LKQ Corporation (LKQ) Q3 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Joe Boutross, Director of Investor Relations for LKQ. Thank you. Mr. Boutross, you may begin.

Thanks, Manny. Good morning, everyone, and thank you for joining us today. This morning, we released our third quarter 2011 financial results and provided our updated guidance for 2011. In the room with me today are Joe Holsten, LKQ's acting Chairman and Co-chief Executive Officer; Rob Wagman, President and Co-chief Executive Officer; and John Quinn, Executive Vice President and Chief Financial Officer. Joe, Rob and John have some prepared remarks, and then we will open the call for questions. In addition to the telephone access for today's call, we are providing an audio cast via the LKQ website. A replay of the audio cast and conference call will be available shortly after the conclusion of the call. Before we begin with our discussion, I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made, except as required by law. Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for information on potential risks. Hopefully, everyone has got a chance to look at our 8-K, which we filed with the SEC earlier today. As normal, we are planning to file our 10-Q in the next few days. And with that, I am happy to turn the call over to Mr. Rob Wagman.

Thank you, Joe. Good morning, and thank you for joining us on the call today. We are pleased with the results we reported this morning. Diluted earnings per share from continuing operations in Q3 were $0.33, an increase of 32%, as compared to $0.25 for the third quarter of 2010. Please note that the third quarter 2011 diluted earnings per share results included a $0.01 charge for restructuring and acquisition costs. Revenue reached a record $784 million in the quarter, an increase of 29%, as compared to Q3 2010. Total organic revenue growth for the quarter was 11.1% and 12.3% for the first 9 months of 2011. Organic revenue growth for Parts and Services for the quarter was 7.6% and 8.8% for the first 9 months of 2011. This continued organic parts and services growth is a result of the broadening our product line offerings and the ongoing optimization of our regional distribution network as we continue to integrate newly acquired companies into the system. This has also resulted in continued improvement in our operating expense leverage. Although we continue to face the headwinds of higher cost of salvage, higher gas prices and the continued pressure on miles driven, we announced today that we have adjusted our organic same-store sales growth range to 7% to 8% versus our previous guidance of 6% to 8%. In addition, we changed our earnings guidance, which John will cover shortly. As mentioned on previous calls, the company continues to implement pricing initiatives in our salvage operations to offset some of the operating pressures we are facing. I am also happy to report that we have realized sequential, gross margin improvements in our salvage operations, in part, as a result of these initiatives. In our Wholesale Parts division, demand for LKQ's recycled parts remained strong during the quarter. Organic revenue growth of recycled parts and services was 8.4% for the quarter. Recycled parts revenue growth from acquisitions was 15.7% for Q3. In the first 9 months of 2011, our recycled parts business grew organically 10.1%, compared to the same period in 2010. During the quarter, we purchased 57,000 vehicles for dismantling by our wholesale operations, which is a 15% increase over Q3 2010. As anticipated in our Q2 call, there was a healthy volume of cars at the auction in Q3. With on-hand product and maintenance of our existing rate of vehicle acquisition, we should have sufficient inventory to continue to grow our recycled parts operations. We are also seeing good growth in our wholesale vehicle salvage, as well as our heavy-duty truck operations. Turning to aftermarket. Our aftermarket refurbished revenue increased 25.4% for the quarter, with organic growth rate of 6.9%, a sequential increase from Q2 of 2011. This healthy growth rate can be partially attributed to the availability of more certified parts entering the system, as well as the maintenance of generally robust inventory levels, allowing us to reach the higher end of our traditional in-stock rates. Aftermarket and refurbished revenue from acquisitions grew 18.3%. And lastly, on October 6, the company became the first certified automotive parts distributor under the new NSF International Automotive Parts Distributor Certification Program. This NSF program requires formal corrective action to complaints and an immediate recall plan, if and when necessary. To earn certification, LKQ was required to demonstrate effective record systems and inventory tracking systems to track orders and parts through the supply chain. We are pleased to be the first participant in this program, and NSF has nearly 1,000 parts already certified and a similar amount currently in the process of evaluation for certification. And with that, I'd like to turn the call over to Joe Holsten to talk about other aspects of our business and our most recent acquisitions.

Thanks, Rob. Turning to our Self Service Retail businesses. During the third quarter, we acquired 90,000 lower-cost, self-service and crush only cars, as compared to 75,000 in the third quarter of 2010, an increase of 19.5%. We saw the cost of these cars rise about 37%. Similar to the second quarter, part of the increase in the cost of these cars is a result of higher scrap prices. The business is performing well and continues to present a long-term growth opportunity for our company. Our heavy-duty truck operations. During the third quarter, we purchased roughly 1,600 units for resale or parts, as compared to only 1,100 in the third quarter of 2010. We continue to build out this business, as indicated by 3 heavy-duty truck acquisitions we closed in the quarter, which added locations in California, Washington, Montana and Oregon. These acquisitions highlight our focus on establishing a national network over the next few years. In addition, the focus of establishing a national network was validated by a recent agreement we signed with Navistar to manage their used and surplus parts facility in Marshfield, Missouri. LKQ's heavy-duty business will manage the receipt, storage and the sale of Navistar's surplus and obsolete parts. In addition to the heavy-duty acquisitions, I'd like to touch on other development efforts that we completed during the quarter. We purchased 3 wholesale salvage businesses with locations in California, Idaho and Minnesota. We added to our cooling parts business with the acquisition of a distributor in North Carolina. We picked up 2 self-service businesses, one in Texas and the other in California. And lastly, we acquired one engine remanufacturing business in the state of Washington. In addition to our development efforts during the quarter, on October 3, the company announced the acquisition of Euro Car Parts, the largest automotive aftermarket parts distributor in the United Kingdom. The acquisition of Euro Car Parts represents an important strategic step for LKQ. It's always been our goal to acquire the best companies in our respective markets. Euro Car Parts represents that type of company in the U.K. with its impressive track record of growth, excellent distribution network and strong management team. Euro Car Parts provides an ideal entry point to Europe for LKQ. And lastly, the company announced that Donald F. Flynn, founder of our company and the Chairman of our Board, passed away on October 10. Again, on behalf of our employees and shareholders, I'd like to thank and acknowledge Don for his vision, his wisdom and his dedication to our people and our shareholders. Due to Don's passing, in the interim, I will be the acting Chairman of the Board, pending the Board of Directors electing a permanent replacement for Don. At this time, I'd like to ask John to provide some details on the financial results for the quarter.

Thanks, Joe. Rob has already given you a breakdown of the major year-over-year revenue changes, so I'll just supplement what he said with a few other data points. For Q3, our total organic revenue growth was 11.1%, and we had an additional growth of 17.6% from acquisitions. Rob mentioned that the Q3 2011 organic growth for parts and services was 7.6%. Other revenue, which is where we record our scrap commodity sales, was up 53.3%. Approximately 32.5% of this was organic growth, as commodity prices were higher on a year-over-year basis and because we had higher volumes of scraps and cores. 20.7% of that increase was a result of acquisitions. In Q3 2011, revenue from our self-service business was $76 million or 9.7% of LKQ's total revenue. Approximately 30% of this revenue was part sales included in recycled and related products, and 70% scrap and core sales, which we included in other revenue. Our acquisition revenue growth was driven by the 15 deals we did in the last half of 2010 and the 7 deals we did in the first half of 2011 and the 10 deals we closed in Q3 this year. The Q3 impact on revenue from acquisitions was approximately $107 million. Gross margin for the third quarter of 2011 was 42.6%, which was down 40 basis points from the 43% in the same period 2010. In last quarter's call, I mentioned that we believe we've anniversaried the increase in the cost of salvage cars at auction. Scrap prices and the cost of product in the self-service line of business are still higher year-over-year, so that continues to put pressure on gross margin percentages. But we believe we’ve maintained gross margin dollars on that revenue. Year-over-year, in Q3, we're still seeing some impact on gross margin percentages from lower margin aluminum and furnace operations we acquired in Q3 last year. But we now hit the anniversary of that deal, so it will no longer be a factor, year-over-year. Did see a small negative impact of about 10 to 20 basis points from the AkzoNobel business. It’s probably worth taking a moment to add a few comments on the sequential gross margins, and gross margins increased slightly from 42.4% in Q2 2011 to 42.6% in Q3 2011. It's fair to say that quarter unfolded much like we described in the last earnings call. Cost of cars and scrap prices were relatively stable, so there were limited impacts from those 2 factors. We had an extra 2 months of AkzoNobel, so that was a slight drag on gross margins sequentially, but we're starting to see the impact of some of the pricing programs we've been discussing the last few quarters. We believe that these programs are part of the reason we saw our gross margins improve sequentially. We continue to see improvements in our facility and warehouse distribution and SG&A expenses. In total, these 3 items fell year-over-year and on a quarterly basis from 30.7% of revenue to 29.8%. I mentioned last quarter that this improvement is partly just a function of math because the higher commodity prices drive higher other revenue without corresponding increase in most of these costs. That also reflects the continued leverage of the business. Year-over-year, our distribution costs were up from 8.5% of revenue to 8.7% for the quarter, as the impact of higher fuel costs continue to impact that line item. Distribution costs did improve slightly sequentially, following the 9.1% of revenue in Q2 2011, to 8.7% of revenue in Q3, as we saw fuel prices retreat from their highs earlier this year. I mentioned on our last quarterly call that we expect to have some ongoing restructuring costs related to acquisitions. And on the October 4 call, I mentioned that we'd incur some cost during Q3 related to the Euro Car Parts acquisition. These costs were a total of $2.9 million for the quarter and are broken out on a separate line item in the income statement as restructuring and acquisition-related expenses. Operating income is $85.5 million for Q3 2011 compared to $65.2 million in Q3 last year, an improvement of $20.3 million or 31%. Net interest expense of $4.8 million was $2.3 million favorable to Q3 last year. This improvement is partly -- excuse me, is primarily due to lower interest rates being paid as a result of our new credit facility and lower swap costs, partially offset by higher borrowing levels. Our effective borrowing rate was 3.17% in Q3 2011, compared to 4.92% in Q3 2010. Effective tax rate was 38.7%. On a reported basis, diluted earnings per share from continuing operations was $0.33 in Q3 2011 compared to $0.25 in 2010. The impact on EPS of the restructuring cost and the cost we wrote off in conjunction with the ECP acquisition was approximately $0.01 after-tax. Excluding these 2 items, EPS from [Audio Gap] Over the reported $0.25 for the same period last year. Cash flow from operations was $159 million compared to $145 million in 2010, an improvement of $15 million. The primary driver of the improved cash flow was improvement in net income of $26 million. Offsetting the higher income were higher levels of working capital, particularly the impact of accounts receivable. There were an additional $17 million use of cash compared to 2010 and additional investments in inventory, which were an incremental $7 million higher use of cash. During the quarter, we spent $85 million in cash and acquisitions, bringing our year-to-date total to $181 million. During 9 months, we also issued 1.1 million shares of stock related to the exercise of stock options and equity compensation. That resulted in $13 million of cash, including related tax benefits. At the end of the quarter, debt was $633 million, and cash and cash equivalents were $45 million. We mentioned in our October 3 press release that we amended our credit facility to increase our capacity by $400 million to $1.4 billion. Under this new facility, as of quarter-end, we had borrowings of $618 million and approximately $35 million of letters of credit that are backstopped by the facility, leaving $740 million of availability for borrowings under the credit facility, including $200 million under the delayed-term loan facility -- delayed-draw term loan facility. We did make a draw under the facility to fund the ECP acquisition of approximately $326 million. In early October, after taking into account the ECP funding, we had $414 million of capacity available, including the delayed-term loan availability. Turning to guidance, you'll note in our press release, we revised much of our guidance. In our year-to-date parts and services growth of 8.8%, we've raised the full-year estimate from 6% to 8% to 7% to 8%. In Q4, we expect to see a slowdown in the organic growth because of more difficult year-over-year comparisons. As we've noted previously, Q4 2011 has one less selling day than Q4 2010. We raised our EPS and net income guidance for the year. The revised EPS guidance is a range of $1.38 to $1.43. New range for income from continuing operations is $204 million to $212 million. I wanted to point out that the revised guidance includes the $0.02 we incurred in the debt refinancing in Q1 and also includes the expected positive impact of ECP. This guidance excludes restructuring, integration and deal costs. Based on the acquisitions we completed today, we expect we could incur approximately $1 million of these costs in Q4 2011. Just take a moment to discuss some of the things that could impact us in Q4. Fuel costs did improve a little sequentially since last quarter, but we're still seeing negative year-over-year miles driven. Further decline in miles driven could lower the number of accidents and, hence, our volume. You will recall in Q1, when commodity prices were rising, we mentioned a positive $0.02 impact to our earnings. We also mentioned that if prices fell, there'd be a risk that we could give up that gain. In Q3, we saw scrap steel commodity prices were essentially flat to Q2. However, at this point, we are seeing some softness in the commodity markets, with some forecasts of scrap prices dropping between $20 and $60 per ton. The decline in scrap steel prices would impact our other revenue category. And we estimate for every $10 decrease in average scrap price compared to Q3 2011 decrease our other revenue by approximately $5 million. In our guidance, we’ve built in an assumption that our diluted earnings per share will be negatively impacted by falling commodity prices of $0.01 to $0.02 per share in Q4. This loss occurs because of the timing difference between when we buy cars and when we sell them as scrap. If commodity prices do fall, we'd expect to be able to buy cars cheaper going forward. So this isn't a long-term impact, but it does impact the quarter when prices fall. We also seen the auction environment fairly stable, although we have paid approximately $1,960 per vehicle for the salvage operations last quarter, which is up from $1,870 we paid in Q2, the mix of cars we bought in Q3 was slightly better. So although we paid more for the cars, we expect them to part out for more. Sequentially, we don't anticipate much impact on the gross margins from the cost of salvage. I've already mentioned that we have one less selling day in Q4 2011, compared to Q4 2010. So it's going to cause a bit of a drag in the organic growth and on earnings. And the revised EPS and guidance includes the impact of Euro Car Parts for Q4. Just wanted to make it clear that the guidance that we gave on October 3 for accretion due to ECP of $0.15 to $0.18 for 2012, incremental earnings to 2012 over what we would otherwise have without ECP, including the impact of ECP in Q4. Our accounting teams are working through the U.K., U.S. GAAP differences and how the companies apply those. ECP includes their national warehouse cost as part of the facility costs, whereas we include those as part of our cost of goods sold. When we described ECP's 2010 gross margin as 44%, that was on the basis of their chart of accounts and their application of GAAP. In our chart of accounts, that margin would likely be a little bit lower. We're still working through the accounting. At this point, it's our expectation that the impact will be less than 100 basis points to our Q4 gross margin. Just to be clear, this is simply moving costs from one line item to another and in no way impacts the net income or accretion we expect from ECP. Our guidance for cash flow from operations of approximately $195 million did not change. And the full-year guidance, we continue to expect our capital spending to be between $85 million and $95 million. We've seen a little less capital spending domestically, and that's being offset by some additional spending, as we continue the aggressive build-out of the U.K. footprint. I know many of our listeners are working on their 2012 projections. Our field is currently working on their detailed estimates. In the next 2 months, Joe, Rob and I will be traveling the country to read those plans. After which, we'll be presenting the consolidated results to our board. Until that work is completed, we're not in a position to speak meaningfully in any detail regarding 2012. But we expect to share our thoughts with you on our Q4 earnings call in a few months. I’ll summarize by saying that we were pleased with the way the quarter ended. Again, growth continued at the high end of our range for both aftermarket and recycling, putting up respectable numbers. We saw our gross margins start to improve a bit over Q2 2011. Scrap, fuel and the cost of salvage were all reasonably stable. We saw operating leverage coming back with our operating margins expanding year-over-year and sequentially. We saw our deal flow very strong with 10 deals in the quarter and, of course, the potentially transformational Euro Car Parts deal being completed earlier this month. Thanks to our improving credit profile and the support of our banks, we ended the quarter with liquidity to complete that transaction and still have over $450 million of cash and other availability for future deals. It’s nice to see everything firing in all cylinders. With that, operator, we'd like to open the phones to questions, please.

[Operator Instructions] Our first question is from the line of Nate Brochmann with William Blair & Company. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Wanted to talk a little bit about -- we talk about the impact of miles driven, and certainly, we know that, that's a little bit of a headwind on the business. What's the offset for your business as the average age of cars goes up and people are keeping the cars longer and the amount of repairs on that? How do you think about the balance between those 2 dynamics?

That's a good question, Nate, because I think, we certainly, as cars get older, they obviously -- were going to require more repairs. And I think as people think [ph] of their car's age, they're more likely look to alternative sources of parts. The little bit of headwind in that same scenario, though, is that people, as the cars get older, may tend to drop their insurance coverage a bit, where it's not fully insured. So it is -- certainly, as cars get older, they’re more likely to total, so on the mechanical side of our business, it's a good thing. Obviously, as those parts start to wear and need replaced, we're in a great position. Of course, this is not just a U.S. phenomenon anymore. It's now the same for us in our England operations where we are selling those type of components regularly. So the good news is that, obviously, the repairs become greater as the cars get older. The only bad side of that, I would say, would be the collision side of our business, where cars will carry less insurance and more likely to total. Overall, it's not a bad thing for LKQ, that's for sure. Nathan Brochmann - William Blair & Company L.L.C., Research Division: And when you combine that with the kind of miles driven being down, do you think, net-net, it's a neutral or net-net, miles driven is a little bit of a greater impact than the benefit from the age going up? So how do you think about how those 2 balance themselves out?

I think it's more of a neutral. I think it's, obviously, people will spend more as the cars get older. Newer cars require less repairs. So I think it’s, at best -- at worst, it's a neutral. And maybe slight uptick, considering that people will put more money into those cars rather than replace them. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Great. And then also, as you guys acquire more of kind of what I'll call different services or different categories, in terms of the cooling or the paint, et cetera, as you're getting into that and you're integrating those businesses, how much overlap in terms of your distribution network are you able to leverage in terms of better density?

Yes, the best thing I can do is give you a great example, and that's with the Akzo acquisition back in May. We actually closed late May. They had 40 locations. We had slated to close 30 of them. 10 were going to stand-alone because there weren't any operations close. We've already closed 27 of them. They have moved into our buildings. We are shuttling their parts on our existing trucks. Delivery trucks are the same ones that are going to those shops. So the answer to your question is there's pretty immediate gains that we can realize by putting these smaller niche companies, and the same goes with the cooling. Last couple of cooling deals we have done, they are all fully integrated into our warehouses, where that was applicable, and the merchandise is riding on the existing trucks that were already going to those shops.

Our next question is from the line of Tony Cristello of BB&T Capital Markets. Anthony F. Cristello - BB&T Capital Markets, Research Division: First question, I think it was in John's prepared remarks. You talked a little bit about the organic growth and the tough comparison you have from the fourth quarter of last year. If I recollect, you had an even tougher comparison in the third quarter and you put up a pretty solid number. So I'm just wondering, is there something you're seeing to the start of this quarter that's giving you a bit of pause? Or is it just conservatism? Or is it something with respect to the acquisitions and some of the integration that makes you a little bit more cautious?

The biggest impact’s probably going to be the one less selling day, actually. I don't think that -- the acquisition revenues is going to be recorded as acquisition revenue, so that doesn't really impact the organic growth per se. I don't think we're seeing really any change in the dynamics of the business. Miles driven, we still continues to see negative miles driven [Audio Gap] with respect to that. Anthony F. Cristello - BB&T Capital Markets, Research Division: Okay. And if I look then at the acquisitions, in addition to Euro Car, you talked about some more heavy-duty. And maybe Joe, can you give us an update on the heavy-duty side of the business, where the sort of trajectory is now on that revenue run rate? And are you getting any more traction with sort of building that parts database to sort of springboard to the next level?

Yes, I think our weekly sales have moved up more in the $1.5 million, $1.6 million range. Periodically, we'll post up a couple of million dollar week. So absent any other transactions, I would guess the business will probably budget around $100 million of revenue for 2012. So we're pleased with having put $100 million a year business on the books here over the last 2, 3 years, but with good margins. Our build-out in the west is really in pretty good shape with the recent transactions. We need something in Southern California, and then we'll be looking in the New Mexico market, west Texas. And we'll really be in excellent shape, west of the Mississippi. We've got a couple of cold starts planned on existing LKQ properties to better leverage our existing asset base. And when that's done, our real attention will turn to the Northeast in terms of -- being pretty close to having a national footprint. The visibility of parts does keep improving. As you can guess, it's taking some time in terms of getting good parts descriptions in the systems and the commonality in the database. But several times a week now, we're seeing situations where the salespeople are able to sell out of each other's inventories and complete a customer's needs. I think it will really make buying significantly easier for our foreign buyers to tap into the database or to make one trip into the country and hit all their needs. But maybe the short answer to the question is we think the original business model and philosophy we had to invest in the businesses is holding to be very true. We probably want to get a little bit more structure in place before we start aggressively marketing for fleet, taking entire fleets of vehicles. We've done that on a couple of occasions. And we really need just a little bit more muscle before we can really effectively handle large fleet dispositions, but that's -- I think we're certainly close. And I would think this time next year, we'll be pretty actively going after fleet managers and trying to manage the disposition of the trucks they’re taking out of service. Anthony F. Cristello - BB&T Capital Markets, Research Division: Okay. And you've been very acquisitive collectively, in various, not only with Euro Car in Europe and heavy-duty and the smelter and the coolant and -- what I'm wondering is if we look at your business today, how much embedded cost and infrastructure and integration are sort of compressing the margin, so to speak? And is there a particular quarter or time period when we should think you start to really see that unwind? And so then it's fully integrated and you start to then really maybe get a stairstep, if you will, in terms of your margin expansion?

Tony, it's John. I don't -- Rob mentioned the AkzoNobel deal where we in 2 quarters have taken out 27 out of the 30 locations that we think we're going to get out of the total 40 locations we bought. So we're pretty good at getting the early hits out. The longer-term impact, I just sort of fall back to what we've always said is that the things like putting more -- being able to ultimately get warehouses that are co-located between the aftermarket and the salvage product line and share the delivery routes a little bit more. Those things just take time over, as the leases come up and as the properties become available, and that really is just sort of the long-term view that we've always said, which is operating income expansion of 40 to 60 basis points or 40 to 50 basis points, considering more products through the same warehouses, putting more product through the same distribution network. I don't think that there's -- we haven't identified a huge amount of latent cost that are, if we stop growing through acquisitions, would suddenly come out of the system, I don't think. It's more just a continuous improvement type philosophy, I think. Anthony F. Cristello - BB&T Capital Markets, Research Division: Okay. And maybe one last quick question on that, then. Is it still fair to assume that gross margin sequentially improving you into the fourth quarter, the smelter's anniversary and maybe, for the first time, you see gross margin on a year-over-year basis improve as well?

Yes. In my prepared remarks, I hit on a couple of those things that could impact it. Let me just run through those again for everybody. The salvage, the cost of salvage really is -- has been pretty stable. So I don't think that, that's going to impact us much. But we are seeing some forecasts, and we've seen a little bit of spottiness in some of our markets, not nationwide yet. We have seen a little bit of softening in commodity prices in some of our markets. So just like we mentioned in Q1 that we had a couple of penny benefit from a rise in commodity environment. If commodity prices do end up falling for the quarter, that's going to hit the gross margin a little bit. And the other thing I just try to give everybody heads up on is that ECP, in our presentation on October 4, we talked about them having a 44% gross margin in 2010. That was on the basis of their chart of accounts and their interpretation of U.K. GAAP. We're going through the integration right now and mapping their chart of accounts to ours. It looks like they've got some costs that are facility costs on their financial statements that we, on our chart of accounts, include in the cost of goods sold. There could be an impact. We think it's less than 100 basis points, but it could impact our gross margin, moving those costs up into cost of goods sold from facility and warehouse costs. You haven't seen this yet, but that's coming in Q4. And I just want to give everybody a heads-up on that. Those 2 things could be a little bit of a drag in Q4.

Tony, I'll just add one last thing that, obviously, the pipeline is still active, and there'll be more deals likely coming as well that will have an impact as well…

Right. And I guess, on the gross margin on the glass half full side, some of the pricing programs we've been executing, we continue to tweak those and try to move those along. The things that we did in Q2 -- excuse me, that are an impact to Q3, I don't anticipate those stopping. We're going to continue to work on that.

Our next question is from the line of Scott Stember with Sidoti & Co. Scott L. Stember - Sidoti & Company, LLC: Could you maybe talk about the cadence of pricing during the quarter? We're seeing used car valuations starting to come in. And maybe just talk about why you spoke to the gross margin already for the fourth quarter to general trends from procurement standpoint going forward?

Yes. Obviously, 2 sides of that salvage environment. We'll talk about the salvage first, Scott. The auctions are very robust in terms of inventory. We did predict that last quarter with all the flooding that happened, and the volumes are up substantially. The good news for us is our backlog remains strong, probably one of the strongest we've seen going into winter season. So hopefully, we'll be a little more selective on our purchases and allow us to do some better buying. But cost, let’s just talk a little bit more about the margin. The cost has remained high, as John mentioned in his prepared remarks, but we are digging deeper into every single car, and it is starting to pay off at the gross margin line. And as John just mentioned, some of the activities we have going on in terms of looking for alternatives to get more funds into the system by offsetting distribution cost, et cetera. In terms of used car prices, you're right. The Manheim Index in September was 3.4% lower than a year ago. However, it's still really high in comparison. I think it's going to take a little bit more time to get a little bit -- it has to come down a little more before we see any kind of meaningful relief at the auctions. So don't really anticipate much help there in the short-term. In terms of the pricing that we're doing, in terms of the pricing of the product once it's in the system, as John mentioned, we are continuing to work on the pricing optimization. We track OE prices relative to what they're doing. They are still averaging consistently 1.5% to 2% increases, though we tend to follow right on their heels. When they raise, we're right behind them. So that's providing us a little bit of relief. Our deviation work that we -- controlling our reps from deviating from the price continues. As I mentioned, the fees we're adding to help offset fuel are certainly helping. And we feel confident that gross margin has certainly turned, bottomed out and likely turning in the right direction. So just one last point on the gross margin. We talked about sequential gains. But in the last year and a half, we've announced over 30 deals. And if you took 2 of them out, the paint deal and the smelting deal, actually, our margins are up year-over-year as well, if you just remove those 2 deals. So everything's heading in the right direction as far as we're concerned. Scott L. Stember - Sidoti & Company, LLC: All right. And maybe just talk about we've seen some of the reports that aftermarket parts in particular are taking share from OEM parts. Could you maybe talk about how that's benefiting your business and frame that out a little?

Yes, we only get the annual results from the estimating company as to what's happening to the APU trend, so we don't have that figure yet. However, one thing, the silver lining for our industry is that we know many of the carriers who have reported their earnings already had a tough Q3, mainly from all the flooding and the cat losses that they sustained. So tremendous pressure on them to continue to increase -- decrease their costs, through increased APU. And obviously, we continue to bring more and more parts into the system. The interesting -- I did mention in my prepared remarks about the certification programs. Really, just some stats here that are just amazing. CAPA has been in business now for over 25 years, and they have 4,300 parts, certified parts in the program. NSF who is a little over 1 year old has a total of 951 parts already in the system with 1,000 parts pending. So a lot of certified parts coming into the system and adding to our ability to sell more and more parts to quick [ph] repairer. So getting more inventory, more parts that the insurance companies are demanding, and the fact that they still have a high demand level for those parts. So really good news there as well. Scott L. Stember - Sidoti & Company, LLC: And last question, could you maybe talk about how the government business is doing? I know you guys rolled it out a couple of quarters ago.

Continuing to plug along in that. Our government affairs division is actually helping us open some doors at the state and federal levels. Really, just plugging along. Nothing heroic to report, unfortunately. But steady growth is occurring every single quarter.

And Rob, I just wanted -- I think you mentioned the Manheim Index. It's up year-over-year, but it's down from the peak.

Our next question is from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Before I ask a question let me just my best to the LKQ family on the loss of Don. The first question had to do with the 10 acquisitions you closed recently. Do you have a sense of the revenue impact for that in 2012?

I don't think we're in position to talk to 2012. We talked about $107 million of acquisition impact in Q3. We're probably looking on, cumulatively, all the acquisitions we've done, probably around $80 million impact on Q4, excluding the ECP deal. And we’ve talked about ECP being an incremental $120 million to $125 million. We're probably around $200 million sequential impact from acquisitions. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Can you comment maybe on the trailing 12-month revenue of the businesses that you acquired?

I don't think we've got that handy. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Okay. Next question. Joe, the acquisition pipeline. Can you just comment on the nature of that pipeline, what valuations look like and what your overall appetite is for debt and how you want to finance those acquisitions?

I'll start. This is Rob, and Joe can jump in if he's got anything to add on that. The acquisition environment is -- remains strong and very active. I’ve long said that this is a family-owned business -- industry, where it appears the kids are not as interested in running the parents' business anymore. So the deals continue to flow quite nicely. I just want to talk about the Q3 deals because I know it's pretty indicative of how we're going to move forward here. We had 10 deals. We had 3 salvage, 2 self-service, one aftermarket, 3 HD and 1 reman. Really spread out nicely across our entire portfolio, and that does not include ECP in that, in those numbers. But the best part about the spreading of those acquisitions across our portfolio is it allows for balanced integration. Like, no one team is going to be stressed to bring 10 into their own organization. So allows for quicker integration and the ability to get benefits realized pretty quick. For full service, it's been -- let’s talk about each division separately. The full service will continue to look at strategic tuck-ins. This past quarter, we acquired locations in Sacramento and Minneapolis, St. Paul. Immediate distribution opportunities in cities that we were servicing from hundreds of miles away. They bring -- we continue to look for key markets with great management. One thing that we're starting now, it's kind of new to our business models, what I dubbed a tweener cleaner opportunity, not really a self-serve, not really a full serve. There’s a car in the middle between $900 to $1,300 that we kind of bypass, picked up here and there for both of our full-service and self-serve. We're going to focus on that going forward in 2012, open up a whole new line of business for us potentially. Still looking at distressed opportunities. Those still exist where the families have just had enough and it's time to call it quits. U.K., as far as the U.K., we're really in no rush to bring salvage there. We'll keep our eyes open and look for opportunities if they come along. But really we want to digest what we have. And we do have one greenfield in the works in Southern California. So hopefully, can add some capacity in the marketplace. And the aftermarket, we did that talk a little bit about looking at niche players, the paint and the cooling, and those will continue. And we'll certainly continue our warehouse expansion and upgrades in that particular field. Self-service, really, geographical expansion of new markets will be our targets. Acquisition is our first preference. But in the event we can't, we will certainly do greenfields. In fact, we have 4 greenfields already in process. And finally, what we're doing a little bit with the self-service, we kind of use hybrid yards and our purchase of GreenLeaf a couple of years ago up in Leominster, Mass, we decided to split the yard in half because of the capacity we have there to a half full-service, half self-service to really get a hybrid model. And finally, Joe already talked about the HD, so I'll skip that. But in reman, we added one additional reman facility this quarter. Really, it has us where we need in terms of capacity so probably not looking to do any more reman engines. However, we have mentioned in the past calls that reman transmissions are an interest to us and other reman capabilities. So we'll continue to look for opportunities in the reman. As far -- in terms of paying for them, John, what our strategy will be.

Sorry Craig, I was -- your question was how do we pay for the acquisitions? Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: My question what were the valuations looking like and how would you intend to finance those acquisitions?

I don't think -- in terms of the valuations, nothing is really changed with respect to how we view the deals. We're still looking -- using an EBITDA metric, which is not the only thing we look at, we're still 4x to 5x, 4x to 6x, maybe on the higher end, if we didn't want to stretch because it’s a new market for us or something, but we haven't really changed our valuation metrics. I spoke to the fact that we still have about $450 million of capacity between the cash and balance sheet and the dry powder on the revolver without any additional cash flow coming in. So part of the reason we expanded the credit facility was to allow us to do the ECP transaction. But after we came out of that transaction, we actually ended up with additional capacity because we expanded it by $400 million. And I mentioned, we drew down $326 million in conjunction with that transaction. So we think we're reasonably in good shape here. Between the cash flows out of the business next year and the revolver, we should have adequate capacity to continue our acquisition program if you will. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And if I could ask a follow-on to Tony's question on secure disposal. As you add locations, does that increase your revenue opportunity with existing contracts? Or is it more about winning new contracts that you would not have otherwise been able to serve because you don't have a national footprint?

Yes, I think it’s adding to the footprint allows us to manage more product ourselves as opposed to having to find essentially competitors to take a piece of the action. So yes, I'd say it allows us to kind of grow from the existing business base we have. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And then to follow on that. The Navistar contract, it would seem to be an additional nuance in that you're managing part inventory more than just securely disposing their assets? Is that fair? And is that a new opportunity?

That's fair. And let's hope it's a new opportunity. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: A couple of housekeeping. What was the in-stock rate in the quarter? You mentioned it was better and maybe compare that to the prior quarter.

It was increased actually over prior quarters, both on all 3 lines: salvage, aftermarket and refurb. And it is in the mid-90 range now, Craig. And improvement of about 100 basis points, actually. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Are you including recycled, it's in mid-90 range?

I'm sorry, without recycled. I'm sorry, that's aftermarket. Recycled are in the 70% range. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just lastly, to clarify. The NSF international certification that you had mentioned, does that help you with your ECP acquisition as you try to penetrate that market with certified parts?

Not necessarily. There is a certification body over in the U.K., Craig, called the Thatcham. NSF is not in that marketplace. However, they have shown interest in following us over there. The biggest bang here is in the United States with the NSF certification program. It is putting pressure on the other certifier to put more parts into the program, which is actually happening. And the other nice benefit is how quickly they're getting parts into the program. As I said, they've been around for a little less than 2 years, and they already have, what's in the pipeline, 50% of what their competitor has certified over 25 years. So their strategy, as we've talked to them, is to get more insurers to recognize them as a reputable certifier. And they already have pulled off one of the top 5 carriers to recognize their certification program. So right now, all the tailwinds here are in the States. But there is an opportunity in the U.K. for sure.

And just to be clear, NSF has been around for many, many years. They certify most food processing equipment in the country and internationally, water and processing is really what their origins are. So they do operate in the U.K. and in Europe. They do have international standing. It's just that in the aftermarket auto parts is really their new niche that they're getting into.

That's correct.

Our next question is from the line of John Lawrence with Morgan Keegan. John R. Lawrence - Morgan Keegan & Company, Inc., Research Division: Rob, would you take a look at -- I don't know if this is a fair question. But as you look across the different lines of businesses over the last couple of years, what's the best measurement or why we could look at the customer base itself? I mean, you had at one time more buying aftermarket and now buying -- how many of these customers are buying from different pieces of your business, and are you tracking it that way in terms of the share?

Predominantly, when you look at our history, in 2003, we were just a salvage recycler selling predominately to the body shop industry. As the Internet got some legs, we started seeing some retail sales come out of that side of the business. Of course, then we got into the aftermarket parts business, which brought in more, obviously, collision and spare parts, so focusing on that side of the business. However, the cooling products that they have allow us to get into the mechanical side of the business as well. Currently, we're operating on 2 systems. Our aftermarket is on one system, and the salvage system is on another. And eventually, the long-term plan is to bring everybody on the same system so that we can absolutely sell more products to existing customers on both sides. Interesting, the cooling acquisition we did a couple of years ago brought in a whole new line of potential repairers to us. And that's the general repairer. That particular repairer probably wasn't doing too many engine or transmission jobs, which is what we had with obviously with the salvage. Now the cooling, fix the radiator, fix the condenser, it’s brought in a whole other line of business and potential customers. Then, of course, ECP has brought in, not only that -- expanded that customer base dramatically, but also opened up a new continent to us as well. So in terms of the market share, I think that we don't track that necessarily by market segments. Certainly, the base of who we sell to has expanded greatly in the last couple of years. John R. Lawrence - Morgan Keegan & Company, Inc., Research Division: And secondly to that, what are we seeing in the foreign nameplates as far as the mix of product at this point as you continue to expand the SKUs?

We report that over 90% of our products in the aftermarket are sourced internationally. The vast majority are coming from foreign markets. I believe that was your question, John? John R. Lawrence - Morgan Keegan & Company, Inc., Research Division: Yes, more or less. As you look at the mix of products getting older, more or less on the salvage side of how much you're looking at foreign nameplates these days on the mix?

It's something we don't track. John R. Lawrence - Morgan Keegan & Company, Inc., Research Division: I would assume it's growing, though, as you look at those aftermarkets trends. I would assume it's just another opportunity.

I would agree. I would agree it's probably growing, but it's something we don’t track down to that level.

Our next question is from the line of Mark Mandel with ThinkEquity.

Just a couple of cleanup questions at this point. You had mentioned potential impact from commodity price deflation. I just wanted to understand clearly that this would have a depressing effect on gross profit dollars, but it should have a favorable effect on gross profit rate. Is that correct?

In the long run, yes. Because what happens is, particularly on the self-serve side of the business, when we buy a vehicle, we build in a certain amount of gross margin dollars. As commodity prices rise, we don't -- we're not able to maintain that margin. So if commodity prices increase as they have, we've talked about the fact that, that’s caused some gross margin compression, particularly on the self-service side of business. But, if in Q4, we were to see a drop in commodity prices, it does cause a onetime drop. As we buy a car today, for argument’s sake, for $500 in the self-serve and we build into that the value of the scrap today, if we sell that car 90 days from now and scrap has dropped, we take a little bit of a decrease in our gross margin until we can go back and start buying those cars cheaper. That's what we were trying to point out is -- just like in Q1, we mentioned there was a $0.02 benefit, as commodity prices increased between Q4 and Q1 last year. If that phenomena reverses, we're going to see a little bit of an impact on our gross margin this quarter. It comes and it goes. But ultimately, you're right. If lower commodity prices tend to -- if we can maintain the same gross margin dollars, you see the percentage go up.

Okay, great. Second question, I just didn't quite hear what you said about the average price paid per vehicle. It compared with $1,870 a year ago, but I didn't catch the number for this year.

It's about $1,960.

Okay. great. And then finally, in terms of your pricing initiatives, where I think you’re taking some of the flexibility, some of the initiative away from the regional managers. Where do you stand with that program? And how far along are you?

We have a -- as we've mentioned on previous calls, Mark, we have a vice president of pricing optimization, so we have taken that away from the regions to a certain extent, and we're controlling it more corporately. We do allow the regions to put their input in on regional differences because there are absolutely some products do better in some markets than others. California tends to be a high foreign populated car population as opposed to Detroit, which is really the Big 3. So we do allow the regions to have some input on that, but in terms of the aftermarket, it's completely controlled at the corporation. So we are getting a little more of a pull-through with less regional differences there.

I think Mark might’ve been asking what the lockdown on the [indiscernible] deviation systems changes?

And in terms of the system changes, we are in fact going forward with the reps being locked down -- there's a new release coming up next week on that, actually, that controls the reps from being able to deviate from the pricing as well.

And you expect that to be rolled out over the next 12 months?

Yes, over time that will roll out. We tend to walk before we run. See the impact, making sure it's not causing any negative impact, and then we'll roll it out over the subsequent quarters. With that, we're respectful of your time. We'll let you get to your other calls. Thanks for joining us on this call and we'll look forward to talking to you in a few months as we report our Q4. Thanks, everyone.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.