Q2 2010 Earnings Call

July 29, 2010 10:00 pm ET


Sarah Lewensohn - Director, Investor Relations

Joe Holsten - President & CEO

John Quinn - EVP & CFO

Rob Wagman - Senior VP of Operations, Wholesale Parts Division


John Lovallo - Bank of America Merill Lynch

Craig Kennison - Robert W. Baird

Nate Brochmann - William Blair

Bill Armstrong - CL King & Associates



Greetings and welcome to the LKQ Corporation second quarter 2010 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sarah Lewensohn, Director of Investor Relations for LKQ Corporation. Thank you, Ms. Lewensohn, you may begin.

Sarah Lewensohn

Thank you, Claudia. Good morning everyone and thank you for joining us today. This morning we released our second quarter 2010 financial results. With me today, from LKQ Corporation are Joe Holsten, President and Chief Executive Officer; John Quinn, Executive Vice President and Chief Financial Officer and Rob Wagman, Senior VP of Operations, Wholesale Parts Division. Both Joe and John will provide some prepared remarks on results and then we will open the call for questions.

In addition, to those that are listening by telephone, we’re providing an audiocast via the LKQ website and both of those forms will have replays available for them after the conclusion of the call. Before we begin with our discussion, I would like to read the following; 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 2009 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.

And with that, I'm happy to turn the call over to Mr. Joe Holsten.

Joe Holsten

Thank you Sarah and good morning, thanks for joining us today. As you can see from the results we recorded this morning, we delivered a very strong second quarter. Diluted earnings per share from continuing operations were $0.26, an increase of 30% as compared to the $0.20 for the second quarter of 2009. And revenue for the second quarter reached $585 million benefiting from acquisitions, increased aftermarket part sales and higher commodity prices.

The organic revenue growth for the company as a whole was 12.2%. As segment driving trends led to relatively flat miles driven in April and May, we benefited from the continued increase in the demand for alternative parts. The top line organic growth reflected in particular, an increasing acceptance of aftermarket and refurbished collision parts.

Insurers continue to operate under significant cost pressures. A recent survey by of the top 100 carriers indicated that net premiums from personal auto line declined in 2009 for the third year in a row while the combined ratio, that’s the measure of underwriting profitability continues to deteriorate.

The net impact was a second straight year of underwriting losses for personal auto coverage and this environment offers great opportunities for LKQ. Demand for LKQ’s wholesale parts was quite strong during the quarter, our second quarter organic revenue from the sale of all parts and services increased 5.5%.

The greatest beneficiary of the APU trend was our aftermarket and refurbished parts category. Aftermarket and refurbished revenues increased 11.4% with an organic growth rate of 8.7%. When we acquired Keystone 2.5 years ago, one of the objectives was to accelerate the adoption of aftermarket collision parts. And that is exactly what has occurred.

For the past four quarters, organic revenue growth of aftermarket and refurbished parts is around 9% or better. Aftermarket and refurbished parts revenue also benefited from the strong used car market which increases the likelihood that vehicles were repaired rather than categorized as total losses.

Organic growth of recycled parts and services was up slightly during the second quarter as the quarter reflected some lingering consequences of the Cash for Clunkers program. In the third and fourth quarters of last year we bought fewer auction cars and many of these vehicles we bought have lower parts values than was necessary to support our growth target.

I believe we reached the inflection point during this quarter and the salvage auction trends have started to improve.

During the second quarter we repurchased almost 52,000 vehicles for dismantling at our wholesale operations which is a 41% increase over the second quarter of last year. The increase in vehicle purchases will clearly help expand our parts inventory.

On the past two calls, I’ve talked about the challenges we face in buying salvage parts. The supply of vehicles was good during the second quarter of the year, but the prices we had to pay were at the high end of what we have historically paid.

We have increased our bid prices to ensure we have adequate inventory to support demand. I know believe that at the current run rate we are acquiring enough cars to build a backlog of vehicles to dismantle during the third quarter in order to meet our targeted volumes.

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