LKQ Corporation (LKQ) Q3 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation Third 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 of Investor Relations for LKQ Corporation. Thank you. Mr. Boutross, you may begin.

Thanks, Devon. Good morning, everyone, and thank you for joining us today. This morning, we released our third 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 has 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 this call. Before we begin our discussion, I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made except as required by law. Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risks. Also note that guidance for 2014 is based on current conditions, including acquisitions completed through October 30, 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. 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 Q3, revenue reached a new quarterly high of $1.72 billion, an increase of 32.6% as compared to Q3 2013. Net income for the third quarter of 2014 was $91.5 million, an increase of 24.6% as compared to $73.4 million for the same period in 2013. Diluted earnings per share of $0.30 for the third quarter ended September 30, 2014, increased 25% from $0.24 for the third quarter of 2013. Diluted earnings per share for the third quarter of 2014 would've been $0.31 compared to $0.25 for the third quarter of 2013 after adjusting for any net losses resulting from restructuring and acquisition-related expenses and changes in fair value of contingent consideration liabilities. During the quarter, we achieved organic revenue growth and acquisition revenue growth for parts and services of 8.9% and 24.6%, respectively. I am particularly pleased with the North American organic revenue growth for parts and services of 6.7%. Now more detail on our North American operations. During the third quarter, we purchased over 72,000 vehicles for dismantling by our wholesale operations, which is a 2.4% increase from Q3 2013. With the Manheim Index trending down over the last 5 months, I want to take a moment to touch on one aspect of our car buying that could impact us in the coming quarters. One way to grow recycled parts business is to simply buy more cars. If we buy 5% more vehicles and they are the right vehicles for which there is demand, then our revenue in that segment should increase proportionately. It is also possible to grow revenue buying a better-quality car, one that will part out for additional revenue. So while the number of vehicles we bought this quarter was up only modestly, we remain confident in our ability to grow the top line because of the better-quality car we are purchasing. While used car prices are falling, we have increased the average value of inventory acquired. We believe that this decision will drive incremental revenue and gross margin dollars in the coming quarters. Because of the life of the selling cycle, this will likely take 2 quarters to fully manifest itself in our results. During the quarter, our aftermarket parts business continued to deliver solid organic growth. Between 2009 and 2013, the average number of parts being replaced on a repair claim has increased 10% with 75% of the increase being captured by aftermarket parts. Insurers' expanded use of aftermarket parts is being driven by the value proposition of aftermarket parts and the increased supply availability as evidenced by a 32% year-over-year increase in the number of available certified parts. In our self-service retail business, during the third quarter, we acquired approximately 134,000 lower-cost self-service and crush-only cars as compared to 128,000 in Q3 of 2013 or roughly a 4.5% increase. 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 Q3, ECP achieved organic revenue growth of 17.9%. This figure includes, for the first time, the paint businesses acquired in August last year. Excluding our paint locations, ECP's organic revenue growth during the quarter was 10.4% for branches open more than 12 months. I am particularly pleased with the ongoing double-digit organic growth despite facing unseasonably warm September, a soft overall economic environment in the U.K. during the quarter and coming up a year that benefited from aggressive branch openings in 2012. On August 7, 2014, ECP assumed the leases of 27 former Unipart Automotive branches. Unipart was a large competitor, which went into receivership during the quarter. We don't intend to retain all of these locations. Our plan is to keep some of the smaller satellite locations to existing branches. Some will become the main branch in that market, replacing our existing site. And some will be operated temporarily while we find a more suitable location in certain markets. When that rationalization is completed, we anticipate that we will net out 18 new ECP branches. Initially, we will incur some upfront costs with these transactions that will cause a drag on earnings. However, we believe this deal positions us well to continue our market share gains in the U.K. and advance our sales to the Unipart Car Care Centres and national accounts. In addition, we've been able to hire many experienced people from across former Unipart. Further highlighting this point, since Unipart went into receivership, our existing ECP branches have seen averages sales per day to Unipart Car Care Centres and national accounts increase 57% and 23%, respectively. During the quarter, ECP opened up a total of 15 branches, 3 new ECP branches and 12 converted Unipart Automotive branches, bringing our current network to 179 branch locations. Our target is to have 190 branches by year-end, including the balance of the Unipart locations. Now an update on ECP's collision program. During the quarter, we continued to witness strong double-digit year-over-year growth of nearly 30% with our collision parts sales. And for the first time, we are witnessing our impact to the U.K. APU rate. Based on reports from multiple industry participants, U.K. APU today stands at 9%, which is a 200 basis point improvement since we launched ECP's collision program in March of 2012. And of that 200 basis points improvement, we believe the vast majority is a direct result of our efforts in educating carriers and body shops of our value proposition to not only drive down cost but to assure them of the quality of the aftermarket collision products and ECP's ability to get them to the shop on time. In conjunction with the growth of ECP's collision parts program, I am also pleased with the growth we are achieving with ECP's paint sales from the distributors we acquired in August 2013. The growth we are witnessing with our paint sales further highlights the leverage and synergies our one-stop shop collision model can achieve in new geographic segments. Now let's turn to our Sator business. On August 27, 2014, the company completed its acquisition of an automotive aftermarket products parts distributor with 11 branches in the Netherlands. This acquisition supports our ongoing plan to convert Sator distribution network from a 3-step to a 2-step model. We anticipate that once we rationalize these 11 branch locations with Sator's existing network, we will net 8 new branches, bringing Sator's branch count to 60. As mentioned on previous calls, our target is 75 to 80 branches for building up the Netherlands market. Though we saw a decline in EBITDA margin in Europe this quarter, driven in part by integration of Netherlands distributors into Sator, we believe the strategic initiatives have positioned us well for executing our growth strategy. Despite the loss of some export sales, Sator posted 2.1% organic growth in the quarter. Now an update on our specialty segment. Keystone Specialty continued its strong performance by posting year-over-year growth of 13.4% in the quarter and year-to-date growth of 11% against its preacquisition results. To further expand Keystone Specialty's presence in the RV market with its existing NTP Distribution business, on October 3, the company announced that it acquired Stag-Parkway. Stag-Parkway is a leading aftermarket distributor of recreational vehicle parts and accessories in North America that has been serving a diverse base of over 6,000 customers from 600 suppliers for the past 50 years. Stag-Parkway offers a broad selection of parts and accessories with next-day shipments that covers 95% of North America. Stag currently operates 12 warehouses in the United States. We believe there are ample opportunities for synergies and for leveraging our existing North American distribution network with the combination of Stag and Keystone Specialty's existing RV business. In addition to the acquisitions in Europe and specialty segments, during the third quarter 2014, the company made 2 additional North American acquisitions, including a salvage yard in Nova Scotia, Canada and a heavy-duty truck salvage yard in Illinois. As you can see, we've been very busy with acquisitions and proud to report that we have completed 20 acquisitions for the first 9 months of 2014, including 12 in North America alone, with the additional 8 in Europe. Acquisition candidates continue to exist across all of our operating segments, and we are well positioned to execute operationally and financially as opportunities present themselves. At this time, I'd like to ask John Quinn to provide some more detail on the financial results for the quarter.

Thanks, Rob. Good morning and thank you for joining us today. Revenue for Q3 2014 was $1.7 billion, an increase of $423 million or 33% over the $1.3 billion we achieved in Q3 2013. Earnings growth was a healthy 25% increase. I'll point out some things about earnings to help explain the difference relative to revenue growth. As a frame of reference, the way we looked at the quarter was as follows. Last year, in Q3, we reported $0.24 of diluted earnings per share when there was $0.01 unfavorable impact from restructuring, acquisition and contingent payment adjustments. There was also $0.01 favorable adjustment relating to discrete tax items. This year, our reported diluted earnings per share was $0.30. We had $0.01 of unfavorable impact from restructuring, acquisition and contingent payment adjustments. Not in our guidance but in our actual results was a further $0.005 of unfavorable impact associated with the new branch startups in the U.K. as a result of a competitor, Unipart, going into insolvency administration. In our guidance but not necessarily in some analyst models was the unfavorable impact of not being able to recognize profit on sales to recently acquired companies in the Netherlands. That was a further $0.01 impact of our earnings. I realize there's a lot going on here, so I'll repeat some of this analysis in the rest of my remarks. The revenue growth breaks down as follows: For Q3, our total organic revenue growth was 8.5% and we delivered additional growth of 22.7% from acquisitions with foreign exchange adding a further 1.3%. Organic growth of parts and services was 8.9%. Within that, we saw our North American operations grow organically 6.7% while the European segment grew 13.4%. North American growth was the highest we've reported in the last 5 quarters. We believe that this growth reflects the basic fundamentals of the company's markets and our value proposition. Last quarter, in our prepared remarks and in our recent investor presentations, we stated that we believe that we should start to see the benefit of higher miles driven, the benefit of higher new car sales starting to come into our sweet spot for alternative parts demand. The fundamental value proposition of alternative parts for the consumer and the insurance companies continues to drive demand as measured in parts consumption. It's our belief that these dynamics will continue to afford our industry and LKQ, in particular, opportunities for continued organic growth in North America. As we anticipated in the last quarterly call, the European segment showed lower growth as we have included the U.K. paint operations acquired in August last year in organic growth for the first time, along with Sator for a full quarter for the first time. Even including the paint businesses, ECP continues to show strong organic growth of 18%. We saw Sator return to positive organic revenue growth with a 2.1% improvement, helped by our expansion in France. 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. But through the first 6 months, those losses have been well controlled and the base business is growing even in a difficult economic environment. Acquisitions completed in the last 12 months through September 30 contributed $295 million to Q3 2014 revenue on a reported basis, including $4 million from acquisitions completed in Q3 2014. The annualized revenue from acquisitions completed in Q3 2014 was approximately $37 million or $9 million per quarter. Rob mentioned we acquired Stag-Parkway earlier in October. Obviously, none of that revenue is in the quarterly numbers. But for modeling purposes, we are estimating that Stag will have an annual revenue of approximately $180 million. Total change in other revenue, which is where we recorded scrap commodity sales, was positive 15%. Acquisitions contributed 9% positive growth and we had 6% organic growth, primarily volume increases, as fuel pricing was about 3% lower year-over-year. The average price we received for scraps deal was $215 per ton this year versus $221 per ton in Q3 2013. Other revenue was 10.3% of total revenue as compared to 11.9% for the same period last year, reflecting the declining relative importance of this revenue to our overall results. In Q3 2014, revenue for our self-serve business was $115 million or 6.7% of LKQ's total revenue. Approximately 31% of this revenue was parts sales included in North American parts and services revenue and 69% scrap and core sales included in other revenue. Our reported gross margin for Q3 2014 was $664 million or 38.6% of revenue, a decline of approximately 130 basis points from our gross margin percentage of 39.3% in Q3 2013. There was 130 basis point decline attributable to the specialty acquisition. Mix and some smaller acquisitions are offsetting a 60 basis point improvement in the base North American business. We are encouraged to see these continued improvements in the North American margins. As I explained in last quarter's call, we're not able to recognize the intercompany profit on sales by Sator to the newly acquired distributors until we complete 1 turn of inventory and those products are sold to the final customers. That process is behind us now. But in Q3 2014, it impacted our gross margins by approximately $4.6 million. Had we not had that impact, our gross margin percentage would have been 30 basis points higher and our EPS about $0.01 higher. Moving to operating expenses. Some of the comparisons are being affected by our specialty acquisition. In the specialty line of business, gross margins tend to be lower, but they incur relatively lower facility and SG&A costs. Specialty will affect the comparisons for the remainder of the year. Facility and warehouse costs were 7.7% of revenue in Q3 2014, a 60 basis point improvement over the 8.3% in Q3 last year. This improvement is primarily due to specialty, which tends to run lower facility costs than the rest of our operations. Distribution cost increased slightly from 8.4% of revenue in Q3 2013 to 8.6% this quarter. This change was mainly attributable to higher cost in the U.K., which was associated with the new branch openings and some startup costs, which we are incurring on the former Unipart locations. Selling and G&A expenses decreased from 11.8% of revenue in Q3 last year to 11.2% in Q3 this year, an improvement of 60 basis points. Keystone Specialty accounts for 30 basis points of the improvement, but 20 basis points of that was offset by the Netherlands acquisitions. Excluding acquisitions, we saw North American leverage generate a 50 basis point improvement in this market. So in summary, the combination of facility and warehouse, distribution and SG&A cost was 27.5% of revenue in Q3 2014 as compared to 28.6% in Q3 2013. About half of that improvement is a net impact of acquisitions, offset by incremental cost of ECP and the other half was leverage from the North American operations. During Q3 2014, we recorded $3.6 million of restructuring and acquisition-related expenses, up from $2.2 million in Q3 last year. The 2014 cost is primarily related to the operations in the Netherlands. Depreciation and amortization was 1.8% of revenue during Q3 this year as compared to 1.6% of revenue in Q3 2013. This increase was due to higher amortization related to intangibles, primarily at the specialty acquisition. Other expenses net increased to $16.4 million in the 3 months ended September 2014, compared to $14.4 million in the same period last year, an increase of $2 million. The main components of the change included net interest expense, which is $1.2 million higher, with $2.4 million attributable to higher debt levels, partially offset by a $1.2 million reduction in lower interest rates. Adjustments to continued consideration were negligible this quarter as compared to an expense of $700,000 in Q3 last year. Other income is also negligible this year, whereas in Q3 2013, it was a positive $1.6 million. This change is also entirely due to currency changes, which generated income of $500,000 last year over a loss of $900,000 this year. Our effective borrowing rate for the quarter was 3.5%. Our year-to-date effective income tax rate was 34% as compared to 34.6% the prior year. In Q3 2014, our effective rate was 34% versus 32.6% Q3 last year. As we previously disclosed, in Q3 last year, we had some favorable discrete items which lowered the rate, impacting earnings per share favorably by approximately $0.01 at that time. On a reported basis, diluted earnings per share was $0.30 in Q3 2014 compared to $0.24 in Q3 2013, an improvement of 25%. Adjusting for the restructuring, acquisition-related expenses and contingent consideration adjustments, EPS would have been about $0.01 higher both this year and the last. So on an adjusted basis, Q3 would have been $0.31 as compared to $0.25 last year. I've also pointed the $0.01 EPS impact to gross margin caused by the Netherlands acquisitions and the $0.01 impact for discrete items in last year's taxpayers. We believe the U.K. branch openings will have further unanticipated $0.005 loss this year. We always have some types of these costs in the company. But in this case, they were not contemplated in our July guidance. Switching to our year-to-date cash flow. Net cash provided by operating activities totaled $323 million through 9 months in 2014 compared to $341 million in 2013. Net income and depreciation were favorable to cash flow by $67 million and $29 million, respectively. Growth in accounts receivable was an incremental 35 -- $34 million use of cash as we continue to grow revenue organically. Similarly, inventory was an incremental use of cash of $37 million as we invest in inventory for the expanded business. The timing of cash taxes resulted in a higher outflow of funds in 2014 compared to 2013 of $20 million and other operating assets was a net use of $21 million, primarily as a result of interest payments on our senior notes and bonus payments in 2014. Capital spending was $100 million in the first 9 months of 2014, and we spent $651 million in cash on acquisitions, the largest being specialty, which accounted for $427 million of the total. During the quarter, we amended our asset securitization program, increasing the facility size from $80 million to $97 million and extending the maturity to October 2017. We ended Q3 2014 with $1.9 billion of debt and cash and cash equivalents were $245 million. Availability in our credit facility was approximately $1.1 billion and with the cash, total liquidity was approximately $1.4 billion. So we have the capacity to pursue additional acquisitions if suitable opportunities arise. Now turning to guidance. The new guidance is calling for net income between $405 million and $417 million. That equates to revised earnings per share guidance of $1.32 to $1.36. We left the remainder of our guidance unchanged from February. Our guidance in 2014 for organic revenue growth from parts and services is 8% to 10% and our guidance for capital expenditures is $110 million to $140 million with cash from operations of approximately $375 million. I'll point out where we see some differences from the last quarter and how we think those impacted Q3 or may impact Q4. Relative to the guidance we provided in Q2, the major changes we've seen relate to the U.K. branch expansion, foreign exchange rates and scrap. The new U.K. branch openings since our last call were not anticipated in our prior guidance. We acquired these locations on very favorable terms. And while it should be a long-run positive for us, they are requiring some initial further investment. We are working very quickly to get these opened and expect that the portfolio will be largely rationalized by the end of the year. We believe that the losses from this program likely will cost us about $0.005 in earnings per share in Q3 and will be almost $0.01 loss in Q4. As I'm sure listeners are aware, the U.S. dollar has strengthened against many currencies, including the Canadian dollar, the euro and the pound. We believe this negatively impacted us in Q3 partly because the earnings convert to lower U.S. dollars but also with short-term losses we recorded in other income, which I mentioned a moment ago. We believe that given where rates are today, we could see $0.015 to $0.01 impact to earnings per share relative to the Q2 guidance. Scrap was down slightly in Q3 but not really enough to call out as an issue. However, we have seen fairly steep drops in October, and we're hearing there's potential further drops in November. We are adjusting our car buying to reflect this, but that takes time and can cause some volume decreases, as we tend to leave the market on the downside. It is possible that we could see the combined volume price from scrap being as much as $0.01 impact to EPS in Q4. As we have discussed before, we see these fluctuations as short-term gains and losses, which take a quarter or 2 to correct but fundamentally don't change the business. And one final reminder, the U.K. paint businesses were included in our organic growth only half the quarter and they'll be in the figure for the full quarter in Q4. So we may get a slight tick-down in the European organic growth as a result of that. With that, I'd like to turn the call back to Rob before we open it up to questions.

Thanks, John. To summarize, we are pleased with our results in the third quarter and for the first 9 months of the year and we are optimistic of what lies ahead for our company. Looking ahead, in North America the recent upswing in miles driven, lower gas prices and increased new car sales should provide nice tailwind to our collision business. In addition, a younger car part that is fully insured and more frequent driving should equate to a higher accident frequency, resulting in more repairs. For insurance companies, the competition for premium dollars is fierce with the personal lines insurance industry today spending more than 3x what they spent on marketing and advertising in 2002. We view this as a positive for LKQ because the value proposition of alternative collision parts continues to be a real solution for insurance carriers to drive down their costs. Another potential positive is that we continue to believe that as more new cars are sold; used car prices will continue to fall. The Manheim Index is down over 1% year-over-year through September, which is good for the cost of the salvage vehicles we procure for our North American recycling business. And as you can see by the acquisitions completed thus far in 2014, North America continues to be a priority in key segments for LKQ, and we have runway to grow our network within all lines of our businesses. In the U.K., in just 2 years, we have built aftermarket-only collision parts business from scratch, which is now approaching $70 million of revenue. Our efforts in the U.K. have played the key role in driving APU growth by 28%. We continue to believe there are ample opportunities to grow this business line in the U.K. and soon the launch on the continent. Again this growth has been accomplished with aftermarket collision parts only, leaving many more untapped opportunities for LKQ in Europe, including salvage, reman and heavy truck, which we continue to explore regularly. In Europe, there are approximately 280 million vehicles on the road, roughly 14% larger than the United States, yet there is no pan-European distributor scale serving the professional mechanical and collision repair. In just over 2 years, LKQ is a leading player in Europe servicing these customers. This dynamic highlights the fragmented nature of this operating segment and a market ripe for consolidation. Lastly, our acquisition strategy has always been to acquire the best assets we can with the best management teams and use those strengths to lever the business to higher growth rates. Clearly, Keystone Specialty fits that criteria and we believe there is opportunity to grow this segment in the niches it serves. In closing, our team of over 29,000 employees work tirelessly to create and evolve what we will believe is a unique company. Our extensive networks, the breadth of our inventory and our industry-leading fulfillment position us well to deliver consistent growth organically and from acquisitions across all of our operating segments. This combination should translate into continued long-term value for our stockholders. And with that, Devon, 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: A couple of key points that you highlighted, organic growth, U.K. APUs, up 200 basis points, and then Sator profit. I want to ask one quick clarification and a follow-up. Rob, on one of the comments you made with respect to the focus on late-model vehicle purchases, it seems to tie with what you're talking about in terms of the sweet spot in terms of the growth of kind of 3-, 4-, 5-year-old units in operation. But at the same time, it doesn't seem like you're looking for any degradation in the pricing environment. So perhaps is that an element of sort of conservatism in your outlook that could incrementally drive a better result looking into the fourth quarter and beyond?

Yes. Jamie, obviously, with car parts shifting to a newer car part, this was a strategy of ours that we have led very quickly. We want to start buying a newer car. That's going to do a couple of things for us. As I mentioned on previous calls, with our shifts switching from an average request of a 7-mod-year car to a 9-mod-year-old car, we were selling an older car part at a lower price. We do believe that we can, in essence, acquire the same number of cars and increase our top line to meet our expectations because we'll be selling at a higher price. With Manheim coming down as well, we do expect a lower cost of this type of vehicles across the board. So we can buy a better car that will part for more at a reasonable price because of Manheim coming down. So it was a conscious shift on our part and we think we can take advantage of that going into 2015 and beyond. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: It just sounds like it's building, I guess, is my point as well.

Absolutely, yes. You're going to see that sweet spot start to get a lot stronger here as those 16 and 17 million car parts move its way towards 2 and 3 years old, which is already happening. So we believe that we're going to start seeing some tailwind from that for sure. James J. Albertine - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. Very helpful. And then as a follow-up, just on the gross margin side, John, thanks for the details as well, trying to understand a little bit on the Sator comment you made. But overall, 130 basis point degradation year-over-year with a 60 basis point lift in core, which has been, I think, consistent with the last 2 or 3 quarters of 60, 70 basis point lift in core. So as we look into the fourth quarter and beyond, we're going to cycle through some of the bigger-picture acquisition headwinds. How should we think about the compares if you look into 2015? It seems like it will be a positive environment for further gross margin expansion. But what are the headwinds that we're missing that we should be considering for next year as well?

Yes. Thanks, Jamie. So there's about 130 basis point drop in Q3 year-over-year. I think we called out about 130 basis of that was specifically tied to the Keystone Specialty acquisition. We think there's about 60 basis points that's just tied to some of the smaller deals, including some of those -- the acquisitions that we did in the Netherlands, where we weren't able to recognize the intercompany profit that you would normally see coming through in the inventory until we actually sell that product through an inventory turn. That's behind us now. It was about a $4.6 million impact at relatively low tax rate in the Netherlands of 25%. So that was probably about another 30 basis points. Obviously, that's not a year-over-year impact, but it is in the numbers, and we just want to try to explain that because I'm not sure everybody appreciated that, even when we tried to call it out on the last quarterly call. And then you did see at the North American base business, we have about 60 basis point improvement. So those 2 kind of netted off against each other. In terms of what's going -- where we see coming down the pipeline, obviously we won't have a repeat of that intercompany issue in Q4, that's behind us. We do think though that scrap is going to fall. We know scrap is falling, and we don't know how far. But I did call out that it could be about $0.01 impact. So in North America, $5 million is roughly $0.01. So that will probably hurt us in Q4 a little bit. But that, I guess, I said, will be offset by the impact of Sator picking up. And then you just have the normal seasonality in terms of the base business. Generally speaking, the collision business is a little bit stronger. And so we do normally see a seasonal impact. It is a positive on that side. Sometimes the margins can be a little bit weaker on the mechanical side in Europe because you have December, where it's lower in Keystone and Stag acquisition are obviously going to be. That's a seasonal low for them as well. Going into next year, obviously we're not giving guidance yet for that. But a lot of these things that I just talked about are sort of more -- I won't call them one-time events, but they're unusual events that we don't expect to repeat. Obviously, the scrap, we address our procurement. So that will bleed through in the quarter, so -- and then we'll get through the Sator thing, continue the integration with respect to some of the integrations over there. It's probably a little bit of a drag with respect to the opening of the new branches in the ECP. So we may see a little bit improvement there, as Rob mentioned, with respect to the car cost as well. So that's maybe a little bit more than you asked for, but...

Our next question comes from the line of Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: A question as it relates to the Keystone Specialty business. I mean, could you sort of just refresh us on what its growth was on a comparable basis, and then how you're seeing that underlying industry growth? I mean, that number, it seems like it's expanding better than the rate of performance parts. And maybe some feeling for market share gains or what might be driving the expansion there.

Bret, year-over-year on the core was 13.4% and year-to-date was 10.3%. So I think what's driving that is the SAAR rate. There's no doubt about it. People are most likely going to accessorize their vehicle at the time of purchase. And many of our better customers or dealerships have really rolled this right into the bank note. So we are very bullish on that quite frankly with the SAAR rate being strong. We think their growth rate is going to continue for as long as the SAAR rate remains strong. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then on Stag, could you give us any more color as far as what their productivity maybe EBITDA rates were on that $180 million in revenues?

Well, let me talk full synergy, where we think we're going to be on that, Bret. Let's talk about the deal as a whole. We paid approximately $110 million for the business with revenue of circa $180 million, as John mentioned. Post synergies -- and we think there's a lot, they have a couple of years to get that. There's a lot of warehouse consolidation that needs to be done. But post synergy, we expect we'll be in the multiple range of our normal multiple range that we pay for business, in the 4 to 6. And I believe it will be closer to the lower end of the range than the higher end of the range when we're all said and done. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. Any news out of State Farm? Could you give us an update on where they are with the chrome bumper business, if there's any signs of expanding that?

Absolutely. This quarter, again really good growth on chrome bumpers. We were up 22.4%. And again really hard to tie how much of that is to State Farm, but we know the market wasn't growing at 22.4% for sure. So we think they have a lot to do with that. Nothing new coming on out of Bloomington, unfortunately. But we remind them every quarter of the results and they show their appreciation for that. There is one uptick to the insurance side of the business. GEICO insurance just became the second-largest insurance company in the United States. It overtook Allstate. They just had phenomenal growth. They're very active users of our products. So even if some of the bigger companies, the State Farms, continue to not use our products, gains by aggressive companies like GEICO continue to bode well for us and really provide a great future. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then one last question, on the 60 basis points gross margin expansion in North America core, could you give us a color on what the pricing environment looks like as far as competition? Is product sourcing generating the margin? Or is it a less competitive pricing environment that's helping?

It was spread across all the lines of business, I think. We saw a little bit improvement in the self-service business. We saw the aftermarket business, we are benefiting a little bit from, we believe, better procurement on that side of the business. It's difficult to say exactly how the Manheim Index is impacting us in terms of the salvage business because as it's coming down, as Rob mentioned, we are buying a slightly better car. So we're investing in more expensive cars than we were a year ago. But we believe that's going to ultimately translate into higher organic growth because they'll have higher -- those cars will part out for more dollars.

And let me just add one thing, Bret, that Q3 historically has not been one of our better gross margin quarters. So to have that expansion in this quarter, we're very pleased with that.

Our next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Maybe start with the guidance, especially on Q4. Your full year organic growth guidance is unchanged, but you're up 9.1% for the first 9 months. So if I do the math, you've got a pretty wide range for Q4. Any insight into why you've decided to keep it so wide? And maybe what are trends looking like so far this quarter?

We just didn't really see any reason to change it, quite frankly. I think it's more than a meaningful change to try to tweak it down or up meaningfully in the quarter to be perfectly frank. In terms of the quarter-to-date, do you have any comments?

Yes. The quarter so far, October, obviously we're 3 weeks in -- almost 4 weeks in, going to plan. We always seem to get a little bit of uptick when we switch to daylight savings time, which happens next week, so pretty much to plan. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then with respect to Europe and your progress with insurance companies there, I'm curious if there's some kind of internal metric you use to determine the pace of adoption? Obviously, you've talked about the whole industry being up pretty significantly. But I'm wondering if you can track your progress with specific insurance companies and if some are outperforming others in terms of their adoption curve.

We can certainly, Craig, where they have their own collision repair shops. And we are seeing more and more adoption through that. As I mentioned in my prepared remarks, the 200 basis point improvement, we believe, we have a major part in that increase. So we do watch the insurance companies, again with their own body shop, so we could track that. Outside, when they're using independents and the direct repair facilities, it's much more difficult because we often don't know who the carrier is at that time. Our focus now is to really hone in on those 17 carriers that we have those relationships with that have an 80% market share and just keep driving the business. No negative news out of any of those carriers whatsoever, not a pullback. So we're optimistic that we can continue to drive this. And at some point, we're going to bring this to the continent. And really what we're waiting for there is really skip the integration of the 3 -- the companies that we bought, the end line distributors at Sator. Once that's complete and we think we'll do that in 2015, we'll be able to watch the collision parts program on the continent. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And finally, I imagine as your insurance company partners are successful with the adoption of these aftermarket parts, they'll start considering recycled parts. At what point do you think it will make sense for you to introduce those types of parts as well?

Yes. It's going to be sooner than later. We have people looking at opportunities over there. We made initially a promise to them that if they adopted the aftermarket parts, we would look to expand our business. They clearly have done that. So I think you'll see us enter the salvage parts business in 2015 somewhere in Europe.

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

Rob, would you take a step further and just go on the European side and maybe walk through sort of that -- the differences maybe in the flows? Obviously, it's a favorable development to get those stores from Unipart. But just give us a little difference in the flows of the upfront cost versus -- on this deal versus if you were just greenfield.

John, it's John Quinn speaking. I'll just start and Rob can supplement it maybe. The Unipart branches, at the time they went into administration, they had been 165 location and were doing, we think, around GBP 165 million. So their productivity at those individual branches is obviously much smaller than what an equivalent ECP branch would do. They were shut down for a number of weeks. And so obviously some of the customers have gone away. We acquired the leases through the administration process, went back and tried to hire as many of the staff that we thought we could that were associated with those branches. But we basically got no inventory. We had to take the signage down. We had to rerack them, and then get our inventory in there and get them into our system. So it's not too dissimilar to a greenfield. I guess, the point we were trying to make was that those things were not in our original guidance. We didn't anticipate the normal startup losses, which is why we didn't really just called them out as a unique item in the press release. We always have some of those costs. Last year, we had some branch openings going on. And so we always have some of those costs. This is just a change from relative to what we had expected in Q2 at the time we did the guidance. So the plan is to take those 27 locations, some of them we're just using as a starter location to get the market going and we're going to actually close the branches and open a bigger branch of our own once we find a suitable site. In a couple of cases, they did have some bigger locations, and we are going to move our location into theirs. And in some cases, we decided that the facility was inappropriate. That's why Rob said out of the 27, we think we're going to net around 18 locations. So you end up -- and we wanted to retain those staff with the additional costs, get training those people into our systems, getting the inventory in, getting the system set up. And it's a big piece of -- there's a lot going on there in a very short period of the time, which is why the costs were a little bit high. But I'd just point out, we did buy these at a very favorable price. We basically assumed the leases and got paid for some small, minor assets.

And I think, John, just to add on to what John said, I think in a perfect world, the greenfield would be perhaps desirable because you can pick your locations and you can build it from scratch. But because the opportunity with them going to receivership, we wanted to move quickly. So it will take a little bit longer, but we're obviously excited about the opportunity. And as you noted from the results, I imagine on the UCC stores, Unipart Car Care Centres and the national accounts, we are starting to get some of that business for sure.

Great. And secondly on the specialty business, so the acquired business you got, if you look at that from a gross margin standpoint will as you tie that in with Keystone, will you get -- will that leverage come from buying synergies or basically just from this warehouse transition? Or are the operating models today about the same?

In terms of the gross margin, we hope to achieve some procurement synergies over time with that. You don't -- ultimately, the -- it's running at the moment on lower EBITDA margin than a normal business. But we believe we can get it up through the rationalization of the inventory and the distribution system or the warehousing and the distribution system.

We would definitely get some pickup on the purchasing, but [indiscernible] the synergies that we get from bringing the distributions together.

Right. But that's not going to go through the gross margin line, by and large. A lot of that [indiscernible] the facility and warehousing and distribution lines.

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

First question for you -- and I don't want to beat you guys up on the gross margin line. I mean, I recognize that the real leverage in the business model isn't there. But we do get a lot of questions on it. And so I'm just thinking from a trend basis, do you think gross margin could return to above the 40% range again? I mean, how should we think about this kind of longer term?

The business has evolved quite a bit from the days when we were enjoying almost 45% margins. So there's a lot of structural things going on in terms of some of the acquisitions we've done. And we've made conscious decisions to adopt paint, for example. The Keystone Automotive acquisition is another example. There is a lower gross margin associated with those businesses. We believe we get those back in terms of better inventory turns or better distribution efficiencies. And by the time we get down to the return on capital, those are still very attractive opportunities for us. The second component is that during a rising commodity environment, you tend to get a little bit of a tailwind and a little bit of a headwind when it's coming down. And if you look at the scrap prices over the course of the last year, so they've actually been drifting down slightly. It could have probably been a little bit headwind to us, not enough to call out on in a particular quarter, other than as I mentioned, Q4 it seems like it's stepping down more dramatically than normal. So I think in terms of those 2 things, you're always going to have the volatility associated with the scrap. But there's some structural things that have changed that are not going to really change dramatically. In terms of the salvage business, that's the third component that I'd always point to. Since the time that business, we've had some compression associated with that with the Manheim Index coming up and more what we're paying for vehicles going up, that remains to be seen. We believe that it's going to come down as we see the cost of cars come down. But when that comes back down, that business is not as large a component of our total company as it was back in the days -- back in, say, 2009 days. So that even if it came back to where the margin it enjoyed before this event, you're not going to see the impact to the total company gross margins. So I think over time, there is some opportunity, as we get bigger to lever some of the procurement opportunities in Europe, for example. I believe there's some more opportunities as we rationalize, for example, Stag-Parkway with the Keystone Automotive operations. There are some opportunities to improve that. But fundamentally, what we pay for vehicles, we're a price taker in terms of the option prices on the salvage business. And we think we're probably already one of the biggest customers of many of our suppliers on the salvage -- on the aftermarket collision side. So there may be some opportunities to improve scale in that. Most of the leverage from the business that comes through the distribution network and through the facility warehouses and the SG&A obviously as we see technology also starting to improve a little bit on that end.

And that's very helpful. And then one final question, just more of a strategic question. If we think about the North American market and the opportunities for further consolidation for you guys, where is the main focus right now? Are you focusing on heavy truck? Or is it in a different area?

I think it's across all the business, John. Still, there's 6,000 recyclers in the United States. We own roughly 190 locations. So there's great opportunity on the salvage side; heavy truck, absolutely good opportunity; self-serve, we will continue to look at those opportunities as well. But the aftermarket, I would say, pretty well developed. We've got dots on the map pretty much in all of North America. However, we'll continue to look at fully niche businesses, like paint, cooling and that type of stuff. So I believe there's a lot of opportunities left in North America. I always point to Southern California as a great example. We have one dot on a map in our salvage in Santa Fe Springs just outside of L.A. servicing what I believe is probably one of the bigger per capita areas between San Diego and L.A. So a really good opportunity to keep growing all lines of the business. And of course, Europe is still very, very wide open in my mind. We like to say that, roughly after 2 years, we're probably the biggest supplier of mechanical components in Europe in just 2 years. So that is a great opportunity as well.

Our final question will be from the line of Bill Armstrong with CL King & Associates. William R. Armstrong - CL King & Associates, Inc., Research Division: I was wondering if you could update us on the transition in Europe to the 2-step distribution model. Rob, I think you mentioned that the acquisition in the Netherlands might help that along. And would we be talking just about the Netherlands or into France and other countries as well?

Yes. At this point, Bill, we are talking just the Netherlands. We will look at France. We did add a location in France earlier this year. So we're up to 3 locations in France. But in terms of the Netherlands build-out, with the latest acquisition we did that we just announced in August, we're up to 60 locations. And we think the right number is somewhere between 75 and 80. So we're certainly well on our way to getting that done. Now the work is getting them on synergies and rationalizing the businesses, which we have a team over there doing, working on that regularly. And as we mentioned on the last call, too, Bill, we did pro forma reduction in revenue. We were pleased with the organic growth, a big positive this quarter. Last quarter, it was negative. So we are making our strides there. And I suspect by a couple of quarters, we will have reached our target of 75 to 80. William R. Armstrong - CL King & Associates, Inc., Research Division: And how does that impact the transition from 3-step to 2-step?

Well, that will allow us to virtually cover the entire Netherlands with our 2-step model. So we will basically be done with the Netherlands. Now of course, going after the business will be the next step. I guess, there are no other questions. So thank you, everyone, for your time this morning, and we look forward to speaking with you in February, when we report our fourth quarter and full year 2014 results. Thanks, and have a great day.