LKQ Corp (LKQ) 2017 Q3 法說會逐字稿

Welcome to LKQ Corporation's Third Quarter 2017 Earnings Conference Call. I'll now turn the call over to Joe Boutross, LKQ's Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to LKQ's Third Quarter 2017 Earnings Conference Call. With us today are Nick Zarcone, LKQ's President and Chief Executive Officer; Varun Laroyia, Executive Vice President and Chief Financial Officer; and Michael Clark, Vice President of Finance and Controller.

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.

And with that, I am happy to turn the call over to Nick Zarcone.

Thank you, Joe, and good morning, everybody, on the call. I am delighted to share the results of our most recent quarter with you. But before I jump into the review, I would like to introduce Varun Laroyia, our new Executive Vice President and Chief Financial Officer. As many of you read from our press release in early September, prior to joining LKQ on October 1, Varun was the Chief Financial Officer of CBRE's Global Workplace Solutions business, a multibillion full-service real estate outsourcing firm with approximately 40,000 employees in over 50 countries. So from a size, scale and level of complexity, it was quite similar to LKQ. Prior to joining CBRE in 2015, Varun spent close to 10 years at Johnson Controls in a variety of senior financial positions around the globe. And prior to that, he held diverse financial positions both overseas and in the U.S. at Gateway Computers, General Electric and KPMG. In short, Varun brings significant global financial and operational expertise to LKQ, will be an outstanding addition to LKQ's unique people culture, and I'm thrilled to have him on the team.

Now on to the quarter. All in all, we believe this was a strong quarter for our company, and we are very pleased with the results. As noted on Slide 4, consolidated revenue was $2,466,000,000, an 11.7% increase over the $2.2 billion recorded in the third quarter of last year. Total revenue growth from parts and services was 11.4%. Importantly, organic growth in parts and services was 3.2% on a reported basis. And after taking into account the impact of 1 fewer selling day in 2017 compared to 2016, global organic growth was a solid 4.7% on a per day basis. Very few companies in our sector are generating organic growth at this level.

Income from continuing operations was $122 million, an increase of 11.4% as compared to $110 million for the same period of 2016. On an adjusted basis, income from continuing operations was $140 million, an increase of 11.1%. Diluted earnings per share from continuing operations was $0.39 in Q3 of 2017 as compared to $0.35 for the comparable period of 2016. Our adjusted diluted earnings per share from continuing operations was $0.45 compared to $0.41 for the same period last year.

Let's turn to some of the operating highlights. As you will note from Slide 6, total parts and services revenue growth for our North American segment grew 4.3% in the third quarter of 2017 compared to the comparable quarter of 2016. Organic revenue growth for parts and services for this segment was 2.5% on a reported basis. And after taking into account 1 less selling day in North America, organic growth was 4.0% on a per day basis. Of particular note, this solid performance during the quarter was achieved notwithstanding the fact that our Houston and Florida markets were confronted with devastating hurricanes. The Houston area experienced upwards of 50 inches of rain in certain areas, resulting in unprecedented levels of flooding, and the winds in Florida created significant damage and knocked out power in many areas for several days. As a result, our 8 Houston area locations and a majority of our 79 Florida locations were shut down for a few days, resulting in some loss of business both prior to the storms and their subsequent aftermath. Importantly, to LKQ, our employees and their families in both markets are safe, despite many sustaining damage to their homes and having to deal with the challenges of managing their daily affairs. Fortunately, the company didn't experience any significant property or asset loss at any location in either Texas or in Florida.

When taking into account the impact of the storms, we believe organic growth for parts and services on a per day basis would have been even a bit higher if not for these unfortunate events. On the bright side, the negative earnings per share impact from the storms in the quarter was far less than we initially anticipated.

As witnessed for several quarters now, we continue to grow our parts and services revenue faster than the market as a whole. According to CCC, collision and liability-related auto claims on a national basis were actually down 0.4% in the third quarter of 2017, so our per day growth of 4% reflects a significant outperformance. This growth gives us confidence that we are continuing on the right track by offering our customers products that represent a significant value proposition in the midst of ever-increasing repair costs. Our solid revenue growth is also impressive because according to the U.S. Department of Transportation, miles driven in the United States during July were up only 0.8% on a nationwide basis, with miles driven in the Northeast and South Atlantic regions up only 0.2% and 0.4%, respectively.

So when you consider the hurricane impacts, negative repairable claim data and soft growth in miles driven, our North American segment really came through in terms of the top line revenue while, importantly, reporting the best gross margins and EBITDA margins of any third quarter in the past 5 years. I could not be more proud of the effort of the team.

As it relates to the recent hurricanes, according to CCC, there were over 300,000 total loss vehicles between both storms. Similar to Hurricane Sandy in 2012, we believe that surge in storm-related total loss vehicles creates a dynamic for us to increase the volume of our bidding and procurement efforts at auction and, in turn, further enhance our inventory levels to continue the growth of our recycling business.

Turning to our ongoing intelligent parts solution initiative with CCC, the revenue and number of aftermarket purchase orders processed through the CCC platform during the third quarter grew 21% and 25%, respectively, year-over-year. While we are very encouraged by the progress, it's important to recognize this program represents a small part of our North American revenue.

Lastly, we integrated 5 PGW branches into existing LKQ facilities during the third quarter, and we have an additional 5 branch consolidations scheduled for the remainder of the year, and that will bring the total consolidations for the year up to 14. These consolidations will help reduce the cost structure on a going-forward basis.

Moving to the other side of the Atlantic, our European segment achieved total revenue growth of 23.8%. Importantly, organic revenue for parts and services witnessed growth of 4.4% on a reported basis and 5.6% on a per day basis given we lost 1 selling day in the quarter. While all the geographies saw strong results, the operations in Eastern Europe again led the way with double-digit organic growth. Operations open for more than a year accounted for about 2/3 of the 5.6% per day organic growth with the impact of new branches accounting for the balance. Acquisitions added an additional 16.5% revenue growth in Europe during the quarter, while the strengthening euro resulted in about a 3% increase due to foreign exchange.

During Q3, our collision parts revenue at ECP had year-over-year revenue growth of over 16%, so a continuation of very robust activity. Also, our U.K.-based industry relations team during the quarter secured 4 insurance repair agreements that include a combination of collision parts and paint supplies tied to a specific level of repair volumes mandated through a large number of independently owned body shops throughout the U.K. This bodes very well for the continued growth of this product line in the United Kingdom.

During the third quarter, we opened up a total of 6 branches in Europe, including 2 new locations in the U.K. and 4 in Eastern Europe. Also, during the quarter, we rebranded 7 P R Reilly locations in the Republic of Ireland, and they are now on the ECP trading platform.

With respect to the Tamworth warehouse project, which we refer to as T2, our team continues to be on plan and within budget. I am pleased to announce that as of today, 158 of our ECP branches are currently being delivered out of T2, and we expect the full branch network to be serviced out of T2 by the end of November. Following the full branch migration, we will begin the process of rationalizing 2 of our smaller facilities with 1 being closed early in 2018 and the other by mid-2018.

With respect to Andrew Page, on September 14, the CMA released its provisional findings, which indicated that there may be a requirement for us to divest up to 10 of the 99 acquired branches. We are continuing to work with the CMA to address any potential issues with respect to those particular 10 locations. The CMA will announce their final decision on or about November 6. Once issued and assuming the hold separate order is removed or at least relaxed, which we think should be the case, our team in the U.K. will begin to work hard to integrate the operations. But it's important to recognize that integration process is complex and will take several quarters to be completed.

And finally, our Specialty segment continued to perform very well, achieving organic revenue growth of about 2.7% during the third quarter. And after taking into account the 1 less selling day, organic growth for Specialty was a solid 4.4% on a per day basis. During the quarter, we witnessed continued favorable sales trends for vehicles in our Specialty sweet spot, namely light trucks, SUVs and RVs. These positive trends were a bit offset by the impact of the hurricanes in Texas and in Florida.

Our corporate development activities continued in earnest, as evidenced by our acquisition of 11 businesses during the third quarter. These include 4 aftermarket parts distributors in Belgium, a wholesale distributor of light vehicle parts in Poland, a recycled parts and tire business in Sweden, an automotive workshop business in Sweden, a small specialty parts and accessories distributor in Germany and a full service salvage yard in Kentucky. We also purchased 2 services-orientated businesses, including a garage management software business in the Netherlands and a developer of management system software for recreational vehicle dealers in the United States. Also, as announced on Monday, we have entered into a definitive agreement to acquire the aftermarket business of Warn Industries from Dover Corporation. Warn offers a product line of aftermarket winches, hoists and bumpers and has an absolute iconic brand that will enhance the market position of our Specialty segment. This transaction is expected to close sometime in the fourth quarter.

We continue to look for opportunities to grow the breadth and depth of our customer offerings through the addition of successful, well-managed businesses to our family of companies around the globe, and the pipeline of potential transactions is robust.

And I will now turn the discussion over to Varun and Michael who will run you through the detail of the consolidated and segment financial results.

That's great. Thanks, Nick, and good morning, to everyone joining us on the call. I am delighted to be part of the LKQ leadership team, and I look forward to sharing our financial results with you for many quarters to come. Over the past few weeks, I've had an opportunity to meet with several investors and key stakeholders such as our banking partners, equity analysts, insurance companies and others. Invariably, the discussion moved to why I decided to join LKQ. Listen, while a major career change is never simple, it really came down to a few key items. First, I believe the growth potential of LKQ is significant, both organic and through acquisitions. It's not very often that one gets an opportunity to join a company that is a clear leader in its core categories and key markets around the globe and a very significant potential to grow further through acquisition both with the customer offerings and geographic footprint.

Second, the stage at which LKQ is currently fits well into my skill set of having built and operated multibillion-dollar businesses in a variety of sectors and geographies. This affords me the unique opportunity to help build the company into a substantially larger and an even more progressive enterprise in the foreseeable future.

And finally, the cultural fit. This aspect was incredibly important for both the company and me. I truly appreciate the transparent culture, the core values and the unwavering integrity of LKQ. Personally, I thrive in such scenarios as it is core to who I am as a person. Each of these elements taken together created an opportunity that I simply couldn't pass up.

And now on to the results. Nick touched on a few of the key financial stats. I will take you through the more detailed review of the consolidated results, and then I'll turn it over to Michael to address our segment margins for the quarter.

Nick described the trends behind our reported revenue of $2.47 billion, so I will start with our consolidated gross margin. As noted on Slide 13 of the presentation, the consolidated gross margin percentage was flat quarter-over-quarter at 38.8%. We saw some relatively minor ups and downs across our segments that effectively netted out to no year-over-year change. Segment EBITDA totaled $267 million for the quarter, reflecting a $21 million or 8.4% increase over the comparable quarter of 2016. As Nick previously mentioned, there was 1 fewer selling day in the third quarter of 2017 compared to 2016, which negatively impacted our segment EBITDA dollars this period. As a percentage of revenue, segment EBITDA was 10.8% versus 11.2% recorded in the third quarter of 2016. We saw a 50 basis point increase in our operating expenses. This was largely due to our European segment as we continue to experience a negative impact from losses associated with the Andrew Page acquisition and higher operating expenses, mostly related to distribution in our Sator business. Until we receive final clearance from the CMA, we are unable to begin the process of integrating the Andrew Page business, and this has left us with certain cost inefficiencies.

During the third quarter of 2017, we experienced a $2 million decrease in restructuring costs compared to the prior year but a $4 million increase in depreciation and amortization expense, largely due to the recent acquisitions. With that, operating income for the third quarter of 2017 was about $16 million or roughly up 9% when compared to the same period in 2016.

Interest expense was a little less than 2% up quarter-over-quarter as we had similar average borrowings and effective interest rates. Nonoperating items were favorable by about $3 million versus prior year as Q3 2017 included a $1 million gain on bargain purchase primarily related to adjustments to the Andrew Page net asset values. We've pulled this gain out of adjusted income from continuing operations and adjusted diluted EPS.

Other nonoperating income, which increased by approximately $2 million versus Q3 of '16 includes foreign exchange gains and losses and various ancillary incomes such as late payment fees. Pretax income during the third quarter of 2017 was $178 million, up $18 million or 11.4% compared to the prior year.

And then coming on to taxes. Owing to our latest forecast of geographic mix of earnings, we've updated our projected full year 2017 base tax rate down 40 basis points to 34.75% before indiscrete (sic) [discrete] items. The update in the forecasted effective tax rate and the discrete benefit of the stock-based compensation resulted in a reported rate of 32.7% in Q3 2017. The comparable Q3 '16 reported rate of 31.2% applied the same 34.75% base rate but benefited from higher discrete stock plan deductions.

Diluted EPS from continuing operations for the third quarter were $0.39, which was up 11.4% compared to the $0.35 reported a year ago. Adjusted EPS, which excludes restructuring charges, intangible asset amortization, the tax benefit associated with stock-based compensation and other onetime items was $0.45 in the third quarter of 2017 versus $0.41 last year, reflecting a 9.8% improvement.

And finally, stronger scrap and other key method prices added about $0.005 to EPS in the third quarter of 2017. And as we anticipated, after annualizing the effect of the Brexit growth in the U.K., the impact of currencies was minimal during the quarter.

And with that, let me turn it over to Michael to give you further details of our 3 segments: North America, Europe and Specialty.

Thank you, Varun, and good morning to everyone on the call. I'll take a few minutes to address our 3 segments, particularly as it relates to some of the margin dynamics.

Going to Slide 16. Gross margins in North America during the third quarter were 43.6%, up 20 basis points over the 43.4% reported last year. The strong results reflected the benefits of procurement initiatives in our salvage operations and increased margins in our self-service business due to rising scrap steel and other metals pricing, partially offset by reductions in our aftermarket business due to higher customer discounts and input costs.

With respect to operating expenses in our North American segment, we improved operating margin by approximately 10 basis points compared to last year. We saw a benefit of about 40 basis points from eliminating shared PGW corporate costs after the sale of the OEM business in March 2017. Outside of this benefit, overhead expenses were up 30 basis points, which related to various individually insignificant items, mostly in distribution costs. In total, segment EBITDA for North America during the third quarter of 2017 was $153 million, a 9.2% increase over last year. As a percentage of revenue, segment EBITDA was 12.9% in Q3 of 2017, up 40 basis points from the 12.5% reported last year. While the margin was down sequentially in Q3, we had typically experienced a seasonal dip in the third quarter and as Nick noted, 12.9% is on the high end of the range of what we have seen in the third quarter in North America over the last 5 years.

Looking at Slide 18. Scrap prices were up 37% over last year, and moved about 8% higher in Q3 relative to Q2. The benefit from scrap reflects the sequential movement in pricing as car costs will generally follow scrap prices higher or lower over time. So we benefited from the sequential increase in scrap prices this quarter but to a lesser extent than experienced in the first quarter of this year.

Moving on to our European segment on Slide 19. Gross margins were 36.4% in Q3, a 20 basis point improvement over the comparable period of 2016. Our Sator business had a net favorable 60 basis point quarter-over-quarter impact as a result of increased private label sales and, to a lesser extent, the conversion of the Belgian market to 2-step distribution.

As noted on the last call, we've been working on procurement initiatives across our European organization, including negotiating consolidated rebate and discount programs with suppliers, and those efforts produced a 30 basis point improvement in margin in the quarter.

Our ECP operations had a 60 basis point negative effect, primarily due to higher costs related to the T2 national distribution center. Gross margins at Rhiag were down versus the prior year, which is attributable to lower margins at businesses acquired into the group in the last 2 quarters.

With respect to operating expenses as a percentage of revenue, we experienced a 140 basis point increase on a consolidated European basis quarter-over-quarter and 40 basis points sequentially. The factors negatively impacting operating leverage remain similar to prior quarter: the inclusion of Andrew Page, which is still losing money while we operate under the hold separate order; and higher distribution costs in our Sator business.

European segment EBITDA totaled $79 million, a 9.2% increase over last year. As shown on Slide 21, relative to the third quarter of 2016, the pound sterling was flat and the euro strengthened about 5% against the dollar. On a constant currency basis, EBITDA in Europe increased by 5.8%. As a percentage of revenue, European segment EBITDA in the third quarter of 2017 was 8.3% versus 9.4% last year, a 110 basis point decline. Approximately 100 basis points of this decline relates to the impact at Andrew Page and the incremental costs in 2017 related to T2. And a 1 fewer selling day relative to the prior year quarter also negatively impacted our leverage on fixed costs compared to the prior year.

Turning to our Specialty segment on Slide 22. Gross margins for the third quarter increased 10 basis points compared to last year. Operating expenses as a percentage of revenue in Specialty were also consistent with the prior year, down about 10 basis points. We did see an offset in other expenses of 30 basis points due to foreign exchange losses and decreases in miscellaneous income items relative to the prior year. Segment EBITDA for Specialty was $35 million, up 2.9% from Q3 of 2016. And as a percentage of revenue, segment EBITDA was down 10 basis points to 10.6%.

Specialty is a highly seasonal business, and the second quarter is typically our strongest. Consistent with the normal seasonal patterns, we saw segment EBITDA margin decrease 280 basis points sequentially. Similar to prior years, you should assume a further sequential decline in segment EBITDA margin in the fourth quarter.

Let's move on to capital allocation. As presented on Slide 24, you will note that our cash flow from continuing operations during the first 9 months of 2017 was approximately $453 million as we experienced strong earnings while investing in working capital to support our growth. Through September, we deployed $382 million of capital to support the growth of our businesses, including $132 million to fund capital expenditures and a net $250 million to fund acquisitions and other investments. The largest capital changes reflect the net paydown of almost $350 million of debt, largely funded by the proceeds derived from the sale of PGW glass manufacturing business in March of 2017.

Going to Slide 25. As of September 30, we had about $3.2 billion of total debt outstanding and approximately $275 million of cash, resulting in net debt of about $2.9 billion or 2.5x last 12 months EBITDA. We have more than $1.3 billion of availability on our line of credit, which together with our cash yields total liquidity of over $1.6 billion.

At this point, I'll turn the call back over to Nick to cover the guidance update.

Thank you both for that financial overview. With respect to our guidance for 2017, we have made some minor tweaks based on where we are sitting 9 months through the year. Organic growth of parts and services has narrowed a bit to 4.0% on the low end to 4.5% on the high end, reflective of the fact that we are at 3.8% for the first 9 months. Likewise, we have narrowed the range for our adjusted diluted earnings per share to $1.86 on the low end and $1.92 at the high end, increasing the midpoint to $1.89 per share. The corresponding adjusted income from continuing operations is $575 million on the low end to $595 million on the high end. Cash flow from operations has been revised to a range of $600 million to $625 million and capital spending has been revised down to a range of $175 million to $200 million. The updated guidance reflects an effective tax rate of 34.75%, exchange rates in the fourth quarter of $1.30 for the pound and $1.18 for the euro and scrap at approximately $160 per ton.

In summary, Q3 was a solid all-around quarter. These terrific results reflect the collective efforts of our more than 40,000 employees around the globe who are working hard to serve our customers each and every day. I would like to thank each and every one of them for their dedication and for being LKQ proud.

Operator, we are now ready to open the call for questions.

(Operator Instructions) Your first question comes from the line of Ryan Merkel of William Blair.

So first question for me. Anything to call out for the slightly slower daily organic growth in Europe and Specialty? And then sort of second to that, are you expecting that growth to stabilize in the fourth quarter or pick up a little bit?

(inaudible) we're really happy with our growth rate on a per day basis. Europe was at a (inaudible). Ryan, we think those are good (inaudible) across the (inaudible) operation (inaudible). But (inaudible) in the third (inaudible) if you will (inaudible) on a going-forward basis.

Okay. And then just secondly, and the line was kind of coming in and out on my phone. I didn't catch all of that answer. But the second question I had was, North America gross margins, it sort of trended down since the first quarter. I know it's still up year-to-date, but anything going on there? And should we assume stable at 43.6% from here?

(inaudible) North America, as you (inaudible) tends to be a little (inaudible) the business (inaudible) on the chart on that (inaudible) patterns will likely continue. But broadly speaking, staying in this range is a good assumption.

Your next question comes from the line of Samik Chatterjee of JPMorgan.

Nick, I just wanted to check. I know you stopped giving some of the organic growth numbers for the European business by discrete business groups like Rhiag, Sator and ECP. But is there anything you can sort of give in terms of directional ballpark number about how they are tracking -- how they track this quarter?

Yes. If you -- the Rhiag business, again, because that's where all the Eastern European operations are centered, right, had the highest organic growth of the 3 companies, if you will. ECP, good numbers kind of in that mid-single-digit level. Sator was a little bit lower than the exceptional performance they had in Q2. But all in all, we're happy with the growth rates.

And a couple of housekeeping questions. I saw the cash flow from operations came down slightly. What led -- for the guidance for the full year, that came down slightly, what led to that? And when I look at the 2017 EPS guide, the only change from the 2Q seems to be the equity method investment sort of block of $0.02. So what's driving that?

Yes. So on the operating cash flow, it reflects enhanced investment in inventory as we continue to grow our business. So we brought OCF down by about $25 million. Likewise, the capital spending is running a little bit light. So we brought in it -- that -- in that $25 million. So if you want to think about free cash flow, the estimate for free cash flow basically stays the same. And your other question was?

The change in the 2017 guidance, the change in the midpoint of the guidance seems to be driven by a contribution from equity method investment.

Oh, that relates to Mekonomen.

Okay. And that wasn't expected back in 2Q?

We did not explicitly call that out in Q2, you're correct.

Okay, okay. Just a final question here. So you announced the acquisition of the aftermarket business of Dover this week, which you mentioned on the call. If I understand correctly, do they have manufacturing operations? And do you intend to keep the manufacturing operations as well?

So you're talking about Warn Industries, which we purchased -- or are going to purchase, we have not yet closed, from Dover Corporation. Yes, they have manufacturing operations, and yes, we are going to keep those manufacturing operations. The Specialty leadership team has had kind of vertical integration as part of their strategy for quite some time. This is the first opportunity to bring something to fruition. We're only going to do it in very select circumstances, cases where there's a market leader with a strong brand that we can control, a business that operates in a large market with good growth opportunities. What Warn represented was an undisputed market leader. They've got about $140 million of revenue, which is about a 10% market share of slightly more than $1 billion market. They've got an incredible brand identity. Vehicle owners ask for the Warn product by name. Very good margins to this business, Samik, circa 20%. So from a margin perspective, they'll be accretive to both the Specialty margins and our consolidated margins. We believe that there's going to be an opportunity for ancillary revenue flow because, in many cases, you cannot put their product on a factory-issued bumper. So we think there's going to be an opportunity for us to sell a few more bumpers. And importantly, it's going to be a bit accretive to the 2018 EPS. So in this case, we were able to acquire only the aftermarket business. Dover actually retained their OE business, so this was much simpler transaction than, say, the PGW situation. Again, at the end of the day, we think it's a great opportunity. It fits well into our product set. It's got a brand that we can control, and we like being in charge of the distribution. And from a size perspective, it's about 1% of our consolidated revenue, so just keep it in perspective.

Your next question comes from the line of Craig Kennison of Baird.

So you've seen maybe an increase in competition in Europe. We've seen a North American distributor enter the French market. I'm wondering if you see that as validation of your strategy or whether you might see that as a strategic drag to some of the other things you want to do in Europe?

Craig, yes, as everyone probably knows, several weeks ago, GPC, which has the NAPA brand here in the U.S., announced their maiden voyage into Europe by buying Alliance, which was a -- is a large enterprise headquartered in France, significant operations in France, a bit in Germany and then significant operations actually in the U.K. as well. We believe Europe is an outstanding marketplace. We've been asked quarter-after-quarter for the last several years why aren't all the other U.S. companies in Europe, and we could not answer that question. We're just happy that we were the first mover and have the largest market share in the European theater. So we think, yes, Craig, it really goes to show that our strategy in Europe is indeed a good and effective strategy. Look, Alliance is a very good competitor in the markets in which they participate. We don't see any material changes due to the ownership by GPC. They're a very good company. They're a very good operator. They're very disciplined. And at the end of the day, we think that's just fine.

And then real quick, could you just comment on the revenue margin and strategic implications of your RV systems management business and your Netherlands management system?

Those -- just so you know, those are 2 very, very small businesses, okay? Let's take the Europe -- the Netherlands business, right? We sell parts to largely the independent mechanical repair shops. Those folks are very good at fixing cars. They are shops that maybe have 6 bays and 8 mechanics. What they're not good at is actually having a CRM system where they can stay in touch with their customers, blast out emails, promotions for oil changes or brake jobs or whatever the case may be. What this company does is it provides that kind of -- that capability for that independent garage owner. By us providing that software to our customers, okay, it will help them grow their business. And our clear goal is to use that incremental service in helping our customers. They get a bigger piece of their wallet when it comes to parts purchases and the like. Again, in the RV side, again, it's providing an incremental service to RV dealers. And what we intend to do is use that to help drive a higher level of revenue and get a bigger share of the dealers' wallet when it comes to the types of parts that we sell.

(Operator Instructions) Your next question comes from the line of Bret Jordan from Jefferies.

Could you just talk a little bit about the impact on cost of goods from what you're going to see on the salvage auction coming out of the hurricanes? I mean, 300,000 cars, fresh water damage, a lot of truck and SUV mix, maybe the magnitude of the benefit and the timing?

Yes. So the best way to track that is our experience coming out of Sandy back in 2012. The reality is there's going to be a lot of good salvage coming to market. We can't buy it all. We can't dramatically up our purchase of cars because we need to have a place to put the cars. You can't put 40 acres of cars on a 30-acre salvage yard, okay? And that's true with us. That's true with everybody. So we think as these cars come to market, we're going to be able to buy a high-quality car, and the average revenue per vehicle will be a bit higher because it's not like the front end is gone or the back end is gone, right? The reality is more parts are going to be available for sale. And we think we can get some good pricing. Again, it's supply and demand, Bret, right? And with a flood of cars coming to the market, at the end of the day, that should help a bit. There's not going to be massive changes, massive gains from a cost of goods sold perspective. But on the margin, over the next several quarters, there should be a little bit of a benefit flowing to all the recyclers, if you will, ourselves included, just from the incremental volumes coming to the market.

Okay. And then a question on alternative parts penetration. You talked about auto claims rates being down 0.4%, yet pretty strong organic growth. Do you have a feeling for what the [AI] penetration might be now?

Our sense is it's probably nudging up slowly. The 4% per day in North America, actually our salvage and what I would call our core aftermarket product, and then think about Keystone product and the box and glass were all nicely above the 4%. Obviously, we're still continuing to feel a little bit of softness and a little bit of negative comparisons in things like paint, cooling and wheels, and then our smaller businesses like our heavy-duty truck business and reman business were kind of in the low single digits. So again, we think that based on our experience -- we can't speak to the rest of the industry. But based on our experience, APU is probably nudging up a little bit here in 2017.

Okay. And did you give an ECP comp number, the stores opened 12 months or longer for just ECP?

No. Again, we're moving towards reporting European growth on a segment basis given that we now are operating in 15 different countries. We've significantly added to our presence in places like Belgium and Ireland and Poland and the like. And -- but again, the positive trends continue.

Your next question comes from the line of Ben Bienvenu of Stephens.

I want to ask, Nick, you gave some sense of magnitude of the Warn acquisition. Can you help us think about what other product categories you could bolt on, on either the Specialty Business or North American business that you're not currently in today?

Well, again, on the Specialty side, we're a distributor at heart. There are other really strong brands in that Specialty space that if they came for sale and if they had those characteristics that I described, large markets, leading market shares, the ability to add and grow into adjacencies, we could add. I can't give you a specific product type, Ben, at the moment because it could be really any of the product types that we sell out of our Specialty business. And as you know, I think last year, we sold 275,000 different SKUs including parts from 800 different vendors. But it would have to be a leading brand that really made a difference.

Fair enough. And then pivoting to Europe. Andrew Page continues to be an incremental drag on the results. Can you talk about some of the key factors driving the OpEx headwinds? I recognize that you're not able to integrate the business today, but it looks like there's a light at the end of the tunnel potentially in the event of potentially gaining regulatory approval. Can you give us a sense of the critical path for synergy capture?

Yes. So the -- if you think about Andrew Page, they're losing money. Their revenue under prior ownership had decreased because they weren't investing in the business, they were not investing in inventory. But they still had a national distribution center that they had to cover the cost on. They still have a corporate office that they have cover the cost on. And that's why they're losing money. I mean, those overhead costs relative to the revenue rate are just too high. Ultimately, with T2, we don't need their national distribution center, okay? And while we need some of the people in their corporate office, we don't need a total duplication. And so those were the real opportunities are. Michael, you mentioned, I think, in your call the impact of Andrew Page on margins for Europe.

Yes, it was 70 basis points on the operating expenses at the -- on the European segment.

Yes. So 70 basis points on Europe overall just from Andrew Page, which means if we get it to breakeven, we'd pick up 70 basis points in Europe. And we're going to get it to profitability, but it's going to take some time, as I mentioned in my comments. The integration isn't measured in weeks or months. It's measured in quarters.

Your next question comes from the line of James Albertine from Consumer Edge.

Welcome to Varun. So wanted to just -- as maybe a follow-on to that previous question, that was more focused on Andrew Page, and I think we could sort of see the light at the end of the tunnel Ben mentioned. But the pressures that you note, I think it was 60 basis points of margin pressures in the Benelux, a little less clear to us at least what the path forward is for correcting that. Can you maybe shed some more light or dig in a little bit deeper there as to what needs to happen and how long that will take?

Yes. Certainly. Jamie, this is Varun Laroyia. Let me try and answer that one to give you a more complete picture about the European OpEx headwind. So apart from the T2 and the Andrew Page piece that Nick just mentioned, the other one was in the third quarter, as we called out, we acquired some businesses in the Sator business, again, going from a 3-step to a 2-step distribution methodology. Now with that -- with those set of acquisitions, there is a slightly different higher cost structure, but essentially that gets offset by a higher gross margin profile also for those businesses. So that's one aspect to kind of take into account just in terms of what took place in the third quarter with the Sator acquisitions, the BCC entities and also car systems in the Netherlands. That's point number one. The other one to think through is as we kind of move forward and we begin to integrate those recently acquired businesses into the continental mainland platform, we do expect there to be further synergies. So as you think about a single ERP versus running a multitude of those, that certainly gives us the benefit also. So apart from the Andrew Page and the T2 piece that was mentioned previously, this was the other aspect that I'm hoping you get a little bit more insight into.

And similar with Andrew Page, we're talking about weeks and months, not quarters here in terms of the moving to a single ERP and transitioning kind of to the broader European platform?

Yes. Listen, so I -- as you could have noted, I spent quite some over in Europe and had done similar acquisition integration and stuff. Listen, as much as I would love to say it's a matter of weeks and months, swapping out (inaudible) systems takes a little bit longer than that. We certainly have started the work on that front. Listen, optimistically, I'm looking at the back end of '18 into '19 to be able to kind of simplify some of those recently acquired businesses. So it has slightly longer tail. But again, we have a great game plan. We've got a great leadership team out there, and they've got the initiatives laid out pretty well in terms of how they're going to tackle this.

Your next question comes from the line of Michael Hoffman from Stifel.

This is Brian Butler for Michael. Just one question on the Warn acquisition. Now that you've kind of stepped into that vertical integration and become somewhat of a competitor to some of your distribution partners, have you had any pushback or feedback from those product providers?

We have not, though it was just announced on Monday of this week, so it's only 4 days ago. The reality, this is a product that the vehicle owners demand by brand. And I think the other distributors who are selling the product are still going to want to sell the Warn product because of the brand identity. It's a very good product for everybody in the distribution of specialty product.

And how about the products that used guys sell through your own partners? I mean, is there, I guess, any pressure then to possible -- of those partners either not selling through you anymore but going someplace else because you're now a direct competitor?

No, we don't anticipate any significant change there.

Your next question comes from the line of David Stratton of Great Lakes Review.

When we look at the planned automatic transmission repair business scheduled to start in 4Q, how is that coming along? Are there any updates that you could give us in regard to that?

Yes. You're talking about the -- our announcement a couple of quarters ago of greenfielding a reman transmission business in Oklahoma City. And the update from our leadership team just on the last few days is they anticipate the first transmissions will be coming off the reman line in the first or second week of November. So we're pretty much right on track. Now it's going to start slow but build from there over the next several years.

Great. And then when we talk about the impact of the hurricanes, you mentioned pretty thoroughly the impact on salvage. Will there be any impact to scrap steel prices that you anticipate going forward where there might be a lower scrap price in the future?

We don't anticipate any significant moves. Obviously, all those total loss vehicles are sooner or later, once we and the other recyclers are done with them, going to head to the metals processors to get recycled and the like. So there will be some incremental volume. But when you think about the total amount of steel that is recycled in this country and used around the globe, we don't see any material pressure. As scrap -- our average scrap prices last week were right in the $160 a ton range, which is down a little bit from maybe a month ago but not materially.

(Operator Instructions) There are no further questions in the queue at this time. I turn the call back over to the presenters.

So we thank everyone for participating on this third quarter call. We do know that this is a very busy time for all of you, and we appreciate your time and attention. Again, we think we had a great third quarter. We're looking forward to a good fourth quarter, and we'll talk to you at the end of February with our year-end results. Thank you, everyone.

This concludes today's conference call. You may now disconnect.