LKQ Corporation (LKQ) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation First Quarter 2015 Earnings Conference 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, Kevin. Good morning, everyone, and thank you for joining us today. This morning, we released our first quarter 2015 financial results. In the room with me today are Rob Wagman, President and Chief Executive Officer; Nick Zarcone, Executive Vice President and Chief Financial Officer; and John Quinn, Chief Executive Officer and Managing Director of our European operations. 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. I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward-looking statements involve risk and uncertainties, some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made except as required by law. Please refer to our Form 10-K and other subsequent documents filed with the SEC and the press release we issued this morning for more information on potential risk. Also, note that guidance for 2015 is based on current conditions, including acquisitions completed through March 31, 2015, 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 Q1, revenue reached a new quarterly high of $1.77 billion, an increase of 9.1% as compared to $1.63 billion in the first quarter of 2014. Net income for the first quarter of 2015 was $107.1 million, an increase of 2.3%, as compared to $104.7 million for the same period of 2014. Diluted earnings per share of $0.35 for the first quarter ended March 31, 2015, increased 2.9% from $0.34 for the first quarter of 2014. Please note that adjusted diluted earnings per share for the first quarter of 2015 would have been $0.36 compared to $0.35 for the first quarter of 2014 after adjusting for net losses resulting from restructuring and acquisition-related expenses, loss on debt extinguishment in 2014 and the change in fair value of contingent consideration liabilities. Organic revenue growth for parts and services was 7.5% for the quarter, following an extremely tough comp from last year. I am particularly pleased with the sequential improvement in the EBITDA margin of our wholesale European segment, which increased 130 basis points in the quarter. Nick will provide more color around margins momentarily. Now moving on to operations. During the first quarter, we purchased nearly 70,000 vehicles for dismantling by our wholesale operations, which is a 3.1% decrease compared to Q1 2014. I want to put some context around the drop in our dismantling procurement. During our third quarter 2014 earnings call, I indicated that we adjusted our procurement strategy for our salvage inventory by focusing on buying a better quality car that would part-out for additional revenue. The intent of this strategy was to drive incremental revenue and gross margin dollars. Though we are still working through the selling cycle, I am encouraged with the initial results, despite lower procurement volumes. Since implementing this strategy, our salvage organic revenue growth has outperformed our overall North American organic growth. Thus far, in Q2, sequentially, our procurement and pricing are trending favorably with ample volume at the auction. With inventory already on hand and a continuation of our current run rate for acquiring cars, we should have sufficient inventory for our recycled parts operations. In our self-service retail business, during the first quarter, we acquired approximately 100,000 lower-cost, self-service and crush-only cars as compared to 120,000 in Q1 of 2014 or roughly a 16% decrease. Similar to last quarter, this decrease was intentional given the continued downward trend in scrap prices and a continued pressure on margins. Also, regarding scrap, it is important to note that scrap will continue to become a smaller portion of our global revenue mix, which we believe will reduce our exposure to unexpected surprises in our earnings stream. For further context on this point, at the end of Q1 2011, a period before we diversified our business into Europe and Specialty, the other revenue line was over 16% of our revenue versus 7.3% at the end of Q1 2015. Lastly, in North America, in April 2015, we renewed our designed patent license agreement with Ford. The license agreement grants LKQ the exclusive right to distribute aftermarket replicas of Ford automotive parts covered by U.S. design patents. The renewal is on a substantially the same terms as the previous agreement, except that the term now extends until March of 2020. LKQ and Ford have forged a mutually beneficial relationship that helps ensure that customers continue to have a choice between original equipment and non-OE automotive parts. Now moving to our European operations. In Q1, our Wholesale European segment had acquisition growth of 12.7% and organic revenue growth of 14%, which was offset by a decrease of 10.7% related to the foreign exchange rates. ECP continued its double-digit performance by posting organic revenue growth of 16.8% in the quarter and for branches opened more than 12 months, ECP's organic revenue growth was 10.2%. In addition, during Q1, our collision parts revenue with ECP had year-over-year revenue growth of approximately 34%, despite a mild U.K. winter. We believe that this growth demonstrates that our 17 insurance partners in the U.K. recognize the value proposition of our alternative parts offering. During the quarter, ECP opened a total of 3 branches, bringing our network total to 192 branch locations. Turning to our Sator business. During the quarter, Sator witnessed some gross margin benefit year-over-year, primarily from the shift in its network from a 3-step to a 2-step model. I am particularly pleased with Sator's 5.3% organic growth in the quarter. We believe that we've successfully weathered any further fallout from our customer base as a result of this new distribution model. Also, during the quarter, Sator acquired 2 additional distributors of aftermarket automotive products in the Netherlands, 1 of which closed on April 1. These 2 acquisitions added an additional 8 locations in the market, bringing Sator's branch network to 72. As I noted on our last call, additional acquisitions in the pipeline and the innovative partner strategy should see us complete our national footprint in the Netherlands by the year end with a target count of circa 80 branches. Now on to the Specialty segment. Our Specialty segment continued its strong performance by posting year-over-year revenue growth of 36% in the quarter, including the benefit of Stag Parkway and organic revenue growth of 6.3%. In Q1, our Specialty team made continued progress on synergy and cost-saving initiatives with Stag Parkway by closing and integrating 4 additional warehouses. We expect the balance of the identified Stag locations to be closed and fully integrated by year-end. Turning to our acquisition activity and pipeline. In addition to the Netherlands distributors, during the first quarter of 2015, the company also acquired a salvage business located in Nebraska. I am pleased with the diligent efforts of our development team and our team's ongoing integration efforts. We continue to see a robust pipeline of opportunities to acquire businesses that fit our growth strategy in each operating segment. At this time, I'd like to ask John and Nick to provide more detail and perspective on the financial results of the quarter.

Thanks, Rob. Good morning. Thank you for joining us today. I'll give a little color on the overall company results. In a moment, Nick will address the segment details, the balance sheet and the guidance. Q1 2015 saw LKQ reach a number of significant milestones. It was our first quarter with revenue reaching an annualized run rate over $7 billion with a Q1 revenue annualizing of $7.1 billion. And this is also the first time we exceeded $210 million of EBITDA in a quarter. These accomplishments were completed even in the face of a severe drop of scrap steel prices. Getting to the specifics in the quarter, beginning with revenue, our Q1 2015 revenue were $1,774,000,000, was an increase of $148 million compared to Q1 last year, or an increase of 9.1%. For Q1, our total organic revenue growth was 5.1% and we delivered an additional growth of 7.5% from acquisitions with foreign exchange negatively impacting total revenue by 3.4%. Rob mentioned that the Q1 2015 organic growth of Parts and Services was 7.5%. We completed 2 small acquisitions in Q1 2015, which were and are expected to be immaterial to revenue. Total change in other revenue, which is where we recorded our scrap commodity sales was negative 17.4%. That was mainly due to the negative organic growth of 17.7% with a small acquisition growth in foreign exchange almost offsetting each other. As Rob mentioned, we saw purchases of cars down in the quarter year-over-year. In the recycling line of business, we've been targeting a better quality car, whereas in the self-service line of business, we adjusted our buying to account for the difficult scrap environment, a process we started in Q4 2014. Some of that volume decrease will impact Q2 when we scrap those cars. The decrease in volume offset some of the fall in scrap steel prices we experienced year-over-year and helped reduce the impact of lower scrap compared to what we had anticipated on the February call. The average price we received for scrap steel was approximately 37% lower year-over-year at $141 per ton this year versus $224 per ton in Q1 2014. Other revenue was 7.3% of total revenue as compared to 9.6% for the same period last year and has continued the trend of becoming a lower percentage of and less significant to, our total revenue. In Q1 2015, revenue for our Self-serve business was $85 million or 4.8% of LKQ's total revenue. Approximately 42% of this revenue was parts sales included in North American parts and services revenue and 58% scrap and core sales included in other revenue. A year ago, in Q1 2014, our Self-serve business was 6.4% of our revenue and that percentage has been falling as scrap prices fell and as we've grown our other lines of business. Our reported gross margin for Q1 2015 was $699 million or 39.4% of revenue, a decline of approximately 70 basis points from our gross margin percentage of 40.1% in Q1 2014. Fifty basis points of the decline was due to mix with lower-margin European and Specialty businesses growing faster than North America. North American margins were 10 basis points lower, which is primarily due to scrap pricing. We estimated that the drop in scrap prices impacted EPS by $0.02, which equates to approximately $10 million of gross margin impact. Without this headwind, North American would have seen improvement in gross margins. Specialty gross margins were lower, primarily due to the acquisitions we completed in Q4 of 2014. Moving on to operating expenses. Facility and warehouse cost improved from 7.8% of revenue in Q1 2014 to 7.5% in Q1 this year. This improvement is primarily due to mix caused by the growth in our Specialty and European segments, which tend to run lower facility costs than the North American segment. Distribution costs were 8% of revenue this quarter, down from 8.4% in the same quarter of last year. The primary reason for this improvement was due to lower fuel expenses. Selling and G&A expenses increased from 11.4% of revenue in Q1 last year to 11.5% in Q1 this year. This reflects cost in the Netherlands associated with the move to a 2-step distribution model, which was responsible for a 20-basis-point increase and that was offset by a 10-basis-point improvement in the Specialty segment as we achieved synergies following the acquisitions. The combination of facility and warehouse distribution and SG&A costs was 27% of revenue in Q1 2015 as compared to 27.6% in Q1 2014. It's worth noting that the drop in other revenues was probably masking additional leverage we achieved 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. So it's likely an improvement in leverage being masked by the lower scrap in core revenue. We estimate this improvement in the 30 to 50 basis-point range. During Q1 2015, we recorded $6.5 million of restructuring and acquisition-related expenses, up from $3.3 million in Q1 last year. The 2015 cost primarily related to the restructuring cost in the Specialty segment. Depreciation and amortization was 1.7% of revenue during Q1 this year as compared to 1.6% of revenue in Q1 2014, reflecting higher capital spending and the impact of acquisitions on amortization. Other expenses, net, increased to $16.8 million in the 3 months ended March 31, 2015, compared to $15.1 million in the same period last year, an increase of $1.7 million. Year-over-year, net interest expense and loss on debt extinguishment was $1.5 million favorable, offset by contingent consideration liabilities, which were $1.4 million of unfavorable and greater foreign exchange losses of $1.8 million. Our effective borrowing rate for the quarter was 3.4%. Our effective tax rate for the quarter was 35.5% compared to 34.0% in Q1 last year. The increase rate reflects mix with a higher portion of pretax income in the higher tax rate United States and a $700,000 unfavorable discrete charge in Q1 2015. On a reported basis, diluted earnings per share was $0.35 in Q1 2015 compared to $0.34 in Q1 2014, an improvement of 2.9%. Adjusting for the combination of acquisition-related expenses, contingent purchase price adjustments and the loss on the debt extinguish, EPS would have been $0.01 higher both this year and last. So on an adjusted basis, Q1 2015 would've been $0.36 as compared to $0.35 last year. I'd also point out that the strengthening U.S. dollar causes our reported foreign exchange earnings to be lower. We estimate the net impact of the stronger dollar added $0.02 negative impact on Q1 2015 earnings per share. With that, I'd like to pass over to Nick Zarcone to provide some details regarding these segments and some color on our outlook.

Thanks, John, and good morning to everyone on the call. I'm delighted to be part of the LKQ leadership team and I look forward to sharing our financial results with you for many quarters to come. While John has provided an overview of our consolidated results, I'd like to take a few minutes to address our 3 segments: North America, Europe, and Specialty products, particularly as it relates to some of the margin dynamics. North American parts and services revenue during the first quarter grew 5.1% compared to last year, most of which represented organic growth. You may recall that Q1 of 2014 was a particularly harsh winter, which resulted in our then-strongest ever quarter. So we knew it was going to be a tough comparison and we are very pleased with these results. In Europe, revenue was up 16% on a year-over-year basis with organic growth of 14% and acquisition growth of 12.7% being modified by the 10.7% negative impact in the movement in FX rates. To put that latter point into perspective, converting the Q1 2015 local currency results, including the acquired revenue at the lower exchange rates, reduced European revenue by approximately $60 million compared to where revenue would have been had the FX rates remained constant at 2014 levels. And as mentioned, revenue for the Specialty segment grew 36%, combining 6% organic growth and 31% acquisition growth, the latter being the result of the Stag Parkway acquisition that was completed in Q4 of 2014. So organic growth from parts and services was 7.5% on a global basis, which is consistent with the guidance provided during our last call. And as mentioned by John, the significant drop in scrap prices led to a 17% decline in other revenue, bringing total organic growth down to 5.1%. When thinking about profitability, it is important to remember that each of our 3 operating segments have different margin characteristics, with our North American segment historically having the highest gross margin and EBITDA margins. As a result, when looking over time periods, a significant portion of the change in margins on a consolidated basis can be attributable to the change in revenue mix. In the first quarter of 2015, North America fell to 59% of global revenue compared to 63.3% during the comparable period of 2014. This largely reflects the impact of the acquisitions in our European and Specialty businesses during 2014, which have further diversified the revenue stream. As highlighted in the press release, consolidated EBITDA margins fell from 12.5% in the first quarter of 2014 to 12% in the first quarter of 2015. Most all of that change was the result of 2 items: one, higher restructuring cost related to the integration of Stag Parkway into our Specialty business as we closed overlapping facilities, incurred-related moving expenses and terminated redundant staff; second, we experienced an increase in the losses from unconsolidated subsidiaries. Importantly, segment EBITDA, which excludes the impact of restructuring charges and the results of unconsolidated subs, increased 7.9% in the first quarter compared to last year to $221 million from $205 million. Segment EBITDA margins were 12.5% in the most recent quarter compared to 12.6% last year. Again, most all of the change was due to a shift in our revenue mix. Gross margins in North America were slightly lower in Q1 of 2015, as improved pricing on the aftermarket side was more than offset by a decline in the salvage margins, particularly due to the significant decline in scrap prices and the change in purchasing strategy that Rob mentioned toward newer, higher-priced salvage vehicles, which generate higher parts sales and dollars but slightly lower gross margins. EBITDA margins of the North American segment were 14.3% during the most recent quarter, which is up 10 basis points from the first quarter of 2014. As one would expect, given the seasonality of the business, on a sequential basis, first quarter margins were up significantly from the 12.8% we reported in Q4 of last year. Remember, Q1 tends to be our strongest quarter of the year in this segment. Notwithstanding the negative drag related to the lower scrap prices, these are the best Q1 margins posted by our North American segment in several years as we experienced leverage in the distribution system due in part to the decline in fuel prices. The gross margin of our Specialty segment fell about 80 basis points due to the acquisition of the Stag Parkway RV-related business in Q4 of 2014. Stag Parkway traditionally has had lower gross margins than our KAO operation. That said, EBITDA margins for the Specialty segment increased by 40 basis points to 10.5% in Q1 of 2015 compared to 10.1% in Q1 of the prior year and ahead of the seasonal low of 7.3% recorded in Q4 of last year. This was largely due to the realization of logistic synergies associated with the rationalizing the distribution network of the acquired business. So it was an excellent performance for this segment and solid evidence that the integration of the recent acquisition is on track. With respect to Europe, gross margins in the first quarter remained constant with the comparable period of 2014. We experienced a slight decline in gross margins in the U.K. related to a shift in revenue toward national accounts, but that was wholly offset by an increase in margin on the continent, reflecting the internalization of incremental gross margin from the acquired distributors as part of our 3 to 2 distribution strategy. As you may recall, the EBITDA margins of our European segment fell by approximately 150 basis points in the second half of 2014 due to 4 primary items: first, there was an aggressive planned ramp in new ECP branches; second, there was an unexpected opportunity to add more than 20 branches from Unipart when it was shut down. Collectively, this resulted in the addition of 44 new branches in the U.K. during 2014, a majority of which hit in the second half of the year. As you know, it takes several quarters for new branches to breakeven and a few years to reach maturity. Clearly, the acceleration and branch openings had a depressing impact on margins; third, as discussed during the last call, there was some price discounting in the marketplace as all the participants sought to replace Unipart as the preferred vendor at select clients when Unipart was shut down. We believe most of that is behind us. And finally, as part of our 3-to-2 distribution strategy in the Benelux region, we had purchased 5 of our former distributor customers in the second half of 2014 and under U.S. GAAP, we were not able to record a profit on the inventory we had previously sold to these distributors, which depressed margins at Sator. While we will continue to buy other distributor customers as we work to complete the migration to a 2-step distribution model, the impact will likely be less than what was experienced in 2014. Those 4 items all had a negative impact on EBITDA margins in the second half of 2014, but we knew with time, the impact would begin to fade. Importantly, if given the same set of circumstances, we would absolutely make the same decisions to grow the business as they were in the best long-term interest of the company and our shareholders. While EBITDA margins of our European segment in Q1 of 2015 were 9.5%, down 30 basis points from the 9.8% reported in Q1 of last year, the entire decline was due to foreign currency transaction losses, including the impact of foreign currency contracts used to hedge the purchase of inventory. Importantly, EBITDA margins in Q1 of 2015 improved by 130 basis points from the 8.2% recorded in Q4 of last year. While some of the improvements is seasonal, we believe the residual impact of our decisions to aggressively grow the European business last year are beginning to abate. Moving on to the key cash flow items for the company as a whole. Funds from operations during Q1 of 2015 totaled $180 million compared to $97 million in Q1 of last year. While we realized a $10 million increase in consolidated EBITDA, the real benefit came from an improvement in working capital since year end as we experienced a reduction in inventories and an increase in payables. You may recall that we accelerated our purchases of aftermarket inventory in Q4 of 2014 in anticipation of some potential issues with the U.S. ports on the West Coast. So this decline was a temporary move and we fully anticipate inventories will grow as we proceed throughout the year. During the quarter, we used $34 million of our cash for long-term investments. This included approximately $26 million of capital expenditures and $8 million of other investments, including acquisitions. The resulting net cash flow of $146 million was used to repay down approximately $80 million of our debt and to build our cash on hand. At the end of Q1, we had approximately $1.7 billion of debt outstanding and $175 million of cash balances. The available capacity under our revolving credit agreement at the end of the quarter was just north of $1.2 billion which, when you add the cash balances, resulted in approximately $1.4 billion of available liquidity. Total debt to the latest 12-month EBITDA was about 2.2x. And if you factor in the full year impact of EBITDA for the acquired businesses, the ratio fell to approximately 2.0x. So we believe we have more than ample ability to finance the continued growth of our business. Finally, we are not changing the guidance provided in late February. We still expect organic revenue growth from Parts and Services will be in the range of 6.5% to 9%. Our net income and earnings per share guidance ranges are $420 million to $450 million, or $1.36 to $1.46 a share, respectively. And our guidance for capital expenditures is $150 million to $180 million with cash flow from operations of approximately $425 million. I would like to highlight a few of the changes we have seen in the business since February and give you some indication as to why we have decided to leave the guidance unchanged, even after a solid first quarter. The organic growth of 7.5% we reported for Parts and Services was in line with our prior guidance. While there will be periodic fluctuations due to weather or other events, we expect the fundamental drivers of that growth to continue. We believe that in North America the number of vehicles in our sweet spot will continue to grow and the trends of higher miles driven will help. In Europe, we will continue to get the benefit of the new branch openings of the past few years and the growth of our collision and e-commerce businesses. On our February earnings call, we discussed that we expected the negative impact from falling scrap prices to be $0.05 to $0.06 a share, primarily spread over the first 2 quarters with an emphasis in Q1. The impact of scrap prices in Q1 was only $0.02 a share. So basically, a $0.01 or $0.02 less than we had anticipated. Assuming current scrap prices hold, we now anticipate the full year impact to scrap will be $0.03 to $0.04 a share compared to the $0.05 to $0.06 we anticipated back in February. In other words, at current levels, we expect scrap to continue to hit earnings per share for $0.01 or $0.02 in the second quarter. The other item we discussed last quarter was the impact of foreign exchange. The currencies continued to be volatile and, as noted, the impact on Q1 earnings per share was $0.02 a share. While the pound is currently trading in a range similar to when we issued our original guidance in February, the average exchange rate for the euro during April is down a bit further. So depending on where the currencies move during the remainder of the year, the initial estimate of FX having a $0.04 to $0.05 negative impact on the earnings per share might be light by a $0.01. So in total, we believe that the combined negative impact of scrap and FX, which was estimated in February at approximately $0.08 to $0.10 a share for the year is still a reasonable estimate. In terms of putting some high-level characterization on the quarter's results, I would say that we believe we saw a strong performance in all of the lines of business. North America continues to benefit from the trends we discussed earlier. As we anticipated on the last call, we saw the European segments starting to snap back from its soft performance in the second half of 2014. And while some of that is simply seasonal, we also benefited from better sales, margins and cost controls. And the integration plans in the Specialty business are on track. The key message is that the underlying business -- the underlying business is progressing very much according to our plans and our balance sheet is in great shape to provide us the flexibility needed to continue to execute our strategy. Before I turn the conversation back over to Rob, I just wanted to mention that over the past few weeks, I've received a few questions from the investment community as to why I decided to join LKQ. While major career changes are never simple, it really boiled down to 2 key items. First, I believe the growth potential of LKQ is significant. How often do you have an opportunity to join a company that is a clear leader in its core categories and markets around the globe and still has organic growth rates that are 3x to 4x that of GDP? And there are still very significant potential to grow through acquisition. That affords an opportunity for me to help build the company into a substantially larger enterprise in the foreseeable future. Second, I have known the company, and more importantly, the leadership team for a very, very long time. I understand the culture, core values and the absolute integrity of the organization, and that reduces the natural risk inherent in a move. Overall, it simply created an opportunity I couldn't pass up. And I will now turn the discussion back to Rob for a wrap-up before Q&A.

Thanks, Nick. To summarize, we are quite pleased with our first quarter 2015 results. And as always, we could not do it without the dedication of our 29,000-plus employees. LKQ was founded in 1998 with a goal of forming the largest nationwide provider of recycled OEM automotive products. We achieved that objective yet have more runway to expand in that particular line of business across our existing North American network and into new geographies. With the acquisition of Keystone Automotive Industries in 2007 and ECP in 2011, we diversified our company into different markets, products and geographies with the intent of expanding the use of all alternative parts globally, both in the professional mechanical and collision repair. Though on the surface some segments and geographies look different, our strategies remain the same: identifying niche markets ripe for consolidation that offer combined synergies and network leverage; seek to acquire the #1 or #2 player with outstanding management in each segment; focus on sound return metrics and strive for the highest fill rates in our operating segments. With this strategy, we continue to believe that LKQ is a unique company, not just because of the strength of our business model and operating segments, but also because of the consistent growth we are able to deliver both organically and from acquisitions. Over the last 5 years, we have averaged over 8% organic growth for parts and services and nearly 19% from acquisitions. This performance was achieved in a low-growth environment for both our economy and for a lot of the companies in our industry. This strategy, coupled with the dynamics of increased miles driven, lower fuel prices and a strong sell rate, creates ongoing opportunities to grow our company across all of our operating segments and add long-term value for our stockholders. Devon, we are now prepared to open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: First question just has to do with the start of the second quarter. If you could give us any perspective on the pace of revenue in the second quarter and any cost we should be aware of just so that we set the second quarter expectation correctly.

Craig, this is Rob. We've been talking to some of our bigger customers in North America. We didn't have a backlog coming out of Q1 that we had last year, but business has been steady, so we're pretty much where we thought we should be for April thus far. In Europe, same story there, pretty much where we expected to be. Revenue was looking to plan over in Europe as well.

And Craig, I think Nick noted that we're expecting some continuing impact from scrap because the cars we're selling today are ones we bought maybe earlier in Q1. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Right, that helps. That helps, John. And then maybe my second question for you, John, since we may not get the opportunity to talk you as frequently on these calls. Just maybe give us a sense for your priorities in Europe. I know it's still early, so you're still forming your plan, but what are your priorities there? And how should we look to track that progress?

Sure. So I spent the better part of last month over there and I guess the way I view it is we have 2 really good businesses for the Netherlands and the U.K. But within each country, I think there are still a lot of work to do to finish some of the integration or the acquisitions we have, particularly in respect to the Netherlands. First thing is don't do any harm but make sure that we can continue to integrate those acquisitions within the countries. And there are some additional deals we need to do to continue to fill out the footprint there. In the Netherlands, we are at about 72 locations. We think we can probably end up somewhere in the 80 to 85 by the time we're done and we hope that platform builds over the end of the year. And then, when you move a little bit higher and you say, what else can we do? There's more integration to be done between the 2 countries. We did some preliminary integration on procurement in the last couple of years. I think we can do a lot more on that front. And that probably starts with getting the common catalog. There was a project underway to get a common catalog among the countries. And then using that knowledge to leverage the procurement across the group. And there are also some opportunities to probably integrate the procurement a little bit stronger between North America and Europe, particularly on some of the collision businesses where there's a heavy overlap in suppliers. And then, the third platform in the car integration is probably on the revenue opportunities, with particular [indiscernible] like e-commerce, where both countries have a nascent e-commerce business and we can lever the distribution network that we have to try to go through that. And then if you take those 1 step higher, there's obviously some other opportunities to do additional product lines, like, for example, we're now distributing paint or collision business in the Netherlands. So we look for additional opportunities to do those kinds of things, probably once we get the integration done. And then other geographies so that's [indiscernible] countries they currently exist, and then look for opportunities in other countries. So I think we'll be pretty busy.

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

Rob, would you go through a simple example? I mean, for years and years we've talked about this core competency of the acquisition procurement process. So with that algorithm now, can you just sort of walk us through what that would look like when a car comes into that -- to the handheld or whatever, what exactly changes as far as just the sort of the remedial process of looking at those cars to get that higher quality?

Yes, really, nothing's changed, John, at all. The handheld device calculates demand, calculates the probability of sale. It's interesting, our average cost has come down from Q4 to Q1, up 4%. So we are buying a better car for less money. So we're very pleased with that trend. But in essence, whether you're buying a $300 car or a $2,000 car, the handheld does the exact same data lookup just basing on demand and probability of sale. And so nothing really has changed in that respect. In fact, it just allows our reps to get a higher dollar for that part as it's just a higher price part. We are buying, on average, about 1/2 a year younger to 1 year younger vehicle this time now as opposed to last year. So really nothing has changed at all.

John, it's John Quinn speaking. I guess one thing you can think about is, if you got somewhere that is, for example, space constrained, the throughput whether you're dismantling a $2,000 car or a $3,000 car, it takes up the same amount of geography and roughly the same amount of labor and warehousing space. So the thinking is that if you can get a better car, you can improve your return on capital as well on those things. We don't have to buy additional land to grow the business. We've always said one way to grow this business is to buy additional cars. You provide 5% more cars, your revenues should go up about 5%. If you also buy a 5% better car, your revenue should go up 5% on basically the same footprint. And so part of this is just the strategy to try to move up market and particularly in a couple yards that are potentially space-constrained where we wouldn't -- want to avoid buying extra land.

Well, we're 40 minutes into the call, so I got to ask about State Farm, I guess.

Sure, glad to answer that. Update on the bumpers, Q1 was a 19.5% increase year-over-year. So still getting -- and that's up a strong comp, John. Other than that, no new news out of Bloomington, unfortunately. But we continue to really raise the number on the products they are writing in the aftermarket, in the bumpers. So we keep reminding them and we'll continue to do so.

Our next question comes from the line of Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Two questions, if I could. The first one has to do with your sequential operating expenses Q1 over Q4. I noticed that there was very nice leverage sequentially. I also noticed that there wasn't a whole lot of acquisitions this quarter, which gives us a little bit of a unique look into potentially what your organic leverage might look like with the legacy business. Can you help us, I'm not sure, Nick, if this for you or for John, but can you help us in terms of sequentially, how much of that leverage came from the absence of some one-off costs that may have occurred in 4Q? For example, some of the European branches, how much of that was seasonal? And how much of that might have been organic leverage, if you could? Specifically around S&W [ph] expenses, distribution expenses and SG&A expenses.

I think it's probably best to talk about the different segments because there's certainly a unique story in each one, right? So you're right, in North America we didn't -- we haven't done a lot of acquisitions in the quarter. There wasn't a lot of acquisition activity going, coming out of Q4, frankly, either in North America. So a lot of that was, I would say, sort of a seasonal leverage and you can just see that through the segment data. On the Specialty segment, that is a seasonal business both on -- with respect to that business and with respect to the European business. I'd just remind people that Q4 tends to be a bit softer in those 2 businesses. Historically, if you look at the company, Q1 was our strongest and Q4 was our second strongest when we were basically a collision-focused business. But as we've been diversifying into more into some of these hard parts [ph] Specialty products, Q1 tends to be the strongest quarter. And on those 2 segments, Q4 is a lot lighter. So you didn't see -- on the Specialty segment, we got the benefit of some of the integration of Stag Parkway. Stag Parkway didn't contribute very much at all in Q4 last year, probably because of the seasonal thing and partly because we haven't really executed on some of the synergies, which I think Nick spoke to the fact that they did a good job getting a lot of those synergies captured already. So some of that is, you're right, integration improvement coming through. And then on the European business, I don't have any specifics for you, Sam, but we did talk about the fact that we were carrying some additional cost associated with the branch openings. There's also a little bit of a profit deferral associated with those acquisitions that we do in the Netherlands. So we did see operating leverage with respect to the businesses there, for sure. And again, some of that's the seasonality and some of it is just better -- getting the revenue, I would say, from those acquisitions and being able to recognize more of the profit with respect to the Sator acquisition.

And Sam, this is Nick. As Rob indicated, and this particularly goes to distribution cost, we did gain a little bit of benefit on fuel, as fuel prices came down pretty substantially from Q4 and that helped a bit. We helped thousands of trucks that travel millions of miles across the roads and highways around the globe and we consume a fair amount of fuel. So that helped a little bit. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Two more quick questions, if I could, and I think you mentioned this in the prepared remarks and I missed it I apologize. What was the impacts specifically of the Sator move to 2-step on overall gross margins? And I have 1 final quick follow-up as well.

On a year-over-year basis? Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Sure.

Let's take a look at that while you go on and ask your second question. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Sure, sure. The last question, I noticed a minority interest was up pretty nicely on a percentage basis, which suggests that your Australian JV is doing quite well. Anything there that is learnings or something translatable that you're seeing down there, Rob, that you might be able to transfer over to your European operations as you try and grow that alternative business?

Well, one thing that is nice, Sam, is that we're obviously working directly with the insurance company, so that owns a large body shop chain down there. So we're taking the parts that we're procuring directly from them and putting them right into their repair stream. So yes, we think there could be actually some move over. As you know, we entered the Swedish market last quarter and we're doing something very similar in the Swedish market there actually by procuring directly from the insurance company. So we do think there is something to be done there. The reason why we don't think it's really applicable here in the U.S. because the country is so large. I mean, Australia is a unique market in that 90% of the population live in 4 cities and we have [indiscernible] in 3 of those 4 cities. Perth, on the western side of the country, we haven't focus on yet. But yes, we do think there is something we could take from the U.S. or from the Australian market into the European market, which we're kind of doing in Sweden right now.

And Sam, with respect to the impact of the acquisitions, we did see a little bit of improvement in the margin in the Netherlands, but because the Netherlands is relatively small compared to the total company, it wasn't really enough to drive the overall company margins.

Our next question comes from the line of Nate Brochmann with William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I appreciate all that color. A couple of things. One, just focusing on kind of the North American organic growth rate. Obviously, we were up against a tough comp. You probably had some weather disruption in certain areas in February with cities shutting down, which ends up being a net negative for you guys. And my gut tells me that there's obviously with buying a few -- fewer cars, obviously that's probably impacted the portion of the self-service that goes into the parts and service number for North America. How should we think about that kind of going forward? Historically, you've always given a range of about 5% to 7% organic growth for North America. We have some favorable trends going on with miles driven and more parts for repair, and like you say, a little bit better quality part. How should we think about the growth rate there for kind of the next couple of quarters or the remainder of the year?

Nate, we get a report from CCC, the leading estimating company here in the United States. We just had a sit down with them this week. It's interesting, they showed stats by states. And New England, as you rightly mentioned, was shut down for those 3 blizzards they had. So it was very slow in New England. It was pretty interesting from Pennsylvania West to the Minnesota-Iowa market, claims were actually down. So they -- we had very little snow in Chicago as you know. So we don't have a backlog coming out of Q1. However, as you mentioned, we're up against a tough comp. We do feel good because of those trends you're talking about, the newer car part, definitely is working in our favor. One thing you didn't mention was the amount of certified parts. Certified parts increased 18% year-over-year, which is good for obviously for the aftermarket. Our backlog is very healthy. Very strong backlog at all of our facilities. Miles driven are increasing. Gas prices, although they've come up a little bit, are still substantially down year-over-year. And the man time [ph] is finally stable. So yes, we feel good about the next couple of quarters once that all fleshes out. And certainly, when these new cars, these 16 million and 17 million SAAR rates start getting 2 and 3 years out, we feel pretty good that there's going to be a really healthy amount of cars coming to the sweet spot. So pretty bullish on the North American growth and I feel confident that the 5 to 7 is still going to hold. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay, great. And John, kind of a question along the other one in terms of all the opportunities over in Europe. And it sounds like, just based on some of the cost pressures that we had temporarily in the fourth quarter and some of things that happened, as those go away, I think it sounds like that, that margin improvement over there is fairly sustainable and probably even has upside as you implement some of those 4 things that you spoke about. Do you have any rough time line on how long you think it will take to get to each of those 4 opportunities or any initial viewpoint on how fast that kind of moves in terms of making that integration kind of seeing at 100% versus where we might be at, give or take, I don't know, 70% today?

Yes. We don't have a good sense here. We just kicked off the project on sort of getting the common catalog. And I think the procurement though, we're very quick to bringing that team together, and so that will be relatively quick. I do think over time, what we'd like to get is the sustainable double-digit EBITDA margins over there. I'd be a bit like an economist to give you number but not a date, but I don't think it's years and but it's probably some time in 2016, 2017 before we get there on a sustainable basis. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay. And then just one quick final question regarding the gross margin improvement in North America, which kind of helped by not buying as many cars because of the scrap impact. Should that be -- I mean, I know that there's a net-net negative impact in the second quarter, but should we continue to see kind of those margins trend up temporarily as we kind of do some of these better pricing initiatives, et cetera? Or it will be impacted buying the better quality parts, eventually kind of offset that and maybe it's kind of a neutral going forward kind of look?

Nate, this is Nick. The gross margins in the first quarter on a comparative basis to last year were actually down, just that and that really reflected the impact of the scrap and the pressure it weighed on with the -- the positive impact of increased prices on the aftermarket not being able to fully cover the impact of scrap. We do not see any major shifts in our margin structure in North America. Obviously, that assumes that scrap prices stay about where they are and it assumes that we still get the pull-through purchasing the higher-quality car that Rob and John talked about a little bit earlier in the call, because that gives us the ability to get more parts dollars off those vehicles. But we are not anticipating any major shifts in the margin structure.

I was just going to add to what Nick said about scrap. Scrap last week was roughly about $135 a ton, so it at least stabilized from where it was in February. But just to put in perspective, it's 37% down year-over-year and 25% sequentially. So scrap will be a little bit of a headwind, still. Nathan Brochmann - William Blair & Company L.L.C., Research Division: But just then kind of put that into conclusion at least going sequentially, we should expect, given some of the puts and the takes, to kind of balance out and give or take, pretty flat gross margins for the rest of the year, again, assuming scrap stays where it's at?

Yes, there's a little bit of seasonality on the gross margin in the Specialty business.

In Q4.

Right.

Right.

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

Rob, you mentioned that you're paying about 4% less for car. Is that really a function of the fact that scrap has come down? Is that what is making the car purchases a little bit better for you?

I think that's certainly a portion of it, Gary. I also think that there's such a large export that the auctions export, and I think that the dollar has worked in our favor. So I think that may also be impacting it. So I think it's a combination of the strong dollar and scrap coming down.

Okay. And then in terms of -- I just want to clear something up with myself, in terms of Sator, when you're going from a 3- to a 2-step distribution model, is the intent to have all of Sator's business go to that 3- to 2-step model?

No. It'll continue to have 3-step distribution models. Keep in mind, we're only talking about the Netherlands when we're talking about converting this right now. The Belgian operation is still [indistinguishable] and so is France.

Okay, so it's only the Netherlands, okay.

Well, even within the Netherlands we'll continue to have partners where -- that are distributing as well.

And I know you had mentioned something about collision parts on the continent, and I know you've purchased something, I think, in Sweden or something like that?

Correct.

But in terms of the bigger part of the continent, France, Germany, all that, when do you think you'll start getting some of that collision parts business out there?

Again, if you -- let me backup. First of all, France has unusual rules that it's against the law to put an aftermarket product on a French-made car. Until that law gets changed, probably not be huge business there, although people do distribute through companies like ourselves OE parts. The OEs use non-dealers to distribute parts there. So there is an opportunity on that front. We generally need the last mile, right? We need to be able to get the parts to the customer. At the moment, we don't have the network to do that anywhere in a particular country, as you described, Germany, France, even the Netherlands, we still not have the product -- the facility built out and the infrastructure built out. So I think the initial focus really is just to get the Netherlands integrations. And if we can find an acquisition or a couple of smaller companies that distribute aftermarket product and there's some salvage companies, if we could find one of those that was attractive and want to sell at a reasonable price, then we would probably buy that and use that as a footprint. Most of our distribution right now is to the mechanical repair shop on the continent. We have a very little interaction with collision body shops. Whereas in the U.K., we've developed very strong relationships with all of the body shops, particularly through our paint acquisitions there. So I guess what I'm telling you, Gary, is it's probably not going to be this year, but it's not going to be multiple years either.

Okay. Thanks for clearing that up. And then just lastly, on the tax rate, John. I think the last call, you had said that the tax rate would be high in the first couple of quarters, then transition down to about 34% as you start getting a better balance of profits coming from lower tax rate jurisdictions is that about where you thinking right now that by the third and fourth quarter, we would be at a 34% tax rate?

No. Generally we try to do is estimate the full year tax rate and then adjust for any discrete items. So there's about a $700,000 discrete item that was -- if you look at the year-over-year increase on the tax rate, about 1/2 of that was a discrete item, that will go away in Q2. And we would anticipate using that same rate, for the rest of the year. So the rate going forward, to use a little bit over 35% is probably about right.

Our next question comes from the line of Jason Rodgers [ph] with Great Lakes Review [ph].

Nice to see the continued double-digit organic growth and the 12 months and older ECP branches, and I was wondering how sustainable you think that is?

It takes almost 4 years for branch -- 3 to 4 years for branch to reach full maturity. So if you look at the cadence of the branches that we've opened the last couple of years -- branches that were opened, for example, in 2013 are still maturing and they're still growing. So some of that growth what you're seeing is maturing on the branches, and then also, the much older branches continue to take market share. So yes, I don't want to get into specifics and giving sort of multi-year guidance here, but we do believe we have a number of years of additional growth just as those branches, as Nick mentioned the 40-odd branches we opened last year, are going to continue to mature over the next couple of years.

Okay. And then looking at the acquisitions that you made, the 2 distributors and the Nebraska business, how much in total revenue do you expect that to contribute on an annual basis?

It's less than $5 million, it's very small.

Alright. And finally the online purchasing through CCC, about what amount in revenue does that make up currently?

We've been tracking it as a percentage of increase because it's still off of a small base. But revenue, Jason, was up 75% year-over-year, and purchase orders were up 70% year-over-year. It's roughly annualizing at about $22 million a year right now.

Ladies and gentlemen, unfortunately we have exceeded our allotted time for questions. I would like to turn the floor back over to management for closing comments.

Thank you, everyone, for your time this morning. We look forward to speaking to you in July, we report our second quarter 2015 results. Have a great day.