LKQ Corp (LKQ) 2014 Q4 法說會逐字稿

Greetings and welcome to the LKQ Corporation fourth-quarter and full-year 2014 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Boutross, Investor Relations for LKQ Corporation. Thank you, Mr. Boutross, you may begin.

Thanks, Devon. Good morning, everyone. Thank you for joining us today. This morning, we released our fourth-quarter and full-year 2014 financial results and provided our full-year 2015 guidance.

In the room with me today are Rob Wagman, President and Chief Executive Officer, and John Quinn, Executive Vice President and Chief Financial Officer. Rob and John have some prepared remarks, and then, we will open the call for questions. In addition to the telephone access for today's call, we are providing an 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 risk 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 risk.

Also note the guidance for 2015 is based on current conditions, including acquisitions completed through February 26, 2015, 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 any 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, and as normal, we are planning to file our 10-K in the next few days. And, with that, I am happy to turn the call over to Mr. Rob Wagman.

Thank you, Joe. Good morning, and thank you for joining us on the call today. All things considered, a reasonable quarter to end a good year. With respect to the activities under our control, the Company performed well. Unfortunately, there are items we don't control that had a negative impact on our financial results.

Global revenue reached $1.68 billion in the quarter, an increase of 27.9% as compared to Q4 2013. Net income for the fourth quarter was $80.5 million, and diluted earnings per share were $0.26, which was flat year over year. Adjusted diluted EPS was $0.27 for the quarter compared to $0.26 in the prior year, an increase of 3.8%.

During the quarter, we experienced significant impacts from deteriorating scrap markets, FX, and tax rates. Adjusted diluted EPS for the fourth quarter of 2014 was negatively affected by $0.04 as a result of these items. Without them, diluted adjusted EPS in the fourth quarter of 2014 would have increased 15% versus the fourth quarter of 2013.

During the quarter, we achieved Company-wide organic revenue growth and acquisition revenue growth for parts and services of 8.7% and 23.9%, respectively. I continue to be pleased with the North American organic revenue growth for parts and services, which during the quarter grew 6.2%, despite facing an unseasonably mild December. While we can't say for certain, having the Christmas holiday in the middle of the week also seemed slightly negative to results.

European organic growth for the quarter was a robust 13.8%. For full year 2014, revenue reached $6.7 billion in 2014, an increase of 33% as compared to 2013. Net income for the full year was $381.5 million compared with $311.6 million for the prior year, an increase of 22.4%. Importantly, organic revenue growth for parts and service for 2014 was 9%, a clear indication of the strength of our Company. And, total organic revenue growth for the year, reflecting the softness in scrap, was 7.1%.

Our adjusted EPS for all of 2014 was $1.27, representing an increase of 19.8% from the $1.06 reported in 2013. Full-year 2014 and 2013 diluted earnings per share included charges equal to $0.02 and $0.04, respectively, resulting from restructuring and acquisition-related expenses, losses on debt extinguishment, and the change in fair value of contingent consideration liabilities. Including these charges, on a diluted basis, our GAAP EPS was $1.25 in 2014 versus $1.02 in 2013.

Before I provide an update on our operations, I want to highlight a few factors that affected our Q4 2014 results. First, while on the last call, we warned that scrap prices would be a headwind in Q4, the actual deterioration in prices was worse than expected. During the quarter, scrap prices were down 15% sequentially and 18% year over year. Taken as a whole, the declining scrap prices had about a $0.02 negative effect on Q4 2014 relative to last year.

Secondly, there were negative impacts from the devaluations of the British pound, euro, and the Canadian dollar relative to the US dollar, which fell 2.2%, 8.2% and 7.6% in Q4 2014. Furthermore, this devaluation, combined with the decline in scrap sequentially, negatively impacted top-line revenue by $37 million.

An increase in the effective tax rate, caused by a shift in earnings to higher tax rate jurisdictions and higher losses from our joint ventures, had a negative impact on the Q4 results. When combined with the FX impact just noted, these items represented an additional $0.02 negative effective relative to Q4 2013. So, while adjusted diluted EPS increased by just 4% over the prior year, Q4 EPS would have increased 15% if scrap prices, FX rates, and the tax rate had remained constant with Q4 of 2013. John will provide further details on these items during his comments.

And now, moving to our operations. During the fourth quarter, we purchased over 74,000 vehicles for dismantling by our wholesale operations, which is a 5.4% increase over Q4 2013. Our full-year 2014 vehicle procurement was approximately 290,000 which is a 3.2% increase over 2013. As we enter 2015, the volume at the auctions is robust, and the outlook for supply remains steady.

In addition, one benefit of the strengthening dollar is that we are more favorably positioned against our export competitors who are now disadvantaged by the stronger US dollar. We continue to buy what we believe is a better quality vehicle at the auction with the goal of driving top line with higher revenue per vehicle. These trends, coupled with inventory already on hand, should provide sufficient inventory to grow our recycled parts operation in 2015.

In our self-service retail business, during the fourth quarter, we acquired over 116,000 lower-cost, self-service, and crush-only cars, which is a 3.4% decrease over Q4 2013. This decrease was intentional given the downward trend in scrap prices and its continued pressure on margins. For full year 2014, vehicle procurement was approximately 514,000, which was flat over 2013.

And lastly, on North America, throughout 2014, we continued to make significant progress with the intelligent parts solution initiative with CCC Information Services. The revenue and number of purchased orders processed through the CCC platform during the quarter grew 90% and 84%, respectively, year over year. Clearly, the trend toward shop adopting this feature within the CCC platform continues to gain traction, with this initiative currently annualizing over $20 million in revenue less than two years from the initial launch.

And now, turning to our European operations. We continue to be pleased with the performance of Euro Car Parts and its ability to increase market share. In Q4, ECP issued organic revenue growth of 18.2%, and for branches open more than 12 months, ECP's organic revenue growth during the quarter was 10.8%.

For full year 2014, ECP achieved organic revenue growth of 20.6% and 12.7% for branches open more than 12 months. We did, however, experience some unbudgeted expenses in Q4, with the continued integration cost of the Unipart Automotive acquisition, and also on the purchase of APX.

During the quarter, ECP opened a total of 10 branches, 3 new ECP branches and 7 converted Unipart branches, bringing our network to 189 branch locations. For the full-year, ECP opened 44 branches, which included 19 former Unipart locations. With its impressive track record of ECP's management team to effectively open, grow, and gain market share, I am pleased to announce that we have approved an additional 13 new ECP branches for 2015. And finally, on ECP. During the quarter, we continued to witness strong double-digit, year-over-year growth of nearly 24% with our collision parts sales and full-year 2014 growth of over 35%.

Turning to our Sator business, during the quarter, Sator started to witness some gross margin benefit from the shift in their network from a three-step to a two-step model. With targeted acquisitions in the pipeline and an innovative partner strategy, Sator's national footprint will be completed in 2015. This step-shift also positions Sator for entering the collision market in the Benelux in 2015 as well. We are confident that the carrier relationships we are developing in the UK will assist the launch of Sator's collision efforts, given 7 of the top 10 carriers in the UK write insurance in their markets. Sator posted 2.6% organic growth in Q4.

Now, on to the specialty segment. Our specialty segment continued its strong performance by posting year-over-year growth of 35.4% in the quarter, including the benefit of Stag-Parkway, a distributor we acquired in October. Full-year organic growth for our specialty segment was 12% against pre-acquisition results.

In 2014, Keystone's management team made tremendous progress on synergy and cost-saving initiatives by closing and relocating 12 of their cross-docks and adding 26 new cross-docks into existing LKQ locations. Keystone also opened a new 231,000 square foot distribution center in Dallas. The Keystone team continued to deliver on synergy initiatives with the previously announced Stag Parkway Holding Company acquisition. During the quarter, 4 of the 13 Stag Parkway locations, when we finalized the transaction on October 3, were closed and relocated into existing Keystone locations.

Now, moving on to corporate development. In addition to Stag Parkway, the Company made two additional acquisitions during the quarter, including a specialty after-market distributor, with locations in Ohio and Pennsylvania, and a salvage business with locations in Sweden and Norway. Our acquisition of the European salvage business demonstrates our commitment to replicating the success of our collision model in Europe and to actively grow the use of alternative collision parts beyond North America.

Our traction to this market was heightened by the Company's strong insurance relationships, allowing us to test our North American APU business model. Our Swedish insurance partners are enthusiastic about our entry into this market, and we are in active discussions with them regarding enhanced programs and services.

I am proud of our development efforts and what our team was able to accomplish in 2014 with the completion of 23 acquisitions. As we enter 2015, I am confident of their ability to identify additional acquisition candidates across our operating segments. At this time, I'd like to ask John Quinn to provide some more detail on the financial results of the quarter and full year.

Thank you, Rob. Good morning, and thank you for joining us today.

Revenue for Q4 2014 was $1.7 billion, an increase of $367 million, or 28% over the $1.3 billion we achieved in Q4 2013. Net income in Q4 2014 of $80.5 million was 3.3% higher than Q4 2013. Obviously, we expected better pull-through of the top-line growth to the bottom line as opposed to the net income margin compression we saw. As Rob said, some the drivers of the lower margin are outside of our control, but we are taking actions in an attempt to mitigate them.

Before I get into the details, on a high level, I would the characterize the quarter's results as having a strong top line in organic growth, being offset by a difficult scrap and foreign exchange environment. Also, the relative performance of Europe caused our tax rate to increase. As I will discuss in a moment, the scrap and foreign exchange issues continue through Q1, but we believe will eventually stabilize, and at least in the case of scrap, possibly improve over time. We also believe the European operations will improve over time, helping not only our pretax income, but also our tax rate.

The revenue growth breaks down as follows. For Q4, our total organic revenue growth was 7.1%, and we delivered an additional growth of 22.2% from acquisitions, with foreign exchange being negative 1.4%. Organic growth in parts and services was 8.7%, and within that, we saw our North American operations grow organically 6.2%, while the European segment grew 13.8%. North American organic growth of 6.2% was 30 basis higher than that reported in Q4 2013.

There are no definitive statistics available, but our sense is that while the weather in Q4 2014 was not as favorable to us as in Q4 2013, we may be starting to see the benefit of higher miles driven and higher new car sales starting to come into our sweet spot for alternative parts demand. October and November 2014 miles driven averaged a 2% year-over-year increase. One of the stronger rates we've seen recently.

New car sales in the US reached 16.5 million light vehicles, their highest level since 2006. It will take a few years before those cars fall into the age group for peak demand for alternative parts, but we believe it is clear evidence that the dynamics of the cars in use are moving in favor of LKQ.

During the quarter, our European segment reported 13.8% organic growth, with ECP continuing to show strong organic growth by achieving 18.2% in the quarter. Sator reported organic revenue growth of 2.6%, which was 50 basis points higher than our Q3 2014 results. We continue to execute at our plan on converting the Netherlands distribution to a two-step model. Given the potential for channel conflict as we execute this strategy, we're pleased that Sator continues to show positive organic growth.

Acquisitions completed during 2014 contributed $292 million to the Q4 2014 revenue on a reported basis, including $38 million from acquisitions completed in Q4 2014. The annualized revenues from acquisitions completed in Q4 2014 was approximately $225 million, or roughly $56 million per quarter. I remind listeners that the annualized revenue acquired includes Stag Parkway acquisition completed in early October. During our Q3 2014 call, we indicated that Stag Parkway had an annual revenue of approximately $180 million, which is included in the $225 million figure I just mentioned.

Total change in other revenue, which is where we record our scrap commodity sales, was marginally positive at 2.9%. Acquisitions contributed 8.4% positive growth, and we had negative 5.3% organic growth. Volume increases were more than offset by falling commodity prices, as ferrous scrap pricing was about 18% lower year over year. Average price we received for scrap steel was $197 per ton this year as compared to $241 per ton in Q4 2013.

Other revenue was 9% of our total revenue, as compared to 11.1% for the same period last year, continuing the trend of declining relative importance of this revenue to our overall results. Although as I will discuss in a moment, the commodity price swings can still impact our short-term earnings.

In Q4 2014, revenue for our self-serve business was $97 million, or 5.7% of LKQ's total revenue. As scrap prices have fallen and our other lines of businesses have grown, this business has become less material to the overall Company. Approximately 35% of this revenue was parts sales included in North American parts and services revenue and 65% scrap and core sales included in other revenue.

Our reported gross margin for Q4 2014 was $665 million, or 39.5% of revenue, a decline of 200 basis points from our gross margin percentage of 41.4% in Q4 2013. There was a 130-basis-point decline attributable to the specialty segment and other small acquisitions. North American margins contributed about 30 basis points of the decline, mainly due to the scrap price falls.

European margins contributed approximately 20 basis points of the decline, as we saw heavier discounting at ECP. Mix contributed about 20 basis points to the decline. We have taken actions at ECP to reverse the decline we saw in Q4, and believe we will begin to see positive results in Q1 2015.

Moving to operating expenses, some of these comparisons are being affected by our specialty segment. In the specialty line of business, gross margins tend to be lower, but they incur relatively lower facility and SG&A costs. January 2015 was the anniversary of the Keystone Automotive acquisition, but Stag Parkway will continue to have some influence on these margins year over year through October, 2015.

Facility and warehouse costs were 8.2% of revenue in Q4 2014, a 40-basis-point improvement over 8.6% in Q4 last year. This improvement was primarily due to the specialty segment. Distribution costs increased slightly from 8.5% of revenue in Q4 2013 to 8.6% this quarter. This change is mainly attributed to a higher cost in Europe, which were associated with the ECP new branch openings and some startup costs we incurred with the former Unipart branch locations and relatively higher distribution costs of running a two-step model in the Netherlands.

Selling and G&A expenses decreased from 12.2% of revenue in Q4 last year to 11.8% in Q4 this year, an improvement of 40 basis points. The specialty segment accounts for 40 basis points of the improvement, but 30 basis points of that was offset by the Netherlands acquisitions and increased costs at ECP. Excluding the acquisitions, we saw North American leverage generate a 30-basis-point improvement in this line.

During Q4 2014, we recorded $2 million of restructuring and acquisition-related expenses, down from $2.8 million in Q4 last year. The 2014 costs were primarily related to the integration of our specialty and Netherlands acquisitions.

Depreciation and amortization was 2% of revenue during Q4 this year as compared to 1.8% of revenue in Q4 2013. Although a small percentage of revenue, these costs have been rising faster than our revenue. The increase year over year of $10.5 million equates to roughly $0.02 of EPS impact in Q4 2014. About half of this increase is due to a larger asset base of fixed assets. The balance relates to the non-cash amortization of intangibles, such as customer relationships associated with acquisitions.

I point this out simply because these costs are a function of our acquisition activity, and if we stopped our acquisition activity, these costs would actually fall over time. We don't intend to stop our acquisition strategy, but as we do large deals, the accounting conventions will require our recognizing these costs and that could impact our operating margin for these non-cash charges.

Other expenses net increased to $16.5 million in the three months ended December 2014, compared to $15.2 million for the same period last year, an increase of $1.3 million. The main reason for the change was the net interest expense, which was $1.3 million higher, with $2.5 million attributable to higher debt levels, partially offset by a $1.2 million reduction from lower interest rates. Our effective borrowing rate for the quarter was 3.3%.

Our year-to-date effective tax rate was 34.7% as compared to 34.5% in the prior year. In Q4 2014, our effective tax rate was 37.3% versus 34.3% in Q4 last year. Our tax rate is a blend of the rates of the countries in which we operate. If we proportionately earn less in lower tax, offshore locations, our tax rate increases. The income from our foreign businesses was negative to both our expectations and our tax rate, due to foreign exchange and relative operating performance.

On a reported basis, diluted earnings per share was $0.26 in Q4 2014, flat to the $0.26 Q4 2013. Adjusting for the restructuring and acquisition-related expenses and contingent consideration adjustments, EPS would have been about $0.01 higher this year. On an adjusted basis, Q4 2014 would have been $0.27 as compared to $0.26 last year, an improvement of 4%. Rob spoke to scrap impacting us approximately $0.02 negatively and foreign exchange, joint ventures, and tax causing a further $0.02 loss.

Before I move to the balance sheet, I will just reference the segment revenue and EBITDA disclosures in our press release. In the fourth quarter of 2014, North American revenue grew year over year from $937 million to $1 billion, and we saw EBITDA increase from $123 million to $129 million. The scrap impacts were entirely related to this segment, and without those impacts, we would have seen EBITDA improvements more proportionate to the revenue growth.

The European segment saw year-over-year revenue growth from $379 million to $465 million, an increase of $86 million. EBITDA of $38 million was flat year over year. While this segment was impacted by foreign currency deteriorations, we expected better EBITDA growth more in line with the revenue growth.

We attribute the flat EBITDA to the lower margins at ECP and the higher costs associated with the acquisitions and Unipart locations we acquired. The cost structure at Sator is also higher than we expect it to be once the conversion to a two-step model is complete and the acquisitions are fully integrated.

The specialty segment saw revenue of $210 million and EBITDA of $15 million in Q4 2014. We did not have a comparable segment in 2013. As previously discussed, the specialty segment is seasonal, and Q4 tends to be a lower performing quarter. The seasonality is evident when comparing Q4 to the full-year EBITDA of $79 million. Stag Parkway contributed very little EBITDA in Q4, so the $79 million compares favorably to the approximately $450 million we paid for the Keystone Automotive acquisition with a first-year multiple of 5.7 times.

Net cash provided by operating activities totaled $371 million for the year 2014 as compared to $428 million in 2013. Net income and depreciation were favorable to cash flow by $70 million and $39 million, respectively. Growth in accounts receivable was an incremental $17 million use of cash, as we continued to grow the revenue organically. Similarly, inventory was an incremental use of cash of $53 million, as we invest in inventory for the expanded business. We had been concerned about the recently resolved, threatened port strikes on the West Coast, and we built some additional inventories as a risk mitigation measure.

The timing of cash taxes resulted in higher outflow of funds in 2014 compared to 2013 of $32 million. Changes in accounts payable and other operating assets was a net source of cash of $13 million in 2014 as compared to a source of cash of $76 million in 2013. The timing of accounts payable disbursements and higher interest and bonus payments being the primary driver of the relatively lower contribution of these items.

Capital spending was $141 million in 2014. In 2014, we spent $776 million in cash on acquisitions, the largest being specialty, which accounted for $427 million of the total. We closed 2014 with $1.9 billion in debt, and cash and cash equivalents were $115 million. Availability on our credit facility was approximately $1.1 billion, and with the cash, total liquidity was approximately $1.2 billion. So, we have the capacity to pursue additional acquisitions if suitable opportunities arise.

And now, turning to guidance, the 2015 annual guidance calls for net income between $420 million and $450 million. That equates to an earnings per share of $1.36 to $1.46. Our guidance for 2015 for organic revenue growth in parts and services is 6.5% to 9%. And, our guidance for capital expenditures is $150 million to $180 million, cash flow from operations of approximately $450 million (sic - see press release, "$425 million").

We don't give quarterly guidance, but I wanted to give you some insight into what we are seeing so far this year. Starting with foreign exchange, the US dollar has strengthened appreciably against the pound, euro, and Canadian dollar, compared to last year's averages.

As of earlier this week, compared to last year's averages, these currencies were, respectively, 6.2%, 14.7%, and 12.2% lower. Compared to the average over last year, we believe that currencies represent approximately a $0.04 to $0.05 headwind at current rates. Obviously, we don't know where these trends will lead.

Scrap steel has also weakened since Q4. I mentioned that our Q4 average scrap sales were $197 per ton. Our report for the self-service business last week showed we were achieving only $130 per ton. At this time, we don't know where the floor is on these prices or when the recovery will start.

As we have discussed many times, when prices fall, we aggressively manage the costs of our vehicles lower, but we incur lower-than-expected income as we sell the cars acquired last quarter when prices were higher. Q1 will be impacted by the this phenomena, and we expect that to carry into Q2. We estimated this will be a negative impact of approximately $0.05 to $0.06 over the year.

In 2008, was saw a large drop in commodity prices. This situation this time is different and the decline in the prices to date has not been as severe. And, as we been discussing in past calls, the total portion of revenue impacted is a much smaller percent of our total revenue. So, while we're not immune to these changes, we believe that we can adjust our buying to account for them, and once we see stability or perhaps even a reversal of prices, we will see the kind of recovery that we saw in 2009 and 2010.

I had mentioned the performance of the European segment in Q4 relative to the prior year in our expectations. We believe that we will see improvements in that segment in relatively short order. We have charged our European team to take active steps to focus on gross margin improvements while simultaneously improving their cost structure. We continue to anticipate improvements in Sator as we build out our footprint in the Netherlands. If the European operations improve at a faster rate than the US operations, we will also see our tax rate improve.

Finally, turning to what we see in the broader economic market. We continue to believe that our markets in North America are going to benefit from the larger number of later-model cars entering our space. The European markets, despite the currency issues, appear to be pulling out of their protracted slow-growth mode.

Lower fuel costs and higher employment figures should lead to more miles driven. So, while we need to work through the challenges that lower scrap prices and the stronger dollar create, ultimately, we see the markets moving in our favor over the next few years. With that, I'd like to turn the call back to Rob before we open to questions.

Thanks, John. To summarize, we faced significant headwinds in the fourth quarter, many of which were outside of our control. Yet despite these challenges, we delivered solid results in 2014. 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, the recent inclement weather in North America could provide some momentum as we enter the second quarter.

For our after-market parts business, we continue to see improvement in our total SKU offering, as well as our certified parts offering, both growing 6% and 18.6%, respectively. In the UK, new car registrations reached a level not seen since 2005, which we believe bodes well for ECP's mechanical parts business and their growing alternative collision parts business. Also, with UK insurance premiums down 13% since 2012, we continue to believe that the value proposition of alternative collision parts is attractive to carriers trying to manage costs.

Also, we continue to be pleased with the performance of our specialty segment and the timing of our entry into the large and highly fragmented market. In 2013, the specialty equipment market produced the highest growth rate since the recent recession, posting a 7% gain and pushing the overall market to over $33 billion. These dynamics, coupled with a projected increase in SAR over the next four years, positions us well for 2015 and beyond within this segment.

In closing, I am proud of the hard work and dedication our 29,000-plus employees delivered for the Company, our stockholders, and most importantly, our customers in 2014. I am equally proud of our team's commitment to effectively manage the dynamics of our business that they can control, while not losing focus on growing the business, developing our people, and continuously looking for opportunities to generate leverage and synergies from our existing and recently acquired operations.

Finally, as you probably saw in our second press release, John Quinn has been appointed to head our European operations. I want to thank John for his five years of service as our CFO. Our commitment to Europe requires strong leadership. John has extensive knowledge of the European business market, having held key positions there at a previous company. His is the ideal person to take our European operations to the next level.

Also, I want to welcome Nick Zarcone as our new CFO. Nick has extensive CFO experience and a great knowledge of our Company. He was the key person at our lead underwriter, Baird, during our IPO in 2003, follow-on offerings in 2005 and 2007, and has advised on several of our strategic initiatives over the years. We are fortunate to have him join our team.

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

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

(Operator Instructions)

Nate Brochmann, William Blair.

Hey, wanted to talk a little bit. I get all the noise certainly created by scrap and FX and the tax rate, and thank you for explaining that very well. There still seems to be an ounce of a gap in terms of guidance. I get the fact that there's some lingering issues in the fourth quarter in terms of cost with Europe and some margin things here and there.

But in terms of guidance, you talked about the expectations that those things would get better, but there still seems to be a little bit of a gap between where expectations were, even adjusting for scrap and FX and kind of where guidance is. Some of that seems to be a little bit of a gap in terms of operational, some of that, again, still might be some gross margin. Some of that may be higher cost with Europe, and just getting the platform established in 2015.

Wondering if you could go through a little bit more in detail where the perception on the gap might be?

Nate, it's John Quinn speaking.

The way we kind of looked at where we came out with the guidance was, if you look at the fundamentals of the Company, it was, Q4 under performed a bit in terms of the European operations. Obviously, that drove the tax rate a little bit higher and there's a pickup, a year-to-date increase in the tax rate that we had to pickup in Q4. We also had some increases in the amortization of some of the intangibles.

If you take that component and then roll it forward, and say we have $1.27 on an adjusted basis in 2014. If you were to grow that at any kind of a reasonable rate, you'd probably be in the $1. 45 to $1.50 range. We then see about a $0.10 headwind associated with the scrap and FX impacts. That's kind of where we ended up on the guidance.

Keep in mind, we don't have a lot of big acquisitions in these numbers. In fact, if you look in 2011 we had ECP coming in to 2012. We had the benefit of Keystone Automotive last year.

The fundamentals of business, I think, are quite strong. We do have these scrap, which is -- we view as being a temporary headwind. I don't know when FX is going to turn or if it ever does, but there are some things we are obviously doing to try to improve those things as well.

Not all the currency has moved the same direction at the same time and that does cause us a little bit of an opportunity for arbitrage in some of the procurement. We'll be looking at that to see if we can mitigating when we talk about mitigating some these impacts. The FX is not just that we have to accept that there are some things that we can do to move cost around, from different currencies.

Okay, that's fair.

I know that obviously you guys been very successful with your strategy in terms of buying acquisitions and the putting them into the business. Clearly, the top-line revenue remains fairly impressive, and certainly within expectations.

Again, I'm sure that the answer will be no, we're not going to change what we're doing. Again, I wouldn't expect necessarily you to as you've been successful with that.

But at some point you wonder, with the stock price bring down here, whether you might look for shareholder returns that could be a little bit better, whether that's buying back stock, or whether that's kind of laying off anything very large. I know timing's always unpredictable.

I know that if you go back to the couple years post-Keystone one, you showed some impressive margin improvement, whether there would be an opportunity to be able to do that and kind of enhance the quality of the earnings and overall shareholder value, or whether that's just really not in the cards and there's just so much opportunity that, that's really still the foremost thing to ultimately create shareholder value.

Nate, I'm going to just touch a little bit on acquisition front and then let Rob address your second question, which was shareholder buybacks or something.

In terms of the acquisition strategy, I call out specifically the Keystone automotive acquisition we did last year. We paid about roughly $450 million for that acquisition. We got some good synergies out of it, and it looks like last year, first year multiples around 5.7 times.

I still believe that with interest rates where they are, our credit facility allows us to borrow. That's good opportunity to create shareholder value at that kind of multiple. Once that business gets going, it's a relatively low capital-intensity business if without a lot of additional CapEx required, so it becomes a very attractive distribution business from our perspective. To the extent we can identify additional opportunities like that, I still believe that, that is the best use of capital.

In terms of -- and I'd also comment in terms of some of the foreign exchange issues that we have, it does impact the income. But when we buy assets in foreign countries, be it Canada or Europe, we try to match that with a foreign currency hedge in so much as we try to borrow as much of the currency in the foreign currency we can. We're underlying the foreign currency cash flows coming in with the foreign currency debt. So although you end up with volatility in the income statement, and we understand that's important, the underlying economics we do create a hedge on the asset itself.

Do you want to comment on the others?

Yes, Nate, I'll comment on stock buyback.

It's something that we consider every quarter when we met with our Board and we discussed that. Honestly, to your point, as of today, we just believe there are opportunities that are better uses of our capital. It's not to say that it wouldn't change at some point, but it's a topic that we discuss regularly with our Board. As we stated, our plan right now is to continue the path we are on.

Acquisitions, as you said, are sticky. They come and go. Could a big deal come on play tomorrow? Absolutely it could. And that's important to have a balance sheet, which we're in a great position to do.

Our liquidity is great at this time, I think we're going to continue with the strategy of trying to build up the network. We think there is first-mover advantages in many markets and those opportunities are something that we just can't pass up at this point.

Okay. Fair enough. I appreciate all that and I'll turn it over.

Thank you. Craig Kennison, Robert W. Baird.

Thanks for taking my questions.

Wanted to start with Europe and the European margins. Clearly, they have been under significant pressure in the last year and there are some outside factors. I'm asking, are you getting the synergy you expect to get out of that business?

And then maybe, Rob, you could cover the two to three year margin outlook for that business. John, maybe you can talk about your priorities as you move into a leadership role there.

Let me talk about the ECP gross margin first, Craig.

For Q4, after the Unipart bankruptcy basically, there was a grab for a lot of the business and it got quite competitive in the marketplace. That is behind us now. We certainly think things are starting to settle down in terms of that.

We have put in pricing programs, not only for single customers but also for our national accounts. We are now truly the only national player for all of the UK. There are other competitors that can team up together but we are the only true single company that can do that. We do expect some margin expansion there as well. We constantly are working on our product cost initiative with vendors and we're going to start seeing some progress there as well.

Just a little bit of a drag on ECP's margins, gross margins, was that with Unipart going down, we did pick up some more national accounts, which are obviously slight dilutive to your overall margins. I think we're going to start seeing some nice turns on the margins at ECP. Certainly through January and February we're very pleased with that.

As far as Sator goes in the margin year, we're still building out the three-step and two-step model. We have 64 locations now. I reported the last quarter that we wanted to have about 80. We will have that done by 2015, and if that point we'll get the significant synergies.

In terms of your second question is, are we seeing the synergy that we thought we were going to see. We're about 80% done with the purchasing synergies between Sator and ECP. There's just 20% more to go and I think that will continue to come as we continue to grow mass and size and being able to leverage that with our vendors.

John, as far as the European priorities?

Sure. First, I'd just -- we believe we have a great set of management teams, both in the Netherlands and in the UK, so this is not -- my new role is not to change things there. It's really a focus of making sure the integration between those goes a little bit better in terms of things like cataloging and some of the not procurement-related synergies, but some of those other back office things that we can do a little bit better.

And then I'd be focusing on -- so I'll be focusing more on the integration to try to reduce the cost structure over there and improve the value proposition to the customer in terms of some of the e-commerce things that we can do. We have a decent ECP e-commerce strategy. We'd like to bring that to the (inaudible).

And then looking for additional acquisitions, both in terms of things that we can -- adjacencies, where we can tuck in things. As an example, we did the paint deals in the UK. We don't distribute paint in the Netherlands. That's collision and we don't do it in Netherlands. Once we get our footprint built out in the Netherlands, we will be looking at further adjacencies.

And then additional markets. As we've talked many times, Europe has got a large car part, larger than the US, depending on how you define it, and we think that, that's a good opportunity. Rob talked about the first-mover advantages.

We do also have a couple of large projects going on there. ECP is building on a new warehouse. That is a fairly large project. We're just going to be focusing on making sure that we've got execution on that front.

That's really helpful.

So when we look at European EBITDA margins, I think you finished the year with a quarter of 8.2% EBITDA margin. For the full year, it was probably closer to 9%, down from maybe approximately 11% last year.

What is the right outlook? Can that business get back to double-digit EBITDA margins within the next two, three years?

I believe it can. We're carrying a lot of cost there associated with the startups, with the Unipart branches that we took over that are not generating as much revenue in Q4. We're still carrying a fair amount of duplicate costs in terms of some of the infrastructure around the Sator acquisitions.

As we expand at the collision business, we opened additional warehousing space the UK, which is causing additional distribution costs. I mentioned a moment ago the product to rationalizing that. That's probably 2017, 2018 project but that actually it's so large we have to start now. Eventually, those things will bring down our average cost on the distribution front.

Those are some things that I talked about in terms of rationalizing the catalog unit and some of those other expenses, we believe there's opportunity there. So we're definitely targeting to get back to double digit.

I'll answer that, Craig.

In 2012, after we did the aggressive branch opening at ECP, we did [42] in 2012. We took the first half of 2013 off and we saw map margin expansions. We're at [189] now. We've always said the right number is somewhere between [200 and 225]. I

believe in two to three years you will see that margin expansion because we will be done with that buildout and you'll start to see those margin expansions like we did in 2013.

Thanks. I'll get back in the queue.

James Albertine, Stifel Nicholas.

Great, thanks for taking the question. Let me just thank John for his years of service. Wish him the best of luck in his new role and welcome, Nick, to the team here at the outset.

Lots of moving pieces, Rob, as you said, some of which are out of your control. Just a quick history lesson.

Has there ever been a period of sustained scrap pressures while wholesale pricing, at least the Manheim index, moves higher? It seems like those, generally if they move down together and move up together. Do you recall a period where you've ever gone through what we're seeing today?

We did go through this in 2008, Jamie. I believe Manheim actually came down in 2008. We're seeing Manheim go up, but scrap actually imploded in 2008.

The difference between 2008 and now, though, is 2008 was very sudden. Scrap went from about $325 a ton as I recall down to very low numbers. This has been more gradual. And actually 2008, from our perspective, was better because it went down so quickly, it drove down the cost of our salvage so much.

It is interesting when I look at what we're paying at auction. In Q4 we paid $1,990 on average. Sequentially, it was down $48 from Q3.

We're starting to see the scrap impact at the auctions. Because Manheim went up, you would think that our prices were going to. We believe that decrease in that car cost of $48 was related to the scrap. The problem is, is that as that drops gradually, we see a gradual drop.

But we did see this in 2008. 2009 and 2010 were good years for us as far scrap recovered. One of two things is going happen here. Either scrap will recover, and that will be, obviously, a good thing, or scrap will continue to be low and then we can adjust our buying appropriately.

Which is one of the things that John mentioned, one of things we're actively doing. We're driving our cost on the acquisition side. You will start to see that margin improve as that scrap stabilizes.

Got it. Very helpful.

As relates to your guidance for organic growth, first of all, looking back it FY14, 9% looks quite strong. Just kind of stuck out with me that the range of 6.5 % to 9% seems fairly wide.

What are the key swing factors that you are seeing there or anticipating? Particularly in light of what John mentioned around the sweet spot. Starting see the early stages of the benefits from SARs -- the SAR recovery, if you will.

The wide range is a couple of factors, obviously. Winter -- we think we're having a good winter, obviously. Let me just talk about the quarter so far. I'm sure someone would ask that anyway.

On January, we were on plan for our numbers. February has been an interesting month because there was such weather -- inclement weather. We had, obviously, major shutdowns in Boston and I understand Atlanta was shut down yesterday by the governor.

February is going to be an interesting month just because of all that inclement weather. We certainly do believe there is going be a snap back, whether it be in March or April into Q2. Most likely Q2 is when it will likely have the snapback of all those cars getting into the repair shops. We are up against a huge comp in Q1, though.

As you recall, last winter was a really strong winter in terms of being very snowy, very icy for the entire United States. Actually, Atlanta had two ice storms last year. So we are up against a tough comp, but we certainly believe this weather has been good to us.

In terms of our European organic growth, ECP has continued to build out so there are more opportunities there. As we get Sator through, that three step to two step again, which will be completed this year, I think we'll start to see some running there on the organic growth rate.

I think there are some good things. There are some headwinds, of course, in terms of the overall impact of the collision losses and where they're going to be in the spring and fall. But we're pretty bullish, actually, on our organic growth.

Again, very helpful.

If I could sneak one more in, as it relates to your leverage ratio, just getting a kind of a sense of where you ended up at the end of FY14 and really with an eye toward your comments around the interest rate environment being favorable. There's some deals you can't pass up.

Have you adjusted your max ratio, the most leverage that you could take on and still feel comfortable running the business day to day? Thanks.

I don't think we've really adjusted it in the -- if you look at just pm the reported EBITDA basis, I think we were around 2.4 times. If you adjust for the bank covenant, where we get credit for acquisitions we did late the year and so forth, we're closer to 2 times leverage.

So leverage right now is very modest I would say, reasonable. We haven't changed it. If you just model, and doing a very large acquisition, say a $1 billion acquisition, and pay and you've got a reasonable multiple, our leverage would go up around 3 times. We're still very comfortable with that.

Historically, we have taken a leverage higher. At one time, back in 2007, we ended up about 4.8 times after the Keystone Automotive. I don't see us doing it that high, but just because the math it would be very difficult to do that.

If a good opportunity comes up, we have taken the leverage up before. If we stop doing acquisitions, the Company generates a lot of cash flow.

Somebody just handed me a note. I think I misspoke. Our cash flow guidance, I think I said $450 million approximately. It should been $425 million approximately, according to the press release. The Company would delever fairly quickly if we were ever to stop doing acquisitions.

As I said earlier, if we can find good accretive deals, we're going to continue to try to do that.

Thanks again and good luck in the next quarter.

Thank you. John Lawrence, Stephens.

It's actually Ben Bienvenu on for John.

I wanted to talk about the ECP branch growth anticipated for next year, the 13 units. Do any of those include Unipart sites?

And then as you look at your longer-term opportunity for ECP branches, as market dynamics change and as you learn more data about the customer set in that market, is there are opportunity for that to move up? Or do you think we're fairly zeroed in on what the opportunity is?

Yes, the new branches do include some Unipart conversions. It's a tough -- little bit tricky question because some of those branches move. We're taking one branch, an ECP branch and a UA branch and bring them together.

Overall though, its a combination of both new branches and combined branches as well.

In the question on the longer-term opportunity, do you feel like you've zeroed in on that or is there an opportunity for that to move?

I think in terms of the -- once we get the branch buildout, we're going to continue to expand the collision business in the UK. We've got the coverage pretty much covered in terms of the country in terms of paint, but the penetration of the collision parts is still relatively low when you compare the UK to the US.

We believe the penetration of alternative parts is probably still maybe a little bit under 10% versus 36%, 37% in North America. There is quite a bit of opportunity for additional expansion on the collision business as well.

And then looking at other penetration, as I mentioned, the e-commerce business has been growing fairly well, which is getting at a retail customer more than a traditional mechanical or repair market.

Just one other thing I would add for that to for the UK.

Down the road, I did mention on the call that we've entered the Swedish salvage market. That is still an opportunity we're looking at, so that's another opportunity, as well as manufacture. We have a strong manufactured base here in the United States and we're looking to bring that into the UK as well as the continent as well, so that's also going to be an opportunity for us.

You'll see us move on that within the next year or so.

That's very helpful color, thanks.

The second question, just related to State Farm, I assumed if there was any meaningful change in the activity there we would have heard something. I'd just like to get an update on what you are seeing there on terms of their buying of alternative parts.

They continue to by our chrome bumpers, the one part that they did allow about a year ago. Chrome bumper sales were up 22.3% for us.

They continue to buy those products and we are cautiously optimistic that -- we know they are happy with the results, they've told us that. We're cautiously optimistic that they actually turn out more and more parts. Nothing new to update other than the fact that they continue to buy our chrome bumpers at a very healthy rate.

Great. Well, we will keep our fingers crossed on that. Thanks.

Scott Stember, Sidoti and Company.

Could you talk about how fuel costs, assuming they stay as low as they are right now, how that will impact margin as regards to your distribution set?

It's John speaking.

We did see a little bit of benefit in Q2 -- excuse me, in Q4. Our annual spend is about $90 million on fuel and that will be an offset to some of these other negatives that we have been talking about, I believe, in 2015.

Okay. Rob, you mentioned the West Coast ports earlier. Could you maybe talk about what you have been doing and what you plan to do? Are you diverting parts shipments to other ports throughout the country?

We did do that, Scott. The good news is they have resolved. I believe the union has approved it. That was the one thing that was left outstanding.

They have come to a settlement. There is a backlog at the ports. We're in very good shape, actually. Our purchasing department did a phenomenal job in diverting cans from the West Coast to the East Coast, to North ports, to other ports as well.

We're in good shape. We think it is going to be a month or two before all that backlog comes out. As John mentioned in his prepared remarks, we did move some that buying into Q4. We did see this coming, so actually we're in great shape on our fill rate. No major concerns there at all, Scott.

And last, just touching base on the commentary you made about the collision parts, potentially selling them in Sweden. Could you talk about penetration within the core European markets, such as where Sator is right now?

Sure. The rates are just about identical. Although interesting enough, last quarter we reported that UK alternate part rates are now up to 9%. When we got into the business, they were at 7%.

We believe the Continent is more on the 7% right now and we think there is an opportunity. As I mentioned in my remarks that 7 out of the 10 carriers that write the area programs with us in the UK are writing on the Continent as well.

It should be great opportunity. All we are waiting for, Scott, is to get that three-step to two-step model done so we can get everybody on the same page, get our synergies and bring those parts in. Hopefully, we will start seeing parts moving in that side of the business by the end of this year.

Great. That's all I have. Thank you.

Bret Jordan, BB&T Capital Markets.

Just a little bit more color on the ECP margin issues, and I guess trying to understand was there brief price war that has since ended? I guess you are talking about seeing some recovery there. I'm just trying to understand what did impact the traditional auto parts market?

There absolutely was a, what I call a land grab, for that business that got quite competitive. There was also another entry into the marketplace that we have since acquired, quite frankly, APX auto parts.

It did get quite aggressive for a little bit. Those days are behind us now. And as I said, Bret, January and February, the margins have come out nicely in the UK business.

What's your market share, do you think, in traditional parts through ECP?

That is very difficult to say. It depends if you include the dealers. Obviously, the dealers are still a very important part of the distribution network.

We do include the dealers, Bret, generally speaking, because they are selling parts as well, of course, into the maintenance and repair market. When you throw them in there, it is in the 20% range, 20%, 25% range.

Okay.

And then a question on alternative parts penetration in North America. I think John might have thrown a number out there, but what's your feeling for 2014 ending? Was it the use of [36 or 37]?

It's going to be in that number for sure. One of the downsides, of course, the strong SAR rate is the fact that a car bought a year ago almost always gets OEM parts -- brand new OEM parts when they are under repair loss.

When those cars work their way through to two, three, four years old -- out, we do expect that to pick back up again. It will be in the [36, 37] range again.

Okay, great. Thank you.

Bill Armstrong, CL King & Associates.

My question also is on the potential pricing pressure. You discussed the UK. Any other pressure in the parts and service in North America or perhaps on the Continent, either from competitive pricing or from any softening in demand?

I'll talk about the buying environment. As I mentioned, Bill, the stronger dollar is, I think, going to keep some the exporters out of the marketplace here, so I think we will be able to buy a little bit better on our salvage.

We've seen no price pressure on the aftermarket side of the business, both on the buy and sale. I don't think we're going to see any pressure on either sides of those businesses here.

Did I hear you say before that Sator will have higher costs as you migrate to a two-step model from a three-step? If I got that right, why -- what sort of costs would increase? Why would that happen?

Sure. It's John speaking.

If you think of a traditional three-step model, we buy the product, we ship it out once a day to our customers, and typically in large loads on semi trucks. When you go to a two step distribution model, we're still stocking those same locations but then we have the additional distribution cost to take it to that final mile, if you will. The smaller vans that deliver with half-hour, one-hour service, so you've got all those additional distribution costs.

What you should be able to pick up is that the margin, the gross margin, from that distributor, gets added to our gross margin, so to speak. You can't mathematically add them, obviously, but you do pick up the two margins instead of the one. Ultimately, we believe that the overall EBITDA margin, when you take out all the costs for those individual customers, should be better then operating independently.

But in terms of the SG&A and in terms of the distribution costs, it does go up slightly when you go into a two-step distribution model versus a three-step if you are the three-step wholesaler. Does that make sense?

Yes, that completely makes sense. And just one last quick question. What sort of income tax rate are you baking into your guidance for the new year?

Somewhere between 34.5% and 35% which, given our size, that can drive it a couple pennies either way. It is really going to depend on the mix. We don't anticipate any changes in the tax rates in the individual countries.

As I mentioned in Q4, the income shifted for the full year more to the US and away from some of the lower tax jurisdictions, including the UK and Netherlands. It is really going to come down to where the mix comes out.

Right. Okay. Thank you very much.

I just want to go back your earlier question about the margins in the US. And I just want to comment on some of the macro trends we're seeing here and why I think that the margins won't be under too much pressure just because some of the tailwinds we are seeing in the business is likely to be strong.

We've touched on some of these, but gas prices coming down and miles driven increasing. Unemployment is coming down so we're seeing more people go to work and be on the roads.

SAR rate remains strong, which is really great for our KAO business. It's interesting, with the new car -- we got the use information from the CCC. With the new strong SAR rate, total losses are actually flat now because they're much higher-dollar cars actually coming into the repair process, so we think the repair market is going get a nice shot in the arm here.

It's pretty interesting. They also told us that repair costs are trending up 3.4%, again also likely because the newer car part, which again bodes well for us because insurance companies will look to drive the costs out.

The other stat that CCC gave us which was really shocking to me, there's 0.4 more parts per estimate being used in 2014 versus 2013 based on 19 million repairables. That's roughly 7 million new parts coming onto estimates that weren't there a year ago. So that's also impressive.

The other thing that they told us which really caught me off guard, quite frankly, in 2009, 39% of estimates had at least one aftermarket part on it. In 2014, 50 % of estimates had at least one aftermarket part on it.

So aftermarket continues to gain market share. So I really think that all those things considered, we're in really good shape for the growth of the business and the core business remains strong. When scrap heals, and it will heal itself, there's no doubt my mind, and FX will eventually, the foreign exchange rates will settle down at some point. I think we are going to be in good shape.

Thanks for that extra color. I really appreciate it.

I think that's it. I want to thank everyone for the time this morning. We look forward to speaking to you in April to report our first-quarter results. Thanks, everybody. Have a good day.

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