LKQ's CEO Discusses Q2 2011 Results - Earnings Call Transcript

LKQ (LKQX)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

John Quinn - Chief Financial Officer and Executive Vice President

Joseph Holsten - Vice Chairman, Co-Chief Executive Officer, Member of Government Affairs Committee and Member of Executive Committee

Joseph P. Boutross -

Robert Wagman - Co-Chief Executive Officer and President

Analysts

John Lawrence - Morgan Keegan & Company, Inc.

Scott Stember - Sidoti & Company, LLC

Craig Kennison - Robert W. Baird & Co. Incorporated

John Lovallo - Bank of America-Merrill Lynch

William Armstrong - CL King & Associates, Inc.

Anthony Cristello - BB&T Capital Markets

Sam Darkatsh - Raymond James & Associates, Inc.

Nathan Brochmann - William Blair & Company L.L.C.

Scot Ciccarelli - RBC Capital Markets, LLC

Presentation

Operator

Good morning, everyone, and welcome to LKQ Corporation's Second Quarter 2011 Earnings Conference Call. I would now like to turn the conference call over to your host, Mr. Joe Boutross, LKQ's Director of Investor Relations. Thank you, sir. You may begin.

Joseph P. Boutross

Thank you, Jackie. Good morning, everyone, and thank you for joining us today. This morning, we released our second quarter 2011 financial results and provided our updated guidance for 2011. In the room with me today are: Joe Holsten, LKQ's Vice Chairman and Co-Chief Executive Officer; Rob Wagman, President and Co-Chief Executive Officer; and John Quinn, our Executive Vice President and Chief Financial Officer. Joe, Rob and John have some prepared remarks and then we will open the call for questions.

In addition to the telephone access for today's call, we are providing an audiocast via the LKQ website. A replay of the audiocast and conference call will be available shortly after the conclusion of this call.

Before we begin with our discussion, I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward-looking statements involve risks and uncertainties some of which are not currently known to us. Actual events or results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors. We assume no obligation to update any forward-looking statements to reflect the 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.

Hopefully, everyone has had a chance to look at our 8-K, which we filled with the SEC earlier today. As normal, we're planning to file our 10-Q in the next few days. And with that, I'm happy to turn the call over to Mr. Robert Wagman.

Robert Wagman

Thank you, Joe. Good morning and thank you for joining us on the call today. We are pleased with the results we reported this morning. Diluted earnings per share from continuing operations in Q2 were $0.32, an increase of 23% as compared to $0.26 for the second quarter of 2010 and in line with our internal expectations for the quarter. Revenue reached a record $760 million in the quarter, an increase of 30% as compared to Q2 2010. Our second quarter total organic revenue growth was 12.2%.

Organic revenue growth for parts and services for the quarter was 8.4%, which reflects increased part sales, primarily driven by improved inventory positions and the optimization of our regional distribution network as we continue to integrate newly acquired companies into the system.

Turning to aftermarket. Our aftermarket and refurbished revenue increased 23% for the quarter with an organic growth rate of 6.4%. Aftermarket and refurbished revenue from acquisitions grew 16.1%. This healthy growth rate can be partially attributed to the availability of more certified parts entering the system, as well as the maintenance of generally robust inventory levels, allowing us to reach the higher end of our traditional installed rates. The above growth rate was obtained despite a drop in miles driven, primarily the result of higher fuel prices. Based on data from the U.S. Department of Transportation, miles driven in April and May were down year-over-year 2.4% and 1.9%, respectively. Next to 2008, the reduction in miles driven for the first half of 2011 annualized is tracking to be the largest drop since 1983. Despite this headwind we face in the quarter, I'm quite pleased with the organic revenue growth we achieved across all segments of our business and our organization's ability to achieve targeted goals. Although relief from high gas prices does not appear imminent, we continue to maintain our guidance to same-store sales growth of 6% to 8% for the balance of the year.

To counteract the cost of increased fuel cost, we did initiate a fuel surcharge in our recycling operation starting in June. We are also planning additional fees starting in August that will address each part of the traveler [ph] to our internal to salvage distribution networks. Both of these programs should help reduce the impact to our fuel budgeted variances. In our recycled parts division, demand for LKQ's wholesale parts remained strong during the quarter. Organic revenue growth of recycled parts and services was 11% for the quarter. Recycled parts revenue growth from acquisitions was 14.5% which includes the impact of our acquired remanufactured engine businesses. Availability to salvage inventory has remained strong, and we continue to put more recycled inventory on our shelves to maintain a healthy backlog of undismantled product at this time. Cost of salvage continues to remain at the high end of our historical averages. However, despite this fact, we've realized good sequential Q1 to Q2 2001 improvements in our recycled parts gross margin percentage, aided by our core recovery in fuel surcharge initiatives.

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