LKQ Corporation (LKQ) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation Third Quarter 2013 Earnings Conference 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. 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 2013 financial results. In the room with me today are Rob Wagman, President and Chief Executive Officer; and John Quinn, Executive Vice President and Chief Financial Officer. Rob and John have some prepared remarks and then we will open the call up 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 this 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 risk and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made, except as required by law. Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risks. Hopefully everyone has had a chance to look at our 8-K, which we filed with the SEC earlier. As normal, we are planning to file our 10-Q in the next few days. And with that, I'm now happy to turn the call over to 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 of $0.24 for the third quarter ended September 30, 2013, increased 33% from $0.18 for the third quarter of 2012. As noted in the press release, the third quarter of 2013 and 2012 diluted earnings per share figures both included losses totaling $0.01 per share resulting from restructuring and acquisition-related expenses and the change in the fair value of contingent consideration liabilities. Adjusting for these items in the quarter, diluted earnings per share would have been $0.25, which represents growth of 32% over the prior-year quarter. Revenue for the quarter was a record $1.3 billion, an increase of 27.7% as compared to $1.02 billion in the third quarter of 2012. Net income for the third quarter of 2013 was $73 million, an increase of 36% as compared to $54 million for the same period of 2012. During the third quarter of 2013, the company delivered organic revenue growth for parts and services of 11.7%. I am particularly pleased with our North American organic revenue growth for parts and services, which increased 6.2% despite facing unseasonably mild summer temperatures and lower-than-average storm activity in the quarter. Now for more detail on our North American operations. During the third quarter, we purchased approximately 69,000 vehicles for dismantling by our wholesale operations, which is a 15% increase over Q3 2012. The volume at the auctions is robust and the outlook for supply remains steady. We continue to be pleased with the pricing dynamics we are witnessing at auction despite the recent movement in the Manheim Index. During Q3, vehicle cost was down over 4% year-over-year. With inventory already on hand and a continuation of our current run rate for acquiring cars, we should be well positioned as we approach year end and the start of 2014. In our heavy-duty truck operations, during the third quarter we purchased approximately 1,800 units for parts as compared to nearly 1,700 in Q3 2012 or a 6% increase. In our self-service retail business, during the third quarter we acquired over 128,000 lower-cost self-service and crush-only cars as compared to nearly 106,000 in Q3 of 2012 or a 21% increase. Lastly on North America, during the quarter, we continued to make significant progress with the intelligent parts solution initiative with CCC Information Services. CCC ONE's total repair platform is now available to approximately 2,000 users of the CCC ONE Control, Optimize and Innovate product packages, up from 600 users in Q2. Though off of a small base, the revenue and number of purchase orders processed through the CCC platform both grew over 200% during the quarter. Now turning to our European operations. We continue to be extremely pleased with the performance of Euro Car Parts and its ability to capture market share. In Q3, ECP achieved organic revenue growth of 32.9%, and for branches open more than 12 months the organic growth rate was 24%. As mentioned on prior calls, we approved 15 additional ECP branches to be opened in the third and fourth quarter of 2013. And today, we are on track to hit that target. Through October, we have opened 6 new branches, with the remaining 9 branches scheduled to be opened by year end. Now for an update on ECP's collisions program. During the quarter, we again witnessed strong, double-digit, year-over-year growth of over 80% with our collision parts sales at ECP. I am also pleased with the growth in our collision parts offerings, which today now stands at over 14,000 SKUs, which represents an increase of 22% year-over-year. Also, we are proud to report that we have finalized an agreement to supply collision parts to a second U.K. carrier in our pilot program. This particular agreement is with a top-10 carrier. Under the terms of the agreement, we are the sole supplier of alternative collision parts to the 16 of their carrier-owned shops located throughout the U.K. Given that we are bound by an NDA, we cannot disclose the carrier's name or any specific details of the agreement at this time. To further our commitment to expanding Euro Car Parts' collision parts business, the company announced on August 6, 2013, that it acquired 5 paint distributors with a total of 26 locations throughout the United Kingdom. The acquired distributors include Bee Bee Refinishing Supplies Halstead, JCA Coatings, Milton Keynes Paint & Equipment, Premier Paints and finally, Sinemaster Motor Factors. We believe that, with the addition of paint and an extended range of consumables for the Euro Car Parts' product portfolio, we have taken another important step toward becoming the leading one-stop-shop supplier to the collision repair industry in the U.K. market. These 5 companies provide us with coverage to most of the U.K. market. We believe we are the only nonmanufacturer with a national distribution capability in the U.K. These acquisitions should help further our growing relationship with both insurers and body-shop repairers in the U.K. Lastly, on our European operations, I am pleased with the initial round of purchasing synergies we are witnessing at Sator. Though still in the early stages, I am confident that we are on target to reach the metrics we indicated when we announced the acquisition. Now moving on to development projects and other acquisitions. On August 20, 2013, the company announced that it had formed a joint venture with Suncorp Group to develop an alternative auto parts business in Australia. Measured by premiums, Suncorp Group is Australia's largest insurer. With this joint venture, we plan to develop at least one wholesale salvage yard, one aftermarket parts distribution business and one self-service salvage yard in or near each of the Melbourne, Brisbane and Sydney markets over the next 4 years. As part of that agreement, LKQ will supply aftermarket parts to the joint venture, in addition to contributing our experience and expertise to help establish automotive parts recycling operations. Suncorp will supply salvage vehicles to the joint venture and help establish relationships with repair shops as customers. Suncorp acquires approximately 60,000 salvage vehicles from its policyholders annually, and approximately 37,000 of those salvage vehicles are acquired within 100 miles of the locations we intend to open. Within these markets, Suncorp currently has 25 of their own repair shops and an extensive list of preferred regional repairers. These dynamics can provide -- combine to provide the joint venture with an immediate and cost-effective source of salvage supply and instant body-shop demand on day 1 of operations. With over 12 million passenger vehicles on the road in Australia and a low usage of alternative parts in the market, we believe that this joint venture model presents potential long-term opportunities for our shareholders not only in Australia but other markets, as well. In addition to our U.K. distributors acquisition and the Australian joint venture, during Q3 we acquired 2 additional companies: A specialty automotive parts distributor in the Benelux and a salvage operation in Arizona. I am pleased with the strength of our acquisition pipeline and the opportunities that continues to present across all lines of business and within our geographic segments. At this time, I'd like to ask John Quinn to provide some more detail on the financial results of the quarter.

Thanks, Rob. Good morning, and thank you for joining us today. Hopefully everyone's had a chance to review our press release this morning. As Joe mentioned, we expect to file our Form 10-Q with the SEC in the next few days, so please watch for that, as well. Rob just spoke to the Australian joint venture. I just want to make it clear that we have a 49% interest in that venture. So from an accounting point of view, that means that we will not be consolidating the joint venture. There's essentially no income statement impact from that transaction in Q3 2013. What we expect is, in the future, we will show our share of net income or loss from the venture being reported on an after-tax basis as a single line in the income statement, below the income-tax provision line. If our investment gets large enough, it'll be shown as a separate line on the balance sheet, as a single line. Beginning with revenue. Our Q3 2013 revenue of $1,298,000,000 was an increase of $281 million as compared to Q3 last year or an increase of 28%. This is our second consecutive quarterly revenue which is annualized to more than $5 billion. Our total organic growth of 10.8% was supplemented by 17.4% acquisition growth and we had about 0.5% of negative impact from foreign currency. Parts and services revenue grew organically at 11.7%. And within that category, as Rob mentioned, our European operations continued to perform strongly with 32.9% organic growth. The North American parts and services' organic growth was also a healthy 6.2%. We did benefit from an extra selling day in Q3 2013 as compared to Q3 2012. We saw other revenue increase by $19 million, a 14% increase. We record scrap and core revenue in other revenue. Acquisitions increased other revenue by $12 million. Or -- our organic growth in this line was $7 million positive as volume increases slightly more than offset lower commodity prices and the discontinuance of operations at one of our aluminum furnaces. The trend I mentioned last quarter regarding other revenue continued this quarter. It remains important to the company because of its absolute size and contribution to the profitability of our recycling and self-service businesses. But as a percent of revenue, we saw other revenue fall again in Q3 this year to 11.9% of total revenue as compared to 13.4% in Q3 last year. We will continue to experience short-term impacts from fluctuating commodity prices. But if the revenue trends continue, we expect that those fluctuations will become less significant to the overall business over time. In Q3 2013, revenue for our self-serve business was $110 million or 8.5% of LKQ's total revenue. Approximately 32% of this revenue was parts sales, included in North American's parts and services and 68% scrap and core sales, included in Other revenue. Our gross margin for Q3 2013 was $518 million or 39.9% of revenue, a decline of 40 basis points from our gross margin percentage of 40.3% in Q3 2012. The impact from the European segment was primarily an acquisition-driven decline, whereas the North American impact was an operationally driven improvement. I had mentioned on last quarter's call that we expected Sator's impact to margins negatively both year-over-year and sequentially. We attributed 70 basis points of the year-over-year decline to Sator and a further 20 basis points to the U.K. paint business we bought part way through the quarter. As we've discussed in the past, paint has a lower gross margins. In Q4, we'll see a small additional negative impact from having those businesses the entire quarter. In the North American segment, we saw an 80-basis-point improvement in the recycled margins, as we saw some benefits of our pricing programs and a reduction of the warranty cost. You may recall that we had a negative impact in Q3 2012 from warranty. In North America, we also saw our self-service margins lower and thereby contributing 30 basis points to the lower company margin as the fall in car costs hasn't kept pace with the drop in scrap. Facility and warehouse costs were 8.3% of revenue in Q3 2013, a 20-basis-point improvement over 8.5% in Q3 last year. Our increased European operations are driving that figure lower and, in the U.K. in particular, where the infrastructure is being spread over more branch locations and a larger revenue base. Distribution costs were 8.4% in this quarter as compared to 9.2% in the same quarter last year, an improvement of 80 basis points. Sator has lower distribution costs and that acquisition drove 30 basis points of the improvement. In North America and the U.K., we saw the benefits of higher revenue leveraging these costs. We also saw lower fuel costs contributing about 10 basis points to the group [indiscernible]. Selling and G&A expenses decreased from 11.9% of revenue in Q3 last year compared to 11.8% in Q3 this year, again related to Sator, as higher sales per customer and therefore lower SG&A cost. In total, facility and warehouse distribution and SG&A costs were 29.6% of revenue in Q3 2012 as compared to 28.6% of revenue in Q3 2013, an improvement of 100 basis points. I've mentioned that Sator accounts for approximately 40 to 50 basis points of that change. I mentioned on our last quarterly call that, excluding acquisitions, we appear to be getting operating leverage in these costs, at least for the last 2 quarters. Other revenue, which tends to require a limited amount of these costs, has been decreasing as a portion of our total revenue and actually fell faster this quarter compared to last, making this leverage all the more meaningful. During Q3 this year, we recorded $2.2 million of restructuring and acquisition-related expenses, primarily related to the U.K. paint acquisitions. Depreciation and amortization was 1.6% of revenue during Q3 this year and last. Other expenses net increased to $14.4 million in the 3 months ended September 30, 2013, compared to $8.2 million in the same period last year, an increase of $6.2 million. Interest expense was $7.2 million higher due to higher debt levels combined with the higher interest rates on our senior notes. Expenses in Q3 2013 related to adjustments of contingent consideration were $700,000 as compared to $1.9 million in the same period last year. Our effective borrowing rate for the quarter was 4.5%. Our effective tax rate for the quarter was 32.6% compared to 35.1% in Q3 last year. We continue to see some benefit from lower foreign tax rates as our international business becomes a larger percentage of the company total. In Q3 2012, we had $1.3 million of favorable discrete adjustments to the taxes and, in Q3 this year, we had $2.9 million. On a reported basis, diluted earnings per share was $0.24 in Q3 2013 as compared to $0.18 in Q3 2012. The combination of acquisition-related expenses and contingent purchase price adjustments impacted EPS by $0.01 for both Q3 in 2012 and 2013. On an adjusted basis, the diluted earnings per share was $0.25 this year as compared to $0.19 last year, or an improvement of 32%. Switching to our year-to-date cash flow. Net cash provided by operating activities totaled $341 million for the 9 months ended September 30, 2013, compared to $182 million for the 9 months of -- first 9 months of 2012. During the first 9 months of 2013, our EBITDA increased by $71 million compared to the prior year period. While we generated greater pretax income in 2013 compared to 2012, we had lower cash payments for income taxes of $28 million due to the prepayments made in 2012. Cash payments for incentive comp were $14 million lower in the 9 months ended September 2013. Other operating cash flows exceeded the prior year period, primarily due to the timing of payments of various accrued liabilities, such as value-added tax and interest. Capital spending was $61 million year-to-date, consistent with the same period last year. We've spent $396 million on acquisitions, the largest being Sator, which accounted for $273 million of the total. On the cash flow statement, you will note that we also have a $9 million investment in the unconsolidated subsidiary related to our Australian joint venture. Year-to-date, we increased our net debt by $146 million. We ended Q3 with $1.3 billion of debt and cash and cash equivalents of $107 million. As of September 30, 2013, availability under our credit facility and accounts receivable securitization facility was $1.2 billion, which, together with our cash balances, provides us with total liquidity of $1.3 billion. Then turning to guidance. As we stated in the past, our guidance excludes any restructuring costs and transactions costs, gains, losses, contingent purchase price adjustments, capital expenditures or cash flows associated with acquisitions. At the moment, we're also assuming no material impact to the P&L from the Australian joint venture. Our revised guidance for the full year. Organic growth for parts and services is 10% to 11.5%. We increased this range from 8.5% to 10.5% to reflect the stronger Q3 we reported this morning. We left unchanged our net income and earnings per share guidance. We increased our cash flow guidance from approximately $300 million to approximately $340 million. Our year-to-date cash flow from operations was $341 million. Our inventory levels in North America are actually about $25 million lower than they were at the beginning of the year, so we may have some inventory build between now and year end. That combined with the other potential movements in working capital may affect the quarter depending on the timing of various payments. But we still anticipate being significantly ahead of our original guidance for this metric. We also reduced our expectation for capital spending from between $100 million and $115 million to a revised estimate of $85 million to $100 million. We've managed to control the replacement capital spending. At this point we think a few of our bigger development projects we've budgeted will be pushed to next year. The higher cash flow from operations and the lower capital spending combine to provide a nice bump to our free cash flow for the year. A couple of comments on how our guidance has evolved and how we're thinking about it. On the Q2 earnings call, we said that scrap prices had increased in July and we were expecting that to continue into August. Average scrap prices in Q3 were lower than in Q2, and that was a negative compared to our thinking on the last call. The prices we achieved for scrap in Q3 2013 were the lowest we've seen since Q3 2010. The drop in prices sequentially wasn't large enough to call out as having a material impact on our EPS but suffering a drop when we expected an increase was obviously still a negative to the quarter and potentially to the remainder of the full year. The movement in the Manheim Index also went contrary to what we'd been expecting. On the Q2 call, we said that the index had been falling and that it had reached 119.7 at the end of June. Unfortunately, as opposed to continuing to fall, the index has risen every month since then and it was standing at 122.8 in September. So while we've seen some relief in car buying costs year-over-year, the improvement hasn't been as great as we had expected. Having both scrap prices and the Manheim Index move against us as compared to where they were headed 90 days ago is obviously a short-term negative but it also points to the volatility of these items. If we see these materially improve that could help us get closer to the top of our guidance. And if they deteriorate further, our margins could see a little pressure in Q4. The other item we've discussed internally is the timing of Christmas this year and how the increase of our European business might impact us. Christmas falls on a Wednesday. If our customers take that whole week as a vacation we could see a drop in our revenue and cash flow from operations in December. Last year, we saw our U.K. business decline in December and we would expect to see something similar this year also in the Benelux business. I don't want to dwell on these items, as I believe they'll correct themselves over time. Meanwhile, the fundamentals that impact us look like they are continuing to improve. New car production continues to be strong and that will eventually lead to more late-model vehicle repairs and lower used car prices. Miles driven continues to be a positive this year. The acceptance of alternative parts continues to grow among our customers and the international expansion continues on pace. With the expected -- with the increases in our guidance for cash flow and the reduction of expected capital expenditures, the company continues to be a strong generator of free cash flow, which we expect to continue to deploy on accretive acquisitions. And obviously, we view raising our organic growth guidance as a strong positive. With that, I'll turn the call back to Rob before we open the call to questions.

Thanks, John. To summarize, we are pleased with our third quarter performance. As we approach the end of 2013, I am proud of the achievements we've made thus far. The North American market continues to grow in geography and product offerings and we are far from being fully built out. APU trends are favorable, certified parts continue to grow, vehicle procurement dynamics are improving and macro trends, such as miles driven, unemployment and gas prices are trending in our favor. These dynamics, coupled with our first-mover advantage on technological initiatives such as the CCC ONE integration have positioned our North American operations well for 2014 and beyond. Also, the unique value proposition we offer to insurance carriers and the professional automotive repair industry transfers well outside of North America and we are pleased with the initial results of expanding that message into new geographic markets beyond the U.S. and Canada. We believe that great things are not done by impulse but by a series of small things brought together. Every day, our 23,000-plus employees work together to build a better company for our customers and shareholders. And for that, I say thank you. Manny, we are now prepared to open the call for Q&A.

[Operator Instructions] Our first question is from Nate Brochmann of William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I wanted to talk a little bit on the organic growth, both for North America and Europe. Obviously, throughout the year, it's been steadily kind of improving. On the North American side, do you think that, that's more of your injection of kind of broadening the different parts throughout the different -- throughout the entire network and maybe taking some share? Or is it still a little bit more just because of the APU going up and the insurance carriers' kind of adoption rates improving? And then kind of similar question over to ECP. I mean, I think that continues to exceed everyone's expectations. Is that because of injecting more inventory there as well? Or just blocking and tackling in terms of marketing and sales efforts by the team over there in terms of winning business?

Yes. Certainly in North America, Nate, it's everything you said. It's better acceptance by the insurance company. You left one important part out, is the certified parts. Certified parts are up 24.7% year-over-year. And as you know, many carriers specifically will only use certified parts. So I think it's a combination of better acceptance, certainly taking market share from the industry, as well. But certified parts are playing a role, as well. We are -- each and every month, we see better cross-selling by our reps, selling both salvage and aftermarket. So get our reps train very quickly on the dual systems. We made great strides over the years of having those systems communicate to each other. So I think it's a combination of all those factors. As far as the U.K. goes, yes, it's new product offerings. Certainly the collision parts program has helped add to that. The new store openings. It's amazing how quickly they come up to speed. Basically within 6 to 9 months, they're at breakeven. So great product training over there, new product offerings and really taking market share from the competition in that market, as well. So we're very pleased on both sides of the pond. Nathan Brochmann - William Blair & Company L.L.C., Research Division: And with that, how are you feeling about the rollout potentially of some other product categories over there in the U.K., such as maybe recycled or getting some of the remanufactured business over there? I know that, that probably won't be as big as a percentage as we are in the U.S. just because of the land space but it does sound like there's an opportunity for that. Just wondering what you think maybe in terms of a timeline for that?

We are still looking at those opportunities, of course. As you know, in previous calls we mentioned that we challenged the insurance industry to adopt the aftermarket parts. As we mentioned on the call today, we've got another insurer that came over the wall. So we're down to 6 in the pilot and 2 in the full program. So we're feeling optimistic that we're obviously gaining acceptance of alternative parts. So we will continue to look at those alternatives, being salvage, reman. Obviously, we entered the paint market in August, so we've covered that leg of the stool. So we continue to look at opportunities, Nate, and as far as a timeline goes, nothing written in stone yet but certainly, as the acceptance of aftermarket gets better and better, we'll continue to look at that more and more closely.

The next question is from John Lawrence of Stephens.

Rob, would you comment a little bit about -- you mentioned obviously the progress with the CCC ONE integration. Can you talk a little bit about -- have you been able to dig through some of those orders? And what do those orders look like as far as not only from line items and ticket size, but just some kind of character of what they look like?

Yes. John, we are looking at, obviously, the estimates in the orders that we're getting. One of the things that we're very pleased with -- one of the ancillary benefits that we didn't anticipate was a lower return percentage. It seems that when shops order their own parts, they do -- we just have a better accuracy on what part ordered [indiscernible]. They're substantially lower. So that certainly has been exciting. As far as looking at line by line, we believe most of these parts orders are basically supplemental to the phone call. However, what we haven't been able to determine yet, we're going to go with more research on this. What we suspect is likely happening is that if a shop called in looking for a fender, for example, the rep would take the order and be done. If the shop needs an inner fender, for example, it's a piece of plastic behind the fender, and didn't ask for it, we probably wouldn't have sold it. So we think now that, that part is automatically showing, there's a likelihood that we are getting some additional sales. Really hard to quantify because we don't know if that person would have asked for it on the call. But we're going to do some more research on that but our initial view of this program has been very good. I mean, you can see the growth, the return rates. We do expect the rollout of all 4,000 CCC shops that have this product -- they have many more customers but 4,000 have access to this product, will be done by year end. And we're really encouraged by the growth. So we think there's opportunities there, for sure.

Too early to know what that order cost you compared to a physical order at this point?

It's about comparable at the moment.

It seems to be comparable at the moment. Yes.

And just another question on -- if you look at the Australian joint venture, is there any timeline in that contract joint venture as far as, at the end of 3 years, what happens? Or a first exclusive right to buy more of that? Or how is that language at this point?

It is open-ended. I don't suspect that there -- at 3 years, we'll be having that kind of meeting. This will be a long-term partnership. It's a great partnership and, quite frankly, I can't think of a better way to enter a market than partnering with the #1 insurance company in the country. So -- and this is going to be a long-term deal for us.

And last question, John, how much -- of all the acquisitions mentioned, what kind of run rate and revenue is that?

Sure. In Q3, the acquisitions' annualized revenue was $170 million. And so, call it $42 million, roughly, a quarter. We reported about $30 million of that in Q3. So in Q4, you should see an incremental roughly about $12 million impact from the acquisitions.

The next question comes from Craig Kennison of Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: John, maybe I'll just piggyback the previous question. What is the amount of acquired revenue that is assumed in guidance?

It's the -- incremental for Q4? It's just the acquisition we've announced, which is about $12 million in Q4 incremental revenue. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Is there a total annual figure that you're able to share?

We can dig that up. I don't know if I have it right in front of me. The annualized acquired revenue in Q3 was $170 million. Is that what you're asking? Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Yes. So the Q3 revenue contribution from acquired businesses is $170 million?

On an annualized basis, of which $30 million was reported in Q3. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Okay. That is helpful. Rob, maybe shifting to the Benelux region. You've had Sator for a few months now. I'm curious about what you've learned, what has surprised you and how you see that European model evolving, given you've got different distribution models in the U.K. and Continental Europe?

Craig, as I mentioned on my prepared remarks that we're very pleased with the synergies that we're going to achieve and we're on target to do that. As we noted, there are very little distribution synergies because, obviously, the U.K. is literally an island from the Benelux market. But I'm very pleased, really starting to learn the territory with our customer base and looking at opportunities to add new products, which we are doing. There were some products that were available in the U.K. that have now been introduced into the Benelux market. As far as the future of the rollout and the different distribution models, we continue to do our due diligence on other markets. As I mentioned on previous calls, there is a Sator, an ECP in every country that -- every European country that we are looking at. So there's small regional players, no pan-European distributor. So we will continue to look at those markets, do our due diligence. I think, in time, we will look to expand that model. We do believe different countries have different models, of course, the U.K. being 2-step and the Benelux being 3-step. We certainly see that across different European countries, the 2- and 3-step models mixed in different countries. And we will certainly look at different opportunities as those markets present themselves. But really, really just still in our due diligence phase of which markets present the best opportunities today. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And then finally, I know you're about to embark on a series of meetings with your regions around the country. If you've proceeded with any of those, do you have an early impression on trends and what the outlook for 2014 might look like?

We actually haven't started those. We kick off with our U.K. trip early next year -- next month. So too early to give any feedback.

The next question is from Bret Jordan with BB&T Capital Markets. David Lee Kelley - BB&T Capital Markets, Research Division: This is actually David Kelley in for Brett this morning. A couple of questions and really just first piggybacking off of the previous question on the expectations for Sator. But here going forward, I think you mentioned that business was roughly 70 basis points headwind gross margins in the quarter. And just wondering if you can provide a little bit of color on your expectations for gross margin impact and when it potentially could be accretive to aggregate gross margins? And maybe sequential expectations heading into the fourth quarter, as well?

It's John speaking, David. What we said was that the EBITDA -- I'll talk to EBITDA, our gross margins' are similar impact. Those margins are below what ECP does. Part of that's because of the 2-step versus the 3-step model. What we said at the time of the acquisition is that we think of it in 2 years, 2 to 3 years, we should be able to achieve procurement synergies that should close that gap and have the margins come up to be similar to the ECP margins. I don't know that it would be accretive but I think at least it won't be dilutive within 2 years. Those acquisition synergies seem to be on track, so I don't think we've changed our thinking on that regard. David Lee Kelley - BB&T Capital Markets, Research Division: Okay, great. Just [indiscernible]. So no change on the timeline there. A quick question, as well, on the tax rate, 32.6% or so for the quarter. I think on the second quarter conference call, you mentioned for the full year looking at a plus or minus 35%, given a few basis points either way. Any expectations or change in expectations in the annualized tax rate given the significant growth that continues in Europe?

No. The Q2 -- excuse me, Q3 was benefited both this year and last year for some discrete items, which you record those in the period as opposed to in the blended full year rate. So we don't anticipate, for this year, being materially different from that 35%. It could be a little bit higher, a little bit lower, depending on the mix of the income and the timing of any perms that we happen to have. But I don't anticipate that. The U.K. rate is coming down. That's what drove the discrete item this quarter, primarily. So the U.K. tax rates are indeed going down, which obviously makes the European business more attractive on an after-tax basis. So as that business grows and becomes a little bit bigger portion, you will see our tax rate drift down over the next couple of years but not material at this point.

The next question is from John Lovallo of Bank of America Merrill Lynch.

First question is on operating margin expansion. Over the past couple of quarters, you guys have done a nice job generating, call it, 60 to 70 basis points of year-over-year expansion. And I think historically, that was kind of the target range that you guys had talked about. And this follows a couple of quarters, prior to the past 2, that we've seen some contraction in the margin. I guess the question is, are you feeling more comfortable, call it, the acquisitions in Europe or just better execution in North America? Are you feeling you're a little bit more confident that you could return to, call it, that 60 to 70 basis points of year-over-year expansion on an ongoing basis?

I think we've often talked about the business model and if we can grow organically, call it, 5% to 8% and then supplement that with some acquisition. We've always said it's going to be a bit lumpy but we believe that over time, we ought to be able to get operating income expansion. And I think that model has worked out precisely the way we've described it in the last couple of quarters because we have had the benefit of the acquisitions we did last year. We did 30 acquisitions last year and some fairly significant acquisitions this year. And we've been blessed with some strong organic growth. So I think that model is continuing. We believe that we're going to continue to have organic growth and acquisition activity in the coming years, so it is -- somebody asked about our focus on the budgets. That is one of the discussion points that we have with our field every budget season, and we hammer it home throughout the year, is what we refer to as operating leverage, which means getting an extra dollar of revenue and having more than that marginally following through to the bottom line in terms of the percentage that we normally see. So we still believe in that. It will be lumpy and some of it does get driven by the impact of the commodity prices. The nice thing that we're seeing right now is that commodity prices, although they're falling, we are still seeing that operating leverage come through because when that other income shrinks it puts a little bit of pressure on the operating margin. We have mentioned to overcome that the last couple of quarters, as you've noticed.

That's helpful. And if we think about Suncorp and just kind of the Australian market, would you say that kind of the same barriers to entry exist there? Meaning the need for permits and things of that nature?

Actually, John, I think it's much better. Certainly there are some permits to getting the salvage-yard operations but certainly going in with the insurer as a partner makes the sale part of it easier. I was actually in Australia last week, looking at the operation, potential operations, and I don't think it's going to be a major barrier to get the zoning permits we need. We're also looking at possibly acquisition opportunities, as well, so -- in the event that does become a barrier. But we are optimistic that we can get up and running relatively quickly. It'll take some time but certainly within a couple of quarters, we expect to be -- start selling our first products. Likely be aftermarket initially but the salvage operations will open relatively quickly, I think, considering what we have to get done in the meantime.

Great. I'll leave it there. I'm sorry, go ahead John?

I was just going to say, those cars are all being handled today. There is an end-of-life program for vehicles in Australia right now. So I would think that, with us bringing our professional standards, we should not have a major issue. We really are only talking about 3 major markets that we're going to hit initially.

[Operator Instructions] The next question is from Bill Armstrong of CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: You mentioned miles driven earlier. We saw it was up in July and August. Does that help Q3 at all? Or should we see more of an impact maybe in Q4?

Miles driven for the year are up 0.8% -- I'm sorry, for year-over-year Q3. We do expect some of the trends we're seeing, gas prices certainly stabilized, if not down, in many markets. I anticipate miles driven to continue to be at least steady, if not slightly up, and that certainly won't hurt us, with miles driven increasing.

At this time of year, most of the accidents get repaired within probably 4 to 6 weeks. In the winter time, sometimes the drivables get extended a little bit. We saw a little bit of that probably in Q2, and got some benefit from the winter in Q3. I think most of the increase that we saw last quarter is probably flushed through the system by now. But obviously, the point, I guess, I was trying to make was that the trend, at least, has started to turn a little bit, it appears, from suffering from negative miles driven to a positive.

And one other thing I'd add to that, Bill, going back to Nate's question from the beginning about organic growth. One of the trends that we really like seeing is that SAR [ph] rate improving. These are going to be late-model cars fully insured. So with a SAR [ph] rate over $16 million, and I've seen estimates next year in the $17 million range, that bodes well for both the collision repair industry and our business, in that later-model cars tend to be more insured or insured in the first place. So we think long term the trends are looking better, for sure. William R. Armstrong - CL King & Associates, Inc., Research Division: Okay, great. And in the U.K., this paint distributor that you bought in the third quarter, is that going to be folded into ECP? And will those products be included in these exclusive deals that you've announced with these insurance companies?

They will be -- actually, there were 5 paint deals, by the way, rolled into one. But there were 5 separate companies we did. They will be merged with ECP delivery in many cases. We anticipate 4 closures by the end of this year. And as I said in my prepared remarks, Bill, this gives us virtual U.K. coverage. We may have to open 1 or 2 or 3 branches just to fill out some geographic holes but there will be some integration with the ECP branches and delivery wherever we can. As far as offerings to the paint -- to the insurance companies as part of those deals, those tend to be separate. The U.K. has always had paint deals separately with insurance companies. However, we do plan on leveraging those relationships where we have parts relationships, we don't paint, we'll leverage that and vice versa. So insurers are very much involved in the repair process in the U.K. as compared to the United States. So that will definitely benefit us long-term, those relationships, on both sides. William R. Armstrong - CL King & Associates, Inc., Research Division: Okay. And then just one last question for John, on the guidance. I think you might have addressed this and I might have just missed it but your cash flow from operations guidance is up about $40 million. Your earnings guidance is unchanged. Is the difference just in changes in working capital or is there something else?

It's mainly just the timing of working capital. And I mentioned that our inventories in the North America is actually down year-over-year. We probably will have a little bit of a build later this year. I wouldn't read too much into it, Bill.

The next question is from Sam Darkatsh of Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of questions. At least it appears as though, for the acquisitions you made this quarter, you paid less on a per-sales basis than you did for the beach-head deals. Is that accurate from an EBITDA standpoint, also? And should we continue to expect that your European deals would be at lower multiples?

I think the big deal, the paint transactions, they are a lower-gross margin business, frankly. So you tend to do, when you look at the economics and all of the cash flows -- we're paying on the cash flows as opposed to the revenue multiple. So I think it's safe to say that it's within our normal parameters in terms of the acquisition deals but you're probably right. There probably is a little bit more revenue per dollar of acquisition cost because the EBITDA is less, the percentage of EBITDA. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Shouldn't we see multiples of subsequent acquisitions come down though, as the need for a beach head is diminished and they become more plug-and-play?

Obviously, we always pay as little as we can but it's going to depend on the asset. If we were to enter the salvage market, that would be a new market for us. We tend to try to buy the best companies that we can whenever we enter our market. So whether it's into a new geographic on the continent or whether it's a new product line within the U.K. or the Benelux area, we're going to look for the best companies. We're going to pay based on the cash flows and it's going to be based on the competitive situation, as well.

But I do think it's a fair statement, Sam, that the first guy in the box does tend to get a little bit higher multiple, generally speaking. I can assure you that the second deal we announced in the Benelux did not transpire at the same multiple of the first one. So I think it's a fair statement. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Two more quick questions, if I could. First off, are you seeing the tipping point either occur or imminent -- is imminent to occur where the U.K. insurance premiums are getting cut by those carriers that are participating in your programs?

We have not seen that yet. However, there's still an ongoing investigation by the Office of Fair Trade over in the U.K., looking into premiums. So I think everything's on hold until they get done with their investigation. But we certainly expect that to be the ultimate result at some point. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And last question. It was interesting, you said that your vehicle costs at auction have not reflected what Manheim is suggesting. What's typically, Rob, in your experience, the lag? And might this be a potential upside, if you're not seeing it? And to Q4, where you might not see the uptick in auction vehicle prices?

It's interesting, Sam, we've actually seen Manheim tick up and our costs have ticked down a little bit. So we actually are seeing opposite in a good way. So we do expect that Manheim to tip at some point. And just my talk with various industry players, in particular CCC, who we talk to constantly, who watches the Manheim Index very closely, they were actually a little surprised that it hasn't started to come down. But they are expecting that to start ticking down as these used cars start to hit the marketplace. So we do expect some relief. We said on a previous call, Sam, we saw that correlation on the way up, where Manheim got higher, we were paying more. We're actually pretty pleased with Manheim ticking slightly up last quarter, yet our prices did drop nicely. So we do expect good things coming when that drops. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: As I understood it, John, though your guidance for Q4 at least, assumes that Manheim will provide pressure on vehicle prices, though?

We're assuming it'll stay at the status quo. I guess the point I was trying to make, Sam, was that in Q2 we saw the Manheim coming down, so it turned around and started going back up. We didn't see as much benefit as we anticipated. As Rob said, we did get a little bit of benefit and I think that was reflected in the North American gross margins, a little bit. But right now we're not forecasting Manheim to go up or down particularly.

And to further complicate the matter, Sam, we saw a reduction in scrap prices. So we know some of that decrease in cost was related to scrap, not necessarily Manheim going one way or the other. So we're not sure where scrap's going. I can tell you scrap in October was actually slightly down compared to Q3. I'm not sure where it's going in November, December, but we've seen a little bit more pressure in the scrap market. So that's still up in the air, too. But that's certainly causing some relief at the auctions, in spite of where Manheim is going.

The next question is from Scott Stember of Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Rob, could you talk about, in the U.S., any appreciable difference between what you're seeing on the recycled side versus the aftermarket?

No. Actually, when we look at the AP usages, they're both getting small gains, or minor variations on both sides. But the salvage markets remain strong. We track the number of cars at auctions. They've been very steady. Aftermarket continues to put certified parts in, as I said, and continue to open up new products to us in terms of when new models come out. I think they're both really steadily just moving along. Scott L. Stember - Sidoti & Company, LLC: Okay. And back to the comment you made about certified parts being up in the high-20% range, I guess, through the first 3 quarters of the year. Are you referring to NSF program and other, like, capital programs, as well?

Yes. I remember in all 3, we have our own quality assurance program. That is up, cap is up and NSF is up. And combined, they were up 24.7%, Scott. Scott L. Stember - Sidoti & Company, LLC: Okay, got you. All right, and just last question. I know you have a lot to bite on with -- in the U.K. and the collision side. But can you just remind us again the eventual opportunity over in Western Europe to grow that piece of the business and a timeline on your expectations?

The total carpark is roughly 250 million cars as compared to the U.S. of 245 million. We had our Vice President of Insurance Relations head over to the Benelux market to start initial discussions on the continent with insurers. We're very pleased with at least the initial discussions. And again, one thing we've always liked, Scott, is that the insurers in the U.K. are also the insurers on the continent, many times, many cases. So there's some overlap. So we're convinced, if we can pull this off in the U.K., and again, 80% growth year-over-year. We're very pleased getting that second insurance company into a program has been very good. And certainly we expect to bring this onto the continent in time. As far as a timeline goes, I've instructed our teams over there that let's continue to work on the synergies we have. But I expect to have our insurance team back over there probably spring or summer at the latest to start looking at more substantive programs on the continent.

Manny, we probably only have time for one more quick call. I want to be respectful of everyone's time.

The next question is from Gary Prestopino of Barrington Research.

I'll be brief because of my questions have been answered. But Rob, you called out 4,000 shops by rollout with this intelligent system from CCC. Is that a maximum because these are the better shops that CCC deals with? Or is that just a goal by the end of, say, 2014?

Yes. Gary, those are the shops that have access to this particular product of CCC. They have many, many, many more customers that currently just haven't stepped up to this package. They certainly could grow if CCC is successful in selling that product. They have, I would imagine, 20,000-plus customers -- 25,000-plus body shop customers across the U.S. So they can continue to sell this product and get more into it. So the 4,000 are the ones that have access to it today and they will have access by the end of this year.

Okay, and then lastly, you had called out, about 1 year or so ago or 2 years ago, you had done some kind of integration with Mitchell. Is that kind of the same thing that you've done with CCC and you don't really call that out in the conference calls? Or is that something entirely different?

Very similar, but the difference is that the CCC is interactive within the estimate. And I think honestly, that's why it's been so much more successful than the Mitchell. Mitchell's plan is to integrate that in time. They just haven't gotten that done yet. One last thing on the CCC product that is going to launch in Q4. It's a salvage interaction. Right now, our current program with CCC is basically just the aftermarket. We do plan on getting the salvage part launched by the end of Q4.

That is all the time we have for questions. I'd like to turn the floor back over to Mr. Wagman for any additional remarks.

Okay, thank you, and thank you, everyone, for the time this morning and we look forward to speaking to you in the new year when we report our fourth quarter and full year 2013 results. Have a great holiday season, everyone. Thank you.

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