LKQ Corporation (LKQ) Q1 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation First Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Joe Boutros, Director of Investor Relations. You may begin.

Thanks, Devin. Good morning, everyone, and thank you for joining us today. This morning, we released our first quarter 2014 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 audiocast via the LKQ website. A replay of the audiocast 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. Also note that guidance for 2014 is based on current conditions, including acquisitions completed through March 31, 2014, and excludes the impact of restructuring and acquisition-related expenses; gains or losses related to acquisitions or divestitures, including changes in the fair value of contingent consideration liabilities; loss on debt extinguishment; and capital spending related to future business acquisitions. 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 today. And 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. In Q1, revenue reached a new quarterly high of $1.63 billion, an increase of 35.9% as compared to Q1 2013. Net income for the first quarter of 2014 was $104.7 million, an increase of 23.7% as compared to $84.6 million for the same period of 2013. Diluted earnings per share of $0.34 for the first quarter ended March 31, 2014, increased 21.4% from $0.28 for the first quarter of 2013. Please note that adjusted diluted earnings per share for the first quarter of 2014 would have been $0.35 compared to $0.29 for the first quarter of 2013 after adjusting for a net loss resulting from restructuring and acquisition-related expenses, loss on debt extinguishment and the change in the fair value of contingent consideration liabilities. Organic revenue growth for parts and services was 10.3% for the quarter. I am particularly pleased with our North American organic revenue growth for parts and services of 6.4% despite the extreme weather we faced throughout January, a month when miles driven was down almost 5% in some of our key North American markets. Now more detail on our North American operations. During the first quarter, we purchased over 72,000 vehicles for dismantling by our wholesale operations, which is an 8% increase over Q1 2013. As we progress into Q2, the volumes and pricing at auctions remain steady despite the recent 2.2% spike in the Manheim Index we witnessed during Q1. With inventory already on hand and a continuation of our current run rate for acquiring cars, we should have sufficient inventory for our recycled parts operations. In our self-service retail businesses, during the first quarter, we acquired approximately 120,000 lower-cost self-service and crush-only cars as compared to over 128,000 in Q1 of 2013 or roughly a 7% decrease. The reason for the decrease was that price and demand for vehicles in certain markets exceeded our acceptable cost given the prices of scrap and other metals. And now we'll comment about APU. In early April, CCC released their annual 2013 APU number, and we ended the year at 37%. Briefly, I would like to put some context around this number. The 37% reported by CCC measures APU as a percentage of parts dollars and not unit volume trends. Unit volume trends are important metric for our industry. With the aging carpark, measuring APU as a percentage of parts dollars does not tell the whole story about what is actually occurring in the marketplace. Why? Simply put, the higher the OE cost, the larger share of parts volume the OEs will appear to capture. To get a more accurate representation of the penetration of APU, we obtained data from CCC on a per-unit basis. From 2009 to 2013, the number of parts being replaced on a per-estimate basis has increased from 7.8 to 8.6. This trend bodes well for the replacement parts industry. Of that increase in replaced parts, CCC data shows that approximately 75% of the time, alternative parts are being written, as opposed to just 25% for OEM. As a result, on a per-unit basis, the alternative parts industry is continuing to take market share from the OEs. Because of the aging carpark, however, the increase in the per-unit share of APU is offset by the lower prices paid for parts that get installed on older vehicles. With the SAAR rate improving, we believe that the carpark will inevitably become younger, and assuming we maintain the higher per unit share of APU, we expect the percentage of parts dollars to begin to increase as well as we begin to sell more expensive, newer model year products. And lastly, in our North American operations, I wanted to update everyone on a recent initiative that could bode well for our aftermarket parts opportunity with State Farm. In close conjunction with the rollout of PartsTrader, State Farm has announced that it has authorized the use of aftermarket certified chrome front and rear bumpers. While these are still early days, we are encouraged by the fact that State Farm is looking at the aftermarket parts industry once again. As of now, they have not given any indication of a broader program. However, we obviously view this as a positive move after nearly 15 years on the sideline. Looking at these particular part types, year-over-year sales of aftermarket chrome bumpers were up 30% in January, 29% in February and 33% in March. While some of this increase may be weather-related, we believe that some of the increase is related to State Farm's new policy regarding aftermarket certified chrome bumpers. We continue to have open dialogue with State Farm, and we hope that they will continue to expand their use of our aftermarket product offerings. Now turning to our European operations. We continue to be extremely pleased with the performance of Euro Car Parts and its ability to increase market share. In Q1, ECP achieved organic revenue growth of 25.3%. For branches open more than 12 months, ECP's organic revenue growth was 18.4% during the first quarter. Also during the quarter, ECP opened 11 of the 20 new branches we have scheduled for 2014. I continue to be impressed with the quality and depth of ECP's management team and their ability to execute our strategic plan in the U.K. market. Now an update on ECP's collision program. During the quarter, we again witnessed strong double-digit year-over-year growth of approximately 60% with our collision parts sales at ECP. I am also pleased with the growth in our collision parts offerings in the first quarter, which today stands at 20,000 SKUs, which represents an increase of 8.5% year-over-year. In addition, during the first quarter, ECP added an additional 2 insurers into their pilot program, bringing our total carrier relationship to 15. Also during the quarter, ECP signed an agreement with a self-insured rental car company to supply collision parts to the shops that they subcontract with for the repair to their fleet. And now moving on to acquisitions and development initiatives. On January 3, 2014, the company completed its acquisition of Keystone Automotive Operations, Inc. Please note that we have broken out the segment separately in our financials as Keystone Specialty. As previously announced, Keystone Specialty is a leading distributor and marketer of specialty equipment and accessories in North America. Keystone continues to deliver on many of our operational expectations, and I am pleased with the initial synergies we are seeing with our warehouse and administrative integration, product cross-selling initiatives, logistics and our shared cultural focus on growth. We have integrated a total of 11 Keystone cross-stock facilities into our existing wholesale operations since we closed the deal in January. In Q1, I had the opportunity to visit one of the Keystone's nationally recognized vendor shows, and I saw firsthand the potential for cross-selling our existing SKUs, such as paint, reman engines and muscle car parts, to Keystone's customer base. And I expect this favorable trend to continue in the future quarters. In addition to the Keystone Specialty acquisition, during the first quarter of 2014, LKQ made 4 additional acquisitions, including a supplier cores and new products for the automotive aftermarket with locations in 9 states; a business in South Carolina with 1 wholesale salvage yard and 1 self-service retail operation; a paint distributor in the United Kingdom; and a paint distributor in Canada. And now a quick update on ACM Parts, our Australian joint venture with the largest insurer in the market, Suncorp Insurance. In late March, ACM acquired Frank's Auto Parts, a salvage yard operator with 2 yards servicing the New Wales (sic) [New South Wales] market. Upon closing, the JV immediately began dismantling some of SunCorp's total loss vehicles at both locations. Clearly, this acquisition springboards our recycling efforts in Australia and provides a talented management team that will enhance our efforts in developing our build-to-suit footprint in the market. Also at ACM, on April 11, NSF International announced that they are expanding their automotive parts certification expertise to Australia. NSF has developed new protocols for aftermarket automotive parts that specifically address the Australian market. This announcement further validates our belief that, on a global basis, insurance carriers, consumers and collision repair shops benefit from a competitive marketplace with a high-quality option for collision repair parts that are affordable and that come with a limited lifetime guarantee. And lastly for our continental European operations at Sator. On April 15, 2014, we announced the signing of letters of intent to acquire 5 Netherlands companies, all of which are customers of and currently serve as distributors for Sator. Our preliminary estimate of the aggregate annual revenue of these 5 companies, after netting out existing sales among the companies and Sator, is approximately $180 million. These transactions are subject to, among other conditions, negotiation by the parties of definitive agreements and authorization under the Dutch merger control procedure. We are currently targeting the completion of the transactions in the second or third quarter of 2014. 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. As Rob noted in our press release tables, we've broken out Keystone automotive operations as a segment for reporting purposes, which we are calling Specialty. While we believe the business has many of the characteristics of our existing North American business, including sharing customers, facilities and economic characteristics, for the time being, we're calling it a separate segment as we believe there is interest in the standalone Specialty results. So for now, we have 3 reportable segments: North America, Europe and Specialty. And I'd also point out that in Q1 2014, we saw LKQ reach a number of significant milestones. It was our first quarter with revenue reaching an annualized run rate over $6 billion, with our Q1 revenue annualizing at a hair over $6.5 billion. It's the first time we exceeded $200 million in EBITDA in a quarter and the first quarter where we exceeded $100 million of net income. Giving you the specifics on the quarter and beginning with revenue. Our Q1 2014 revenue of $1,626,000,000 was an increase of $430 million as compared to Q1 last year or an increase of 36%. For Q1, our total organic revenue growth was 6%, and we delivered an additional 29% from acquisitions, with foreign exchange adding a further 1 point. Rob mentioned that the Q1 2014 organic growth for parts and services was 10.3%. And within that, we saw our North American operations grow organically 6.4% while the European segment grew 25.3%. We completed 5 acquisitions in Q1 2014, with Specialty being the largest. Our Q1 2014 acquisitions contributed $197 million in revenue in Q1 2014, of which Keystone Specialty accounted for $177 million. The total revenue acquired in Q1 on an annual basis was $790 million. Total change to other revenue, which is where we record scrap commodity sales, was negative 10%. This was mainly due to negative organic growth of 19%, offset by 9% acquisition-related growth. We saw decreases in our self-service car volumes and in aluminum furnace and precious metal businesses. The average price we received for scrap steel was approximately 7% lower year-over-year at $224 per tonne [ph] this year versus $242 per tonne [ph] in Q1 2013. Other revenue was 9.6% of total revenue as compared to 14.5% for the same period last year and has continued the trend of becoming a lower percentage of and, therefore, less significant to our total revenue. In Q1 2014, revenue for our self-serve business was $105 million or 6.4% of LKQ's total revenue. Approximately 33% of this was parts sales included in North American parts and services revenue, and 6.7% -- excuse me, 67% was scrap and core sales included in other revenue. A year ago, in Q1 2013, our self-serve business was 9.5% of our total revenue, and that percentage has been falling each of the last 5 quarters as we've grown our aftermarket business. Our reported gross margin for Q1 2014 was $652 million or 40.1% of revenue, a decline of approximately 190 basis points from a gross margin percentage of 42% in Q1 2013. The primary reason for this decrease was a 230-basis-point decline attributable to acquisitions completed after March 31, 2013, including 110 basis points related to the Specialty acquisition, 70 basis points from the European Sator acquisition and the remainder due to other acquisitions, including the U.K. paint transaction. The decline due to Specialty of 110 basis points is in line with the guidance we provided last quarter. Excluding these items, we saw an improvement of about 70 basis points in the North American margins, of which a portion resulted from the mix with the reduction of lower-margin other revenue that I mentioned earlier. Other immaterial factors reduced gross margin by about 30 basis points relative to the prior year. Now moving to operating expenses. Some of the comparisons are being affected by our Specialty and Sator acquisitions, which both operate 3-step models. In this model, gross margins tend to be lower than the 2-step approach, but they will incur relatively lower facility distribution and SG&A costs. While Sator will anniversary in Q2, Specialty will affect the comparisons for the remainder of the year. Facility and warehouse costs were 7.8% of revenue in Q1 2014, a 60-basis-point improvement over 8.4% in Q1 last year. This improvement is primarily due to Specialty, which tends to lower -- run lower facility costs than the rest of our operations. Distributions costs for the -- were 8.4% this quarter, down from 8.7% in the same quarter last year. And we attribute most of this improvement to Sator, which has lower distribution cost. Selling and G&A expenses decreased from 11.5% of revenue in Q1 last year to 11.4% in Q1 this year. This improvement is primarily related to Sator and Specialty, which would have driven this number 40 basis points lower but was offset by higher costs in the U.K. as we incurred higher personnel and advertising costs, most of which I would characterize as being build-out ahead of the branch expansion that Rob mentioned. The combination of warehouse, facility, distribution and SG&A costs was 27.6% of revenue in Q1 2014 as compared to 28.5% in Q1 2013. I've explained that most of this improvement is due to the acquisitions we've completed, but it's worth noting that the drop in other revenue is probably masking leverage that we're achieving in the base business. It's hard to accurately quantify the exact impact, but as I've pointed out in the past, other revenue tends to incur very little incremental cost in these line items. So there's likely a 10- to 30-basis-point improvement in leverage being masked by lower scrap and core revenue. During Q1 2014, we recorded $3.3 million of restructuring and acquisition-related expenses, up from $1.5 million in Q1 last year. The 2014 costs primarily related to Specialty. Depreciation and amortization was 1.6% of revenue during Q1 this year as compared to 1.5% of revenue in Q1 2013. We saw a modest reduction in depreciation as a percent of revenue of 10 basis points as we levered the assets over a larger revenue base. But that improvement was more than offset by higher amortization related to intangibles from the Sator and Specialty acquisitions. Other expenses net increased to $15.1 million in the 3 months ended March 31, 2014, compared to $9.8 million for the same period last year, an increase of $5.3 million. Interest expense was $7.5 million higher, of which $6 million was due to higher debt levels and $1.5 million from the higher interest rates, primarily on our senior notes. During the quarter, we incurred $300,000 of expenses related to debt extinguishment costs. Adjustments to consider -- contingent consideration were an income of $1.2 million in Q1 this year as compared to an expense of $800,000 last year in the same period. Our effective borrowing rate for the quarter was 3.6%, and our effective tax rate for the quarter was 34% compared to 35.8% in Q1 last year. Taxes came in a little bit better than what we had expected at the time of our last call, as the effective rate in Specialty was slightly lower than we anticipated. On a reported basis, diluted earnings per share was $0.34 in Q1 2014 compared to $0.28 in Q1 2013, an improvement of 21%. Adjusting for the combination of acquisition-related expenses, contingent purchase price adjustments and the loss on debt extinguishment, EPS would have been about $0.01 higher both this year and last. So on an adjusted basis, Q1 2014 would have been $0.35 as compared to $0.29 last year. Switching to our year-to-date cash flow. Net cash provided by operation activities totaled $97 million during the 3 months of 2014 compared to $106 million in 2013. Net income and depreciation were favorable to cash flow by $20 million and $9 million, respectively. But these were offset by a change in the use of cash of $29 million related to inventories. In Q1 2013, we entered the quarter with the inventories at fairly high levels, so Q1 last year saw a benefit to cash flow. In 2014, we increased inventories in Europe in anticipation of the branch expansion and at Specialty ahead of the busy summer season, resulting in inventories being a use of cash this year. Capital spending was $34 million in Q1 2014, and we have spent $487 million in cash on acquisitions, the largest being Specialty, which accounted for $427 million of the total. During Q1, we refinanced our credit facility, increasing the total size of the facility to $2.3 billion and extending the maturity until May 2019. We made a number of amendments to the covenants to provide us with additional operational flexibility. We were also fortunate to be able to amend our pricing grid and reduce our borrowing cost on the facility between 25 and 50 basis points, depending upon our leverage. I would like to acknowledge and thank our banking partners for the support they demonstrate to LKQ, as evidenced by these changes. We ended Q1 2014 with $1.7 billion of debt, and cash and cash equivalents were $113 million. Availability under our credit facility was approximately $1.2 billion. And with the cash, total liquidity was about $1.4 billion. So we have capacity to pursue additional acquisitions as suitable opportunities arise. Now turning to guidance. We've left our guidance unchanged from February. Our guidance for 2014 for organic parts -- excuse me, organic revenue growth for parts and services is 8% to 10%. Our net income and earnings per share guidance ranges are $400 million to $430 million and $1.30 to $1.40, respectively. And our guidance for capital expenditures, $110 million to $140 million, and cash from operations of approximately $375 million. I'd like to highlight a few of the changes we've seen in the business since February and give you some indication why we decided to leave the guidance unchanged even after a fairly strong Q1. In January, we saw very light sales volume. As weather was so severe, many of our operations closed. And we were concerned that if people were not driving, the accidents may simply have never occurred. In February and March, we did see that volume pick up. Although there are no formal sources, our informal channel checks suggest that the shops have a reasonable backlog for Q2. In contrast, we saw a mild winter in Europe, and that business was a little softer than we had expected throughout the quarter. The organic growth of 10.3% we reported for Q1 parts and services was ahead of our full year guidance, but we still believe that our growth will abate in the back half of the year as we start reporting Sator and the U.K. paint businesses in that number. As I discussed a moment ago, we've seen a drop in scrap steel prices. And Rob mentioned we scaled back the car buying in the self-serve line of business because the cost of the cars in this line of business wasn't falling as fast as necessary to reflect the lower scrap prices. The impacts of this showed up in other revenue, which is primarily scrap and cores from the hulks. This lower volume and the continued stubborn lower prices on scrap steel were not contemplated in our earlier guidance. We certainly didn't expect a negative 19% organic growth in other revenue, and it turned out to be a headwind for us in Q1. We haven't seen any material improvement in that outlook in April. The Manheim Index, which we expected to start falling, has actually been increasing in the last 3 months and is higher now than in March 2011. So we've not seen any meaningful relief on car buying costs in either the self-serve or the recycling lines of business. Against the negatives of scrap prices and car cost, we do have a number of positives. We reported only a de minimis impact from our Australian joint venture. While things are progressing there, the losses we anticipated for 2014 may not be as much as the $0.02 we earlier thought likely. The refinancing of the credit facility will save us a minimum of 25 basis points on borrowings over what we would have otherwise paid. And as we worked through the Specialty acquisition impacts, the tax rates came in favorable to what we expected on the last call. We believe these will add a couple of pennies to what we expected in February. Offsetting these are the scrap and car pressures that I mentioned. Aside from those items, we do keep an eye on foreign exchange, particularly as Europe continues to grow, and on the ongoing scrap volatility and weather in the balance of the year. In terms of providing some high-level characterization on the quarter's results, I would say, overall, we believe we saw a strong performance in the North American collision business, buoyed by a protracted winter and an in-line performance at Specialty. This performance was partially offset by a soft commodity market, ongoing high used car prices and a mild winter in Europe, which dampened sales in some key product lines. Weather and commodity prices will fluctuate over time, but the key message from our perspective is that the underlying business is progressing very much according to our plans. With that, I'll turn the call back to Rob.

Thanks, John. To summarize, we are quite pleased with our first quarter 2014 results and proud of how our team of over 26,000 employees performed in the midst of some unusual weather-related operating challenges during the quarter in both North America and Europe and nonoperational headlines that could have impacted our morale, performance and long-term strategy. But collectively, we never took our eye off the ball and got it done. And with that, Devin, we'd like to open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Nate Brochmann with William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I wanted to talk a little bit -- congratulations on the opportunity to start working with State Farm a little bit. I know you work with them on some of the mechanical and recycle-type aftermarket things but not so much, obviously, on the collision. And I know that this is a small data point and we shouldn't get overly excited about it. But I was wondering if you could talk a little bit about how those discussions went to start doing these chrome bumpers, when they might have started or whether they just one day kind of picked up the phone and said, "We're going to start doing it," or whether you guys were involved in that in terms of trying to think about what the pipeline might be for future products.

We were not involved in that decision, Nate. Of course, we regularly pitch our products and services to State Farm. They came this -- upon this on themselves, and they did it in conjunction with the rollout of PartsTrader. And as PartsTrader has gone across the country, obviously, we've seen more and more sales. Our reps that are on PartsTrader reviewing those estimates know about those 2 part types and are pushing them hard. So while we can't comment -- I don't know for sure how much of that percentage increase was related to State Farm because not all times that we know there's a repair or tell us who they're repairing a car for. But clearly, the 29% and 33% increases, some of that was related to State Farm's new policy. With an 18%-plus market share, they're a mover, obviously. So we're monitoring this, and we still, as I said in my prepared remarks, in constant communication with State Farm. And hopefully, they continue to expand the product offerings. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay, great. That's optimistic. And then second, congratulations also on getting a couple of more insurance companies into the ECP pilot programs. It kind of sounds like even though -- while some of those insurance companies are kind of still tiptoeing around, being really aggressive with those programs, given your increase in overall revenue, they're clearly starting to use those. Is there any take in terms of whether or not they have to officially sign on for those programs to still take hold or whether you really expect gradually they'll take hold even if they don't fully move past the pilot program?

Yes. I would expect that they'll continue to move, Nate. The fact that they haven't signed anything, I wouldn't read anything into that. We certainly haven't. The fact that of the 15 that are in pilots, plus the rental car company we announced today as well, none of them have stopped writing it, so they continue to write it. And I think some of them are averse to actually signing a contract. But we do have 2 under contract, and the rental car company is under a contract as well. But I suspect it will continue to move along as we continue to grow our product offering. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay, great. And then just 2 housekeeping things, John, if I could. One, what tax rate should we be thinking about going forward now with some of these adjustments?

Yes, I think we had a 34% rate in Q1. Absent some discrete items, I would say probably in that range, 34%, maybe 34.5% for the rest of the year. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay, great. And then also, too, you talked about maybe some lower organic total growth expectations towards the end of the year as Sator gets in there or maybe the U.K. paint business. Could you just give us maybe a rough estimate of what the organic growth of those individual businesses are as we think about the overall mix?

Yes. And we're thinking it's probably going to be sort of more North American mid single digits on those 2 components.

Our next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: A lot on the call here. I'm going to have to reread the transcript. But did want to ask about your pending acquisitions in The Netherlands. It would seem to be a very big positive if you're able to close those deals. I'm curious how other jobbers in that market have reacted to the announcement, and I'll start with that.

Sure, Craig. The -- we have a tie-in with every one of our customers over there with our computer system. We've been in contact with every one of those other jobbers. Some of them have offered to sell us their business. These 5 acquisitions give us 52 facilities. We think the right number is circa 75. So we're going fill in the balance either through acquisition or greenfield. So we've gotten some inquiries about selling the businesses, but we haven't had one defection as of yet. Some of that certainly is at risk. They could probably find somebody else, but the tie-in with the computer system, they use our operating system, actually, to order a lot of parts and to actually manage their business. So it's going to be pretty difficult for them to get away from us, and as of now, we've had no defections whatsoever. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And to follow up, you mentioned the operating system. It's my understanding that Sator has an order platform, if you will, that is widely used. Could you explain what that is and whether it's something that could scale more broadly beyond that particular geography?

Yes, absolutely. Basically, what we have -- the system that the jobbers use actually ties right into our system live. It's called My Grossier [ph], my best attempt at Dutch, where basically, we -- they can see our inventory. We can see what they're doing as well in terms of ordering, so it's pretty intricate. We have looked at that as an ECP potential model to move to other parts of Europe. But at this point, we're still, obviously, just looking at that. And then now with the acquisitions now going into a 2-step model, we'll have to relook at that as well. But it is an interesting system where we get really full visibility of what our customers are doing.

Yes, and it actually goes down to the garage level. So the garage uses our software. They use that to look up inventory, not only at our customers but they can actually see right through to our inventory. And then they can order those parts. So they order -- the garages are ordering from our customers using our software, and they're sort of an intermediary in there. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: If you look at ECP in the U.K., is there a different operating platform that you don't control that is used?

Yes. The garages use typically their own software for the garage management system, if you will.

We don't have the access to -- we don't have the ability to see what they're doing, though we do in Holland. So it's very intriguing, and we're looking at ways to replicate that in the U.K. at some point. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And then one more on that deal. What does the rest of Europe look like from a 2-step or 3-step model perspective?

Pretty much every country has some level of 2-step and 3-step, but the vast majority of Western Europe is predominantly going to be 2-step. There are some 3-steppers still out there, but the bigger companies are going to be 2-step. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And then, John, one housekeeping question. On the 4 deals, the incremental deals that were announced in the transcript, what was the trailing annual revenue? And can you give that to us by geography, if possible, North America versus Europe?

The total annualized revenue is $790 million, and pretty much all of it's in North America. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: That includes Keystone?

Yes. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Do you know what it is x Keystone?

Keystone was around $700 million, so it was about $90 million of other deals.

Our next question comes from the line of James Albertine with Stifel. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: Obviously, everyone's going to have their State Farm questions, and we certainly do as well. But I wanted to focus, if I could, on just making sure I understood what you said on gross margin. Your core, if I understood it, North American gross margin was up 70 basis points year-on-year. Is that correct? And sort of can you get to a little bit of what's driving that, whether it's sort of the flow-through of deals as they leverage or something going on with the sweet spot of kind of the SAAR roll-off?

We just -- we saw a little bit better margins in the businesses here. I did mention that other revenue was down. Some of that was the aluminum furnaces and precious metals businesses being down. Those tend to be relatively lower-margin businesses. So as that other revenue came down, it was probably a slight benefit to the margins, which is why we said don't count all of that 70 basis points. It's just sort of the math on product mix. We did see a little bit improvement in the margin in the late model [ph] of the salvage business and a little bit improvement on the aftermarket parts costs. It was pretty widespread, frankly, other than we did get those benefits just from having lower other revenue, which probably hurt us on the operating leverage on the facility and warehouse and other below-the-line costs. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: And can you remind me -- last quarter, I think it was positive year-over-year as well but maybe a lower on rate-of-change basis. So we're seeing acceleration in the improvement, in other words?

I think if you strip out the other revenue, it's probably fairly consistent, right? I haven't got my notes in front of me, but I think you're right. I think we've said around 50 bps is our number currently. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then if you guys could just help us understand. I think you've said in the past sort of ballpark assumption is 30 to 50 basis points of operating margin kind of expansion on an annual basis, I mean, inclusive of the M&A, which obviously is a little dilutive at the outset. As some of the M&A flows through here from Sator and Keystone, sounds like it may even be ahead of schedule to some degree in terms of the integration strategy. Is that sort of range changing? Or should we expect something more in the higher end of that range as a result?

I've always said this thing's going to be lumpy. And you've got to kind of adjust for the fact that you look like you're getting operating leverage when scrap costs are going up and it looks like you're losing it when they're going down. But I don't think we've changed our view with respect to that in terms of it's our belief that we can grow the business organically the way we do and then supplement that with some acquisitions. We ought to be able to see leverage coming through like we did this quarter in depreciation. And as I said, if you adjust for the other revenue, you do see that leverage in the North American operations, and we did see a little bit in the gross margin. But I don't know that's so much operating leverage as just cost structure in terms of price range for the cars.

Our next question comes from the line of John Lawrence with Stephens.

Rob, would you talk a little bit about -- you mentioned Keystone a little bit, some of the end markets, what you're seeing as far as the muscle cars, et cetera. Talk a little bit -- take one more step on those end markets. And maybe what are you seeing today in the activities surrounding sort of integration that you have left to do in '14 for that business?

Sure. John, the integration has actually gone much quicker than we expected. As we mentioned -- as I mentioned, we closed 11 cross-stocks. We also moved about 14 locations into existing locations. To give you a quick example, Keystone was delivering into the Dallas market from Kansas City, and they were driving through Oklahoma City. And they would drive to Dallas, drop off all the parts, and then trucks would then leave Dallas to go service the Oklahoma City. That shuttle truck is now stopping in Oklahoma City, dropping off the products for Oklahoma City and local LKQ/Keystone drivers delivering those products. So we're seeing a tremendous amount of freight going from Dallas all the way back to Oklahoma City, where that truck is already going by. So that's some of the found synergies that we really didn't anticipate, quite frankly, is 14 of those locations. We're on plan for synergies on both the financial and the operational side. We -- as I mentioned on the last call, at some point, we want to bring some products to Europe to try and test this. We've actually -- I actually personally met with the CEO of our Keystone operation, with one vendor in Chicago, and we're going to launch, hopefully, something in late Q2 to start bringing some products into Europe as a trial. Meeting the vendors, we're seeing some cross-selling opportunities, as we discussed. One of the things that we found was, in the RV side of the business, there's a lot of these dealerships have paint and repair businesses, and we're already starting to market our paint products into those RV businesses. The LKQ reps already have access to the Keystone inventory, so they can now sell that product. It just started about a week ago, so it's really too early to say what the impact of that's going to be. And then, of course, Keystone has access to the muscle car products, our cooling products and as well as our reman engines, so that is now starting to cross-sell. So we're pretty bullish on, hopefully, what the cross-selling opportunities are. And most importantly to me, the cultures are in lock step. They're a growth-oriented company. We are too. And we're very pleased with that acquisition. And just finally, one last thing on Keystone. We approved a new distribution center in Texas. That's a big market for the Keystone. As I said, we're servicing Kansas City now, and we're going to have our own distribution center there. So really excited about what we got going in the works there.

Our next question comes from the line of John Lovallo with Bank of America Merrill Lynch.

First question is on the inventory at the salvage auctions. Are you seeing pretty good inventory supply there? And I mean, do you think that, over the next quarter or 2, that higher kind of supply -- in fact, you are seeing that, could offset higher Manheim prices and maybe be a benefit in pricing?

Yes. We track weekly, John, the number of vehicles at the auctions. And we've only seen a modest spike so far. So I assume the Coparts and the ADESAs and the insurance auto auctions are sitting on a backlog because we haven't seen it hit the auctions yet. And it generally does take 2 months before it gets through the systems. But we certainly expect that if that volume increases as much as the number of total losses that likely took place in Q1, we do expect it to have a positive impact on Manheim, thereby lowering, hopefully, our cost. But haven't seen that yet. Our auction costs actually were, year-over-year, just down slightly. But I would also mention that scrap is down, so that could be just a scrap relation. But we do expect Manheim to eventually start to lighten up a little bit here, hopefully soon.

Okay, that's helpful. And then there's been more talk about multi-bidding platform in terms of the salvage auction industry and in the whole car auction industry. What are your guys thoughts on that? I mean, do you think that, that would have any impact on potential pricing competition and so forth?

Well, the Internet bidding has been around really -- [indiscernible] Copart's initial, I think, came out in '04, if I'm not mistaken, maybe even earlier than that. So it's been around for quite a bit of time. So those multi-bid functions have been there for quite a while. We've been dealing with them. So I don't see any additional impact because they've been open for quite a few years. So really not expecting to see anything there negative.

Okay, great. And last question, John. I think last quarter you guys had mentioned that you expect kind of EPS to ramp sequentially throughout the year. First quarter was probably a little bit better than expected. I mean, is it still reasonable to think that we'll see some kind of ramp-up? Or is the normal seasonality something we should think about?

I think the things that are sort of different is Keystone Automotive is -- their strongest quarter, we believe, is going to be Q2. What we did see is the European businesses, and it's our understanding that Keystone also are pretty light in Q4.

Our next question comes from the line of Gary Prestopino with Barrington Research.

Just talk a little bit more about State Farm so I get my understanding here correctly. Are you the only entity that has been approved to sell these aftermarket bumpers?

No. They authorized the use of certified aftermarket chrome front and rear bumpers, and anyone who carries a certified bumper has the ability to sell that product.

Okay. So -- and is this really the first time in a long time that State Farm has -- is starting to use, what would they be called, collision repair parts?

On the collision part, yes. They have written radius condensers, but that's considered mechanical. This was really the first collision part they've entered the marketplace with.

So do you think it's to be expected that they'll come out with some more going forward, then?

We're certainly hoping, but nothing more than that at this point, unfortunately.

Our next question comes from the line of Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: As you look at the end of the first quarter, coming into the second quarter, do you have a feeling for sort of what the collision channel backlog looks like? I mean, there are certainly increased crash rates, but there are some issues, maybe some of those repairs weren't made, given supply disruption. And as we look at Q2, do you have a feeling maybe year-over-year how we entered the quarter with sort of channel demand?

Honestly, Bret, just anecdotally, we hear -- because a lot of the cars were drivable, so you might drive by a shop and not see many cars there. But just because the car is drivable, it is scheduled to come in. I can say that we don't give, honestly, guidance for the quarter. But I will say that, for the first 3 weeks of April, it appears that the shops are working through some backlog. But it's really, really tough to say how much backlog is actually out there. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then on Keystone Specialty, do you have a feeling, I guess -- I'm sure you have a feeling for what the inventory levels are on that? And then just given the fact that, that's closer to traditional auto parts, which, in many cases, has got better working capital leverage, is there the potential to generate cash as you could extend payables or leverage some of that inventory you're carrying at Keystone Specialty?

Yes. I'll just give you some indication. The -- we acquired about $152 million through that deal. They were one of the causes of the increase in the inventory in the quarter. So quarter end, they were at about $166 million. The type of programs you're talking about, you're right, this has more potential for that sort of a financing structure. We don't have any plans in place at the moment, but given we're -- that refinancing of our credit facility, it can be more interesting, I suspect, in terms of it's really a leverage play. So I won't say never, but we don't have anything in the hopper at the moment.

Our next question comes from the line of Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Could you remind us how big the chrome bumpers are within the portfolio of products that you guys have?

Yes. It's -- obviously, they're just basically on pick-up trucks. So it's a pretty limited line, mainly Ford, Chevy and Dodge. But the 4 manufacturers don't carry much. But as you know, the F-150 is the #1-selling vehicle in the United States. So it's not a huge product line. It is pretty limited in that respect. Scott L. Stember - Sidoti & Company, LLC: Okay. And to that point, just trying to figure out how much business you could potentially get out of this versus your competitors. Are these parts, do they have any extra certifications that possibly some of your competitors would not have?

No. It's basically being done through -- NSF is the certifying body for most of those products. I think CAPA does a few, but it's mainly NSF. Scott L. Stember - Sidoti & Company, LLC: Okay. And can you talk about CCC ONE platform? You didn't give an update on it. Is there anything new there?

Still progressing. The growth sequentially was 23% in revenue. Again, that's off a small base, but the volume was up 30%. So still gaining traction. Roughly still around 4,000 shops in the program, Scott. Salvage, though, this is -- right now, we're just solely limited to aftermarket. Salvage is slated to roll out in late summer, and that seems to be on target. And CCC tells us they're averaging about 80 shops a month that are being enabled. So they're getting deeper and deeper into this thing. And actually, CCC is actually running some contests to get more shops involved. So they're stepping up on their side. I'm still really very excited about the product, mainly because it's -- the shop is doing most of the work. But the biggest ancillary benefit is that their returns have dropped dramatically as the shops do the -- keen to do a better job keying in the product than our reps were, what we were being told to key in. So very excited about the program, and hope it continues to grow. Scott L. Stember - Sidoti & Company, LLC: Great. And last question on the collision parts program in Europe. Particularly with many of the underwriters in the U.K. writing business in Europe as well, have you seen any initial traction there?

We have not. This will be Phase 2 of that now with the locations that we acquired at Sator, the 5 locations. We'll now be able to go direct to those shops. So probably later this year, we'll start bringing our insurance team over there to start marketing to the insurance companies. And hopefully, later this year or early next year, we'll start our collision parts program there on the continent.

Our next question comes from the line of Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Most of my questions have been asked and answered. Just a couple of follow-ups. The Keystone Specialty segment, what's the growth of that business right now? I know you didn't have it, obviously, in the books last year, but what's the year-on-year growth right now that you're seeing?

It's growing -- in Q1, year-over-year -- and again, it's not -- we're not obviously reporting it as organic growth yet, but it was mid to high single digits. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And is that how we should be looking at that for 2014, you figure?

No. We said it's going to grow more North America, but they had a really good Q1. So we think it's going to be somewhere between the 5% to 7%. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. And then the April commentary, where you said that it appears that the shops are working through the backlogs, should I look at that statement and the implication being that April was better than March or better than March and February overall?

Well, April definitely slows down compared to March just because of the backlog from January to February. But we think we're going to track on plan for April. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And last question, and if you've already mentioned this and I missed it, I apologize. You have 156 ECP stores now, having opened 11 this past quarter. I think your goal originally was 165 by year end. And it would seem as though you're ahead of that pace. Are you still looking at 165? Or how should we look at the store count by year end?

Yes, we're going to bring those 9 finish by -- hopefully, by the end of Q2, actually. A few of them may go into early Q3. And at that point, Sam, we'll reevaluate if we can do more. But we'll hit the 165 for no problem at all.

Our final question is from the line of Bill Armstrong with CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: I just wanted to follow up on a previous question. You don't see a lot of chrome bumpers on the roads anymore. Any idea -- if you look at the carpark is, I think, maybe 270 million vehicles, any idea how many have chrome bumpers? And maybe more importantly, what indication, if any, has State Farm given that they may expand this program to plastic bumpers, all types of bumpers and then, obviously, beyond that to other collision parts?

No indication past the chrome bumpers, and I really don't know what the pick-up truck population in the U.S. is today. But it's certainly a lot smaller than the car population. But yes, you're just going to find these, Bill, to your point, basically just on pick-up trucks. That's all they'll be on. William R. Armstrong - CL King & Associates, Inc., Research Division: Okay. And so far, they haven't given any indication that they may expand this to plastic bumpers or anything else?

None whatsoever at this point. And with that, we'll be back in about 3 months to give you an update on our results for Q2. Thanks for joining the call, everybody.

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