LKQ Corp (LKQ) 2014 Q1 法說會逐字稿

Greetings and welcome LKQ Corporation first quarter 2014 earnings call, at this time all participants on a listen only mode a question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to turn the conference over to your host Mr. Joe Boutross, Director of Investor Relations. Thank you, you may begin.

Thanks, Devon. Good morning everyone and thank you for joining us today. This morning we released our first-quarter 2014 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 & 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 audiocast and conference will be available shortly after the conclusion of the call.

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

Forward-looking statements involve risks and uncertainties some 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 statements to reflect events or circumstances arising after the date on which it was made except as required by law.

Also note that guidance for 2014 is based on current conditions including acquisitions completed through March 31, 2014. And excludes the impact of restructuring and acquisition related expenses gains or losses related to acquisitions or divestitures, including changes in the fair value of contingent consideration liabilities, loss on debt extinguishment and capital spending related to future business acquisitions. Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risks.

Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier today. As normal we are planning to file our 10-Q in the next few days. And with that, I am happy to turn the call over to Mr. Rob Wagman.

Thank you, Joe. Good morning, and thank you for joining us on the call today. In Q1, revenue reached a new quarterly high of $1.63 billion, an increase of 35.9% as compared to Q1 2013. Net income for the first quarter of 2014 was $104.7 million, an increase of 23.7%, as compared to $84.6 million for the same period of 2013. Diluted earnings per share of $0.34 for the first quarter ended March 31, 2014 increased 21.4% from $0.28 for the first quarter of 2013. Please note that adjusted diluted earnings per share for the first quarter 2014 would have been $0.35 compared to $0.29 for the first quarter of 2013 after adjusting for a net loss resulting from restructuring and acquisition related expenses, loss on debt extinguishment and the change in the fair value of contingent consideration liabilities.

Organic revenue growth for parts and services was 10.3% for the quarter. I am particularly pleased with our North American organic revenue growth for parts and services of 6.4% despite the extreme weather we faced throughout January, a month when miles driven was driving almost 5% in some of our key North American markets.

Now more detail in our North American operations. During the first quarter, we purchased over 72,000 vehicles for dismantling by our wholesale operations which is an 8% increase over Q1 2013. As we progressed into Q2, the volumes and pricing and auctions remain steady despite the recent 2.2% spike in the Manheim Index we witnessed during Q1. With inventory already on hand, and a continuation of our current run rate for acquiring cars, we should have sufficient inventory for our recycled parts operations.

In our self-service retail businesses, during the first quarter we acquired approximately 120,000 lower-cost self-service and crush only cars as compared to over 128,000 in Q1 of 2013. Or roughly a 7% decrease. The reason for the decrease was that prices demanded for vehicles in certain markets exceeded our acceptable cost given the prices of scrap and other metals.

I now will comment about APU. In early April, CCC released their annual 2013 APU number and we ended the year at 37%. Briefly, I like to put some context around this number. The 37% reported by CCC measures APU as a percentage of parts dollars and not unit volume trends. Unit volume trends are an important metric for our industry. With the aging car parts measuring APU as a percentage of parts dollars does not tell the whole story about what is actually occurring in the marketplace. Why? Simply put, the higher the OE cost, the larger share of parts volume the OEs will appear to capture.

To get a more accurate representation of the penetration of APU we obtained data from CCC on a per unit basis. From 2009 to 2013, the number of parts being replaced on a per estimate basis, has increased from 7.8% to 8.6%. This trend bodes well for the replacement parts industry. Of that increase in replaced parts, CCC data shows that approximately 75% of the time, alternative parts are being written as opposed to just 25% for OEM. As a result on a per unit basis, the alternative parts industry is continuing to take market share from the OEs.

Because of the aging car parts however, the increase in the per unit share of APU is offset by the lower prices paid for parts that get installed an older vehicles. With this [side] rate improving, we believe that the car part will inevitably become younger and assuming we maintain the higher per unit share of APU we expect the percentage of parts dollars to begin to increase as well as we begin to sell more expensive newer model year products.

And lastly in our North American operations, I want to update everyone on a recent initiative that could bode well for our aftermarket parts opportunity with State Farm. In close conjunction with the rollout of parts trader, State Farm has announced that its authorized use of aftermarket certified chrome front and rear bumpers.

While these are still early days, we are encouraged by the fact that State Farm is looking at the aftermarket parts industry once again. As of now, they have not given any indication of a product program however, we obviously view this as a positive move after nearly 15 years on the sideline.

Looking at these particular part types, year-over-year sales of aftermarket chrome bumpers were up 30% in January, 29% in February, and 33% in March. While some of this increase may be weather-related, we believe that some of the increases related to State Farm's new policy regarding aftermarket certified chrome bumpers. We continue to have open dialogue with State Farm and we hope that they will continue to expand their use of our aftermarket product offerings.

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. And Q1, ECP achieved organic revenue growth of 25.3%. For branches open more than 12 months, ECP's organic revenue growth was 18.4% during the first quarter. Also during the quarter, ECP opened 11 of the 20 new branches we have scheduled for 2014. I continue to be impressed with the quality and depth of ECP's management team and their ability to execute our strategic plan in the UK market.

Now an update on ECP's collision program. During the quarter, we began with a strong double-digit year-over-year growth of approximately 60% with collision parts sales at ECP. I am also pleased with the growth in our collision parts offerings in the first quarter, which today stands at 20,000 SKUs which represents an increase of 8.5% year-over-year.

In addition, during the first quarter, ECP added an additional two insurers into their pilot program bringing our total carrier relationship to 15. Also during the quarter, ECP signed an agreement with a self-insured rental car company to supply collision parts to the shops that they subcontract with for the repair to their fleet.

Now moving on to acquisitions and development initiatives. On January 3, 2014, the company completed its acquisition of Keystone Automotive Operations Incorporated. Please note, that we have broken out this segment separately in our financials as Keystone Specialty.

As previously announced, Keystone Specialty is a leading distributor and marketer of specialty equipment and accessories in North America. Keystone continues to deliver on many of our operational expectations and I am pleased with the initial synergies we are seeing with our warehouse and administrative integration, product cross-selling initiatives, logistics and our shared cultural focus on growth.

We have integrated a total of 11 Keystone cross dock facilities into our existing wholesale operations since we closed the deal in January. In Q1, I had the opportunity to visit one of the Keystone's nationally recognized vendor shows and I saw firsthand the potential for cross-selling our existing SKUs such as paint, reman engines and muscle car parts to Keystone's customer base. And I expect this favorable trend to continue into future quarters.

In addition to the Keystone Specialty acquisition, during the first quarter of 2014, LKQ made four additional acquisitions including: a supplier of cores and new parts to the automotive aftermarket with locations in nine states; a business in South Carolina with one wholesale salvage yard and one self-service retail operation; a paint distributor in the United Kingdom, and a paint distributor in Canada.

And now a quick update on ACM Parts, our Australian joint venture with the largest insurer in the market, Suncorp Insurance. In late March, ACM acquired Frank's Auto Parts, a salvage yard operated with 2 yards servicing the New Wales market. Upon closing, the JV immediately began dismantling some of Suncorp total loss vehicles at both locations. Clearly this acquisition springboards our recycling efforts in Australia and provides a talented management team that will enhance our efforts in developing our build to suit footprint in the market.

Also at ACM, on April 11th, NSF International announced that they are expanding their automotive parts certification expertise to Australia. NSF has developed new protocols for aftermarket automotive parts that specifically address the Australian market. This announcement further validates our belief that on a global basis insurance carriers, consumers, and collision repair shops benefit from a competitive marketplace with a high quality auction for collision repair parts that are affordable, and that come with a limited lifetime guarantee.

And lastly for our Continental European operations in Sator. On April 15, 2014 we announced the signing of letters of intent to acquire five Netherlands companies, all of which are customers of, and currently serve, as distributors for Sator. Our preliminary estimate of the aggregate annual revenue of these five companies, after netting out existing sales among the companies and Sator, is approximately $180 million. These transactions are subject to among other conditions negotiation by the parties of definitive agreements and authorization under the Dutch Merger Control Procedure. We are currently targeting the completion of the transactions in the second or third quarter of 2014.

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

Thanks Rob. Good morning, and thank you for joining us today, as Rob noted in our press release tables we've broken down Keystone Automotive Operations as a segment for reporting purposes which are calling Specialty. While we believe the business has the many of the characteristics of existing North American business including sharing customers, facilities and economic characteristics, for the time being we are calling it a separate segment as we believe there is interest in the standalone specialty results. So for now we have three reportable segments North America, Europe and Specialty.

I'd also point out that in Q1 2014 we saw LKQ reach a number of significant milestones, as our first quarter with revenue reaching an annualized run rate over $6 billion with our Q1 revenue annualized at a hair over $6.5 billion. It is the first time we existed $200 million in EBITDA in the quarter and the first quarter revenue exceeded $100 million of net income.

Getting into the specifics on the quarter beginning with revenue our Q1 2014 revenue $1.626 billion was an increase of $430 million as compared to Q1 last year or an increase of 36%. For Q1, our total organic growth revenue growth was 6%, and we delivered an additional 29% from acquisitions with foreign exchange adding a further point. Rob mentioned that the Q1's 2014 organic growth for parts and services was 10.3%. And within that we saw our North American operations grow organically 6.4% while the European segment grew 25.3%. We completed five acquisitions in Q1 2014 with Specialty being the largest. Our Q1 2014 acquisitions contributed $197 million in revenue in Q1 2014, of which Keystone Specialty accounted for $177 million.

The total revenue acquired in Q1 on an annual basis was $790 million. Total change to other revenue, which is where we record scrap commodity sales, was negative10%, this is mainly due to negative organic growth of 19%, offset by 9% acquisition related growth. We saw decreases and in our self-service car volumes and aluminum earnest in precious metal businesses. The average price we received for scrap steel is approximately 7% lower year-over-year at $224 per ton this year versus $242 per ton in Q1 2013.

Other revenue was 9.6% of total revenue as compared to 14.5% for the same period last year. And has continued the trend of becoming a lower percentage of, and therefore less significant to, our total revenue.

In Q1 2014, revenue for our self-service business was $105 million or 6.4% of LKQ's total revenue. Approximately 33% of this was part sales included in North American parts and services revenue and 6.7%, excuse me 67% scrap and car sales included and other revenue. A year ago in Q1 2013 our self-service business was 9.5% of our total revenue and that percentage has been falling each of the last five quarters as we've grown our aftermarket business.

Our reported gross margin for Q1 2014 was $652 million or 40.1% of revenue, a decline of approximately 190 basis points from our gross margin percentage of 42% in Q1 2013. The primary reason for this decrease was a 230 basis point decline attributable to acquisitions completed after March 31, 2013 including 110 basis points related to the Specialty acquisition, 70 basis points from the European Sator acquisition and a remainder due to other acquisitions including the UK paint transaction.

The decline due to Specialty of 110 basis points is in line with the guidance we provided last quarter. Excluding these items we saw an improvement of about 70 basis points in the North American margins of which a portion resulted from a mix with the reduction of lower margin and other revenue that I mentioned earlier. Other material factors reduced gross margin about 30 basis points relative to the prior year.

And moving to operating expenses some of the comparisons are being affected by our Specialty and Sator acquisitions which both operate three-step models. In this model gross margins tend to be lower than the two-step approach but they will incur relatively lower facility, distribution and SG&A costs. While Sator will anniversary in Q2, Specialty will affect the comparisons for the remainder of the year.

Facility and warehouse costs were 7.8% of revenue in Q1 2014, a 60 basis point improvement over 8.4% in Q1 last year. This improvement is primarily due to Specialty which tends to run lower facility costs than the rest of our operations. Distribution costs were 8.4% this quarter, down from 8.7% in the same quarter last year, and we attribute most of this improvement to Sator, which is a lower distribution cost.

Selling and G&A expenses to 11.5% of revenue last year to 11.4% in Q1 this year. This improvement is primarily related to Sator and Specialty which would've driven this number 40 basis points lower but was offset by higher costs in the UK as we incurred higher personnel and advertising costs, most of which I would characterize as being billed out ahead of the branch expansion that Rob mentioned.

The combination of warehouse, facility, distribution and SG&A cost was 27.6% of revenue in 2014 as compared to 28.5% in 2013. I've explained that most of this improvement is due to the acquisitions we've completed, but it's worth noting that the drop in other revenue is probably masking leverage that were achieving in the base business. It's hard to accurately quantify the exact impact, but as I pointed out the past, other revenue tends to incur very little incremental costs in these line items. So it's likely a10 to 30 basis point improvement in leverage being masked by lower scrap and core revenue.

During Q1 2014, we recorded $3.3 million of restructuring and acquisition related expenses up on $1.5 million in Q1 last year. The 2014 cost primarily related to Specialty.

Depreciation and amortization was 1.6% of revenue during Q1 this year as compared to 1.5% of revenue in Q1 2013. We saw a modest reduction in depreciation as a percent of revenue of 10 basis points as we levered the assets over a larger revenue base, but that improvement was more than offset by higher amortization related to intangibles from the Sator and Specialty acquisitions.

Other expenses net increased to $15.1 million in the three months end March 31, 2014 compared to $9.8 million for the same period last year, an increase of $5.3 million. Interest expense was $7.5 million dollars higher, of which $6 million was due to hired debt levels, and $1.5 million from higher interest rates primarily on our senior notes.

During the quarter, we incurred $300,000 of expenses related to debt extinguishment costs. Adjustments to consider contingent consideration were an income of $1.2 million in Q1 this year as compared to an expense of $800,000 last year in the same period. Our effective borrowing rate for the quarter was 3.6% and our effective tax rate for the quarter was 34% compared to 35.8% in Q1 last year.

Taxes came in a little bit better than what we had expected at the time of our call as the effective rate on Specialty was slightly lower than we anticipated. On a reported basis, diluted earnings per share was $0.34 in Q1 2014 compared to $0.28 in Q1 2013, an improvement of 21%. Adjustment for the combination of acquisition related expenses, contingent of purchase price adjustments and the loss in debt extinguishment, EPS would've been about of $0.01 higher both this year and last, so on an adjusted basis Q1 2014 would've been $0.35 as compared to $0.29 last year.

Switching to our year-to-date cash flow, net cash provided by operation activities totaled $97 million through the three months of 2014, as compared to $106 million in 2013. Net income and depreciation were favorable to cash flow by $20 million and $9 million, respectively, but these were offset by a change in the use of cash of $29 million related to inventories.

In Q1 2013 we entered the quarter with inventories a fairly high levels so Q1 last year saw a benefit to cash flow. In 2014, we increased inventories in Europe in anticipation of the branch expansion and at Specialty ahead of the busy summer season resulting in inventories being a use of cash this year. Capital spending was $34 million in Q1 2014, and we have spent $487 million in cash and acquisitions, the largest being Specialty, which accounted for $427 million of the total.

During Q1, we refinanced our credit facility increasing the total size of the facility to $2.3 billion and extending the maturity until May 2019. We made a number of amendments to the covenants to provide us with additional operational flexibility. We are also fortunate to be able to mend our pricing grid and reducing our borrowing costs on the facility between 25 and 50 basis points depending upon our leverage. I would like to acknowledge and thank our banking partners for the support they demonstrate to LKQ as evidenced by these changes.

We ended in Q1 2014 with $1.7 billion of debt and cash and cash equivalents were $113 million. Availability under our credit facility was approximately $1.2 billion and with the cash, total liquidity was about $1.4 billion so we have capacity to pursue additional acquisitions as suitable opportunities arrive.

Now turning to guidance, we left our guidance unchanged from February. Our guidance for 2014 for organic parts -- organic revenue in parts and services is 8% to 10%, our net income and earnings per share guidance ranges are $400 million to $430 million and $1.30 to $1.40, respectively, and our guidance for capital expenditures $110 million to $140 million, and cash flow from operations of approximately $375 million.

We like to highlight a few of the changes we've seen in the business since February and give you some indication why we decided to leave the guidance unchanged even after a fairly strong Q1. In January we saw very light sales volume as weather was so severe many of our operations closed and we were concerned that people were not driving the accidents may simply have never occurred.

In February and March, we did see that volume pick up, although there are no formal sources our informal channel checks suggests that the shops have a reasonable backlog for Q2. In contrast, we saw a mild winter in Europe and that business was a little softer than we expected throughout the quarter. The organic growth of 10.3% we reported for Q1 parts and services was ahead of our full-year guidance but we still believe our growth will abate the back half of the year as we start reporting Sator and the UK paint businesses in that number.

As I discussed a moment ago we have seen a drop in scrap steel prices and Rob mentioned we scaled back the car buying and the self-serve line business because the cost of the cars in this line of business wasn't falling as fast as necessary to reflect the lower scrap prices. The impacts of this showed up in other revenue which is primarily scrap and cores from the hulks. This lower volume and the continued stubborn lower prices on scrap steel were not contemplated in our earlier guidance. We certainly didn't expect a negative 19% organic growth in other revenue and it turned out to be a headwind for us in Q1.

We haven't seen any material improvement in that outlook in April. The Manheim Index which we expected to start falling has actually been increasing in the last three months and is higher now than in March 2011 so we've not seen any meaningful relief in car buying costs in either the self-serve or other [types of] lines of business. Against the negative to scrap prices and car costs we do have a number of positives, we reported only a de minimis impact from our Australian joint venture. While things are progressing there the losses we anticipated for 2014 may not be as much as the $0.02 we earlier thought likely.

Refinancing the credit facility will save us a minimum of 25 basis points on borrowings over what we would've otherwise paid. And as we work through the Specialty acquisition impacts, the tax rates came in favorable to what we expected on the last call. We believe these will add a couple of pennies to what we expected in February. Offsetting these are the scrap and car pressures that I mentioned. Aside from those items we do keep an eye on foreign-exchange particularly as Europe continues to grow and on the ongoing scrap volatility and weather in the balance of the year.

In terms of putting some high-level characterization on the quarter's results, I would say overall we believe we saw a strong performance in the North American collision business, buoyed by an protracted winter and an in-line performance of Specialty. This performance was partially offset by a soft commodity market, ongoing high used car prices and a mild winter in Europe which dampened sales in some key product lines. Weather and commodity prices will fluctuate over time but the key message from our perspective is that the underlying business is progressing very much according to our plans.

With that, I will turn the call back Rob.

Thanks, John. To summarize, we are quite pleased with our first-quarter 2014 results and proud of how our team of over 26,000 employees performed in the midst of some unusual weather related operating challenges during the quarter in both North America and Europe and non-operational headlines that could have impacted our morale, performance and long-term strategy. But collectively, we never took our eye off the ball and got it done.

And with that, Devon, we would like to open the line for Q&A.

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

(Operator Instructions)

Nate Brochmann, William Blair.

Good morning everyone and congratulations on a pre-solid quarter given all the weather disruption. I wanted to talk a little bit about -- congratulations on the opportunity to start working with State Farm a little bit I know you work with them on some of the mechanical and recycled type aftermarket things but not so much obviously on the collision. I know that this is a small data point and we shouldn't get overly excited about it. I was wondering if you could talk a little bit about how those discussions went to start doing these chrome bumpers, when they might have started? Or whether they just one day picked up the phone and said we are going to start doing it? Or whether you guys were in involved in that in terms of trying to think of what the pipeline might be for future products.

We were not involved in that decision Nate of course we regularly pitch our products and services to State Farm. They came to us upon themselves and they did it in conjunction with the rollout of Parts Trader. And as Parts Trader has gone across the country obviously we seem more and more sales.

Our reps that are on Parts Trader reviewing those estimates know about those two-parts types and are pushing them hard. So while we can't comment -- don't know for sure how much of that percentage increase was related to State Farm. Because not all times do we know, does the repairer tell us who they are repairing the car for. But clearly 29%, 33% increases some of that was related to State Farm's new policy. With an 18%-plus market share their a mover obviously so were monitoring this and we still as I said in my prepared remarks in consistent communication with State Farm and hopefully they continue to expand the product offerings.

Okay great that's optimistic. And in second congratulations also on getting a couple more insurance companies into the ECP pilot programs. It sounds like even though while some of those insurance companies are still tiptoeing around being really aggressive with those programs given your increase in overall revenue they're clearly starting to use those. Is there any take in terms of you know whether or not they have to officially signed on for those programs to still take hold, or whether you really expect gradually they'll take hold even if they don't fully move past the pilot program.

Yes, I would expect that they will continue to move Nate, the fact that they haven't signed anything, I would really read anything into that we certainly haven't. The fact that of the 15 that are in pilots, plus the rental car company announced today as well. None of them have stopped writing it. So they continue to write it. I think some of them are adverse to actually signing a contract but we do have two under contract and the rental car company is under contract as well but I suspect it will continue to move along as we continue to grow our product offering.

Okay great and then two just housekeeping things, John, if I could, one what tax rates should we be thinking about going forward now with some of these adjustments?

Yes, I think we had a 34% rate in Q1, absence of some discrete items, I would say probably in that range 34% to 34.5% for the rest of the year.

Okay great, and also to you also talked about maybe some lower organic total growth expectations toward the end of the year as Sator gets in there and maybe UK paint business. Could you just give us maybe a rough estimate of what the organic growth of those individual businesses are as we think about the overall mix?

What we are thinking is probably going to be based more North American mid single-digits on those two components.

Okay. Great. Thanks a lot guys, I will turn it over.

Craig Kennison, Robert W Baird.

Good morning thanks for taking my questions as well. A lot on the call here I'm going to have to reread the transcript but I did want to ask about your pending acquisitions in the Netherlands. It would seem to be a very big positive if you are able to close those deals. I'm curious how other jobbers in that market have reacted to the announcement? I will start with that.

Sure, Craig, we have a tie-in with every one of our customers over there with our computer system. We've been in contact with everyone of those other jobbers some of them have offered to sell us their business. These five acquisitions give us 52 facilities we think the right numbers circa 75. So were going to fill in the balance leader through acquisition of greenfield we've gotten some increase about selling the businesses.

But we haven't had one defection as of yet. Some of that certainly is at risk they could try and find somebody else, but the tie-in with the computer system -- they use our operating system actually to order a lot of parts and to actually manage their business. So is going to be pretty difficult for them to get away from us, and as of now we've had no defections whatsoever.

To follow-up we've mentioned the operating system is my understanding that Sator has an order platform if you will that is widely used. Could you explain what that is and whether it's something that could scale more broadly beyond that particular geography?

Absolutely. Basically what we have the system that the jobbers use, actually ties right into our system life. It's called, Mijngrossier my best attempt at Dutch. Where basically they can see our inventory and we can see what they're doing as well in terms of ordering. So it's pretty intricate. We have looked at that as an ECP potential model to move to other parts of Europe. But at this point were still obviously just looking at that and then now the acquisitions now going into a two-step model will have to relook at that as well. It is an interesting system where we get really full visibility ability for customers are doing.

It actually goes down to the garage level so the garage uses our software. They use that to look up inventory not only at our customers so they can actually see right through to our inventory and then they can order those parts. The garages are ordering from our customers using our software and their serving intermediary in there.

If you look at ECP and the UK is there a different operating platform that you don't control that is used?

Yes the garage is used typically their own software. The garage management system if you will.

We don't have the access -- we don't have the ability to see what they're doing, the way we do at Holland. So it's very intriguing we are looking at ways to replicate that in UK at some point.

And one more on that deal what is the rest of Europe look like from a two-step or three-step model perspective?

Pretty much every country has some level of two-step and three-step but the vast majority of Western Europe is predominately going to be two-step. There are actually three-steppers still out there but the bigger companies are going to be two-step.

And then John one housekeeping question on the four deals -- the incremental deals that were announced in the transcript. What was the trailing annual revenue and can you give that to us by geography of possible North America versus Europe?

The total annualized revenue is $790 million and pretty much all of it is in North America.

That includes Keystone.

Yes.

Do you what it is ex-Keystone?

Keystone was around $700 million. And then some $90 million other deals.

Great, thank you, guys.

Thank you. James Albertine, Stifel.

Great, thanks for taking my question as well, and offer my congratulations, it's a good morning guys. Obviously everyone's going to have their State Farm questions and we certainly do as well. But I wanted to focus if I could on just making sure I understood what you said on gross margin. Your core, if I understood at North American gross margin was up 70 basis points year-on-year is that correct? And can you get to a little bit about of what's driving that whether its flow-through of deals that they leverage or something going on with a sweet spot of the Sator role off.

We saw little bit better margins in the businesses here, I did mention that the other revenue was down. Some of that was the aluminum furnaces and precious metals businesses being down those tend to be relatively lower margin businesses. So as that other revenue came down was probably a slight benefit to the margins. Which is why we said don't count all of that 70 basis points is just sort of the math on product mix.

We did see a little bit of improvement in the margin in the late-model salvage business and a little bit of improvement on the aftermarket parts costs. That is pretty much it, frankly, other than we did get the advantages from having lower other revenue which probably hurts us on the operating leverage on the facility and warehouse and other below line costs.

Can you remind me, last quarter I think it was positive year-over-year as well but maybe be a lower rate of change basis. So we are seeing acceleration in the improvement in other words?

I think if you strip out the other revenue it's probably fairly consistent. I don't have my notes in front of me, but I think you are right, I think we said about 50 basis points, if I remember correctly.

Okay, and if you guys could just help us understand I think you said in past ballpark assumption is 30 to 50 basis points of operating margin expansion on an annual basis, inclusive of the M&A which obviously is a little dilutive with the outset. Some of the M&A flows through from here to Sator and Keystone sounds like it may be even ahead of schedule to some degree in terms of the integration strategy. Is that sort of range changing or should we expect something more in the higher end of that range as a result?

I've always said that this is thing going to be lumpy and you have to adjust for the fact that you look like you're getting operating leverage when scrap costs are going up in it looks like your losing it when they are going down. But I don't think we've changed our view with respect to that. In terms of ways that we can grow the business organically the way we do and then supplement that with some acquisitions. We ought to be able to see leverage come in through like we did this quarter. And depreciation, as I said, if you adjust for the other revenue you do see that leverage in the North American operations. We did see a little bit in the gross margin and I don't know if that is so much operating leverages as just cost structure in terms of the price we paid for the cars.

Very good, well I will get back in queue, congratulations again and good luck in the second quarter.

Thank you.

John Lawrence, Stephens.

Good morning guys, congratulations. Rob will you talk a little about you mentioned Keystone a little bit some of the end markets which you're seeing as far as the muscle cars, et cetera. Talk of little bit -- take a little, take one more step in those end markets. Maybe what are you seeing today in the activity surrounding integration that you have left to do in 2014 for that business.

Sure the integration is actually going much quicker than we expected. As I mentioned we closed 11 cross docks we also moved them up 14 locations into existing locations. I'll give you a quick example. Keystone was delivering into the Dallas market from Kansas City. And they were driving through Oklahoma City. And they would drive to Dallas drop off all the parts and then trucks with then leave Dallas to go service the Oklahoma City. That shuttle truck is now stopping in Oklahoma City, dropping off the parts for Oklahoma City and local LKQ and/Keystone drivers delivering those parts. So we are saving a tremendous amount of freight going from Dallas all way back to Oklahoma City with that truck is already going by. So that is some of the found synergies that we really didn't anticipate quite frankly is 14 of those locations.

We're on plan for synergies on both the financial and the operational side. As I mentioned on the last call at some point we want to bring some products to Europe to try to test this. We've actually, I've actually personally met with the CEO of our Keystone operation with one vendor in Chicago and were going to launch hopefully something in late Q2 to start bringing some products into Europe as a trial. Leaving the vendors were seeing some cross-selling opportunities as we discussed. One of the things we found was in the RV side of the business there's a lot of these dealerships have paint and repair businesses. We're already starting to market our paint products into those RV businesses.

The LKQ representatives already have access to the Keystone inventory so they can now sell that product it just started about a week ago so it's really too early to say what the impact of that is going to be. And of course Keystone has access to the muscle car products, our cooling products, as well as reman engines so that is now starting to cross sell so were pretty bullish on hopefully what the cross-selling opportunities are.

Most importantly the cultures are lock-step. They are a growth oriented company we are too and were very pleased that acquisition. Just finally one less thing on Keystone we approved a new distribution center in Texas. That's a big market for the Keystone as I said we are serving through Kansas City now and we are going to have own distribution center there some really excited about we have going in the works there.

Great. Thanks a lot, congrats.

Thanks John.

John Lovallo with Bank of America Merrill Lynch.

Hey guys, thanks for taking the call. First question is on the inventory at the salvage auctions are you seeing pre-good inventory supply there? I mean do you think that over the next quarter or two that higher supply -- the fact you are seeing that, could offset higher Manheim prices and maybe be a benefit in pricing?

We track weekly, John, the number of vehicles at the auctions we've only seen a modest spike so far. So I assume the CoParts, the Adesas, and the Insurance Auto actions are sitting on a backlog. Because we haven't seen them hit the auction yet. And it generally does take two months before it gets through the systems.

But we certainly expect that if that volume increases as much as the number of total losses that likely took place in Q1 we do expected to have a positive impact on Manheim that by lowering hopefully our cost. But haven't seen that yet. Our option costs actually for year-over-year just down slightly. I would also mention that scrape is down so that could be just a scrape relation but we do expect Manheim to eventually start to light up a little bit here hopefully soon.

Okay that's helpful. And then this been more talk about multi-bidding platform you know in terms of the salvage auction industry and in the whole car auction industry. What are your guys thoughts on that? Do you think that would have any impact on potential pricing competition so forth?

Will the Internet bidding has been around really VB2 CoParts initial -- I think came out in 2004 may be earlier than that. So it's been around for quite a bit of time. So those multi-bid functions have been there for quite a while we have be been dealing with them. So I don't see any additional impact they been open for quite a few years so I do really don't expect anything there -- negative.

Okay great in the last question John, I think the last quarter you guys mentioned that you expect the EPS to ramp sequentially throughout the year. First quarter was probably a little bit better than expected. I mean, is it still reasonable to think that we'll see some ramp up or is that the normal seasonality something which thing about?

I think the things that are sort of different is Keystone Automotive is -- their strongest quarter we believe is going to be Q2. What we did see, is the European businesses -- and it's our understanding that Keystone also, pretty light in Q4.

Okay, that's very helpful guys thank you.

Thank you. Gary Prestopino, Barrington Research.

Good morning everyone.

Good morning, Gary.

Can you just talk a little bit more about State Farm so I get my understanding here correctly. Are you the only entity that is been approved to sell these aftermarket bumpers?

No. They've authorize the use of certified aftermarket chrome front and rear bumpers and anyone who carries a certified bumper has the ability to sell that product.

Okay. So is this really the first time in a long time that State Farm has started to use -- what they be called, collision repair parts?

On a collision part yes they have written [radiators] condensers but that's considered a mechanical. This is really the first collision part they've reference in the aftermarket place with.

So you think it's to be expected that they will come out with some more going forward then?

We certainly hoping but nothing more than that, at this point unfortunately.

Thanks.

Thank you. Bret Jordan, BB&T Capital Markets.

Good morning.

Good morning Bret.

As you look at the end of the first quarter coming into the second quarter, do you have a feeling for sort of what the collision channel backlog looks like I mean is there certainly increased crash rates but there are some issues maybe some of those repairs weren't made given supply disruption. As we look at Q2 to a feeling maybe year-over-year, how we enter the quarter with channel demand.

Honestly Bret, just anecdotally we hear because a lot of the cars were drivable so you might drive by a shop and not see many cars there but it's because the cars driveable they have it scheduled to come in. I can say this we don't give, obviously, guidance for the quarter but I will say for the first three weeks in April it appears that the shops are working for some backlog but it's really, really tough to say how much backlog next is actually other.

Okay. And then on Keystone Specialty do you have feeling -- I guess I'm sure you have a feeling, for what the inventory levels are on that? And then just given the fact that, that's closer to traditional auto parts which in many cases has got better working capital leverage, is there the potential to generate cash as you can extend payables or lever some of that inventory your carrying at Keystone Specialty?

Just to give you some indication, we acquired about $152 million through that deal they were one of the causes of the increase in the inventory in the quarter. So quarter end there was about $166 million. The type of programs you're talking about -- you're right this leverage has more potential for that sort of financing structure. We don't have any plans in place at the moment, but given what the refinance in our credit facility -- (technical difficulty) can be more interesting I'd suspect. In terms of it's really a leverage play. So I won't say never but we don't have anything in the hopper at the moment.

Okay. Thank you.

Thanks Bret.

Scott Stember, Sidoti.

Good morning. Can you remind us how big the chrome bumpers are within the portfolio of products that you guys have?

It's obviously there just basically on pickup truck. So it's a pretty bit limited line, mainly Ford, Chevy and Dodge the foreign manufacturers don't carry much. As you know the F150 is the number one selling vehicle in the United States. So it is not a huge product line, it is pretty limited in that respect.

Okay. And then to that point of just try to figure out how much business you could potentially get out of this versus your competitors. Are these parts -- do they have any extra certifications that possibly some of your competitors would not have.

No. No it is basically being done for NSF is the certifying body for most of this product. I think CAPA does a few but it's mainly NSF.

Okay. And can you talk about CCC ONE platform you didn't give an update on it. Is there anything new there for this quarter?

Still progressing, the growth sequentially was 23% in revenue and again that's off a small base. But the volume was up 30% so it still gaining traction roughly it still around 4,000 shops in the program Scott. Salvage though, this is -- right now were solely limited to aftermarket -- salvage is slated to rollout in late summer and that seems to be on target. CCC tells us that they're averaging about 80 shops the month that are being enabled. So they're getting deeper and deeper into this thing.

Actually CCC is actually running some contracts to get more shops involved. So they're stepping up on their side. I still really very excited about the product mainly because the shops doing most of the work but the biggest ancillary benefit is that their returns have dropped dramatically as the shops to seem to do a better job of keying in the product that our reps [sold or we] are being told to key in. So very excited about the program and hope it continues to grow.

One last question on the collision parts program, and in Europe, particularly with many of the underwriters in the UK writing business in Europe as well. Have you seen any initial traction there?

We have not. This will be phase 2 of that now with the location that we acquired at Sator -- the five locations will now be able to go direct to those shops. So probably later this year will start bringing our insurance team over there to start marketing to the insurance companies and hopefully later this year or early next year will start our collision parts program there on the continent.

Great that's all I have thank you.

Thank you. Sam Darkatsh, Raymond James.

Good morning Rob, John, Joe how are you? Most of my questions have been asked or answered just a couple of follow-ups. The Keystone Specialty segment. What's the growth of that business right now I know you didn't have it, obviously, on the books last year -- but what's the year-on-year growth right now that you're seeing.

It's growing you know in Q1 year-over-year. Again it's not -- we obviously not reporting organic growth yet but it was mid to high single-digits.

And is that how we should be looking at that for 2014, you figure?

We said it going to go more North American but they had a really good Q1. So we think it's going to be somewhere between the 5% to 7%.

Okay. And then April commentary where you said, that it appears that the shops are working through the backlog. Should I look at that statement and the implication being that April was better than March or better than March and February overall?

While April definitely slows down compared to March because of the backlog from January, February, but we think we are going to track on plan for April.

And last question, and if you already mention this and I missed it then I apologize. You have 156 ECP stores now, having opened 11 this past quarter I think your goal originally was 165 by year-end. It would seem as though you are ahead up that pace. Are you still looking at 165 or how should we look at the store count by year-end?

You were going to bring those 9 finished by hopefully by the end of Q2 actually. A few of them may go into early Q3, and at that point Sam we will reevaluate if we can do more but we will have hit the 165, no problem at all.

Very good, thanks much.

Thank you. Bill Armstrong, CL King & Associates.

Good morning gentlemen, just wanted to follow up on a previous question. You don't see a lot of chrome bumpers on the roads anymore. Any idea if you look at the car park is maybe 270 million vehicles, any idea how many have chrome bumpers? And maybe more importantly what indication if any has State Farm given that they may expand this program to all -- plastic bumpers, all types of bumpers and obviously beyond that to other collision parts?

No indication past the chrome bumpers and I really don't know what the pickup truck population in the US is today. But it's certainly a lot smaller than the car population. But yes you're just going to find these built, to your point, basically on pickup trucks, that's all they will be on.

Okay and so far they haven't given any indication that they may expand this to plastic bumpers or anything else?

None whatsoever at this point.

Okay right thanks.

And with that, we will be back in about three months to give you an update on our results of Q2 that's for joining the call everybody.

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