LKQ Corp (LKQ) 2014 Q3 法說會逐字稿

Greetings and welcome to the LKQ Corporation third-quarter 2014 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Joe Boutross, Director of Investor Relations for LKQ Corporation.

Good morning, everyone, and thank you for joining us today. This morning we released our third-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 and John have some prepared remarks and then we will open the call up for questions. In addition to the telephone access for today's call, we are providing an audiocast via the LKQ website. A replay of the audiocast and conference call will be available shortly after the conclusion of this call.

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

Also note that guidance for 2014 is based on current conditions, including acquisitions completed through October 30, 2014, and excludes any 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.

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'm 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 Q3 revenue reached a new quarterly high of $1.72 billion an increase of 32.6% as compared to Q3 2013. Net income for the third quarter of 2014 was $91.5 million, an increase of 24.6% as compared to $73.4 million for the same period of 2013. Diluted earnings per share of $0.30 for the third quarter ended September 30, 2014 increased 25% from $0.24 for the third quarter of 2013.

Diluted earnings per share for the third quarter of 2014 would have been $0.31 compared to $0.25 for the third quarter of 2013 after adjusting for any net losses resulting from restructuring and acquisition-related expenses, and changes in fair value of contingent consideration liabilities. During the quarter, we achieved organic revenue growth and acquisition revenue growth for parts and services of 8.9% and 24.6%, respectively. I am particularly pleased with the North American organic revenue growth for parts and services of 6.7%.

Now more detail on our North American operations. During the third quarter we purchased over 72,000 vehicles for dismantling by our wholesale operations which is a 2.4% increase from Q3 2013. With the Manheim Index trending down over the last five months, I want to take a moment to touch on one aspect of our car buy that could impact us in the coming quarters. One way to grow recycled parts business is to simply buy more cars.

If we buy 5% more vehicles and they are the right vehicles for which there is demand, then our revenue in that segment should increase proportionately. It is also possible to grow revenue while buying a better quality car, one that will part out for additional revenue. So while the number of vehicles we bought this quarter was up only modestly, we remain confident in our ability to grow the top line because of the better quality car we are purchasing.

While used car prices are falling we've increased the average value of inventory acquired. We believe this decision will drive incremental revenue and gross margin dollars in the coming quarters. Because of the length of the selling cycle this will likely take two quarters to fully manifest itself in our results.

During the quarter, our aftermarket parts business continued to deliver solid organic growth. Between 2009 and 2013 the average number of parts of being replaced on a repair claim has increased 10% with 75% of increase being captured by aftermarket parts. Insurers expanded use of aftermarket parts is being driven by the value proposition of aftermarket parts and the increased supply availability as evidenced by a 32% year-over-year increase in a number of available certified parts. In our self-service retail business, during the third quarter we acquired approximately 134,000 lower cost self-service and crushable cars as compared to 128,000 in Q3 of 2013, or roughly a 4.5% increase.

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 Q3 ECP achieved organic revenue growth of 17.9%. This figure includes for the first time the paint businesses acquired in August last year. Excluding our paint locations, ECP's organic revenue growth during the quarter was 10.4% for branches open more than 12 months. I am particularly pleased with the ongoing double-digit organic growth despite facing unseasonably warm September, a soft overall economic environment in the UK during the quarter, and coming off a year that benefited from aggressive branch openings in 2012.

On August 7, 2014 ECP assumed the leases of 27 former Unipart automotive branches. Unipart was a large competitor which went into receivership during the quarter. We don't intend to retain all these locations. Our plans to keep some of the smaller satellite locations to existing branches, some will become the main branch in that market replacing our existing site, and some will be operated temporarily while we find a more suitable location in certain markets. When that rationalization is completed we anticipate that we will net out 18 new ECP branches.

Initially, we will accrue some up front cost for this transactions that will cause a drag on earnings. However, we believe this deal positions us well to continue our market share gains in the UK and advance our sales to the Unipart car care centers and national accounts. In addition we've been able to hire many experienced people from across the former Unipart. Further highlighting this point, since Unipart when into receivership our existing ECP branches have seen average sales per day to Unipart car care centers and national accounts increase 57% and 23%, respectively.

During the quarter ECP opened a total of 15 branches: three new ECP branches and 12 converted Unipart automotive branches bringing our current network to 179 branch locations. Our target is to have 190 branches by year-end including the balance of the Unipart locations.

Now an update on ECP's collision program. During the quarter we continued to witness strong double-digit year-over-year growth of nearly 30% with our collision parts sales and for the first time we are witnessing our impact to the UK APU rate. Based on reports from multiple industry participants UK APU to-date stands at 9% which is a 200 basis point improvement since we launched ECP's collision program in March 2012. And of that 200 basis points improvement we believe the vast majority is a direct result of our efforts in educating carriers and body shops of our value proposition to not only drive down costs but to assure that the quality of the aftermarket collision products and ECP's ability to get them to the shop on time.

In conjunction with the growth of ECP's collision parts program I am also pleased with the growth we are achieving with ECP's paint sales from the distributors we acquired in August 2013. The growth we are witnessing with our paint sales further highlights the leverage and synergies our one-stop shop collision model can achieve in new geographic segments.

Now let's turn to our Sator business. On August 27, 2014 the company completed its acquisition of an automotive aftermarket products parts distributor with 11 branches in the Netherlands. This acquisition supports our ongoing plan to convert Sator distribution network from a three-step to two-step model. We anticipate that once we rationalize these 11 branch locations with Sator's existing network we will net eight new branches, bringing Sator's branch count to 60. As mentioned on previous calls, our target is 75 to 80 branches for building out the Netherlands market.

Though we saw a decline in EBITDA margin in Europe this quarter, driven in part by the integration of Netherlands distributors into Sator, we believe the strategic initiatives have positioned as well for executing our growth strategy. Despite the losses from export sales, Sator posted 2.1% organic growth in the quarter.

Now an update on our Specialty segment. Keystone Specialty continued its strong performance by boasting year-over-year growth of 13.4% in the quarter and year-to-date growth of 11% against its pre-acquisition results. To further expand Keystone Specialty's presence in the RV market, with its existing NTP distribution business, on October 3 the company announced it acquired Stag-Parkway.

Stag-Parkway is a leading aftermarket distributor of recreational vehicle parts and accessories in North America that has been serving a diverse base of over 6,000 customers from 600 suppliers for the past 50 years. Stag-Parkway offers a broad selection of parts and accessories with next day shipments that covers 95% of North America. Stag currently operates 12 warehouses in the United States. We believe there are ample opportunities for synergies and for leveraging our existing North American distribution network with a combination of Stag and Keystone Specialty's existing RV business.

In addition to the acquisitions in Europe and Specialty segments during the third quarter of 2014 the company made two additional North American acquisitions including a salvage yard in Nova Scotia, Canada and a heavy-duty truck salvage yard in Illinois. As you can see we've been very busy with acquisitions and proud to report that we've completed 20 acquisitions for the first nine months of 2014, including 12 in North America alone with an additional 8 in Europe.

Acquisition candidates continue to exist across all of our operating segments and we are well-positioned to execute operationally and financially as opportunities present themselves. At this time, I'd like to ask John Quinn to provide some more detail on the financial results for the quarter.

Thanks Rob. Good morning and thank you for joining us today.

Revenue for Q3 2014 was $1.7 billion, an increase of $423 million or 33% over the $1.3 billion we achieved in Q3 2013. Earnings growth was a healthy 25% increase. I'll point out some things about earnings that help explain the difference relative to revenue growth. As a frame of reference, the way we looked at the quarter is as follows.

Last year in Q3 we reported $0.24 of diluted earnings per share when there was a $0.01 unfavorable impact from restructuring, acquisition and contingent payment adjustments. There was also a $0.01 favorable adjustment relating to discrete tax items. This year our reported diluted earnings per share was $0.30. We had a $0.01 of unfavorable impact from restructuring, acquisition and contingent payment adjustments.

Not in our guidance but in our actual results was a further $0.005 of unfavorable impact associated with the new branch startups in the UK as a result of a competitor Unipart going into insolvency administration. In our guidance but not necessarily in some analyst models was the unfavorable impact of not being able to recognize profit on sales to recently acquired companies in the Netherlands. That was a further $0.01 impact of our earnings. I realize there's a lot going on here so I'll repeat some of this analysis in the rest of my remarks.

The revenue growth breaks down as follows. For Q3 our total organic revenue growth was 8.5% and we delivered additional growth of 22.7% from acquisitions with foreign exchange adding a further 1.3%. Organic growth of parts and services was 8.9%. Within that we saw our North American operations grow organically 6.7%, while the European segment grew 13.4%.

North American growth was the highest we've reported in the last five quarters. We believe that this growth reflects the basic fundamentals of the company's markets and our value proposition. Last quarter in our prepared remarks and in our recent investor presentations we stated that we believe that we should start to see the benefit of higher miles driven, the benefit of hire new car sales starting to come into our sweet spot for alternative parts demand. The fundamental value proposition of alternative parts for the consumer and the insurance companies continues to drive demand as measured in parts consumption. It's our belief that these dynamics will continue to afford our industry, and LKQ in particular, opportunities for continued organic growth in North America.

As we anticipated in the last quarterly call, the European segment showed lower growth as we've included the UK paint operations acquired in August last year in organic growth for the first time, along with Sator for a full quarter for the first time.

Even including the paint businesses, ECP continues to show strong organic growth of 18%. We saw Sator return to positive organic revenue growth with a 2.1% improvement helped by our expansion in France. With the acquisition of some of our major customers and converting the distribution to a two-step model, we anticipated some loss of revenue in the base business but through the first six months those losses have been well-controlled and the base business is growing even in a difficult economic environment.

Acquisitions completed in the last 12 months to September 30 contributed $295 million to Q3 2014 revenue on a reported basis, including $4 million from acquisitions completed in Q3 2014. The annualized revenue from acquisitions completed in Q3 2014 was approximately $37 million or $9 million per quarter. Rob mentioned we acquired Stag-Parkway earlier in October. Obviously, none of that revenue is in the quarterly numbers but for modeling purposes we're estimating that Stag will have an annual revenue of approximately $180 million.

Total change in other revenue, which is where we record our scrap commodity sales, was positive 15%. Acquisitions contributed 9% positive growth and we had 6% organic growth, primarily volume increases as steel pricing was about 3% lower year-over-year. The average price we received for scrap steel was $215 per ton this year versus $221 per ton in Q3 2013. Other revenue was 10.3% of total revenue as compared to 11.9% for the same period last year reflecting the declining relative importance of this revenue to our overall results. In Q3 2014 revenue for our self-serve business was $150 million, or 6.7% of LKQ's total revenue. Approximately 31% of this revenue was parts sales included in North American parts and services revenue and 69% scrap and core sales included in other revenue.

Our reported gross margin for Q3 2014 was $664 million or 38.6% of revenue, a decline of approximately 130 basis points from our gross margin percentage of 39.3% in Q3 2013. There was 130 basis points decline attributable to the Specialty acquisition. Mix and some smaller acquisitions are offsetting a 60 basis point improvement in the base North American business. We are encouraged to see these continued improvements in North American markets.

As I explained in last quarter's call we are not able to recognize the inter-company profit on sales by Sator to the newly acquired distributors until we complete one turn of inventory and those products are sold to the final customers. That process is behind us now but in Q3 2014 it impacted our gross margins by approximately $4.6 million. Had we not had that impact, our gross margin percentage would've been 30 basis points higher and our EPS about $0.01 higher.

Moving to operating expenses some of the comparisons are being affected by our Specialty acquisition. In the Specialty line of business gross margins tend to be lower but they incur relatively lower facility and SG&A costs. Specialty will affect the comparisons for the remainder of the year. Facility and warehouse costs were 7.7% of revenue in Q3 2014, a 60 basis point improvement over the 8.3% in Q3 last year. This improvement is primarily due to Specialty, which tends to run lower facility costs than the rest of our operations.

Distribution costs increased slightly from 8.4% of revenue in Q3 2013 to 8.6% this quarter. This change was mainly attributable to higher costs in the UK, which are associated with the new branch openings and some startup costs which we are incurring on the former Unipart locations. Selling and G&A expenses decreased from 11.8% of revenue in Q3 last year to 11.2% in Q3 this year, an improvement of 60 basis points. Keystone Specialty accounts for 30 basis points of the improvement and 20 basis points of that was offset by the Netherlands acquisitions. Excluding acquisitions we saw North America leverage generate a 50 basis point improvement in this line.

So in summary, the combination of facility and warehouse, distribution and SG&A costs was 27.5% of revenue in Q3 2014 as compared to 28.6% in Q3 2013. About half of that improvement is the net impact of acquisitions offset by incremental costs of ECP and the other half was leverage from the North American operations. During Q3 2014 we recorded $3.6 million of restructuring and acquisition-related expenses, up from $2.2 million in Q3 last year. The 2014 costs primarily related to the operations in the Netherlands.

Depreciation and amortization was 1.8% of revenue during Q3 this year as compared to 1.6% of revenue in Q3 2013. This increase was due to higher amortization related to intangibles, primarily at the Specialty acquisition. Other expenses net increased to $16.4 million in the three months ended September 2014 compared to $14.4 million in the same period last year, an increase of $2 million. The main components of the change included net interest expense which was $1.2 million higher with $2.4 million attributable to higher debt levels, partially offset by $1.2 million reduction in lower interest rates.

Adjustments to contingent consideration were negligible this quarter as compared to an expense of 700 -- excuse me, as compared to an expense of $700,000 in Q3 last year. Other income is also negligible this year whereas in Q3 2013 it was a positive $1.6 million. This change was almost entirely due to currency changes, which generated income of $500,000 last year over a loss of $900,000 this year.

Our effective borrowing rate for the quarter was 3.5%. Our year-to-date effective income tax rate was 34% as compared to 34.6% the prior year. In Q3 2014 our effective rate was 34% versus 32.6% in Q3 last year. As we previously disclosed in Q3 last year we had some favorable discrete items, which lowered the rate impacting earnings-per-share favorably by approximately $0.01 at that time.

On a reported basis diluted earnings per share was $0.30 in Q3 2014 compared to $0.24 in Q3 2013, an improvement of 25%. Adjusting for the restructuring and acquisition-related expenses and contingent consideration adjustments EPS would've been about $0.01 higher both this year and last, so on an adjusted basis Q3 would've been $0.31 as compared to $0.25 last year. I've also pointed out in the $0.01 EPS impact to gross margin caused by the Netherlands acquisitions and the $0.01 impact for discrete items in last year's tax figures. We believe the UK branch openings were further unanticipated $0.005 loss this year. We always have some types of these costs in the company, but in this case they were not contemplated in our July guidance.

Switching to our year-to-date cash flow. Net cash provided by operating activities totaled $323 million through nine months in 2014 compared to $341 million in 2013. Net income and depreciation were favorable to cash flow by $67 million and $29 million, respectively. Growth in accounts receivable was an incremental $34 million use of cash as we continued to grow revenue organically. Similarly, inventory was an incremental use of cash of $37 million as we invest in inventory for the expanded business.

The timing of cash taxes resulted in the higher outflow of funds in 2014 compared to 2013 of $20 million and other operating assets was a net use of $21 million, primarily as a result of interest payments on our senior notes in bonus payments in 2014. Capital spending was $100 million in the first nine months of 2014 and we've spent $651 million in cash on acquisitions, the largest being Specialty, which accounted for $427 million of the total.

During the quarter we amended our asset securitization program increasing the facility size from $80 million to $97 million and extending the maturity to October 2017. We ended Q3 2014 with $1.9 billion of debt and cash and cash equivalents were $245 million. Availability in our credit facility was approximately $1.1 billion and with the cash, total liquidity was approximately $1.4 billion so we have the capacity to pursue additional acquisitions as suitable opportunities arise.

Now turning to guidance, the new guidance is calling for net income between $405 million and $417 million. That equates to a revised earnings-per-share guidance of $1.32 to $1.36. We left the remainder of our guidance unchanged from February, our guidance of 2014 for organic revenue growth from parts and services is 8% to 10% and our guidance for capital expenditures is $110 million to $140 million with cash flow from operations of approximately $375 million.

I'll point out where we see some differences from last quarter and how we think those impacted Q3 or may impact Q4. Relative to the guidance we provided in Q2 the major changes we've seen relate to the UK branch expansion, foreign exchange rates, and scrap. The new UK branch openings since our last call were not anticipated in our prior guidance. We acquired these locations on very favorable terms and while it should be a long run positive for us, they are requiring some initial further investment.

We are working very quickly to get these open and expect that the portfolio will be largely rationalized by the end of the year. We believe that the losses from this program likely cost us about $0.005 of earnings-per-share in Q3 and will be almost a $0.01 loss in Q4. As I'm sure listeners are aware, the US dollar has strengthened against many currencies including the Canadian dollar, the euro and the pound. We believe this negatively impacted us in Q3 partly because the earnings convert to lower US dollars, but also the short-term losses we recorded in other income which I mentioned a moment ago. We believe that given where rates are today, we could see a $0.015 to $0.01 impact to earnings per share relative to the Q2 guidance.

Scrap was down slightly in Q3 but not really enough to call out as an issue. However, we have seen fairly steep drops in October and we're hearing of potential further drops in November. We are adjusting our car buying to reflect this but that takes time and can cause some volume decreases as we tend to lead the market on the downside. It is possible that we can see the combined volume price from scrap being as much as a $0.01 impact to the EPS in Q4. As we've discussed before we see these fluctuations as short-term gains and losses which take a quarter or two to correct but fundamentally don't change the business.

And one final reminder the UK paint businesses were included in our organic growth. Only half the quarter and they'll be in the figure for the full quarter in Q4, so they may get a slight tick down in the European organic growth as a result of that. With that I'd like to turn the call back to Rob before we open it up to questions.

Thanks John.

To summarize, we are pleased with our results in the third quarter and for the first nine months of the year and we are optimistic of what lies ahead for our company. Looking ahead, in North America the recent upswing in miles driven, lower gas prices, and increased new car sales, should provide a nice tailwind to our collision business. In addition, a younger [car park] that is fully insured and more frequent driving should equate to a higher accident frequency resulting in more repairs.

For insurance companies the competition for premium dollars is fierce with the personal lines insurance industry today spending more than three times what they spent on marketing and advertising in 2002. We view this as a positive for LKQ because the value proposition of alternative collision parts continues to be a real solution for insurance carriers to drive down their costs. Another potential positive is that we continue to believe that as more new cars are sold, used car prices will continue to fall.

The Manheim Index is down over 1% year-over-year through September which is good for the cost of the salvage vehicles we procure for our North American recycling business. And as you can see by the acquisitions completed thus far in 2014, North America continues to be a priority and key segment for LKQ and we have runway to grow our network within all lines of our businesses.

In the UK, in just 2 years we have built an aftermarket only collision parts business from scratch, which is now approaching a $70 million revenue. Our efforts in the UK have played a key role in driving APU growth by 28%. We continue to believe there are ample opportunities to grow this business line in the UK and soon the launch on the Continent. Again this growth has been accomplished with aftermarket collision parts only, leaving many more untapped opportunities for LKQ in Europe including salvage, re-man, and heavy truck which we continue to explore regularly.

In Europe there approximately 280 million vehicles on the road, roughly 14% larger than the United States yet there is no pan-European distributor of scale serving the professional mechanical and collision repair. In just over two years LKQ as a leading player in Europe servicing these customers. This dynamic highlights the fragmented nature of this operating segment in a market ripe for consolidation.

Lastly, our acquisition strategy has always been to acquire the best assets we can with the best management teams and use those strengths to lever the business to higher growth rates. Clearly Keystone Specialty fits that criteria and we believe there is opportunity to grow this segment in the niches it serves.

In closing, our team of over 29,000 employees worked tirelessly to create and evolve what we will believe is a unique company. Our extensive networks, the breadth of our inventory, and our industry-leading fulfillment, position us well to deliver consistent growth organically and from acquisitions across all of our operating segments. This combination should translate into continued long-term value for our stockholders. And with that Devynn, we are now prepared to open the call for Q&A.

Thank you. (Operator Instructions)

First question comes from James Albertine with Stifel.

Good morning. Thanks for taking the question and congratulations.

A couple of key points there that you highlighted organic growth, UK APUs, up 200 basis points in Sator profits, so thanks for all the detail. I wanted to ask one quick clarification then a follow-up. Rob, on one of the comments you made with respect to the focus on late-model vehicle purchases it seems to tie with what you're talking about in terms of the sweet spot in terms of the growth 3-, 4-, 5-year-old operation.

But at the same time it doesn't seem like you're looking for any degradation in the pricing environment so perhaps, is that an element of conservatism in your outlook that could incrementally drive a better result looking into the fourth quarter and beyond?

Yes. August with the carpark shifting to a newer carpark this was a strategy of ours that we implemented very quickly. We want to start buying in newer cars. That's going to a couple things for us. As I mentioned on previous calls with our shifts switching from an average request of a seven-year old car to a 9-year old model car we were selling an older car part at a lower price.

We do believe that we can in essence acquire the same number of cars and increase our topline to meet our expectations because of these selling at a higher price. With Manheim coming down as well we do expect a lower cost of these type of vehicles across the board. So we can buy a better car, that we'll part out for more, at a reasonable price because of the Manheim coming down. It was a conscious shift on our part, and we think we can take advantage of that going into 2015 and beyond.

It just sounds like it's building, I guess, is my point as well.

Absolutely. You're going to see that sweet spot start to get a lot stronger here as those 16 million and 17 million car carpark move its way towards 2-, and 3-years old which is already happening. We believe that we are going to start seeing some tailwind from that for sure.

Very helpful and then as a follow-up just on the gross margin side, John thanks for the details as well. Trying to understand a little bit on the Sator comment you made. But overall 130 basis point degradation year-over-year with a 60-basis point lift in core which has been I think consistent with the last two or three quarters a 60-to-70-basis point lift in core. So as we look into the fourth quarter and beyond we're going to cycle through some of the bigger picture acquisition headwinds.

How should we think about the compares if you look into 2015. It seems like it would be a positive environment for further gross margin expansion, but what are the headwinds that we're missing that we should be considering for next year as well.

So there's about 130 basis point drop in Q3 year-over-year. I think we called out 130 basis of that was specifically tied to the Keystone specialty acquisition. We think there's about 60 basis points just tied to some of the smaller deals including, some of the acquisitions we did in the Netherlands where we weren't able to recognize the intercompany profit that you would normally see coming through in the inventory until we actually sell that product through an inventory turn.

That's behind us now, it is about $4.6 million impact at relatively low tax rate in the Netherlands of 25%. That was probably another 30 basis points. Obviously that's not a year-over-year impact, but it is in the numbers and we just wanted to try to explain that, because I'm not sure everybody appreciated that, even though we tried to call it out on last quarterly call. And then you did see the North American base business, we have about 60 basis point improvement, so those two netted off against each other.

In terms of what's going -- what we see coming down the pipeline obviously we won't have a repeat of that intercompany issue in Q4 that's behind us. We do think, though, scrap is going to fall. We know scrap is falling and we don't how far but I did call out that it could be about a $0.01 impact, in North America $5 million is roughly a $0.01. So that will probably hurt us in Q4 a little bit. But as I said that'll be offset by the impact of Sator picking up. And then you have the normal seasonality in terms of the base business.

Generally speaking the collision business is a little bit stronger, and so we normally see a seasonal impact, there's a positive on that side. Sometimes margins can be a little bit weaker on the mechanical side in Europe because you have December where it's lower in Keystone and the Stag acquisition are, obviously, going to be -- that's a seasonal low for them as well.

Going into next year, obviously not giving guidance yet for that, but a lot of these things I just talked about, I won't call them one-time events but they're unusual events that we don't expect to repeat, obviously. The scrap we adjust our procurement so that'll bleed through in the quarter or so. And then, look at through the Sator thing and continue the integration with respect to the integrations over there.

It's probably little bit of a drag with respect to the opening of the new branches in BCP. So we may see a little bit of improvement there as Rob mentioned with respect to the car costs as well. That may be a little bit more than you asked for.

Always accepting more information. Thanks again for all the color and good luck in the fourth quarter.

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

Good morning. A question as it relates to the Keystone specialty business. Could you just refresh us on what its growth was on a comparable basis. And then how you're seeing that underlying industry growth? That number -- it seems like it's expanding better than the rate of performance parts. And maybe some feeling for market share gains or what might be driving the expansion there?

Brett the year-over-year on the quarter was 13.4% and year-to-date was 10.3%. So I think what's driving that is the sell rate there's no doubt about it. People are most likely going to accessorize their vehicle at the time of purchase. Many of our better customers are dealerships that really roll this right into the bank though. We are very bullish on that quite frankly with the sell rate being strong. We think their growth rate is going to continue as long as the sell rate remains strong.

Okay. And then on Stag, could you give us any more color as far as what their productivity, EBITDAR rates were on that $180 million in revenues?

Well, let me talk a post synergy, where we think we're going to be on that, Bret. Let's talk about the deal in whole. We paid approximately $110 million for the business with revenue circa $180 million, as John mentioned. Post synergies, that we think there's a lot, and maybe a couple years to get back there's a lot of warehouse consolidation needs to be done. But post synergy, we expect, we'll be in the multiple range from our normal multiple range that we pay for businesses, so the 4% and the 6%, and I believe it will be closer to the lower end of the range than the higher when we're all said and done.

Okay. Any news out of State Farm? Could you give us an update on where they are with the chrome bumper business, if there's any signs of expanding that?

Absolutely. This quarter, again, really good growth on chrome bumpers we were up 22.4% and again really hard to tie how much of that is State Farm but we know the market was a growing at 22.4% for sure. So we think they have a lot to do with that.

Nothing new coming on out of Bloomington, unfortunately. But we remind them every quarter of the results and they show their appreciation for that. There is one uptick to the insurance side of the business. Geico insurance just became the second largest insurance company in the United States; they overtook Allstate. They just had phenomenal growth.

They're very active uses of our product so even if some of the bigger companies, the State Farms continue to not use our products, gains by aggressive companies like Geico, continue to bode well for us and really provide a bright future.

Okay and one last question. On the 60-basis point growth margin expansion in North America core, could you give us some color on what the pricing environment looks like as far as competition? Is product sourcing generating that margin or is it a less competitive pricing environment is helping?

It was spread across all the lines of business, I think. We saw a little bit of improvement in the self-service business, we saw the aftermarket business, we are benefiting a little bit from, we believe, better procurement on that side of the business. Is difficult to say exactly how the Manheim Index is impacting us, in terms of the salvage business, because as it's coming down, as Rob mentioned, we are buying the slightly better car.

So we're investing in a more expensive car than we were year ago. But we believe that it's going to ultimately trend into higher organic growth because we'll have a higher -- those cars will part out for more dollars.

And I'll just add one thing Bret that Q3 historically has not been one of our better gross margin quarters so to have that expansion in this quarter. We're very pleased with that.

Okay. Thank you.

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

Good morning. Thanks for taking my question as well.

Maybe start with the guidance, especially on Q4. Your full year organic growth guidance is unchanged, but you were up 9.1% for the first nine months. I do the math you have got a pretty wide range for Q4. Any insight into why you've decided to keep it so wide, and maybe what are trends looking like so far this quarter?

We just didn't see any reason to change it, quite frankly. It wasn't a meaningful change to try and tweak it down or up meaningfully in the quarter to be perfectly frank. In terms of the quarter-to-date? Do you have any comments?

The quarter, so far October, honestly, we're three weeks into it; almost 4 weeks in. Going to plan; we always seem to get a little bit of uptick when we switch to daylight savings time, which happens next week. So pretty much to plan.

Okay thanks. And with respect to Europe and your progress with insurance companies there, I'm curious if there's some kind of internal metric you use to determine the pace of adoption. Obviously you've talked about the whole industry being up pretty significantly. But I'm wondering if you can track your progress with specific insurance companies, and if some are outperforming others in terms of their adoption curve?

We can certainly Craig where they have their own collision repair shops. And we are seeing more and more adoption through that. As I mentioned in my prepared remarks, the 200 basis point improvement we believe we have a major part in that increase. So, we do watch the insurance companies again with their own body shops so we can track that.

Outside when they're using independence repair facilities it's more difficult because we often don't know who the carrier is at that time. Our focus now is to really hone in on those 17 carriers that we have those relationships with that have an 80% market share and just keep driving the business. No negative news out of any of those carriers whatsoever. None have pulled back.

We're optimistic that we can continue to drive this and at some point we're going to bring this to the continent. And really what we're waiting for there is to get the integration of the companies that we bought, and the inline distributors at Sator. Once that's complete, we think we'll do that in 2015, we'll be able to launch the collision parts program on the continent.

And finally I imagine as your insurance company partners are successful with the adoption of these aftermarket parts they'll start considering recycled parts. At what point do you think it will make sense for you to introduce those types of parts as well?

It's going to be sooner than later. We have people looking at opportunities over there. We made an initial promise to them that if they adopted the aftermarket parts we would look to expand our business. The clearly have done that. I think you'll see us enter the salvage parts business in 2015 somewhere in Europe.

Thank you.

Our next question comes from John Lawrence was Stephens.

Good morning.

Hi John.

Rob would you take a step further and go on the European side and walk-through sort of that the differences maybe in the flows, obviously it's a favorable development to get those stores from Unipart but give us a little difference in the flows of the upfront costs versus on this deal, versus, on this deal if you were just greenfield?

Yes John, it's John Quinn speaking I'll just start and Rob can supplement it maybe. The Unipart branches at the time that they went into administration they had about 165 locations and were doing, we think, around GBP165 million. The productivity of those individual branches obviously much smaller than the equivalent ECP branch would do. They were shut down for a number of weeks, and so obviously some of the customers had gone away.

We acquired the leases through the administration process, went back and tried to hire as many of the staff that we thought we could that were associated with those branches. But we basically got no inventory. We had to take the signage down. We had to re-rack them and then get our inventory in there and get them into our system. So it's not too dissimilar to a Greenfield. I guess the point we were trying to make is those things were not in our original guidance.

We didn't anticipate the normal startup losses. Which is why we really didn't just call them out as a unique item in the press release. We always had some of those costs; last year we had branch openings going on. So we always had some of those costs, this is just a change from relative to what we had expected in Q2 at the time we did the guidance. The plan is to take those 27 locations, some of them we are using as a starter location to get the market going and we are actually going to close their branches and open a bigger branch of our own once we find a suitable site.

In a couple of cases they did have some bigger locations and we are going to move our locations into theirs. And in some cases we decided that the facility was inappropriate. That's why Rob said, out of the 27 we think we're going to net around 18 locations. So we end up -- we wanted to retain those staff. You end up with the additional cost; training those people on our systems, getting the inventory in and getting the system set up.

It's a big piece of -- there's a lot going on there in a very short period of time which is why the costs were little bit high. But I just point out that we did buy these at a very favorable price, basically assumed the leases and got the papers and small minor assets.

And I think, just to add on to what John said. I think in a perfect world the greenfield would be perhaps desirable because you can pick your locations and you can build it from scratch, but because of the opportunity with them going to receivership we wanted to move quickly. It will take a little bit longer but we're obviously excited about the opportunity. And as you noted from the results I mentioned on the UCC stores Unipart and Tire Care Centers and the national accounts we are starting to get some of that business for sure.

Great. Thanks. And secondly on the specialty business. The acquired business you got if you look at that from a gross margin standpoint will, as you tie that in with Keystone will you get -- will the leverage come from buying synergies or basically just from this warehouse transition? Or are the operating models today about the same?

In terms of the gross margin you know we hope to achieve some procurement synergies over time with that. Ultimately it's running at the moment a lower EBITDA margin than the normal business. But we believe we can get it up through the rationalization of the inventory and the distribution system or the warehouse and the distribution system.

We would definitely get some pick up on the purchasing but the lion's share will cover the synergies that we get from bringing the distributions together.

But that's not going to go through the gross margin line by and large. A lot of that, the facility and warehouse distribution lines.

Great. Thanks.

Our next question comes from Joe LoBello with Bank of America Merrill Lynch.

Hello. Thanks for taking the call.

Hi Joe.

First question for you, and I don't want to beat you up in the gross margin line. I mean that's the real leverage in the business model isn't there. But we do get a lot of questions on it, and so I'm just thinking from a trend basis do you think gross margin could return to above the 40% range again. How should we think about this longer-term?

The businesses has evolved quite a bit from the days when we were enjoying almost 45% margins. There's a lot of structural things going on in terms of some of the acquisitions we've done and we've made conscious decisions to adopt paint for example. The Keystone automotive acquisition is another example. There's a lower gross margin associated with those businesses. We believe we get those back in terms of better inventory turns or better distribution efficiencies. By the time you get down to a return on capital those are still very attractive opportunities for us.

The second component is during a rise in commodity environment you tend to get a little bit of a tailwind and a little bit of a headwind when it's coming down. And if you look at the scrap prices over the course of the last year or so they've actually been drifting down slightly, there's probably been a little bit of a headwind to it. Not enough to call out on a particular quarter other than as I mentioned Q4 seems like it's stepping down more dramatically than normal.

So, I think in terms of those two things, you always going to have volatility associated with the scrap, but there's some structural things that have changed that are not going to change dramatically. In terms of the salvage business, that's the third component that I always point to. Since the time that business, we've had some compression associated with that with the Manheim Index coming up and what we were paying for vehicles going up. That remains to be seen. We believe that it's going to come down as we see the cost of cars come down.

But when that comes back down that business is not as large a component of our total company as it was back in the days, back say the 2009 days. So even if it came back to where the margins it enjoyed before this event you are not going to see the impact of the total company gross margins. So I think over time there is some opportunity as we get bigger to leverage some of the procurement opportunities in Europe for example. I believe there's opportunities as we rationalize Stag-Parkway with the Keystone automotive operations. There are opportunities to improve that.

But fundamentally what we pay for vehicles, we are real price-takers in terms of the option prices on the salvage business. And we think we're probably already one of the biggest customers of many of our suppliers on the aftermarket collision side. There may be some opportunities to improve scale on that. Most of the leverage from the business comes to the distribution network and through the facility warehouses and the SG&A, obviously, as we see technology also start to improve a little bit on that end.

That's very helpful. Thank you. And one final question, more of a strategic question. If we think about the North American market and the opportunities for further consolidation for you, where is the main focus right now? Are you focusing on heavy truck or is it in a different area?

I think it's across all the business lines John. There's 6,000 recyclers in the United States. We own roughly 190 locations. There's some great opportunity on the salvage side. Heavy truck, absolutely a good opportunity. Self serve, we will continue to look at those opportunities as well. The aftermarket I would say pretty well developed. We've got dots on the map pretty much in all of North America. However, we'll continue to look at niche businesses like paint, cooling, and that type of stuff.

I believe there's a lot of opportunities left in North America. I always point to Southern California as a great example that we have one dot on the map in our salvage in Santa Fe Springs, it's just outside of LA, servicing what I believe is probably one of the bigger per capita areas between San Diego and LA. Really good opportunity to keep growing all lines of the business and of course Europe is still very wide-open in my mind.

We like to say we're roughly, after two years, we're probably the biggest supplier of mechanical components in Europe in just two years. So that is a great opportunity, as well.

Great. Thanks for all the color guys.

Operator, I think we have time for one more quick question.

Our final question will be from Bill Armstrong with CL King and Associates.

Good morning. I was wondering if you could update us on the transition in Europe to the two-step distribution model? Rob, I think you mentioned that the acquisition in the Netherlands might help that along and would we be talking just about the Netherlands or into France and other countries, as well?

At this point Bill, we are talking just the Netherlands, we will look at France and we did add a location in France earlier this year. So, we're up to three locations in France. In terms of the Netherlands buildout, with the latest acquisition we did that we just announced in August we're up to 60 locations and we think the right number is somewhere between 75 and 80. So we're certainly well on our way to getting that done.

Now the work is getting them on synergies and rationalizing the businesses, which we have a team over there doing, working on that regularly. As we mentioned on our last call too Bill, we did pro forma reduction in revenue. We were pleased with the organic growth of being positive this quarter. Last quarter it was negative. We are making our strides there, and I suspect by a couple of quarters we will have reached our target 75 to 80.

And how does that impact the transition from three-step to two-step?

Well that will allow us to virtually cover the enter Netherlands with our two-step model, so we will basically be done with the Netherlands. Now, of course, going after the business will be the next step.

Okay thanks.

I guess there are no other questions, so thank you everyone for your time this morning. We look forward to speaking with you in February, where we'll report o fourth quarter and full-year results. Thanks and have a great day.

This concludes today's teleconference.