LKQ Corporation (LKQ) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation's Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Boutross, Director, Investor Relations for LKQ Corporation. Thank you. Mr. Boutross, you may begin.

Thanks, Devin. Good morning, everyone, and thank you for joining us today. This morning, we released our second 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 up the call 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 currently unknown 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. Also note that guidance for 2014 is based on current conditions, including acquisitions completed through July 31, 2014, and excludes any 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. 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'm 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 Q2, revenue reached a new quarterly high of $1.71 billion, an increase of 36.5% as compared to Q2 2013. Net income for the second quarter of 2014 was $104.9 million, an increase of 38.5% as compared to $75.7 million for the same period of 2013. Diluted earnings per share of $0.34 for the second quarter ended June 30, 2014, increased 36% from $0.25 for the second quarter of 2013. Please note that adjusted diluted earnings per share for the second quarter 2014 would have been $0.35 compared to $0.26 for the second quarter of 2013 after adjusting for any net losses resulting from restructuring and acquisition-related expenses, losses of debt extinguishment and the changes in the fair value of contingent consideration liabilities. During the quarter, we achieved organic revenue growth and acquisition revenue growth for parts and services of 8.1% and 31%, respectively. I am particularly pleased with this performance, given we were able to translate this revenue growth into an improved bottom line, with a 39% increase in net income and a 36% increase in diluted EPS, despite the tough year-over-year comparatives. Now more detail on our North American operations. During the second quarter, we purchased over 71,000 vehicles for dismantling by our wholesale operations, which is a 2.4% decrease from Q2 2013. While our purchases were slightly down year-over-year in Q2, the backlog from a strong Q1 purchasing environment left us with solid inventory levels of product to continue the growth of our recycled parts operations in Q2 and now into Q3. In our self-service retail businesses, during the second quarter, we acquired approximately 143,000 lower-cost, self-service and crush-only cars as compared to over 135,000 in Q2 of 2013 or roughly a 6% increase. Lastly, in our North American operations, I want to update everyone on State Farm and their previously announced use of aftermarket certified chrome front and rear bumpers. During the quarter, sales of this particular part type were up 22% year-over-year, which we believe is partially attributable to State Farm. At this point, we are not aware of State Farm considering a broader use of our aftermarket offerings, but we do remain encouraged, given that we estimate they are witnessing savings of approximately 20% on this part type alone. Clearly, a broader program which includes aftermarket other sheet metal and body panels, offers State Farm and its policyholders tremendous economic benefits. 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 Q2, ECP achieved organic revenue growth of 22.3%. For branches open more than 12 months, ECP's organic revenue growth was 14.4% during the quarter. This performance was particularly impressive given that ECP had 1 less selling day year-over-year. Also during the quarter, ECP opened 9 branches, bringing our total to 20 for the year, the number we initially scheduled for 2014. Given the recent disruption with one of our main competitors in the U.K. market, we are currently assessing whether or not we will accelerate the opening of additional branches this year. And now an update on ECP's collision program. During the quarter, we continued to win strong double-digit year-over-year growth of over 33% with our collision parts sales at ECP despite the headwind of an extremely mild winter in the U.K. and, again, 1 less selling day. In addition, during the second quarter, ECP added 2 additional insurers into ECP's pilot program, bringing our total carrier relationship to 17. These 2 new carriers each signed agreements identifying ECP as the first distributor of choice for non-OE collision parts with their respective body shop networks. I am quite pleased with the carrier penetration we have achieved since we launched ECP's collision program and pleased to note that these 17 carriers represent well over 80% of the auto insurance market in the U.K. And lastly, on Europe, on May 30, 2014, the company completed its acquisition of 5 Netherlands parts distributors, all of which were customers of Sator. Combined, these distributors added 52 branches to Sator's Netherlands network. Strategically, this deal accelerates our efforts in converting Sator's distribution network from a 3-step to a 2-step model, strengthens our growth and prospects and margin profile and positions the business well for eventual entry into the alternative collision parts market in the Benelux. Although it is still early, these 5 acquisitions are meeting our expectations. Now to our Specialty segment. Keystone Specialty continues to outperform many of our operational and financial expectations. John will cover the financial performance for our Specialty segment, but operationally, I'd like to give you a brief update on Keystone. Just finalizing the acquisition in January, Keystone has closed 12 cross dock facilities and added an additional 36 drop points into existing wholesale operations. This cross dock initiative has reduced our driving distances and improved our customer experiences, while allowing us to reinvest resources toward adding more frequent deliveries and building the delivery network capable of handling more revenue growth going forward. Furthermore, we are well on our way to launching our new distribution center in Texas, which will be operational later this year and provide additional access to a substantial truck and off-road market. In addition, Keystone continues to make great progress identifying cross-selling opportunities for our existing products. Keystone, through recent systems and sales exploration efforts, now offers over 1,000 collision SKUs, an ATK remanufactured engine line and over 20,000 SKUs from our Goodmark aftermarket muscle car and classic lines to their Specialty customers. Lastly on Keystone, in July, all HR functions have been fully integrated into LKQ processes, and efforts in other administrative areas are on target. Moving on to acquisitions and development initiatives. In addition to the acquisition of the 5 Netherlands parts distributors, during the second quarter of 2014, LKQ made 6 additional acquisitions, all of them in North America, including a paint distributor in Texas; a self-serve yard in Georgia; a paint distributor with 6 locations in Ontario; a paint distributor in New York; an aftermarket collision parts distributor with locations in Florida and Georgia; and finally, a tire recycler in Ohio. As we enter the back half of the year, we continue to witness a steady flow of M&A opportunities in the geographies and segments in which we operate. Given the strength of our balance sheet and operational capabilities, I believe we are well positioned to execute on more strategic acquisitions. 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. Rob mentioned that the top line revenue of $1.7 billion for the quarter was an increase of $457 million or 37% over the $1.25 billion we achieved in Q2 2013. This is the second consecutive quarter LKQ is annualizing revenue in excess of $6.5 billion, with quarterly EBITDA over $200 million and net income over $100 million. So overall, pretty solid back-to-back quarters. The revenue growth breaks down as follows: For Q2, our total organic revenue growth was 6.6%, and we delivered additional growth of 28.3% from acquisitions, with foreign exchange adding a further 1.7%. Organic growth for parts and services was 8.1%. Within that, we saw our North American operations grow organically 5.3%, while the European segment grew 15.6%. We were facing a difficult comparison to Q2 2013 in the North American segment when we reported 7.3%. Although we believe the shops had good backlogs going into Q2 this year, they had a similar situation last year with the late winter in 2013. The European segment showed lower growth as we've included Sator for the first time. ECP continues to show strong organic growth of 22%, but Sator had an organic revenue decline of 6.9%. The Sator negative growth appears to be related to general market conditions, particularly for some of our private label product, which was exported, and the impact of acquisitions on the base business. With the acquisition of some of our major customers and converting the distribution to a 2-step model, we anticipated some loss of revenue in the base business. Meanwhile, as Rob mentioned, the sales of the garages by our newly acquired distributors are progressing well. Acquisitions completed in the last 12 months to June 30 contributed $354 million to Q2 2014 revenue on a reported basis, including $25 million from acquisitions completed in Q2 2014. The annualized revenue from acquisitions completed in Q2 2014 is approximately $220 million or roughly $55 million per quarter. I know we've got some questions about our Specialty segment, which is where we are reporting the revenue for Keystone Specialty, the company we acquired in January this year. For Q2 2014, our revenue for that segment was $218 million. While we didn't own Keystone last year, we estimated that their revenue was $196 million for Q2, so that business grew 11% year-over-year, hence, Rob's comments of our being pleased with its progress. Total change in other revenue, which is where we record our scrap commodity sales, was positive 7%. While acquisitions contributed 11% positive growth, that was offset by negative 4% growth from our existing business. We saw a decline in both pricing and volumes, with pricing being down on scrap steel about 5% and our volumes of aluminum and other precious metals lower year-over-year. The average price we received for scrap steel was $217 per ton this year versus $228 per ton in Q2 2013. Other revenue was 9.8% of total revenue compared to 12.6% in the same period last year, reflecting the declining relative importance of this revenue to our overall results. In Q2 2014, revenue from our self-service business was $109 million or 6.4% of LKQ's total revenue. Approximately 32% of this revenue is parts sales included in North American parts and services revenue and 68% scrap and core sales included in other revenue. A year ago, in Q2 2013, our self-serve business was 8.8% of revenue. The lower percentage this year reflects the lower commodity prices and the faster growth of our other lines of business. Our reported gross margin for Q2 2014 was $671 million or 39.3% of revenue, a decline of approximately 140 basis points from our gross margin percentage of 40.7% in Q2 2013. The primary reason for this decrease was a 210 basis point decline attributable to acquisitions completed after March 2013, including 120 basis points related to the specialty acquisition and 90 basis points from other acquisitions. Excluding these items, we saw an improvement of about 70 basis points in the North American operating margins. Moving to our operating expenses. Some of the comparisons are being affected by the Specialty and Sator acquisitions, which both operate 3-step models to some extent. In this model, gross margins tend to be lower than in the 2-step approach, but they incur relatively lower facility, distribution and SG&A costs. Sator will not affect these comparisons as much going forward because it was in Q2 2013 for 2 of the 3 months. Specialty will affect comparisons for the remainder of the year. Facility and warehouse costs were 7.5% of revenue in Q2 2014, a 70 basis point improvement over 8.2% in Q2 last year. This improvement is primarily due to the Specialty acquisition, which tends to run at lower facility costs than the rest of our operations. Distribution costs increased slightly from 8.5% of revenue in Q2 2013 to 8.6% this quarter. This change is mainly attributable to higher costs in the U.K., which is associated with the new branch openings and offset by lower costs from the Specialty segment. Selling and G&A expenses decreased from 11.7% of revenue in Q2 last year to 10.9% in Q2 this year, an improvement of 80 basis points. Keystone Specialty accounts for 50 basis points of the improvement, but we also saw operating leverage in the balance of the business with a 30 basis point improvement. The combination of facility and warehouse, distribution and SG&A costs was 27% of revenue in Q2 2014 as compared to 28.4% in Q2 2013. I've explained much of this improvement is due to the acquisitions we've completed, but it's worth pointing out again that the drop of other revenue relative to the total revenue is masking the leverage 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 on these line items. During Q2 2014, we recorded $5.9 million of restructuring and acquisition-related expenses, up from $3.7 million in Q2 last year 2014 costs primarily related to the specialty and Netherlands acquisitions. Depreciation and amortization was 1.8% of revenue during Q2 this year as compared to 1.5% of revenue in Q2 2013. This increase is due to higher amortization related to intangibles, particularly from the Sator and Specialty acquisitions. Other expenses, net, decreased to $13.9 million in the 3 months ended June 2014 compared to $14.9 million in the same period last year, a decrease of $1 million. The main components of the change include interest expense which was $3.1 million higher, with $4.6 million attributable to higher debt levels and a $1.5 million reduction from lower interest rates. During Q2 2013, we included -- we incurred a $2.8 million loss related to the debt extinguishment costs. Adjustments to contingent consideration were income of $0.8 million in Q2 this year as compared to an expense of $200,000 last year in the same period. Our effective borrowing rate for the quarter was 3.4%. Our year-to-date effective tax rate was 34% compared to 35.4% in the first half of 2013, reflecting our growing International business, which has lower tax rates. On a reported basis, diluted earnings per share was $0.34 in Q2 2014 compared to $0.25 in Q2 2013, an improvement of 36%. Adjusting for the combination of restructuring and acquisition-related expenses, contingent purchase price adjustments and the loss on debt extinguishment, EPS would have been $0.01 higher both this year and last. So on an adjusted basis, Q2 2014 would have been $0.35 as compared to $0.26 last year. Switching to our year-to-date cash flow. Net cash provided by operating activities totaled $152 million through 6 months in 2014 compared to $209 million in 2013. Net income and depreciation were favorable to cash flow by $49 million and $19 million, respectively, but those are offset by a change in the use of cash of $35 million related to inventories. In Q2 -- excuse me, in Q1 2013, we entered the quarter with inventories at fairly high levels, so Q1 last year saw the benefit in our 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. Similarly, accounts receivable has been $21 million higher use of cash this year, reflecting the strong sales growth year-over-year and the seasonality of the specialty business. Accounts payable has been a use of cash this year compared to a source of cash last year, creating the $35 million year-over-year change in cash flow. Timing of cash taxes resulted to a higher outflow of funds in 2014 compared to 2013 of $25 million. Capital spending was $67 million in the first 6 months of 2014 and we've spent $635 million in cash on acquisitions, the largest being Specialty, which accounted for $427 million of the total. If you recall, in 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 ended Q2 2014 with $1,951,000,000 of debt, and cash and cash equivalents were $110 million. Availability under our credit facility is approximately $1.1 billion, and with cash, total liquidity was about $1.2 billion. So we have capacity to pursue additional acquisitions as suitable opportunities arise. And now turning to guidance. We increased the bottom end of our income guidance, with the new guidance calling for net income between $405 million and $430 million. That equates to a revised earnings per share guidance of $1.32 to $1.40. We left the remainder of our guidance unchanged from February. Our guidance for 2014 for organic revenue growth for parts and services is 8% to 10%, and our guidance for capital expenditures is $110 million to $140 million, with cash flow from operations of approximately $375 million. A few general comments on what we are seeing in the business and how it's reflected in our guidance. North American wholesale continues to remain fairly steady in terms of volume and costs. We've seen slight upticks in the miles driven and in the last few years, higher new vehicle production is slowly working its way into our sweet spot of our market. While new car production initially hurts us because many insurance companies will not use alternative parts until the car is a few years old, ultimately, we believe we will see favorable improvements in the age profile of the car part, which will be helpful. We haven't seen any appreciable change in used car prices and are paying more for vehicles this year than last. We remain ever hopeful that used car prices will fall and we'll begin to get a benefit, but that hasn't shown up in any appreciable manner. A little less than 10% of our revenue are self-serve business and scrap volumes are still important to our company. In Q2, we saw another sequential drop in prices of about 3% for scrap steel. That seems to have stabilized, and our car buying in that line of business has been adjusted to the lower scrap levels. Our European operations continue to see what I would describe as sluggish demand, particularly on the continent. We thought we might see an uptick from the delayed winter spending, but that really hasn't been the case. We saw our largest aftermarket competitor in the U.K. go into receivership this month, which is probably a reflection of the difficult market conditions there, along with our success of our branch expansion. We are optimistic that we'll be able to obtain some of that revenue that the company had previously been enjoying. The acquisition integrations are going well. Rob mentioned that Keystone Specialty is slightly ahead of our expectations. Our recent acquisitions in the Netherlands are performing in line with our goals. Although it's early days, we remain confident that we are on the right strategy. I would remind everyone that the U.K. paint acquisitions completed in August last year will begin to anniversary in Q3, but they will not -- they are not growing at the same rate as Europe as a whole. So that will adversely impact our reported European organic growth. On the flip side, we had the benefit of 21 new branches we opened in Europe in the first half of the year, and we expect those to contribute to the top line growth. Historically, Q4 has been one of LKQ's stronger quarters, but our product mix has changed. We expect the European operations in our Specialty segment to slow in Q4, which will dampen the improved results we normally expect in our collision business in North America. Both Christmas and New Year's will fall on a Thursday this year, which may also cause some disruption to normal revenue and cash flow patterns. 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. I believe that Arthur is the only named storm that reached landfall so far this year, and from our perspective, we saw a very little impact. Before I turn the call back to Rob, I just want to take a moment put the results of our first half of this year into perspective. In full year 2011, we had revenue for the year of $3.3 billion and net income of $210 million. In the first half of 2014, our revenue was $3.3 billion and our net income was $210 million. We accomplished in 6 months of 2014 what it took us a full year to achieve in 2011. Over the years, Rob and I have answered numerous questions regarding our acquisition and growth strategies, and we frequently respond to questions regarding how these acquisitions impact our gross margin or operating margins. I believe what it is telling about the comparison I just made is that despite doubling our size, we maintained the net income margins. It sometimes takes a bit of time to integrate our acquisitions and they will be quarterly fluctuations, but over time, when it comes to the bottom line, and by that, I mean, to include the impact of differing tax rates, we are demonstrating remarkably -- remarkable consistency in the execution of our strategy. And that, I believe, is what makes LKQ a unique company. We're growing parts and services revenue organically at a reasonably high rate, for example, 8.1% this past quarter, and we've also consistently acquired and integrated good companies and growing them at similar rates. It's rare to find a company with the markets and the skill set to both execute organic growth and acquisitions with the kind of consistency that LKQ has shown. With that, I'll turn the call back to Rob before we open to questions.

Thanks, John. To summarize, we are quite pleased with our results in the second quarter and the first half of the year and we are optimistic of what lies ahead for our company. Looking ahead, in North America, the recent upswing and trend in new vehicle sales bodes well for our collision business because newer vehicles tend to be fully insured with higher premiums and lower deductibles, and if financed, lien holders require the owner of the vehicle to carry mandatory insurance coverage. New cars are more valuable, so they are less likely to total, and from our perspective this means that newer cars are more likely to be repaired than an older vehicle. We also believe that as more new cars are sold, used car prices will eventually fall, which is good for us because it should reduce the cost of salvaged vehicles we procure for our North American recycling business. Simply put, increased new vehicle sales equate to more insured repairs and, therefore, more opportunities for LKQ. The increase in new vehicle sales is also a favorable trend for our new Specialty segment because the most common time for someone to modify their vehicle with specialty products is in the first 2 years of vehicle ownership. The performance of our Specialty segment in the second quarter, I believe, was in part a result of this trend. In Europe, we are in the early innings with capitalizing on the opportunities in that segment. Over the last 3 years, we've gained tremendous knowledge with the success of ECP and their ability to gain share in the U.K. market. Our objective is to replicate ECP's exceptional 2-step distribution and logistics model, in the industry-leading fill rates with Sator and the recent acquisition of the 5 distributors in the Netherlands. And of course, we intend on expanding this model into other European markets and remain committed to our European strategy and the long-term growth prospects for this segment. In closing, our team of over 28,000 employees, working across our geographic and operating segments, collaborate daily to leverage their combined operational expertise with a common goal of maximizing our growth and diversification strategy. This collaboration, coupled with our ability to successfully identify, acquire, integrate and grow these businesses, continues to create a long-term value for our stockholders. Operator, we are now prepared to open the call for Q&A.

[Operator Instructions] Our first question comes from the line of James Albertine with Stifel. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: I wanted to ask you on ECP. I heard you on the addition of 2 insurers, now you're at 17 over -- I think you said well over 80% of the insurance market there. I just wanted to understand how did the market, overall -- from an alternative parts penetration perspective, how long did it take to get to 7%? And what's your view on how that 7% can work higher? Is it something that can spike as auto insurance providers sort of change their tone on alternative parts? Or is this going to be more of a gradual sort of improvement over time? And then as it relates to that, I figured I'll just ask the follow-up now. Given your competitor -- business competitor weakness and your growth, geographically speaking, how much better positioned are you now to leverage that APU growth?

Sure. The 7%, Jamie, it was basically when we arrived in the U.K. were roughly 5% to 7%. But we think we've had, obviously, a positive impact so we continue to grow the marketplace. But the answer to your question, it really depends on the insurer. The insurer has to buy in -- and of course, I think why we're so successful here in the United States with alternative parts because the insurance company is, in fact, pushing the alternative parts. The nice part about the U.K. is that all the policies of the major insurance companies that we've looked at, all have, in their policy language, the ability to use these alternative parts. So it's going to be a long slog to get this through and get the insurance companies comfortable. But every quarter, we see more and more acceptance, and the growth has just been really, really strong. The second half of your question, about the competitive environment in the U.K. As you know, as we mentioned on the call, one of our largest competitors did go into receivership, they went into mensuration last week. We are currently looking at the various sites that were shuttered in the process and looking to see if we can find geographic holes to fill in our market and expand our distribution network. There are many trained, very talented employees now in the marketplace, and we are looking at opportunities to hire as many of those people as possible. And I think we're very well positioned to inherit a lot of that revenue that they had over there. We are 1 of 2 national companies now left on the marketplace. So we're going after the national accounts. And, again, looking to fill in the geographical holes. As I mentioned in my presentation, we added 20 locations this year, it puts us at 165. Our goal was always about 200. We will look to maybe acquire some of those so we don't have to greenfield those, and that's what we're looking at right now. So we're actively looking at opportunities in the marketplace. But we think it's a great opportunity for us to expand our strength in the U.K. market.

And Jamie, just to supplement what Rob said a little bit. In terms of the collision business, the company Rob's referring to is called Unipart Automotive. They did not distribute body panels. They did a little bit of collision work in terms of lighting and that sort of thing. But in terms of the mechanical market, great opportunity for us and I don't think it's really going to impact our -- the cadence of the acceptance of collision parts, particularly.

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

First question, and I apologize if I missed this, I jumped on a couple of minutes late here. But Rob, I think you mentioned that wholesale vehicle purchases were down, I think, 2% in the quarter, and I believe on a year-over-year basis. Can you just give a little color on that? Was that supply related, pricing related? What were the kind of drivers behind that?

The main reason, John, was that we had a really healthy backlog coming out of Q1. With the nasty winter weather we had, the auctions were quite plentiful of salvage. So we did stock up quite heavily in Q1. Year-over-year, we are ahead of where we were for the 6 months to 6 months. So we have enough product in the backlog to continue to hit our salvage numbers.

That's helpful. Next, you guys made a couple of nice paint distribution acquisitions in the quarter. Could you just remind us -- or can you just kind of size that market opportunity in North America and Europe and maybe give us an idea of how the returns on the paint business compared to kind of corporate average?

Yes, the market opportunity is pretty big here in the United States. It's well over $2 billion marketplace. We're #2 in North America. Finish Master would be the largest. We're a close second now, we've been gaining on them and looking at opportunities to continue to fill in that network. So you'll see more acquisitions in the paint business here in North America. As far as the U.K., we are by far the #1 distributor of paint at this point with locations throughout the U.K. John, you want to comment on the impact?

Yes, it tends to be a little lower gross margin business, John, but -- and we believe we get that back on an ROIC basis due, typically, you're just holding inventory prior to it being distributed on our own vehicles. I think the example we've always pointed to is back when we did the AkzoNobel acquisition and we bought 40 of their locations, and a little over 30 of them ended up in our existing locations. And so from an ROIC point of view, I think that they're quite attractive, but they are a little bit lower gross margin businesses. And you heard us refer to that, some of the gross margin deterioration year-over-year is just a result of the acquisitions in August last year associated with the U.K. paint deals.

Great. If I could just sneak one last one here. The Chrysler agreement that you guys reached, if I remember correctly, was only pertaining to very few parts. I mean, is there an opportunity to broaden that relationship with Chrysler over time?

There is, John. And by the way, the initial lawsuit that they posed against us was for one vehicle. They have several vehicles, actually, in the patent process, so it's bigger than just the one vehicle that was mentioned in the initial lawsuit. So it is settled, and I do believe it's a got a great opportunity because, of course, they always are continuing to patent parts so -- going forward. So that will continue to grow year-over-year. As you've seen in our Ford agreement, every year we seem to get a little more traction in that program, and I expect the same will happen with Chrysler.

Our next question comes from the line of Nate Brochmann with William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I wanted to go back to the European landscape a little bit and I was just wondering if you could update us on the mechanical side, what the aftermarket parts penetration is. And you mentioned that you're now 1 of 2 national suppliers there. If you could talk about just the competitive landscape in terms of how fragmented that is, just kind of trying to frame the opportunity with Unipart kind of having their struggles like in terms of the market share that you might be able to pick up.

Sure. In terms of the mechanical penetration there, Nate, we believe in the United States is roughly 80%. We are -- back-of-the-envelope calculations that -- we've got various sources over there -- somewhere between 50% and 60% penetration of the aftermarket. The OEs had a much stronger foothold there. That has been eroding though, with the passage of the Block Exemption Rule, about 4 years ago, which basically prohibited the OEs from voiding warranty if you put market products on. So we expect the aftermarket marketplace to continue to gain market share from the OEs. In terms of what's the opportunity, we know Unipart roughly had about $225 million worth of business. They had 160 branches. All of those branches were closed. We think there's a great opportunity, especially from a national accounts perspective, to be able to go after that business that they had. I believe roughly 40% of their business was national accounts. And that is really up for grabs and, like I said, which one of the other -- there's only LKQ or Euro Car Parts and another competitor that can possibly get that business. So we're actively going after that. This just happened a week ago, so we're actively pursuing those opportunities as we speak. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay, great. And then in terms of going back to, like North America, obviously, the organic numbers were well within your range and also up against the tough comps. What are we kind of looking for going forward in terms of the sustainability of that 5% to 7% organic growth in terms of just the dynamics for the rest of the year? I know you mentioned some of the seasonality that you're going to get out of the specialty business, but if you look at just the kind of collision opportunity, how should we feel about that?

I feel very good about our North American organic growth rate of 5% to 7%. John mentioned in his presentation about the SAAR rate and the continued advantages we have there. That will start to flow through here in the next year, at the latest. We'll start seeing some of those benefits relative to newer car parts. So I'm very confident in that 5% to 7% range. And with KAO, KAO was actually up 11% year-over-year. Even though it's not our [indiscernible] numbers, that bodes well for us that the new cars are starting to get to the marketplace, and as those cars get in accidents, that will definitely be a positive for us. So, feel very confident in the 5% to 7%, certainly long term as those new cars get into the system, but even short term, I think we're pretty good there. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay. And then just one last quick big -- kind of big picture thing, but a lot of people are starting to talk about these accident avoidance systems and whether or not they might actually have any impact, just wanted to see what kind of your big picture thoughts on that might be and whether you guys have done any research there in terms of whether they do make a difference.

We have done that research. In fact, John and I had a meeting this week with CCC. We get a quarterly update on what they're seeing in the market. And they gave us an updated chart here. And they are standing by the fact that in 20 years, we should see a reduction of 5% in accident claims, 20 years from now. 5 years, it's predicted to be about 2.5%. So very little impact they're predicting over the coming years. The example we always use, Nate, was the anti-lock brakes that became a requirement somewhere around 1996. Took until about 2011 before 80% of the cars actually had them. So there's a long cycle time to work out the older cars. So we think, comfortably, this 15 to 20 years of very little impact on the accident-avoidance systems.

Our next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: On Keystone Automotive, the specialty parts business, John, you indicated that was significantly above trend at 11%. Can you explain what's driving that? Is there a market dynamic or something more specific to Keystone?

I think there is a little bit of a market dynamic. That company does benefit from new car production. When we look at their SAAR rate, it is up slightly year-over-year, I don't know it's up enough to drive that whole 11%. I'd like to think that some of it is the fact that we are -- we believe we're improving the service with the additional point distribution -- point, so to speak. We're also investing in that business, we're opening a new warehouse in Texas in the fall. So I don't know if it's anything unique. Rob, do you have a view?

I absolutely believe, Craig, what John said is right. Those 36 additional distribution points have been really critical. We're using existing LKQ facilities, so there's no additional costs and we're getting the parts to our customers even quicker. And we're starting the process, starting to share deliveries now as well. So we see that as a win-win. Customers will get the product faster. We'll continue to get additional costs out of those businesses going forward. So that's long term. We've got to get those routes all combined, but I am convinced that those extra drop points are really a key, a benefit for us to get customers more sticky with us in terms of them wanting to buy from us. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: So as the balance of the year unfolds and you have the benefit of those additional distribution points, do you think we'll see 3 more quarters of sort of above-trend growth in that business?

I'll comment through June -- up to July, I mean, they're having a very good July as well. I think we're going to see continued growth there, strong growth. We originally -- when we announced the deal, we thought we'd grow North American 5% to 7%, I think you'll see strong growth. We'll be at the high end of that range, if not higher, I feel pretty confident going forward. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: That's great. And then on Sator, I think you mentioned some contraction in their core business. Could you just spend a little more time explaining the dynamics affecting that? And then also maybe inject how you think the 5 jobber acquisitions are going to play in that overall equation?

Sure. There are a couple of things, Craig, on the Sator organic. Mainly, I think the most important ones is we did buy our 5 best customers, and that revenue went from organic to intercompany. Even though the deal didn't close until May, it was announced in April for the competition commission to get involved. So it was basically the whole quarter. And I'm -- what's hard to really quantify, we're pretty certain some of the remaining customers likely moved a portion of their spend elsewhere. If another competitor had the product, they didn't want to spend it with us. There was no mass leaving of customers, but we believe that their spend likely was diversified outside of LKQ. A little bit of an impact with the export business. We had a pretty decent excellent export business into Russia and the Ukraine. That, obviously, had a little bit of an impact with the political disruption in those markets. It was a mild winter in Europe, which didn't help our Q2. So I think all those factors combined a little bit to drive down the organic growth. The 5 locations that we did buy are performing to plan. It's been a couple of months since we've had them under our belt, but they are performing to our performer expectations. And customers are seeing better fill rates with us. Obviously, we're selling more of our products into those customers we bought. So we're very happy with that progress of the 5 locations we bought. We are looking, obviously, as we mentioned on the last call, Craig, that those are 52 locations. We think the optimum number is 75. So we'll look to buy a few more acquisitions in that marketplace to fill up the market and cover the entire Netherlands. So -- and finally, on that, we did pro forma a decrease in growth with those 5 acquisitions because we knew some of our customers would likely look for alternative sources. So all in all, it's expected, and we think with the 5, now we can start to drive the organic growth as we get more comfortable.

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

You guys mentioned and talked about the -- that basically, John, you said that some of the margin improvement in the U.S. business is being masked by some of the other noise. Can you talk a little bit about what's causing that? Obviously, you get that kind of organic growth from North America, and we can understand why we get part of it. But obviously, that number is trending better probably than you expected.

Yes, I think the point I was trying to make was that, obviously, the bigger driver that changed the margins has been the acquisitions, and those are masking the overall improvement. And we had about a 70 basis point improvement in North America. The other point I was trying to make was that because other revenue is becoming -- is shrinking relative to the rest of the size of the business, that's masking the leverage that we're getting out of the SG&A and the distribution network a little bit. Because if you look at those numbers, they're coming down as a total percent of revenue as well in many cases. But had we kept that other revenue higher simply because of commodity prices being higher, you would have seen those come down much more. The fact that we're compensating for that drop in other revenue is masking a little bit of the improvement in the operating leverage that we're getting in the base business. That was the point I was trying to make, John.

Yes, right. And just one more point there. The 70 basis points in North America is just primarily leveraged from that organic growth?

It's a little bit of a gross margin improvement on -- particularly, this quarter, we saw our self-serve and our aftermarket businesses taking a little bit of an uptick and then it's just that down below the gross margin line is just leveraged throughout the entire network.

And last question. If you look forward and just trying to think about the puts and takes on margin pressure, how is it -- Rob, you mentioned on the Specialty business, that should be more of just flow-through of the business rather than a change in gross margin mix that will change anything on the gross margin line. Is that right?

Yes, that business -- the Specialty business is a lower gross margin, John, so as we gain market share and grow the business, it will be a slight deterioration on our overall gross margin as they continue to outperform.

But it should not -- overall, the mix there shouldn't change either way, really, up or down as far as where we could see gross margin there?

I think it's minimal on the grants, de minimis on the grants, on the overall company performance. But it is slightly margin dilutive, that business.

And then, secondly, as we go to Europe, obviously, the -- as you wind through and continue to add and move from 3-step to 2-step, that helps Sator. And then I assume the next round of revenue growth, and with the ECP branches, could come in at a little lower of cost based of -- if you pick something up from Unipart.

Yes, I think that's right, John. A couple of things on the 3, 2 -- excuse me, the Netherlands acquisitions. The -- initially, we have to defer the intercompany revenue profit on -- associated with those sales. And so -- and once we get those fully integrated and get an inventory turn in there, you'll start to see a little bit of improvement in the Sator margins. ECP has opened 20 branches this year, they've incurred some of those costs in the first half of the year. As we've said before, those branches take a little while to get profitable. So I would anticipate the margins in the U.K. coming up over time as those branches expand and as they take advantage of, hopefully, our revenue part [ph] associated with that and the bankruptcy of Unipart.

Our next question comes from the line of Bill Armstrong with CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: Just on Sator, with the Netherlands acquisitions, is there a risk of further customer loss going forward? Or do you think you've already realized it all?

I think it's been realized, Bill. I think the good customer defections would have been gone by now. I'd say, I think it's probably losing -- they're losing a little bit of their spend, but we haven't lost a significant customer through this process. William R. Armstrong - CL King & Associates, Inc., Research Division: Okay. And in North America, on salvaged vehicles, can you just comment on the pricing trends at the auctions and also what sort of volumes or availability of vehicles you're seeing at the auctions?

Yes, the auctions have been very steady, Bill. We haven't seen a huge spike out of -- from all that winter weather. So we track the number of vehicles that we see at the auctions and very, very steady. As far as our cost, it is slightly up year-over-year. However, that is almost by plan because we're actually trying to buy a better car to fulfill our needs. So slight increase in the car cost, but pretty much the plan. As I said, nice backlog at our facilities, and the auctions have been very, very steady. One thing I do want to talk about a little bit about is on the scrap impact as it relates to that. We were down year-over-year, about $10 a ton and, sequentially, we were down $9 a ton. And we see a slight uptick in July. So we've seen a little bit -- at least the bottom seems to have hit there. But year-to-date, we lost about $0.01 of EPS due to the scrap being down over the course of the year. So hopefully, that stabilizes and we don't lose any more on the scrap line. William R. Armstrong - CL King & Associates, Inc., Research Division: Right. And if we adjust for the mix, I know you're going after maybe a little bit better quality vehicle. Just kind of on a more apples-to-apples basis, are you seeing pricing kind of steady? Or do you think it's increasing on an apples-to-apples basis also?

Actually, it's pretty steady, but the Manheim year-to-date -- actually, year-over-year, is up about 3.6%, so that's remaining high. Everyone we've heard talk about that seems to think that has to be the end of it. It's going to start coming down because of the SAAR rate, but auction prices happen to be pretty steady.

Our next question comes from the line of Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of quick questions. First off, you mentioned that the Keystone business was dilutive to gross margin. At least in this quarter, it seemed like it was nicely accretive to EBITDA margin at 13%, which is higher, I think, at least than we were pegging it. How sustainable is that 13% EBITDA margin in and of itself?

There is a seasonality to that business, I think Q2 is probably their strongest quarter. Obviously, we haven't owned the business for -- a little over 6 months. So -- but we anticipate that Q4 is probably going to be softer on that. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. And then a couple of more quick questions, if I could. The acquired businesses that you acquired in the quarter outside of distributors in the Netherlands, what's a ballpark sales base on an annualized basis for those?

Well, the total, including the Sator piece, is $220 million. And in the quarter -- that equates about $55 million per quarter. In the quarter, we reported $25 million, so you can anticipate about $30 million on average, again, taking out seasonality. But we should have a $30 million revenue still to come on a quarterly basis. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. Yes, I think so. And then the last question I would have. Rob, as it relates to the U.K. pilot, the insurance company pilot for collision parts, how should we think about a time frame in terms of it switching from a pilot to a full commitment on their behalf? I mean, are there certain mile posts that have been voiced to you? Or how should we define the success of the program and its gestation period?

Sure. Sam, I kind of wish we never used the word pilot because it obviously signifies that it's a test. The fact that no insurance company -- we launched this back in March of 2012, has stopped writing the product. I believe it's just a word that we probably regret using. We are in full-status program with these guys. Again, just taking away the word pilot. The growth that -- double-digit strong, 33% this quarter off a mild winter, I think we can continue to see those programs last. I would say we're over the hump right now with most of the carriers on the uneasiness about using these parts. Everyone has been committed to the program, and no one is showing any signs of taking back with their stance on the aftermarket parts. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Is there a tipping point coming from the aftermarket parts manufacturers then, in terms of them committing a product for you to inventory then?

The nice part about this, Sam, is they're the exact same manufacturers for us here in North America, so we have them fully committed to putting more certified parts into the program, both here and the north -- and in the U.K. In fact, we had an increase of certified parts of 33% here in North America. So no issues at all with our manufacturers whatsoever.

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

My questions have been answered, but I was going to ask about buying these Sator distributors and what it was going to eventually do to your margins. But I think, John, you kind of answered it. You said it's up a smidge over time?

Yes, I think so. Basically, we were making a profit selling to the distributors, distributors were making a profit, so you've got -- once you eliminate that intercompany revenue, ultimately, we anticipate a slight uptick in the gross margins. We had to defer the profit on the intercompany sales until we get a turn in inventory. So we didn't get much benefit from that in Q2, probably won't get much benefit in Q3, start to see a little bit better improvement in Q4.

Okay. And then, Rob, with your business, I remember in Q1, you said it was definitely impacted by weather. There was a lot of backlog in the collision repair facilities. I mean, how much did that really benefit you in Q2? And has that -- I would assume at this point, that, that's equilibrialized.

It's certainly helped, Gary, there was definitely a backlog going into Q2. We're in constant contact with our customers. They still feel that there's work in the field, whether that's late in the winter or now it's the hailstorms or just normal conditions. But volume's been pretty good through July. We're very pleased with the amount of locked work at the shops.

Okay. And then, lastly, John, you were talking about the changes in seasonality for -- based on Europe. So that would mean Q3, based on that seasonality, will be stronger than it historically has been, and Q4 would be less strong than it historically has been. Is that how I should read that?

If you look back many years ago, our strongest quarters tend to be Q1, followed by Q4. The point I was trying to make, I think, was with the European businesses, Q4 tends to be a little bit lighter than, say, Q2. And the Keystone automotive business, there's a lot of recreational associated -- especially with people who want to enhance their vehicles. But a lot of that tends to take place in the summer months. So we're anticipating a little step-down in the Keystone automotive in Q4.

Our next question comes from the line of Scott Stember with Sidoti & Company. Scott L. Stember - Sidoti & Company, LLC: Rob, you indicated that the Keystone Specialty operations is now offering 1,000 SKUs of collision parts nature. Could you maybe just talk about how that's been received, how those are moving and, specifically, what kind of parts those are?

Yes, it's really early days, Scott. We just got all the systems communicating with each other, so the reps on both sides can see the product. It's mainly cooling products at this point, radiators, condensers, that stuff that goes into those specialty shops as well. But very pleased to have that inventory there. They actually -- I think the big potential win here will be the muscle car. Those specialty shops do tend to work on those type of vehicles, and those 20,000 SKUs of the Goodmark muscle car parts, that opens up a new opportunity to move that. It's not a huge market, the specialty -- muscle car market, but we have a nice line to be able to go after those customers now. So early days, but the communication is going back and forth and the products are flowing. And again, with 36 of their locations now -- LKQ locations as their drop point, much easier to get to them to as well. Scott L. Stember - Sidoti & Company, LLC: Okay. And just moving over to Europe. Now that you've had relationships with several big carriers in the U.K. for -- going on over a year now, can you talk about any success with driving the collision parts program in the continent?

We've done nothing yet. At this point, Scott, our plan was to get the 3 to 2 the companies -- Sator companies under -- through the consolidation process. We are working on that. But I believe, by Q4, we'll start putting some insurance marketing people over there. And hopefully, by Q1 of next year, we should be able to launch a program over there with parts. Scott L. Stember - Sidoti & Company, LLC: Okay. And just last question on -- can you just give an update on CCC ONE and how that's going, where you stand with that?

Sure. Sequentially, we had a 15% growth in orders and a 14% growth in dollars and they've over 4,200 shops enrolled at this point. So slow but steady, but still growing. And salvage will be in pilot, so that they'll be able to order salvage in Q4 with a rollout in Q1 of 2015. So moving ahead very nicely. We want to be courteous of your time, so we'll wrap up here. Thank you, everyone, for your time this morning, and we look forward to speaking to you in October when we report our third quarter 2014 results. Have a good day.

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