think some of the -- you will see the industry moving towards more of electronic procurement, and the CCC product that we've been talking about. It's very early days, but we are seeing a lot of electronic ordering coming through for that. And we're finding that is improving the accuracy, which means fewer returns. It's improving the -- obviously, it's a lot easier to process an electronic order.

And we're seeing that pressure coming not only from the shops, but also some of our insurance partners as well. I think we talked in the past about State Farm's product, that they're trying to implement some kind of an electronic ordering process; which at the moment is actually causing a little bit more cost for us, as opposed to less. But, ultimately, I think the industry goes to that sort of a platform of some kind.

Yes, and I was just going to highlight, Nate, on top of what John said, the Keystone integration is a great example. I couldn't be more pleased with the speed of that integration -- to have 10 cross-docks in about 1.5 months, full within to our facilities. Stage 2 of that, now that we've got them moved in, will be to start sharing deliveries wherever we can, of course, to try and gain efficiencies. We actually expect, as a result of that, our service levels to increase. We'll be able to get to the customers even quicker. So we're very pleased with that, and I think we'll continue to leverage that.

And to John's second point on the CCC system, just one upgrade that's coming at the end of Q2, we'll be launching e-invoices to all of our customers through CCC, which will allow substantial savings for our customers; and hopefully, eventually, us, on the admin costs.

So we're continuing to look at those opportunities to tuck-in the businesses together, and I think the KAO acquisition is a great example of how fast we can move on that.

Okay, great. And then, just last question. John, usually at this point, you give us what could impact the high end or the low end of guidance, in terms of what may or may not be in there. I would assume that you're probably not, even on the high end, including a lot of benefit if you roll out more of the collision parts, or the Manheim really does drop maybe a little bit more significantly. I assume that that's not in there at all. But could you give us a little sense for what is in there on the low end versus the high end?

I think Rob mentioned that Q1 started off a little bit slow. In January, we were shut down in a number of places. We see other industries that are completely unrelated to us -- like restaurants and so forth -- saying their sales were down. I don't know if people didn't have accidents because they weren't driving to the restaurant or not. To the extent how big the backlog is in those shops, we don't really know yet. But our sense is that this is a much better weather environment than we had a year ago.

Other things that could be impacting obviously are the FX rates, the weather for the rest of the year. Scrap? We assume scrap is going to be relatively neutral to us. That could be favorable or unfavorable. I think the Manheim Index, we just assume, steady as it goes. I don't think there's much risk on the upside to that. Our bias is that it will probably come down over time. I've been saying that on this call over (laughter) -- a fair number of quarters, so I still believe it to be true. It's just a question of when.

Obviously the new car production took a little bit of a step back in January. They think that's the weather. But the systemic trend there that we see is probably good for us. There has been some threats of port strikes. I don't think that's going to impact us yet. We're going to try to manage that, and build up the inventory. If it looks serious, we'll try to get the product off the water sooner. But obviously that could have an impact on us.

Rob, did you --?

That's right. Like I said, Nate, in my remarks, that I was very encouraged by last week -- the first week of the year that we went a week without on interrupted distribution runs, and we posted a record week. So it feels like there's some pent-up demand that's going to be coming through the system.

And Europe is -- I'll just mentioned that briefly. Europe is suffering from a very mild winter, frankly. While we were hit here, they were suffering from a mild winter. And that is unfortunate for them, because things like battery sales and such just are not happening over there.

Okay, great. Thanks, guys. I'll turn it over and get back in line.

Bret Jordan, BB&T Capital Markets.

A question on Keystone, now that you've had it for a bit. I guess if you could give us some thoughts on maybe how you see that business growing going forward as it exists today. And then whether or not there's any change as far as the distribution model that you can make, either adding more direct or incremental points of sale that might change that growth rate from just a traditional three-stepper into something else.

Sure. As I mentioned, the speed of the integration we are thrilled with, Bret. I never envisioned getting 10 of these cross-docks already co-located, so very pleased with that. I personally have had the opportunity to interact with the associates at Keystone, the customers, and suppliers. Keystone puts on three, what they call, big shows with customers and vendors. They were all held in January and February, and I got to join two of those, really just getting to know people and know the space.

The Keystone people are -- our new Keystone colleagues have presented us an opportunity in one major market to add additional warehouse, would make the sixth distribution center. We've already approved it; great potential for market share gains in that particular market. The operation synergies, as I said, they're not just for cost savings, but I believe there's going to be meaningful enhancements to the customer service levels. We'll be able to get the parts to the customers even quicker at less expense, is what we hope. Back office synergies, really in line with our expectations, and progressing very well.

I just want to talk about some of the cross-selling opportunities, as well. At the three shows, we actually launched LKQ products to those customer base. Basically three main product lines coming into play here: ATK, which is our re-man engine division; Goodmark, which is our classic car collision parts; and our Coast to Coast line, which is wheels and accessories.

Very well received by the customer base there, and very interesting crossover of sales opportunities there. It's early. I want to warn everybody that these are early days. But we actually are starting to talk with our European counterparts over at Sator and ECP, at the potential of European distribution of these products. So, overall, we're very pleased.

I just want to share with you two things that happened at the shows for me personally. Just talking with some of the customers, I actually ran over a customer that said he needed a pickup bed for one of his units, and we sold him a pickup bed on the spot.

So there are some opportunities. And the second one that we saw was on paint. These are the customers -- and many of these other customers that Keystone markets to have many paint booths. So we're already launched our paint teams into these new opportunities. So, very pleased with that.

The second half of your question was really going to a two-step. I don't see that happening anytime soon. We will certainly market these products to collision repair shops. But we'll continue certainly to market to that three-step model, because that's the most effective way to go to market at this point.

Okay. And then one question as it relates to North American collision -- net-net, taking out the delivery issues on the first quarter to date, are you seeing what seems to be a fairly extreme weather pattern, for this winter being a benefit to total aftermarket or alternative parts demand this year? Is it improving the growth rate?

I will take this weather over a 50-degree weather any day of the week. I think it's just going to be lumpy, Bret, like I said, just because of so many days we couldn't deliver the parts. But I am expecting that backlog to come through.

All right. And one last question. Do you have the most recent number on alternative parts penetration?

I don't. We did get an update from CCC. CCC reports that figure, the annual figure, in March. However, during the year, CCC actually reported APU fluctuating between 37% and 38%. I think in June, it was at 38%. It does move, depending on seasonality and supplements that hit the marketplace. We think when the final number is in, it's obviously going to be somewhere between 37% and 38%, but it could very well round down to 37%.

But we actually believe there's a reason why the number has been flat recently. And we've really discussed in the past, but I just want to reiterate as long as we get asked the question. As you know, APU was computed and reported as dollars spent on alternative parts as a percentage of total dollars spent on all repair parts.

There have been three major trends impacting APU recently -- first, the aging car part. LKQ -- this is a pretty interesting stat. Compared to 2008, we're selling on average, a two-year-older model year part then we were in 2008 because of the aging car part. Obviously an older car part is going to command a lower part price.

Second, with the recent lower-than-average sal rate that has limited the availability of recycled parts that we have even to sell -- after the fall of new car production between 2008 and 2011, fewer cars reached the salvage pools; and then obviously fewer parts in what I call our sweet spot -- that 3 to 8 years, Bret.

However, we think the recent improvement in the sal rate over the past three years should start to mitigate that trend. And we think that the average age of vehicle will start coming down. And obviously because that bigger tranche of vehicles is now starting at that sweet spot, there's going to be more recycled parts available.

And the last drag on APU usage has been the recent surge in the sal rate, interestingly enough. That's worked a little bit against us, in that brand-new cars tend to get OE parts for the first couple of years. But, again, as those things start aging into three and four years, we think that's a good trend for us.

So, with all those headwinds in front of us, and I think most of them now behind us, we are actually pretty happy that AP usage has been stable. Interesting enough, CCC does do a report that actually shows on a per unit basis -- not in a parts dollars, but the number of units actually being written in alternative parts -- and it's actually expanding, so we are continuing to take market share from the OEs on a per-unit basis.

And the last thing I do want to say about AP usage is it's an industry-wide stat that CCC reports. And while it has remained flat over the past few years, LKQ grew organically in our North American collision repair segments by over 6.6%. So I think it really highlights the effectiveness we've had with our direct marketing to the insurance industry, and the team that has helped that for LKQ.

All right, thank you.

John Lawrence, Stephens.

Rob, would you comment just a little bit? If you go back, remind us -- maybe history a little bit of when there's this type of availability in the marketplace at the auctions, what have you seen that variability be as far as pricing and the ability to, as you get to a certain point in those cycle times, to be able to get a better price for that car?

We tend to see -- it tends to follow supply and demand, John. And the supply is obviously going to be increased. We do some of our better buying in this timeframe because the auctions are plentiful and we get to buy a lot of cars. So I expect this will be a good buying period for LKQ, with the influx of the salvage and just with the sheer availability of those cars starting to come through the pipeline, should bode well for our purchasing.

You mentioned some backlog. But just in general, how long -- if you buy the car today, just in terms of timing, how long -- that cycle time before you sell that part is roughly what?

Generally speaking, depending on the backlog we have in our operations -- but from the time we buy it, plug it into our facility, we [priage] it -- getting the fluids out, getting all the hazardous materials out, inventorying it -- and keeping in mind that backlog, it's 4 to 6 weeks from the time we buy it until it's actually in inventory, ready to go. Because we have a pretty healthy backlog as we speak right now.

Great. And last question, on Europe, obviously a lot of progress with the insurance companies. What do you think that timeframe for some of these other pilots to be reviewed and decisions made?

I'm optimistic that in 2014 we'll be bringing some of these things over the hill here, John. We've gotten really great response; and, again, with 80% growth, it has worked really well for us. What has also been a powerful play for us is the paint acquisition we did there, and being able to bundle options to our body shop customers. We are very happy with the synergies that are coming along and been achieved, and they will be achieved over the timeframe we've made public to the Street.

And we're making progress on leveraging that distribution network as well, so we can get the products on the same trucks. Our paint NDC -- we opened up an NDC, a national distribution center, just for our paint products. It will be fully operational by the end of March, and will be servicing all the branches. And then obviously having those nationwide delivery capabilities for our paint is allowing us to gain national accounts on the paint business. So I'm very pleased with that, and expect continued growth there.

Great, thanks. Good luck.

Operator, I see we're running a little bit over. Just being respectful of people's time, maybe one more question.

Sam Darkatsh, Raymond James.

Back on January 16, Rob, you came out with a press release; and in there, you mentioned -- you reminded us that neither the Company nor its insiders can buy LKQ stock during a blackout. Once the blackout now has been lifted, can we expect to see a fair amount of insider purchases in the coming days?

Some of us -- some of the Section 16 officers sold stock in December. And, unfortunately, they're blocked out for six months as an SEC rule. So we won't be able to -- those who did sell in December won't be able to do anything. As far as the Company itself buying back stock, I don't think that's going to happen, Sam. We think the better use of our capital is to continue our acquisition strategy, and the Board has not authorized a stock purchase buyback at this time.

Are you or John restricted to buying stock in the next six months?

We both are.

Okay. And so the intent -- or at least putting words in your mouth -- hopefully I'm not doing that -- but after that restriction has been lifted, assuming no material increase in the stock price, would you imagine that you would be interested in buying the stock back at these levels?

I would be.

Okay. Last question, ECP stores -- John, you mentioned the 12-month comps for stores that were open at least 12 months. Do you happen to have the growth rates of those stores that were open at least two or three years?

We have more than one year, and that is --.

Yes, we're looking it up right now, Sam.

I put those in your remarks.

I think, in your remarks, you said it was either 19% or 21% growth for stores open at least 12 months. But obviously that would be inflated by those stores that are rolling into the comp base that are only 13, 14, 15 months old. And then you've got a fair amount of those. So to get a sense of what the true organic growth of the business is on stores that have been open for at least two or three years might be helpful for us.

My script was just on the last quarter, so -- yes, I think you're looking for more details.

Yes, we don't have a breakout between years, Sam. We just bifurcate it between open more than a year -- which was 19% in Q4, and 21% for the full year -- and then less than a year.

Okay. I'll get that off-line. I appreciate it. Thank you very much, gentlemen.

Thanks, Sam. And thank you, everyone, for your time this morning. We look forward to speaking you with April when we report our first-quarter 2014 results. Thanks, everybody.

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