LKQ Corp (LKQ) 2015 Q2 法說會逐字稿

Greetings and welcome to the LKQ Corporation second-quarter 2015 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, Investor Relations for LKQ Corporation. Thank you, Mr. Boutross. You may begin.

Thank you, Devon. Good morning, everyone, and welcome to LKQ's second-quarter 2015 earnings conference call. With us today are Rob Wagman and Nick Zarcone.

Please refer to the LKQ website for our earnings release issued this morning as well as the accompanying slide presentation for this call. Now let me quickly cover the Safe Harbor.

Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions, or strategies. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements.

For more information, please refer to the risk factors discussed in our Form 10-K for 2014 and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

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

Thank you, Joe. Good morning and thank you for joining us on the call today. At LKQ, we are a mission-driven company and I would like to start this call by highlighting our recently updated mission statement.

We want to be the leading global value-added distributor of vehicle parts and accessories by offering our customers the most comprehensive, available and cost-effective selection of parts solutions while building strong partnerships with our employees and the communities in which we operate. We are well on our way toward fulfilling our mission statement.

Our goal is to be the leading distributor versus simply a parts provider. We are global with nearly 28% of our revenue outside of North America. Our products are for all types of vehicles and not solely replacement parts for autos and light trucks. And most importantly, we are focused on building strong partnerships with our customers, our people, our suppliers, and the communities in which we operate.

With that said, I believe our performance during the quarter speaks to this mission and I'm quite pleased with the results. In Q2, revenue reached a new quarterly high of $1.84 billion, an increase of 7.5%, as compared to $1.71 billion in the second quarter of 2014.

Net income for the second quarter of 2015 was $119.7 million, an increase of 14.1% as compared to $104.9 million for the same period of 2014. Diluted earnings per share of $0.39 for the second quarter ended June 30, 2015, increased 14.7% from $0.34 for the second quarter of 2014.

Organic revenue growth for parts and services was 7.5% for the quarter. And on a constant currency basis, total growth for parts and services was 14.9%. I am particularly pleased with our EPS performance, given the effect from F/X and soft commodity prices which combined negatively impacted the year over year change in EPS by $0.03.

On a six-month year to date basis, revenue was $3.61 billion, an increase of 8.3% from $3.33 billion for the comparable period of 2014. Parts and services organic revenue growth for the first six months of 2015 was 7.5%.

Net income for the first six months of 2015 was $226.8 million as compared to $209.5 million for the first half of 2014. Diluted earnings per share was $0.74 for the first six months of 2015 as compared to $0.69 for the comparable period of 2014.

Now onto our operations. During the quarter, our North American operations benefitted from various macro trends. Let me highlight a few. According to the US Department of Transportation, the 12-month moving average for miles driven through May 2015 reached its highest level since 1990, the year they began tracking the data.

For 2015, cumulative miles driven witnessed a year over year increase of 3.4% through May. In addition, the year to date average price of unleaded regular gas was $2.42 a gallon through May of 2015 compared to an average of $3.51 during the same period in 2014. This represents a 31% drop in the average gas price.

Also, the unemployment rate in the US has improved. The average unemployment rate in Q2 of 2015 was 5.4% compared to 6.2% for Q2 of 2014, a 13% decrease year over year. And lastly, new car sales continue to improve. The SAR rate for Q2 2015 was 17.2 million units compared to 16.6 million units for Q2 of 2014, a 4% increase year over year.

Now some specifics on our North American business. In Q2, our North American segment had organic growth of 6.3%. On a constant currency basis, organic revenue growth was 7.2% with the difference primarily due to the weakness in the Canadian dollar.

As noted on slide 8, during the second quarter we purchased nearly 75,000 vehicles for dismantling by our wholesale operations, which is a 5.6% increase compared to Q2 of 2014. During Q2, the pricing at auction was flat year over year but we are also buying a newer vehicle compared to 2014. This younger vehicle dynamic should equate to higher top line revenue and improved margin dollars in this line of business.

Also, our North American aftermarket parts business continues to perform well as witnessed by its positive 30 basis point contribution year over year to our wholesale North American gross margins.

Another important metric that we track is the number of available certified parts. On a year over year basis, that number of SKUs increased 18%, which is critical to our insurance partners.

Lastly, in our self-service retail businesses we acquired over 131,000 lower cost self-service and crush-only cars, as compared to 143,000 in Q2 of 2014, or roughly an 8.4% decrease. This decrease was intentional, given the downward trend in scrap prices we faced in Q1, which continued as we entered Q2.

We were encouraged as Q2 progressed because we began to witness periods of pricing improvement and stability in the scrap market. Though this improvement was a positive from Q1 lows, we were slightly down sequentially and 36% year over year.

As we enter Q3, this temporary improvement has softened due to the sluggish demand out of China and the strengthening of the US dollar. Nick will provide some further context around scrap shortly.

Now moving to our European operations. In Q2, our wholesale European segment had organic revenue growth of 10.1% and acquisition growth of 11.1%, which was offset by a decrease of 11.7% related to foreign exchange rates.

ECP's continued solid performance drove organic revenue growth of 11.6% in the quarter. And for branches open more than 12 months, ECP's organic revenue growth was 7.1%. In addition, during Q2 our collision parts revenue in ECP had year over year revenue growth of 33%.

Our UK-based insurance industry relation teams have been working diligently with our 17 insurance partners in the UK to drive increased alternative collision part usage within their respective body shop networks.

During the quarter, ECP opened two additional branches, bringing our UK network to 194 branches. We anticipate opening five branches in Q3 and three additional in Q4, keeping us on track to open the 13 branches we approved for 2015.

Now turning to our Sator business. During the quarter, Sator witnessed additional gross margin benefit year over year primarily from the shift in its network from three-step to two-step distribution model and opening of our Lyon location in France in 2014. I am particularly pleased with Sator's 6.2% organic growth in the quarter.

Also during the quarter Sator acquired 6 additional distributors of aftermarket automotive products in the Netherlands. These acquisitions add 10 additional branches into the market, bringing Sator's branch network to 82, getting our branch count close to being fully built up.

Now to our specialty mark -- segment. Our specialty segment continued its strong performance by posting year over year revenue growth of 30% in the quarter, including the benefit of Stag Parkway and organic revenue growth of 6.6%.

With this type of growth and operational effectiveness of our specialty segment, we recently approved the lease for a 250,000 square foot distribution center in Washington State. This facility will allow us to improve service levels across the Pacific Northwest and Western Canada. We hope to have this facility open by the end of 2015.

And lastly on specialty, earlier this month SEMA released their annual market data report. And last year the industry increased sales for the fifth year in a row, with 2014 increasing total sales volume 8% from 2013.

With our current footprint in this segment and a number of new vehicles sales projected to increase in the coming years, we believe we are well positioned for continuing the growth of this segment.

Turning to corporate development. On July 8, 2015, the Company announced the acquisition of substantially all of the assets of PartsChannel, Inc., an aftermarket collision parts distributor with 14 warehouses servicing over 30 markets across the United States. PartsChannel presents attractive synergies with our existing North American aftermarket collision parts business.

Following the PartsChannel announcement, on July 9, 2015, we announced the signing of a definitive agreement to acquire the Coast Distribution System, Incorporated. Coast is a leading distributor of replacement parts and supplies and accessories for recreational vehicles, primarily to retail parts and supplies stores, service and repair establishments, and new and used RV dealers in North America.

This tender offer began July -- period began July 22, 2015, and will expire at the end of the day on August 18, 2015, unless the offer is extended. Because the tender offer is not complete, we are precluded from answering any quotes -- Coast-specific questions during the Q&A portion of the call.

Also on July 14, 2015, the Company acquired 8 self-service yards from Ecology Auto Parts, an auto recycler based in California. This acquisition of the Ecology self-service yards furthers our commitment to the expanding our recycled parts business and overall capacity to service the significant car park and population of California.

Lastly, during the quarter we also acquired a wholesale salvage business located in Alabama and an aftermarket parts distributor in Iowa.

Before I turn the call over to Nick, I would like to update everyone on a couple key projects initiated in the second quarter that we anticipate will have a positive long-term impact on the Company. These initiatives are highlighted on slides 10 and 11.

Our European operations are growing quickly. When we acquired Euro Car Parts, it had 89 branches. We've expanded that network to 194 locations and added 26 paint distribution locations as well.

At the time of the acquisition, the initial 89 branches were supported by a single national distribution center, or NDC, in Tamworth, England. In order to support the growth, we leased two additional sites in nearby locations.

Today, we are supporting that branch network out of these three locations which is inefficient from a logistics point of view and even with three locations we are projecting to be out of space in a few years' time.

In order to remedy these issues, earlier this year we broke ground on a new leased national distribution warehouse we are calling Tamworth 2, or T2 for short, adjacent to our primary NDC. T2 will be approximately 70 -- 750,000 square feet and will include significant automated warehouse functions.

We don't expect T2 to be fully operational until 2018. While we anticipate we will ultimately close two of the existing facilities, during 2016 and 2017 we will incur costs on all four.

This is a large and exciting project with a strong return on capital profile that will provide us with a competitive advantage in the UK to further protect the business and provide a platform for continued growth. But it will require investment both in terms of capital and transition expenses.

We will give more details in the coming quarters, but for modeling purposes, we are preliminarily suggesting that the project will negatively impact EPS by $0.02 to $0.03 in 2016, and $0.07 to $0.09 in 2017, after which we expect a positive contribution.

This adverse impact on EPS is primarily due to the operating of duplicate facilities during relocation and startup. There will be some cost incurred in 2015, but these have been included in our guidance. If these costs are material in any one quarter, we will expect to disclose them separately.

And second, we recently hired the services of Alix Partners, a global consulting and advisory form -- firm to assist us in identifying areas in which we might uncover potential operational efficiencies and improvements to maintain our market-leading positions.

Simultaneously, we are working closely with Alix to find opportunities to continuously enhance the experience for both our customers and team members. While we do expect this process to yield positive financial benefits, it will take some time before we can fully implement any recommendations coming out of that review. As this project with Alix unfolds, we will keep you apprised of its impact.

And at this time, I'd like to ask Nick to provide more detail and perspective on the financial results for the quarter.

Thanks, Rob. And good morning to everyone on the call.

I am delighted to run you through the financial summary on the quarter. And over the next few minutes I will address the consolidated results of our Company and review the performance of each of our three segments before quickly touching on the balance sheet and addressing our revised guidance.

For those of you who accessed our earnings presentation on the website, you will notice that we've included detail on both the second quarter ended June 30 as well as for your convenience the first six months of 2015. My comments will generally follow the flow of the presentation, but to be concise on this call, I will primarily focus on the quarterly results.

The Cliff Notes version of our financial performance in the second quarter of 2015 would be that we experienced solid revenue growth despite the continued headwinds from the strong dollar and lower commodity prices. And our businesses drove margin increases relative to the second quarter of last year.

Consolidated revenue in the second quarter of 2015 was $1.84 billion, representing a 7.5% increase over last year. That reflects a 10.6% increase in revenue for parts and services, partially offset by a 20.5% decrease in other revenue, primarily related to the decline in scrap prices, which I will address in a few minutes.

The components of the parts and services revenue increase include approximately 7.5% organic plus 7.4% from acquisitions before backing out 4.3% for F/X. As noted on slide 14 of the presentation, consolidated gross margins improved 10 basis points to 39.4% during the quarter.

The uptick reflected a 40 basis point improvement from operations, offset by a 30 basis point decline due to revenue mix as the revenue growth of our European and specialty businesses, which have lower gross margin structures, outpaced that of our North American operations.

We've picked up about 10 basis points of efficiencies in our operating expenses. Facility costs as a percent of revenues declined primarily due to the shift in revenue mix towards our European and specialty segments, which structurally have a lower facility expense.

These units tend to utilize regional distribution centers, the cost of which is captured in cost of goods sold, as opposed to in the facility expense line. Our distribution costs as a percent of revenue also declined relative to last year primarily due to the lower fuel prices.

These improvements were partially offset by an increase in SG&A expenses as a percent of revenue, mainly due to an expansion of our sales force and administrative personnel in Europe to support the growth of the business.

Segment EBITDA totaled $233 million for the quarter, reflecting a 10% increase from 2014. And as a percent of revenue, segment EBITDA was 12.7%, a 30 basis point increase over the 12.4% recorded in second quarter of last year.

The increase in EBITDA when combined with the lower levels of depreciation, interest expense, and restructuring costs on both an absolute and relative basis allowed pretax income to increase by 16% during the second quarter of 2015 compared to the same period last year. And margins expanded by 80 basis points to 10.1%.

Our tax rate during the second quarter was 34.9%, up from 34% last year. The tax rate reflects an effective rate of 35.1%, reduced a bit by a few discrete items related to state taxes.

As Rob mentioned, fully diluted EPS for the quarter was $0.39 compared to $0.34, up about 15%. And adjusted EPS before the restructuring charges and other items was $0.39 versus $0.35 a share, reflecting an 11% improvement.

On a year to date basis, total revenue is up 8.3% to $3.6 billion for the first six months of 2014. Revenue from parts and services increased 11.3% comprised of organic growth of 7.5% and the impact of acquisitions, which added another 7.8% before factoring in the negative impacts of currency movements.

Gross margin for the first six months was 39.4%, reflecting a 30 basis point decline from the prior year, as the favorable experience in the second quarter could not fully offset the downtick in Q1.

For the first six months, segment EBITDA margins were up 10 basis points, reflecting the continued efficiencies achieved in terms of warehousing and distribution. Fully diluted earnings per share for the first six months was $0.74 compared to $0.69, reflecting a 7.2% increase. And on an adjusted basis, again before restructuring, EPS for the first six months was $0.76 compared to $0.70, or an 8% -- 8.6% increase.

And as Rob mentioned, we estimate that for the first six months of 2015, the significant drop in scrap prices had a $0.03 negative impact in EPS while the weak foreign currencies relative to the dollar added another $0.03 negative impact on earnings per share.

As highlighted on slide 16, the composition of our revenue continues to change due to varying growth rates of our different businesses and the impact of acquisitions. Since each of our segments has a different margin structure, this mix shift can distort the trend in consolidated margins.

Accordingly, we have provided some extra segment-by-segment margin information in the presentation to provide more context as to what's going on in the businesses. And with that, let's get into the details on the segments.

Revenue in North America during the second quarter of 2015 increased to $1.045 billion or about 2% over 2014. This is a combination of a 6.3% organic growth in parts and services offset by a 20% decline in other revenue. Again, the latter of which is due to the lower scrap prices.

About half of the organic growth in parts and services was due to volume and half was due to price. You will recall that the organic growth rate of our North American parts and services business during the first quarter of 2015 was just under 5% due to the tough comparable results posted in Q1 of 2014.

During the earnings call back in April, we mentioned that this growth rate would bounce back to normal levels, which it did. This was a solid quarter for our North American business.

Gross margins in North America during the second quarter increased 40 basis points relative to last year from 42% to 42.4%. This increase was primarily due to a solid 50 basis point increase in our wholesale operations, offset by a decline at our self-service operations.

On a sequential basis, the gross margin was lower than Q1, which is shown by the graph in the upper right hand corner of slide 17, is consistent with our normal seasonal trend. With respect to operating expenses, we lost 50 basis points of margin compared to the comparable quarter of 2014.

On the upside, our wholesale operations tightly controlled head count, which helped reduce facility and warehousing expense as a percent of revenue. In addition, we experienced continued improvements in fuel cost relative to last year as diesel averaged $2.85 a gallon in 2015 compared to $3.94 a gallon last year.

This was the primary driver behind a significant improvement in distribution expenses in North America on a percent of revenue basis. However, these positive trends were largely offset by our self-serve unit, which experienced flat operating expenses but lower revenue to both the significant decline in scrap prices and the reduction in the number of cars purchased and processed.

Slide 19 takes a closer look at scrap prices over the last 18 months. You will note that the average price we realized in the second quarter of 2015 was approximately $140 a ton or down 36% compared to the average of $217 a ton realized in Q2 of last year.

In total, the lower pricing reduced our revenue for the quarter significantly and on a year over year basis had approximately a $0.012 negative impact on our EPS during the quarter.

So in total, EBITDA for the North American business during the second quarter of 2015 was $139 million, reflecting a 1.2% increase over last year. EBITDA for the wholesale operations increased 11% over the prior year, while the self-serve operation saw a decline.

As a percent of revenue, EBITDA for the North American segment was 13.3%, down ten basis points over the comparable period of last year. Again, the wholesale operations experienced a solid 80 basis point improvement in EBITDA margins but that was more than offset by a decline at our self-service operations. Again, with the latter largely reflecting the impact of the lower scrap prices.

Moving onto our European segment, total revenue in the quarter accelerated to $510 million from $465 million. Organic growth in Europe during the quarter was 10.1%, reflecting a combination of 11.6% organic growth at ECP and 6.2% growth at Sator. And the impact of acquisitions in Europe represented an additional 11.1% increase in revenue.

These gains were offsent -- offset by an 11.7% decline due to the translation impact of the strong dollar, creating negative impact on revenue and resulting in total reported growth for our European parts and services business of 9.5%.

Gross margins in Europe increased to 37.9% during the quarter, a 70 basis point improvement over the comparable period of last year. And a sequential improvement of 90 basis points over Q1 of 2015.

While a bit of the Q2 pickup is seasonal, we benefitted from improved procurement in the UK and the internalization of the gross margin from our 2014 acquisitions in the Netherlands. These are the highest quarterly gross margins we have achieved in Europe since early 2013.

With respect to operating expenses in Europe, there were some gives and takes which netted out to a wash. On the upside, we benefitted from the internalization of certain delivery activities that were previously outsourced at ECP, as well as lower fuel cost.

On the downside as mentioned, we had higher SG&A expenses at both ECP and Sator. European EBITDA totaled $54 million, a 17.5% increase even after taking into account the impact of the strong dollar.

As a percent of revenue, European EBITDA in the second quarter of 2015 was 10.6% versus 9.9% last year. Again, these EBITDA margins for the European segment are the best we've posted in over 18 months.

We do anticipate the normal seasonal patterns will continue in 2015 and these margins will decline in the back half of the year, particularly in the fourth quarter. As noted on slide 22, relative to the second quarter of 2014, the pound declined 9% and the euro declined 19%.

We estimate that the strong dollar reduced revenue significantly in EPS by about $0.018 during the quarter. As noted on this page, removing the impact of the currency swings would have resulted in second quarter European revenue growth of 21% and given the margin improvement, EBITDA growth of 32%, which we believe is quite strong.

Turning to the specialty segment, revenue for the second quarter totaled $284 million, a 30% increase over the comparable quarter of 2014. Obviously, the impact of the Stag acquisition in Q4 of last year accounted for the largest component of growth. But the organic growth of 6.6% was also quite strong.

Gross margins in our specialty segment for the second quarter remained generally constant with last year at 38 -- at 30.8% compared to 30.9%. The slight 10 basis point decline is due to mix shift caused by the addition of the Stag business, which has lower gross margins than the core KAO operation.

That said, operating expense as a percent of revenues in specialty were down 120 basis points as we continue to see the leverage from integrating the Stag acquisition into the Keystone infrastructure, as well as the benefit of the lower fuel prices.

EBITDA for this segment was $40 million, reflecting a 42% increase over last year. And as a percent of revenue, EBITDA for the specialty segment increased to 14.1% in 2015 compared to 13% last year. We are quite pleased with the 110 basis point expansion in EBITDA margins compared to the prior year.

This is a highly seasonal business and the second quarter is by far the strongest, as demonstrated by the graph in the upper right corner of slide 23. So it is important to recognize that as we move through the back half of the year, you should expect the margins to moderate meaningfully as the selling activity moves slower.

Let's move onto capital allocation, which given the working capital swings, lumpiness of capital spending, and the timing of acquisitions I think is best viewed on a year to date basis as presented on slide 25.

You will note that our after-tax cash flow from earnings for the first six months was approximately $299 million and we experienced a $16 million increase in working capital, resulting in approximately $283 million of cash provided by operations.

The working capital uptick is the result of an increase in accounts receivable associated with our revenue growth, partially offset by a reduction in inventory as we continue to work our way down from the intentionally high balances held at year end to protect us from what we anticipated could be some potential port issues early in the year.

Thus far in 2015, we have deployed $109 million of capital to support the growth of our businesses, including $67 million to fund capital expenditures, and $42 million to fund acquisitions and other investments.

So for the first six months, we generated $174 million of free cash and we used about $150 million of that to repay our debt balances. We sourced an incremental $5 million from other financing sources. The remaining $29 million was added to our liquidity and we closed the quarter with approximately $143 million of cash, of which $85 million is held in Europe.

At June 30, we had $1.7 billion of total debt outstanding, which on a GAAP basis was approximately 2.1 times our latest 12-month EBITDA. And if you factor in the full impact of the EBITDA for the acquisitions completed over the past 12 months and back out our cash balances, the net debt to EBITDA ratio would be approximately 1.9 times.

The weighted average interest rates on our borrowings during the quarter remain constant at 3.4%. And the available capacity on our credit facility was approximately $1.2 billion, which we believe provides adequate liquidity to fund the continued growth of our business.

We are focused on return metrics for our company. And for the latest 12 months, both our return on equity and return on invested capital are generally consistent with the levels achieved over the past five years. You should note that we've deployed a significant amount of capital over the past few years and investments tend to have a lower return in those early years, which clearly has an impact on the metrics. We are, however, focused on driving these higher.

As noted in our press release, we have adjusted our guidance on some of the key financial metrics for the year. As relates to organic growth for parts and services, we have tightened the full year range from what was 6.5% to 9% to now 7% to 8.5%.

In terms of earnings per share, we are narrowing the guidance a bit to $1.38 on the low end to $1.45 on the high end. And essentially leaving the midpoint alone. This all assumes that the pound sterling, euro and Canadian dollar remain at current levels of $1.55, $1.10, and $0.76, respectively. And importantly, that scrap remains at approximately $140 a ton.

We recognize that the earnings reported today exceeded the consensus estimates for the quarter. But we would encourage folks to neither add that difference to the current annual consensus nor extrapolate that forward to the back half of the year.

In particular, it is important to be sensitive to the seasonal trends of our businesses and the historical impact that has had on the revenue and operating margins. The consensus EPS estimate for the fourth quarter is currently $0.35, which appears overly optimistic in light of the normal seasonal patterns of our business.

Finally, we've adjusted guidance for the income from operations up to $450 million to reflect the slightly lower investment working capital. And we believe the guidance for capital spending is still valid at $150 to $180 million.

And at this point, I'll turn the call back over to Rob.

Thanks, Nick. Before we open it up for Q&A, I wanted to end with a historical summary of our founding strategy and business model highlighted on slide 29 which today is still the nucleus of our company and one that is the cornerstone of our operating segments, despite their unique mix of products and geographies.

At founding, we saw the opportunity to create a national network of wholesale recyclers to service the North American body shop and auto repair industries. With this strategy, we looked to acquire the best recycling locations with the best management teams and operators and create a network that provided synergies through consolidating this fragmented industry.

These yards when combined in a given trading zone would create the highest fulfillment rates in the industry, which today still holds true. This strategy continued when we entered the aftermarket collision business with the acquisition of Keystone to grow our North American alternative collision business, the European market with ECP and Sator, and the specialty space with KAO, and tuck-ins like Stag Parkway.

While our European and specialty businesses offer different products and the vernacular can create confusion, make no mistake, the founding strategy and business model is consistent. Each of our businesses operate in fragmented markets that are ripe for consolidation.

By buying the number one or number two players in the market with the right management teams, we can begin to build a network that offers tremendous synergies and scale by offering industry-leading fill rates.

Simply stated, in the vehicle parts business, the distributor that has the part readily available and can get it to the customer on time wins the sale. We believe that we can offer that capability across all of our segments and with more runway to grow. With this core strategy and operation model, I am confident that our team of over 30,000 employees will continue to add long-term value for our customers and stockholders.

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

Thank you. We will not be conducting a question and answer session. (Operator Instructions) Craig Kennison, Robert W. Baird.

Good morning, thanks for taking my question. Also, thanks for the slide presentation and guidance commentary. All of that has been very helpful today.

Nick, first question on guidance. I just want to be clear, does it include either PartsChannel or Coast?

Yes, they do. We're not anticipating that either of those are going to have a material impact, Craig, on the back half of the year. It's going to take some time to get them fully integrated and the like. And obviously, with Coast we have to wait to see the results of the tender offer.

Thank you. And then with respect to the Tamworth D.C., on slide 10 it looks like it'll cost $0.09 to $0.12 over the balance of two years. Could you frame the actual cost of the project and how much of that would be capitalized versus expensed?

Well, Craig, this is Nick. Ultimately, we're going to lease the facility but all of the inner workings, if you will, are going to be capitalized and then depreciated over time.

It's a fairly large investment on our behalf. It's on the order of GBP75 million. So it's quite significant. We have to start paying rent when we take possession of the facility, which will be in early 2016 but it's going to take us some time to fit it out and get it up and running. The better part of a couple years.

And so that's why Rob mentioned that we're going to have kind of duplicate rental expense for -- because we're going to have four facilities for a period of time before getting down to two.

And then on a related note, I know you've taken greater care to understand future expectations in terms of what's embedded in consensus expectations. I guess I'm wondering, looking ahead to 2016 and 2017, although you haven't provided guidance, is it possible that none of us have really anticipated these costs, given that this is the first time you've really talked about them?

That would be my expectation, Craig. Because we did want to get this out to the investment community as soon as we had a pretty good sense as to what it was going to mean.

We understand that a number of folks do longer term projections and there was no way for them to have an understanding as to what may be coming their way related to these projects.

That's helpful. Thanks and we'll get back into queue.

Thanks, Craig.

Nate Brochmann, William Blair.

So couple things. One, it was nice to see the uptick in the gross margins across the board. And I know that fuel obviously helped on the distribution expense.

But minus the normal seasonality and any impact from future acquisitions that might come in a little bit negatively, and I know that we have a little bit of mix shift. But apples to apples, are you guys fairly comfortable that we can kind of continue on a more stable run rate on the gross margin line?

Nate, this is Nick. I think you have to take a look at that on a business unit by business unit basis. And that's why we've provided the additional disclosure with respect to gross margins.

You will see there is some quarterly fluctuations in the overall margin structures of the business. We provided basically the gross margins over the last six quarters so you can kind of take that into account as well.

The back half of the year in North America, the margins tend to be generally consistent with the second quarter but obviously down from the first quarter. European margins as well, there's a little bit of fluctuation in them.

So we would encourage you to take a look at the historical seasonal patterns, because that's the best guidance as to where you may head in future.

Okay. And then regarding the Alix project, obviously I think that that's probably, you know, makes sense with where you are in your kind of build out of the North American business.

Is that kind of a signal that there might be an opportunity overall to maybe enhance the operating margins a little bit in terms of just some network efficiency? Is that one of the overall goals of that project? Or is there something else embedded in that?

No, that's exactly it, Nate. We've been very a decentralized company. And what we challenged ourselves to do was to figure out how to maintain that entrepreneurial spirit yet get some operational efficiency.

So with that in mind, we focused on four key components that we're looking at. One is our sales organization. The second is logistics, the fleet as we have thousands of trucks on the road every day.

Purchasing. Getting some more purchasing synergies. And then looking at our dismantling capabilities and how to get some best practices across our region. So, yes, we do expect some operating efficiencies to come likely in mid-2016 we'll start seeing those results come through.

But you're spot on. We want to make sure we had that entrepreneurial spirit still in the Company. That's what the base of this company's been so successful on. So we're going to get the best of both worlds with this project. Assuming it goes the way we expect it to, we will look at Europe at some point of doing the same process over there.

Okay. And then just final question in terms of the ECP facility and I get the fact that maybe we didn't anticipate the upfront cost of that. But I assume that that's an indication, though, in terms of the bigger picture of where the opportunity is not only in terms of new parts injection.

But in terms of just being a little bit more efficient with your distribution capability and combining those facilities, I assume that the collision network is going to be a little bit more integrated with the mechanical side.

So ultimately that should get you a lot of synergies out of that. And probably a sign of positive things to come in terms of the potential volume growth we could get out of that. Is that a fair assessment?

I think that's right on. We're operating out of three buildings now. We're going to go to two eventually. The three buildings, by the way, are roughly 20 miles apart from each other, as well.

These are literally separated by a retention pond, these two buildings in Tamworth. So we will get some operating efficiencies for sure. And the automation that's coming with it as well will provide some nice pickups there as well.

So and finally the other major aspect of doing it is to prepare for future growth. As I said in my remarks, Nate, that we have three buildings and we're already pushing the limits of those. So getting two in the same footprint will be greatly enhancing our capabilities to our customers.

Okay. And then one last quick check the facts question and then I'll turn it over. But any update on State Farm?

Same. I -- still meeting with them constantly. No decision's been made. But as far as chrome bumpers go, I can give you an update on that corner. Up 16.9% so they clearly are driving that product type for us. And fingers crossed that they come back here soon.

Okay. Great, thank you very much.

Thanks, Nate.

James Albertine, Stifel.

Congratulations, by the way, on the nice quarter. And let me just add on the slides, thanks to Joe and Nick and team for all your hard work there. They are tremendously helpful.

If I may, looking at your guidance, it looks like you've tightened your net income guidance but haven't really moved the midpoint there. And yet your net cash from ops guidance is up by $25 million. So wanted to get into a little bit more detail as to what's driving that.

And then maybe just sort of fast forward to a free cash flow question. How many more years do you expect sort of have this elevated level of CapEx to support things like the D.C. in the UK? The D.C. in Washington State and so forth? And are there any other big opportunities to invest in your future growth sort of globally? Thanks.

I'll start with the guidance. Again, we tightened up the range a little bit, essentially left the midpoint alone. The uptick on the free cash flow is basically a sense that our working capital needs are going to be less than we originally anticipated.

And so we pulled in the net income range $5 million off the top and up from the bottom. But it's really the working capital that's driving the $25 million uptick in free cash flow. All of our, most of our capital spending is to support the growth of our business.

Our rough estimate is about 75% of what we spend is growth orientated as opposed to repair and replacement and the like. As long as there are really good opportunities to continue to grow our business, we will deploy capital behind our businesses.

Obviously, something like Tamworth, that may be a once in a moon kind of event for our company. Something of that size and scale. But there are other situations across North America where we are going to be expanding warehouses, going into new distribution facilities to support the continued growth of our business.

And I just want to add one thing to that, Jamie. As a percent of revenue, our capital has been pretty much in line. So to Nick's point, as long as there's opportunities to continue to grow the business, it will stay in line with that percentage of revenue.

Understood. And just if I may a quick follow up, just a housekeeping item. Rob, you've talked about alternative parts usage historically in the US and UK. Are there any updates you can provide based on the data you're seeing in those markets? It's still around 9%, I assume, in the UK 37%-ish in the US. But wanted to get your insights there.

That is correct. A little bit less in the US circa 36% to 37%. It's been right in the middle there, teetering between the two. But we expected that in the US with the recent surge in the new car park.

We're seeing the same thing, actually, you over in the UK a little bit with a strong SAR rate right now. But we do expect as these newer cars get into the sweet spot outside of three years, we're going to start seeing uptick in the AP usage here in the US.

Very good. Thanks again and good luck in the third quarter.

Actually, just one last thing. You know, as we highlight in the slide deck is that -- in our investor deck is the part comp. I just want to give a quick update on that.

They're actually up to 9.1 parts per estimate now versus 7.9 just five years ago. So we are seeing more parts get on the estimate. And that's why we're kind of bullish, what we think is going to happen as these cars get into our sweet spot of three years. We're going to see that growth in the AP usage.

Thank you.

Thanks, Jamie.

Ben Bienvenu, Stephens.

Just quickly on the UK collision side. You've talked in the past about the pilot program with insurance carriers. Any update there? What kind of progress you're making and what that pipeline looks like.

Yes, we're still at 17 carriers right now, Ben, in the program, which amount to about 80% of the UK insurance base. So it's probably going to be at that number for a while. No one has pulled out of the program. And as I mentioned in my remarks, 33% increase. So still getting traction and still heading in the right direction.

As we mentioned on previous calls, once we get our 3-to-2 built out, our three-step to two-step in the Netherlands, we will be introducing collision parts there with many of the same carriers that right -- in the UK also right on the continent. So we're probably a couple quarters away from launching some kind of program on the continent.

Okay. Very good. Secondly, looking at the Unipart branches, how have those progressed since you've made those acquisitions? Are you comping in line with the chain? What does profitability of those look like? What are your thoughts on the progress there?

Yes, I'll talk about the, what we've been able to integrate. We've pretty much opened every one of those stores that we did, that we targeted. You remember some, we closed two stores to make one. We either closed an EPC store or we closed the Unipart store and brought in.

That has been done and we're starting to see the benefits of that. The employees are fully trained now in our systems and taking phone calls as we do in our normal course of business. As far as the profitability, it does kind of get melded in there, into the overall mix.

And but we're very pleased with what we've done there. And like I said, we have 194 branches now. So we're certainly at the tail end of our build out of 200 to 225. And we anticipate that being done in the next couple years.

Okay, great. Lastly from me, we saw some pretty severe flooding in Texas. I'd be interested to hear if those cars are showing up at auction yet. What they look like.

I would think with your predisposition towards buying higher quality vehicles, those would be a good fit for you. But just any commentary or color there would be helpful.

Yes, I'll go back to my days at the auction business. Those are great cars in terms of your quality. Fresh water floods are really great because there's no body damage.

We have not seen them start to flow through the auctions yet. There is generally a lag of about 45 to 60 days before the pools can get access to the titles. But we do expect some really good salvage to be coming through.

Okay, great. Thanks, guys. Best of luck.

Thanks, Ben.

Bill Armstrong, C.L. King and Associates.

Good morning, guys. I'll also add my appreciation for these slides. I think they're very helpful. Are there any construction costs for the Tamworth D.C. built into the second half of 2015 in your guidance?

There are some just ancillary costs related to the project, Bill. But nothing of significance. Again, right now it's under construction, as you can see by the slide that we put into the deck.

It's a pretty massive facility. But ultimately the landlord is incurring those expenses. Obviously, there's some broader project-related activities as we continue to plan out for the outfitting of the facility and the like. But nothing material.

Okay. In terms of the auction environment, can you talk about your average price that you paid per car for the quarter versus a year ago? And what you're seeing in the auctions overall in terms of supply and pricing trends.

Yes, sure, Bill. This is Rob. Our salvage cost was basically flat. It was about $4 better a vehicle. But again, we are buying a younger vehicle. So we know we're buying a better vehicle.

On the self-service side of the business, really not so much in the auction, but they do buy some. We were down $81 to an average of just under $400, which is all scrap related. In terms of the volume at the auctions, very consistent.

We tracked the number of cars that we -- the auctions we visit. They're pretty much flat to slightly up. So plenty of availability. We're still only buying roughly 6% to 7% of the auction. So plenty availability to keep driving the top line.

Got it. Okay. And then in terms of vehicle miles driven, we know when in the US, that we've had a pretty strong increase this year. Do you have any data for that in the UK or the Netherlands, by any chance?

We do not have that available. We know the SAR rate is up, but we do not have miles driven on a European basis. But we'll have Joe get back to you on that.

Okay. Sounds good. Thank you.

Thanks, Bill.

Jason Rodgers, Great Lakes Review.

Yes, just a question on ECP's organic growth rate for the branches open more than 12 months. It came down a little bit in the quarter versus historical trends. And I was wondering if there are any one-time factors there. Or is that the rate we should expect going forward, just given the maturity of the branches?

Yes, couple factors going on there, Jason. Certainly when we bought the business in 2011 with 89 locations, the 90th, the 91st to the hundredth branch were obviously the lowest hanging fruit.

So we're getting at the tail end of that. So that's having a little bit of impact there. There is a surge in new cars, as I just mentioned. So that's going to be a little bit of a headwind for the time being until those cars get out of warranty.

One thing that I do want to add that when we show that 12 month and over, that does include our paint locations now. So that does drag it down a little bit. And then just one last point on that, we in talking to our suppliers, they say the market is generally a little soft right now.

They equate it to the new car sales going up a little bit. And just general market conditions. They do expect it to rebound, so I think you'll still see mid- to high single digit growth out of the stores open more than 12 months.

You take the paint out of there, it's actually a little bit higher. But we are expecting with the new stores and as well as the stores in general, still double digit growth here for the balance of the year.

That's helpful. And then how should we be thinking about foreign currency and scrap for the second half of the year?

Sure. If you take a look at the slide where we've kind of set out the historical scrap prices, right? In Q1, we're -- the comparison was $224 versus $141. In Q2, $217 in last year, $140 this year. Q3 of last year was $215.

So scrap has remained pretty steady last year. And if you assume that it's going to stay in the $140 range, we would expect, we lost a couple pennies in the first quarter, a penny in the second quarter.

There's a chance that there's a half a penny to a penny yet in Q3. By Q4 where the comparison gets a little bit better. Q4 of last year was $187, so if scrap stays at $140, it'd be probably more of a rounding error, if you will. So maybe another half a penny to a penny.

On the F/X, you can go through the same analysis. Really for the first three quarters of last year, the currency stayed pretty consistent. On the euro, 137,137, 133 for the first three quarters of last year. The pound sterling, 166, 168, 167.

And so it was -- we talked about $0.02 in F/X. Last quarter, it was actually, we -- it was $0.016 and rounded up. This quarter was another couple pennies. But again, it's a rounding up, so $0.03 for the first six months.

We're probably going to be in that same range for Q3. So think about maybe a penny and a half plus or minus. In Q4, both the sterling and the euro started to drop a little bit. So probably a little bit less in Q4.

We thought originally F/X would hit us for $0.04 to $0.05. We last call, you may remember, we talked about that the $0.08 to $0.10 from scrap and F/X was probably going to get flipped, probably $0.06 or so from F/X and that's not a bad estimate.

Thank you.

Gary Prestopino, Barrington Research.

Hi, guys. I think the last question here just asked the same question I was going to ask you. We're still looking at those same ranges for F/X and scrap, the impact your EPS guidance for this year, correct? I think it was, like, $0.03 to $0.04 for scrap and $0.05 to $0.06 for F/X.

That's correct. Again, scrap ended the quarter right around $137, $138. There's a lot of noise coming out of China about economic growth and the like. And there are some folks out there forecasting that scrap will get a little bit softer here.

We're assuming at this point in time kind of a steady state on scrap. We'll have to see what the fed does with interest rates and the impact that has to do on the dollar. But again, we're assuming that rates are going to stay relatively constant at $1.55 for the pound and about $1.10 for the euro.

Is scrap all really predicated on what goes on in China? Because I know Turkey's a big buyer or scrap, too. Is -- you hearing anything out of there?

Those are the two countries, Gary. You're right. Have not heard much out of Turkey. It's really China is the big one. The domestic mills seem to be doing okay but Turkey and China will definitely drive the exporting, for sure.

Okay, thanks.

Bret Jordan, Jefferies.

In the (inaudible) log, what percentage of your revenues are two-step versus three now? Maybe you can give us some color what the spread of a margin is in those channels.

(multiple speakers) We'll have to get back to you on that, Bret.

Okay, and part of it is hard because it all get -- once we make the acquisitions, it all gets integrated, if you will, into the -- into our financial system. So it's not like we have a bunchy of stand-alone P&L that we then roll up at the end of the month and the end of the quarter.

Okay, thanks. And then I guess on PartsChannel, can you give us any color on what their productivity looked like versus your own aftermarket parts business?

I'm sorry, their productivity?

Yes. Were they just generally generating similar profits to you? Or were they less productive because they had smaller scale?

I think we'll be able to pull their margins up to ours, Bret. And they did get us into a few markets, interestingly enough. So, yes, their margins were generally a little bit lower than ours and they will come up to our numbers.

All right, great. Thank you.

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you, everyone, for your time this morning. And we look forward to speaking to you in October when we report our Q3 results. Have a great day, everybody.

Thank you.

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