LKQ Corp (LKQ) 2016 Q2 法說會逐字稿

Greetings, and welcome to the LKQ Corporation second-quarter 2016 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 2016 earnings conference call. With us today are Rob Wagman and Nick Zarcone.

Please refer to the LKQ website at lkqcorp.com 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 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 slide presentation. With that, I'm happy to turn the call over to Rob Wagman, our CEO. Thank you, Joe. Good morning, and thanks for joining us on the call today. This morning, I will begin our review with a few high-level financial metrics, followed by an update on our operating segments and some macro trends we witnessed in Q2.

Nick will follow with a detailed overview of our financial performance.

Turning to slide 3, Q2 revenue reached a record $2.45 billion, an increase of 33.3%, as compared to $1.84 billion in the second quarter of 2015. Net income for the second quarter of 2016 was $140.7 million, an increase of 17.6%, as compared to $119.7 million for the same period of 2015.

On an adjusted basis, net income was $169.2 million, an increase of 34%, as compared to the $126.3 million for the same period of 2015. Diluted earnings per share of $0.46 for Q2 increased 17.9% from $0.39 for the second quarter of 2015, while adjusted diluted EPS increased from $0.41 to $0.55, an increase of 34.1%. Nick will provide more will provide more specifics from these adjustments, shortly.

During the quarter, organic revenue growth for parts and services was a respectable 5.4%, despite facing tough year-over-year comps and a continuation of the challenging weather dynamics we faced in Q1, globally. Let's now turn to our North America operations.

There is no doubt that the impact of the mild winter in Q1 continued into Q2, as collision claims were down in many states. According to CCC, total year-to-date collision claims were up only 2.3%. In addition, the US market witnessed average temperatures well above historical levels, making year-to-date 2016 the third warmest on record, with only 2012 and 2006 being warmer.

Also, year-to-date precipitation was mixed across North America, with key markets like Pennsylvania witnessing levels 17% below historical averages, while Colorado was 14% above. With that said, it's important to note that this impact was not consistent across North America. The geographic regions of Canada, the Northeast and the Midwest had declines in Q1 repairable claims and organic growth, and the metrics in these regions were soft again in Q2.

Conversely, our central and southeast regions, which had nearly double-digit organic growth in Q1, continued that trend of solid organic growth in Q2. Despite a tough comp and the short-term challenges of weather and subsequent lower claims volume, North America delivered Q2 and year-to-date organic revenue growth for parts and services of 3.1% and 4%, respectively. During Q2, we purchased over 72,000 vehicles for dismantling by our North American wholesale operations, a 2.9% decrease over Q2 2015.

Procurement costs at auction increased over Q2 2015 by 2.7%. But again, we continue to buy a slightly younger vehicle year over year.

For our North American aftermarket business, we continue to see improvements in our total collision SKU offerings, as well as the total number of certified parts available. Each, growing 9.6% and 16.8%, respectively, year over year and in the quarter. In addition, our North American operations improved gross margins during the quarter, which included 40 basis points of improvement from the aftermarket procurement initiatives implemented during 2016.

Lastly, during the quarter, we added a top-10 carrier to our key IQ, proprietary aftermarket parts program. This carrier was a solid win for our North American team, given this carrier was using aftermarket parts, only on a limited basis. We expect to have the entire program fully deployed by November 1, 2016.

In our self-service retail business during Q2, we acquired over 138,000 lower-cost self-service and crush-only cars, which is a 5.3% increase over Q2 2015. Similar to Q1, we increased our self-service procurement to take advantage of the favorable pricing through the higher quality vehicles in this line of business. Nick will provide more details on scrap, shortly.

Turning to our ongoing intelligent parts solution initiative, with CCC, during Q2, the revenue and number of aftermarket purchase orders processed through the CCC platform grew 91% and 66%, respectively, year over year. Briefly, I want to provide an update on our sales force effectiveness and route optimization productivity initiatives discussed on the last call. During the quarter, our sales force effectiveness efforts focused on increasing the level of outbound calls for a sales rep, which increase from 17.2% to 18% per day, a 4% increase sequentially, from Q1 to Q2, 2016.

In addition, in June, we launched an add-on sales program to drive incremental sales per order, with a specific group of SKUs. The early results of this launch are encouraging, with some of the SKUs in the program doubling in sales. Both dollar increase in sales from this program are minimal, the intent is to instill discipline in our sales force to continuously focus on selling deeper into every customer and every order.

Also, during the quarter, we continue to make great strides with the implementation of Roadnet, the Tier-1 provider we selected for the technology component of our route optimization efforts. At the end of Q2, our current utilization rate with Roadnet reached 80%, accounting for over 3,400 vehicles, driving over 285,000 miles and making over 42,000 stops on a daily basis. Thus far with this initiative, our focus has been to introduce our operations to the use of Roadnet.

Once we have reached full installation by year-end, we will begin the arduous task of assessing all the opportunities that exist across our networks and fleet. Combined, this should generate operational efficiencies and incremental margin within our North American business.

Now, moving to our European operations. In Q2, our Europe segment had organic revenue growth for parts and services of 8% and acquisition growth of 57.5%, primarily related to Rhiag, which were offset by a decrease of 3.7%, related to foreign exchange rates. During Q2, ECP grew organic revenue growth for products and services of 9.6%, and for branches open more than 12 months, ECP's organic revenue growth was 7.8%.

I am pleased with this growth, given the extremely wet weather conditions in the quarter. According to the UK Met Office, June was the 11th wettest since 1910, which had a slight impact on road travel in the midst of a normal busy driving season. During the quarter, ECP opened seven new branches, bringing our network to 206 branches.

During Q2, collision parts sales at ECP had year-over-year revenue growth of 18.2%. Also during the quarter, ECP collision entered into a parts agreement with CRM, or the car repair network, a nationwide network of over 170 repairers that combined are responsible for over 18,000 repairs per year. In addition to CRM, we successfully achieved approval status for the supplier of parts to the largest UK repair group nationwide accident repair centers, following a successful tender process.

Lastly on ECP, I'd like to note that while the UK referendum to leave the EU has created some near-term uncertainty and negatively impacted its currency, we do expect that people will largely continue to drive their vehicles. As most of you are aware, the demand for the parts we sell in Europe are related to the total miles driven and the average age of cars on the road. Neither of which should be directly impacted by the results of the referendum.

Frankly, in tough economic times, the value proposition of alternative parts becomes more attractive. Nick will provide additional color on the referendum impact, shortly.

Now, turning to our Sator business. During Q2, Sator had organic revenue growth for parts and services of 4.4%. Also, as mentioned on our Q1 call, our investments in 2014 and 2015 continue to drive margin improvements at Sator, with Q2 recording the highest gross and EBITDA margins achieved since acquiring the business in May of 2013.

Now, an update on Rhiag. Q2 was the first full quarter of ownership of Rhiag. Overall, Rhiag tracked in line with our expectation and is executing on its growth initiatives.

Since we acquired Rhiag in March, it has added 11 new branch locations to the network. We have been very busy with the integration with our teams focused on the purchasing functions. As I speak, we are keenly focused on gathering the necessary data and putting in place the communication lines to achieve the targeted synergies for building a sustainable pan-European procurement function.

As an example, we have learned that Rhiag has certain branded products that ECP will be able to distribute, allowing ECP to augment or replace some of its existing suppliers. Not only will this example reduce the number of vendors and the complexity associated with the current suppliers in the UK, but it will also improve margins. With that said, we continue to believe that we are well along and on the right path to building a company that's unique that will have benefit from our scale and common ownership to create a leading position throughout all of Europe.

Now, onto our specialty segment. Our specialty segment continued its strong performance by posting year-over-year total revenue growth of 18.5% in the quarter, including the benefits of the coast acquisition and strong organic revenue growth of 8%. This continued solid organic growth is largely due to the expansion of our specialty delivery routes, the integration of the Coast business onto our existing delivery fleet, expanded warehouse service levels, a strong SAR and enhanced inventory offerings.

Lastly, specialty continued their integration activities from the coast acquisition by consolidating additional coast distribution centers into our existing network. At the end of Q2, only four of the 17 original Coast warehouses were in operation. As previously mentioned, on April 21, 2016, the Company closed its acquisition of PGW, a leading global distributor and manufacturer of automotive glass products.

With this acquisition, we now have a new reporting segment that Nick will cover further. Regarding their operations, during the quarter, the PGW team secured a manufacturer renewal agreement for an existing OE platform with a new model launch. Also, a one-year renewal contract with a large North American MSO for their ARG business.

In addition to the PGW acquisition during the second quarter of 2016, LKQ acquired a distributor of aftermarket automotive products in Belgium. At this time, I'd like to ask Nick to provide more details and perspective on our financial results and our updated 2016 guidance.

Thanks, Rob, and good morning to everybody on the call. I am delighted to run you through the financial summary for 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 core segments during the second quarter, before touching on the balance sheet and then addressing our revised guidance for 2016.

The short version of our financial performance in Q2, of 2016, is that we had a terrific quarter and taken as a whole, performed ahead of our expectations. While the revenue growth in North America was a bit behind expectations, the margins in this segment were very strong. In addition, the European operations performed well, the two big acquisitions were slightly above target, and we finally got a small boost from a sequential increase in scrap field prices.

To refresh everyone's memory, Rhiag closed in late March and was included for the full quarter, while PGW closed in late April and contributed for only 10 weeks. As Rob mentioned, consolidated revenue for the second quarter of 2016 was $2.45 billion, representing a 33% increase over last year. That reflects a 36.8% increase in revenue from parts and services, partially offset by an 11.2% decrease in other revenue.

The components of the parts and services revenue growth includes approximately 5.4% from organic, plus 32.8% from acquisitions, for a constant currency growth of 38.2%, before backing out the translation impact of FX, which was a 1.4% decline. I will provide a bit more detail on the organic growth of each business as I walk through the segment results. As noted on page 11 of the presentation, consolidated gross margins declined 180 basis points to 37.6%, due entirely to the impact of the acquisitions.

You will recall that when we initially announced the transactions, we highlighted the fact that both Rhiag and PGW have lower gross margins than our historical businesses. Excluding the two big acquisitions, gross margins were actually up by about 70 basis points during the quarter. While consolidated gross margins were down, consolidated operating expenses as a percent of revenue were also about 160 basis points below last year.

Some of that reflects the impact of the different margin structure of the two acquisitions and some of it reflects improved efficiencies in the historical businesses. Segment EBITDA totaled $319 million for the quarter, reflecting a 37% increase from 2015. As a percent of revenue, segment EBITDA was 13%, a 30 basis-point increase over the 12.7% recorded last year.

On a year-over-year basis, we experienced an increase in restructuring cost, primarily related to expenses connected with the integration of our specialty acquisitions. Depreciation and amortization was up almost $23 million, most all of which relates to the impact of the two big acquisitions. The same holds true for interest expense, which is up by about $12 million.

With that, pre-tax income increased 16% over last year. Our effective tax rate during the second quarter was 34.75%, down from the 34.85% in 2015, and consistent with the annual guidance we provided in April. Diluted earnings-per-share for the quarter was $0.46, which was up 18% compared to the $0.39 reported last year.

Adjusted EPS, which is before restructuring charges, the loss on debt extinguishment, the hedging gain, intangible asset amortization and a non-cash inventory step-up adjustment, related to the PGW acquisition, was $0.55 a share, versus $0.41, reflecting a 34% improvement. As mentioned, the impact of scrap was a bit of a tailwind in the quarter, and actually helped earnings per share by about $0.02. Currency fluctuations negatively impacted earnings per share by about a penny during the second quarter, and we anticipate that currencies will have a bigger negative impact in the back half of the year, given the devaluation of the pound sterling, following the Brexit vote.

As highlighted on page 13, the composition of our revenue continues to change due to the 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 impacts the trend in consolidated margins. This became more accentuated now that we have closed both Rhiag and PGW, and you saw a shift in the second-quarter metrics where in North American parts and services revenue accounted for less than 40% of the consolidated total.

With that, let's get onto the details of the operating segments. Revenue in our North American segment during the second quarter of 2016 increased to $1.081 billion, or a 3.4% increase over 2015. This is the combination of a 5.6% growth rate in parts and services, offset by 11.4% decline in other revenue, the latter of which, was due primarily to the sale of our precious metals business at the end of Q2 of last year, and lower prices received for other metals, such as aluminum, platinum, palladium and rhodium, relative to Q2 of last year.

The 5.6% growth in North American parts and services was the combination of 3.1% organic growth and 2.8% acquisition growth, offset by a 30 basis-point FX decline due to the weakness of the Canadian dollar. There is no doubt that the impact of the mild winter had a bleed-over impact on our Q2 revenue. According to CCC, repairable collision claims were down on a year-over-year basis in many of the big population snow belt states, including Massachusetts, Pennsylvania, Ohio, Michigan and Illinois.

Collision parts simply don't sell as well when accidents frequency is down. As Rob mentioned, this was not consistent across North America, as our central and southeast regions, which had excellent organic growth in Q1, continued to report above-average organic growth in Q2. Gross margins in North America during the second quarter were 44.1%, a 170 basis-point increase over 2015.

The benefits of the procurement initiatives started to manifest themselves in Q2 and a lower cost of aftermarket inventories added approximately 40 basis points of improvement to the gross margin of our overall North American operations. Salvage also experienced a slight increase in gross margins, while our self-service operations contribute -- contributed a 110 basis-point increase to North American gross margins, largely reflecting the sequential improvement in scrap steel pricing. You will note that scrap spiked in May, reaching over $150 per ton, but has reversed course and we are now back down into the low $100 range.

With respect to operating expenses in our North American segment, we gained about 30 basis points of margin, compared to the comparable quarter of last year, reflecting improvements in both the wholesale and self-service operations. On the upside, we continue to experience improvements in both fuel and facility cost, relative to last year, but on the downside, we lost a bit of margin related to freight expense. In total, EBITDA for the North American business during the second quarter was $164 million, and as a percent of revenue, EBITDA for the North American segment was 15.2% in Q2 of this year, up 190 basis points from the 13.3% reported in the comparable period of the prior year.

You will recall that in Q1 we indicated that we expected the benefit from our productivity initiatives to pick up as we move through the year. As just mentioned, we saw some benefit in our cost of goods sold, related to the procurement savings of our aftermarket parts inventory. In addition, there are procurement benefits in many other expense categories across North America.

The route optimization effort is now rolled out across 80% of the country, and we anticipate we will begin to see the positive impact of that program begin to accrue over the next few quarters. In total, we estimate that the aggregate benefit of the productivity initiatives during the second-quarter, was approximately $0.01 a share.

Moving on to our European segment, total revenue in the second quarter accelerated to $824 million, up from $510 million, a 62% increase. Organic growth for parts and services in Europe during the second quarter was 8%, reflecting the combination of 9.6% growth at ECP, 4.4% growth at Sator, and 9.9% in Sweden. The impact of the acquisitions in Europe resulted in an additional 58% increase in revenue, with most -- with the most significant amount reflecting the addition of Rhiag.

On a constant currency basis, European parts and services revenue was up 66%. These gains were offset by a 4% decline due to the translation impact of the strong dollar, particularly relative to the pound sterling. As you can see on page 19, the average rate during the quarter for the sterling was about 6% below last year, and [it followed] an incremental 7% to about $1.33 at quarter end, due to the Brexit vote.

More recently, the sterling has been down further to about $1.30 to $1.31. The translation impact of this will absolutely weigh on a reported US dollar results for the rest of the year, probably to the tune of $0.01 in each of the third and fourth quarters.

Gross margins in Europe were 37.4%, a 50 basis-point decline from the comparable period of 2015, largely reflecting the impact of Rhiag. Excluding the impact of Rhiag, gross margins in Europe increased 100 basis points as we continued to benefit from improved procurement in the UK and the internalization of the gross margin from our acquisitions in the Netherlands. As mentioned when we announced the Rhiag acquisition back in December, given the three-step distribution model in Italy and Switzerland, Rhiag has a lower gross margin structure than either ECP or Sator.

The impact was not as significant as initially anticipated, however. After mapping Rhiag's general ledger accounts to LKQ's chart of accounts, and completing the conversion from IFRS to US GAAP, Rhiag had gross margins of about 34.6% during the second quarter. With respect to operating expenses as a percent of revenue, we experienced a 60 basis-point improvement on a consolidated European basis.

We benefited from a 170 basis-point reduction in operating expense due to the addition of Rhiag, which has lower operating expenses as a percent of revenue than either ECP or Sator. We also saw a 40 basis-point improvement in SG&A expense as a percent of revenue, primarily at ECP. Offsetting these gains was 140 basis-point increase in facility and warehouse expense.

As you will recall, we started paying rent and related property costs on the new distribution facility in Tamworth, England, in February. The incremental costs related to this project in Q2 were approximately GBP2.2 million, or about $3.2 million, which reflects a 40 basis-point increase in operating expenses as a percent of revenue for Europe. We were also impacted by new branches in-housed at ECP and an increase in warehouse personnel at Sator related to new product introductions.

European EBITDA totaled $90 million, a 67% increase over last year, reflecting solid performance at ECP and Sator and a positive impact of Rhiag. Excluding the negative impact of FX rates, constant currency EBITDA growth in Europe was 71%. As a percent of revenue, European EBITDA for the second quarter of 2016 was 10.9%, versus 10.6% last year, a 30 basis-point improvement, even after taking into account the impact of the T2 project.

Turning to our specialty segment, revenue for the second quarter totaled $337 million, a 19% increase over the comparable quarter of 2015, the organic growth rate of 8% was quite strong while the impact of the Coast acquisition in August of 2015 added the 11% to revenue growth. Gross margins in our specialty segment for the second-quarter decreased about 160 basis points compared to last year, largely due to the impact of stocking two new specialty distribution centers in Michigan, and Washington state, which were not in operation at this time last year, as well as increased customer volume rebates associated with the higher sales levels.

Operating expenses as a percent of revenue in specialty were up about 30 basis points. Facility expense increased due to certain costs related to the two new distribution centers mentioned a bit ago. On the plus side, we continued to see the SG&A leverage from integrating the acquisitions into our existing network, as well as the benefit of the lower fuel prices.

EBITDA for the specialty segment was $42 million, up 4% from Q2 of 2015, and as a percent of revenue, EBITDA for the specialty segment decreased 170 basis points to 12.4% in 2016, compared to 14.1% last year. Remember, this is a highly seasonal business and you should assume these margins will moderate as we move through the back half of the year.

On page 22, you can see the impact of the acquisition of PGW. Revenue for the quarter was $210 million, which again reflects 10 weeks of activity. You should know Q2 tends to be a very strong quarter for PGW.

Gross margins were 18.4%, but this included a one-time non-cash charge of $10 million, reflecting the write-off of inventory. You may recall that on the Q1 call, I mentioned that under US GAAP, we had to mark the closing date inventory of PGW up to the market value, and this increase would get amortized as a non-cash expense, as we turn the inventory. We anticipated an $8 million to $12 million charge and it came right in the middle at $10 million.

It doesn't affect our adjusted net income or adjusted EPS, but it was a one-time hit to gross margin, diluted net income and diluted EPS during the quarter. Excluding this one-time non-cash item, the gross margin at PGW would have been 23.3%, which is generally consistent with the expectations we highlighted at the time the transaction was announced. EBITDA margins for PGW was 11.1%, slightly higher than the annual level mentioned when we announced the transaction, largely reflecting the seasonality of the business, as Q2 tends to be relatively strong.

Let's move on to capital allocation. As presented on slide 23, you will note that our after-tax cash flow from operations during the first six months was approximately $355 million, as we experienced strong cash earnings and only a moderate increase in working capital. During the first six months of 2016, we deployed a little more than $1.9 billion of capital to support the growth of our businesses, including $102 million to fund capital expenditures and almost $1.8 billion to fund acquisitions.

The acquisitions of Rhiag and PGW were financed by drawing down on our line of credit, and the completion of a euro note offering back in April. We closed the quarter with approximately $273 million of cash, of which $196 million was held outside of the United States, and we had slightly more than $3.3 billion of total debt outstanding. Our net debt was approximately $3.1 billion, and on a pro forma basis, taking into account the impact of the acquisitions, our leverage ratio was about 2.8 times, latest 12-month EBITDA.

At quarter end, total availability under our credit facility was approximately $1.1 billion, which we believe is sufficient to support the continued growth of our businesses. Finally, as you noted in the Press Release, we have provided updated guidance on some of our key financial metrics for 2016. Again, Rhiag closed on March 18 and PGW on April 21, so we will record a tad more than nine months and eight months of the respective results in 2016.

As it relates to the organic growth for parts and services, we slightly reduced the guidance for 2016 to 5.5% to 7.0%, reflecting the softness in the North American year-to-date results following the mild winter. Our range for adjusted EPS, which excludes the after-tax impact of intangible amortization is now $1.79 to $1.87 per share, with the midpoint of $1.83. The increase from the previous midpoint of $1.81 reflects the better than expected Q2 results, partially offset by anticipated headwinds from the currencies in the back half of the year, particularly the pound sterling, lower scraps deal prices than experienced in Q2, and a better appreciation for the seasonality of the two new acquisitions, particularly related to typical Q4 slowdowns.

The new EPS guidance assumes the pound sterling and euro exchange rates of $1.30 and $1.10, respectively, and importantly that scrap remains at current levels, as well. Our assumed tax rate for 2016 remains constant at 34.75%. Our current guidance for cash flow from operations is up a bit to approximately $585 million to $635 million, and the guidance for capital spending is unchanged. At this point, I will return the call back over to Rob to wrap up.

Thanks, Nick. To summarize, we are pleased with our second-quarter performance. As we enter the back half of 2016, I am confident that we will continue to execute on our performance priorities of organic growth, margin expansion, the leveraging of our networks and our passion for delivering our one-stop shop solution and industry-leading fill rates to each of our customers.

We believe that great things are not done by impulse, but by a series of small things brought together. Every day, our 38,000-plus employees work together to build a better company for our customers and shareholders, and for that, I would like to say thank you. This team effort combined with our unique competitive position in each of our business segments, continues to translate into consistent earnings growth for our shareholders, which has allowed us to increase our guidance for 2016, despite the unpredictable weather anomalies we faced earlier this year. With that, Devon, we are now prepared to open the call for Q&A.

(Operator Instructions)

Craig Kennison with Robert W. Baird.

Rob, it looks like -- you mentioned collisions were soft, but are you seeing any impact from growth in the number of cars in your sweet spot that might offset some of the weakness in collision activity?

Yes, Craig, it was soft, as I said in my prepared remarks. CCC reported 2.3% growth, and we came in at 4% for the first half. We still are taking market share.

To answer your question about the cars hitting the sweet spot, we expect that at the end of this year, early 2017. So, as the cars start coming in -- hitting that three-year spot. It's pretty flat right now, year over year. At the end of 2016, early 2017, we start to see it expand.

And then, Nick, to what extent can you quantify the impact of the efficiency projects you are undertaking in North America? I know you've made a number of changes there. I'm wondering what you think the full annualized impact might be down the road.

Again, Craig, as we've mentioned on several calls here, we are going to report that as we go. We are thrilled that in Q2, the total impact was $0.01 a share to the positive. Just to put that in perspective, that's $0.01 a share is $5 million of pre-tax. We would anticipate that we've got that locked in for the rest of the year.

We do anticipate to be able to garner some improved efficiencies as we move through 2016 and 2017, because some of the programs take a little bit of time to ramp up. But, again, if you want to annualize the second quarter, that would be $0.04 a share, or the better part of $20 million.

Thank you.

Thank you. Nate Brochmann with William Blair.

Just to dig a little bit further on the organic growth, clearly weather is what it is. Normally, with some of the positive factors, in terms of the miles driven, more parts per repair, all the things that we've talked about, particularly, and again, with somewhat of the market share gains, I would still normally expect the spread between the industry growth and you guys to be just a little bit wider -- I mean, still positive.

Just wondering if there was anything going on there in terms of the mix of geographies? Again, you pointed out some were stronger, some were a little bit weaker. Also, whether, maybe, the conversion to Roadnet had any bit of -- at all any disruption in terms of that organic growth at all.

Certainly, the geographic differences, Nate, were pretty stark, actually. We were very strong in the south and the central regions. The rustbelt, the winter belt, was very, very light. And it really matched up almost identical with what CCC gave us for claims.

One other thing that CCC pointed out to us was pretty interesting. A later-model car is being repaired now, which is a little bit of a headwind at first, because obviously newer cars will get new parts. There aren't a lot of used parts into the stream yet, as well as aftermarket parts for that matter.

So, we are expecting, when that sweet spot moves our way, we are expecting to see more growth in our -- for those type of products, because there will just be much more demand. Remember, when we talked about that 3 to 8 years, we are bringing in that 2009 model year now car, where it was the lowest [SAR] production of all. So, we'll get through it next year, and we think a lot more cars start hitting the sweet spot.

Okay. Maybe this is a separate question then, but in terms of the conversion over to Roadnet, obviously you'll get a lot of ultimate efficiencies on that, but is there any near-term disruption in terms of your drivers just getting used to that, or in terms of just the different routing schedules?

No, that's gone pretty smoothly, actually. We did a very controlled rollout of that, so no hiccups there.

What we do anticipate is, once we get the whole country rolled out, we'll start looking at the individual routes to really start to drive the efficiencies. So, no real hiccups in that rollout at all.

Nate, just to be clear, there's absolutely no correlation between the distribution of the parts, which is really what Roadnet goes after, and the ultimate sale of the part. The reality is, when collision frequency is down, you are going to sell less parts.

Sure. Totally get that. Okay.

In terms of the procurement effort over in Europe, that obviously seems to be progressing well. Can you talk about, particularly with now Rhiag in the fold, a little bit, in terms of how those discussions are going and how much further, you think, in terms of the opportunity, in terms of those procurement savings?

Obviously, what we are doing now, Nate, is working with each individual manufacturer, and pooling our combined purchases. That's an arduous task to get through, to get them to, obviously, agree to the terms that we're looking for, and pooling all of those orders together. As we add more and more companies, it kind of resets it every time.

The talks are well on the way. We have consolidated our purchasing under one lead person now for Europe. Those talks will continue, and we will continue to obviously work those.

September is the big conference over there; it's called Automechanika. We have meetings with every one of our manufacturers, and we expect some positive results out of those meetings.

Okay, great. And then just a check-the-box question, but any updates on State Farm, in terms of how those discussions are going? Obviously, maybe they got a little bit of reprieve in terms of accident rates here in the first half, but obviously the pressures keep building, I would think.

Sure. I would love to say that top-10 carrier I mentioned in my prepared remarks was State Farm; it was not, unfortunately. It was a carrier who had multiple brands, and only one of the brands was using my aftermarket parts, and now they're bringing the whole company over. So, that's a good win.

As far as State Farm goes, no, nothing new there, Nate. I agree with you that they maybe got a little bit of a reprieve this first half, but Geico continues to take market share, and we keep talking to State Farm on a regular basis.

Okay. Great. Thanks for all that.

Ben Bienvenu with Stephens.

If I look at your organic parts and services guidance for the full year, and I try to infer second-half North American organic growth, it looks like it's something mid-single digits. Is it fair -- which, that suggests a sequential acceleration in the two-year stack in North America. Is it fair to think that the tail for this weather impact starts to dissipate here as we move into the back half?

That's our thoughts, Ben, that we should start to normalize here now. And we are anticipating mid-single digits back to where we projected earlier in the year.

Okay. Great. Then, Nick, if you could, and this is a little bit hand-holding, but are you able to quantify the embedded assumptions around the impact from FX scrap steel on an EPS basis for the balance of the year?

Yes. We believe that if the currency rates stay where they are, basically $1.30 on the pound and $1.10 on the euro, that will [hit us], as I indicated in my prepared remarks, for about $0.01 a share a quarter. So, $0.01 in the third quarter, $0.01 in the fourth quarter.

On scrap, we got $0.02 to the positive in the second quarter. That was an unexpected surprise.

If you look at the chart in the deck, you saw that the scrap prices during the month of May hit just north of $150 a ton. The average for the quarter was $1.38 (sic - see presentation, "$138"), which is up from a $91 in Q1, and now we are back down to $115.

So, if you look at the change last year, from Q2 to Q3, we went from $140 a ton down to $123. And if you went to the Q3 script last year, that was $0.02 a share to the negative.

If you just replay that this year, there could be as much as $0.02. We're hoping it will be a little bit less, just because, we were on a consistent downward trend in scrap pricing last year. This year, it's only the one quarter tick up, and then it looks like back down, so there's a chance it won't be quite as significant. But figure $0.01 or $0.02 in the back half of the year for scrap, as well.

Thanks. That's helpful.

And then I think, Nick, I heard you say that when everything shook out on Rhiag, gross margins in the quarter were at 34.6%, which is materially higher than what was anticipated on a full-year basis. How does that change your expectation for the full-year basis for Rhiag's gross margin profile?

The total doesn't change when you think about the underlying profitability of the Company. It's just -- under international reporting standards, right, you have different costs get reported in cost of goods sold, as opposed to operating expense. So, while the total doesn't change, it's just a shift. Higher gross margins and the offset is in operating expenses.

We anticipated that Rhiag would be at like an 11% EBITDA margin. When we announced the transaction back in December, they were north of that.

For the second quarter, there is seasonality to their business, as an example. In their Italian business, there's three less working days in the back half of the year than the front half of the year. In the Czech Republic, there's two less days. The fourth quarter, which traditionally is a little bit softer in our European businesses, you are going to see that with Rhiag as well.

One key thing, and this is true with PGW as well, is, there have been no changes to the annual plans for either Rhiag or PGW. We are very confident that the accretion expectations that we set forth when we announced those transactions will absolutely occur.

Again, there's a little bit of shift between the quarters, with Q2 being a really good quarter for both those entities. The benefits will be a little bit less in Q3 and Q4. Again, we are thrilled with how both the big acquisitions are performing under the first quarter or so of our ownership.

And, Ben, I just want to add one more thing to what Nick said on the Rhiag deal. We announced -- in my prepared remarks, I said we did 11 branch openings. We're going to do an additional 20 to 25 in the back half of the year as well, because we are so pleased with the way the acquisition is going.

It's going to mimic a lot of what we did at ECP the year we bought that, as well. Very pleased with that acquisition.

That's great. That helps.

Last one for me, if I think about the implications of Brexit, obviously it's pretty nebulous at this point, but how do you think that impacts your acquisition strategy abroad, if at all?

A couple of comments on Brexit -- we do see likely an increase in cost of goods coming into the UK. However -- because of the valuation of the pound sterling -- we do expect all of our competitors to face that, obviously. We expect to pass that through.

In terms of the acquisition strategy, as I mentioned, and Nick mentioned as well, we're going to keep building out the Rhiag network through greenfields, and we will look for acquisitions as well. Likely, probably going to turn down a little bit, we expect; some of the sellers might pull back and wait for the smoke to clear a little bit. But we are watching, and we think it's an opportunity to continue to grow the Business.

Okay. Thanks, guys. Good luck.

Bret Jordan with Jefferies.

Is there a way to look at the North American growth, breaking out traffic versus ticket, maybe? Is there any trend either on inflation or deflation in pricing and/or change in penetration of alternative parts? Trying to get a feeling for that -- the drivers of organic.

Bret, nothing that -- none of the data that we analyzed on a daily, weekly, monthly basis, whether it's the number of calls we are receiving, the number of formal part requests, the number of estimates, conversion rates, et cetera, et cetera, would suggest that there's any substantive changes in the market, as a whole. The reality is, while, in general, miles driven should correlate positively to collision activity, right, number of cars on the road, at the end of the day the key metric is the number of accidents that actually occur. It's been soft in the first half of the year.

I will add to what Nick said, Bret. That CCC did -- we had a quarterly update from them on that chart that we have in our slide deck, our investor deck that shows the part penetration per estimate, another increase by the alternative parts industry for Q2. Continue to take market share from the OEs.

I just think it's a result of just a lower claims volume right now. But when that returns to normal, I think we will see that acceleration come back.

Okay, great. Your comment about a top-10 carrier that you've added -- obviously not State Farm. Are there other top 10s that are underindexed to alternative parts? We've all focused on State Farm, but is there other share to gain there?

That was the last one that had half of the -- actually, about three-quarters of their company not writing in a quarter writing. So, that's it, other than State Farm, of course. Allstate -- when you take a company like Allstate, they only write certified parts, and that's why we always highlight the number of certified parts hitting the marketplace.

They have limited use; in other words, they won't write all parts. But everyone else on the top 10 are writing some form of alternative parts now, other than State Farm, on aftermarket.

Okay. A last question -- you mentioned PGW picked up an MSO renewal. What percentage of PGW's replacement glass business is through MSOs?

It's pretty small, actually -- less than 2%.

Okay. Great. Thank you.

James Albertine with ConsumerEdge.

I wanted to follow up on two key topics. First, you alluded to, in your slides, and apologies if you went into more detail on the prepared remarks. I had to dial in a little bit late -- apologies for that.

You are buying fewer units for slightly higher dollars per unit, so higher quality vehicles, and there is some expected follow-through, I think, as we've discussed in the past, that you can maybe sell those parts for higher prices, as well. Just wanted to get an update on that theme and how it's playing out.

We are intentionally buying a better vehicle. It's slightly newer -- younger, I should say, in age. With that intent of, as that car part shifts to a newer car, Jamie, we want to have, obviously, newer model parts in the inventory.

It is going to plan. We are buying that younger vehicle. We are absolutely getting more gross margin dollars. We run a report here that is showing that we are actually getting more dollars out of the same amount of cars.

And as the units in operation improve, are you starting to see benefits from an inventory turn perspective, as well?

Not really. The inventory, historically, has turned about 3 times a year; there's no big changes there.

Got it. Okay. (Multiple speakers)

On a consolidated basis, it will begin to turn a bit faster, just because PGW has a much higher turn, because their OE business is basically direct delivery to the assembly lines.

And the PGW turns, just from a housekeeping perspective, roughly if you are saying that your core business is 3 times, what's PGW?

Order of 6 to 7 times.

Got it. There's clearly a lot on your plate with respect to Rhiag and PGW integration, the AlixPartners and Tamworth initiatives. I don't want to add more to your plate. But it does seem, from some peer reports in the auto aftermarket, that results have slowed, certainly decelerated on a comp-store sales basis.

I'm wondering if that presents an opportunity for you, as you think about other North American verticals, whether that's wholesale channels or other larger acquisition opportunities. I know you've discussed that as a later decade sort of endeavor, but wondering if you are pulling forward that, or thinking about pulling that forward, at all?

I think that's fair, Jamie. It is opening up new opportunities for us, particularly in the accessory space -- those vertical moves. We have a lot of opportunities there to expand that side of the Business.

We are not in the reman transmission business today. We think that's a great opportunity for us, so we are looking at those opportunities very closely now.

Okay. I appreciate the additional color, and best of luck in the next quarter.

Thanks, Jamie.

The next question is with John Healy with Northcoast Research.

Just wanted to ask you guys just a clarification question. I know you are a little downbeat in just that the weather trends curtailed some of the US growth in the first half. But it seems like you are excited about and pleased how PGW performed in the last two months of the quarter, since the end of April when you took it into your operations.

Is it reasonable to assume, by that, that you are seeing the parts and service business, kind of the traditional parts ex-glass, perform well in May and June, maybe better than what you saw in the first, call it, four months of the year? It is hard to believe that the glass business could be doing really well and then the component part of the Business not doing so well?

Yes. John, PGW had a really good contribution to the quarter. Again, they haven't changed their overall projections for the year, their budgets or their plans. So, they're right on target.

That's a combination of both the aftermarket business and the OE business. Obviously, the OE business plays to different dynamics than our historical businesses, if you will.

The reality is, they are very -- they're different, right? The drivers of our core North American business are different than the core drivers of the PGW business.

Again, we think our core North American business had a great quarter. I mean, the margins were up, gross margins were up, operating margins were up, profitability was up nicely. The organic growth was a little bit lower than I think was expected. But given what was happening with total, the frequency of collisions, all put together, we think we had a terrific first quarter in North America.

I will just add to what Nick said, with the PGW acquisition, we are starting to sell glass in our LKQ facilities. Those reps have access to that. We do like that. Certainly, the distribution side of the Business, to be able to cross sell in our different entities. We're looking at opportunities in Europe as well, so we're very pleased with that acquisition.

Great. I just wanted to ask, you gave the statistic about the benefit you are getting out of the sales force productivity. I think you said 17 calls, or 17.2 calls going to 18 calls, maybe. Where do you ultimately see that going to over time? And how much productivity do you think that you can really drive from an external sales standpoint amongst the sales force?

The biggest benefit we think we can get is just training. By consolidating our call centers, and getting our people better trained and better monitored is the ultimate goal here. We talked about the CCC initiative where more and more is going online as an opportunity as well.

We see more effectiveness with our sales reps, and just being able to better handle call volume as well. The way we are situated now with sales reps spread out all over, we now have the ability to move our phones -- if the phones go down, we can move it to a different call center. We do plan on going to extended hours, so that at 5 in the morning, if someone on the West Coast wanted to order a part, if they are up early, those will ring on the East Coast, and when we close down at 5 o'clock on the East Coast, those phones will be ringing on the West Coast.

We expect expanded service because of the way we're going to be routing the calls and handling the sales force. We do expect some good efficiencies to come out of this.

Thank you.

Our final question comes from Jason Rodgers with Great Lakes Review.

Back to the North American market again, is it possible to separate the percent of revenue generated from collision versus mechanical repair?

Collision today is roughly 30% of our total revenue.

How about the performance of that 30%, for North America, in the quarter? (Multiple speakers)

I think the question you are asking -- is collision -- kind of performance of collision versus mechanical?

Just the North American -- just trying to flesh out the collision performance versus the rest of the Business there.

The collision side actually performed a little bit better than mechanical. The two biggest parts we take off of a salvage vehicle is obviously the engine and the transmission.

On the aftermarket side, we sell no mechanical. Mechanical strictly relates to the salvage side of the Business. The reality is, those parts start selling year seven or so. If you take a look at the requests that we get for engines and transmissions, about 15% of the total requests relate to model years that are 1 to 6 years old. 65% of the requests come from model years that are 7 to 15 years old.

The sweet spot for the mechanical side are older vehicles, and the strong SAR rate over the last several years, it's going to take some time before those cars come into the sweet spot on the mechanical side. A little bit stronger performance on collision versus the mechanical, but nothing -- not significant.

What is the approximate annual revenue generated from the UK collision market?

It's annualizing roughly about $80 million now.

Thanks very much.

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

Thank you, everyone, for your time today, and we look forward to speaking with you in October when we report Q3 2016 results. Have a great day.

Thanks, everyone.

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