LKQ (LKQX)

Q3 2011 Earnings Call

October 27, 2011 10:00 am ET

Executives

John S. Quinn - Chief Financial Officer and Executive Vice President

Robert L. Wagman - Co-Chief Executive Officer and President

Joseph P. Boutross - Director of Investor Relations

Joseph M. Holsten - Acting Chairman, Co-Chief Executive Officer and Member of Government Affairs Committee

Analysts

Scott L. Stember - Sidoti & Company, LLC

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Mark D. Mandel - ThinkEquity LLC, Research Division

John R. Lawrence - Morgan Keegan & Company, Inc., Research Division

Anthony F. Cristello - BB&T Capital Markets, Research Division

Presentation

Operator

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

Joseph P. Boutross

Thanks, Manny. Good morning, everyone, and thank you for joining us today. This morning, we released our third quarter 2011 financial results and provided our updated guidance for 2011. In the room with me today are Joe Holsten, LKQ's acting Chairman and Co-chief Executive Officer; Rob Wagman, President and Co-chief Executive Officer; and John Quinn, 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 audio cast via the LKQ website. A replay of the audio cast and conference call will be available shortly after the conclusion of the call.

Before we begin with our discussion, I would like to remind everyone that the statements made in this call that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. Forward-looking statements involve risks and uncertainties, some 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 information on potential risks. Hopefully, everyone has got 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.

Robert L. 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 Q3 were $0.33, an increase of 32%, as compared to $0.25 for the third quarter of 2010. Please note that the third quarter 2011 diluted earnings per share results included a $0.01 charge restructuring and acquisition costs.

Revenue reached a record $784 million in the quarter, an increase of 29%, as compared to Q3 2010. Total organic revenue growth for the quarter was 11.1% and 12.3% for the first 9 months of 2011.

Organic revenue growth for Parts and Services for the quarter was 7.6%, and 8.8% for the first 9 months of 2011. This continued organic parts and services growth is a result of the broadening our product line offerings and the ongoing optimization of our regional distribution network, as we continue to integrate newly-acquired companies into the system. This has also resulted in continued improvement in our operating expense leverage.

Although we continue to face the headwinds of higher cost of salvage, higher gas prices and the continued pressure on miles driven. We announced today that we have adjusted our organic same-store sales growth range to 7% to 8% versus our previous guidance of 6% to 8%. In addition, we changed our earnings guidance, which John will cover shortly.

As mentioned on previous calls, the company continues to implement pricing initiatives in our salvage operations to offset some of the operating pressures we are facing. I am also happy to report that we have realized sequential, gross margin improvements in our salvage operations, in part, as a result of these initiatives.

In our Wholesale Parts division, demand for LKQ's recycled parts remained strong during the quarter. Organic revenue growth of recycled parts and services was 8.4% for the quarter. Recycled parts revenue growth from acquisitions was 15.7% for Q3.

In the first 9 months of 2011, our recycled parts business grew organically 10.1%, compared to the same period in 2010.

During the quarter, we purchased 57,000 vehicles for dismantling by our wholesale operations, which is a 15% increase over Q3 2010. As anticipated in our Q2 call, there a healthy volume of cars at the auction in Q3. With on-hand product and maintenance of our existing rate of vehicle acquisition, we should have sufficient inventory to continue to grow our recycled parts operations.

We are also seeing good growth in our wholesale vehicle salvage, as well as our heavy-duty truck operations.

Turning to aftermarket. Our aftermarket refurbished revenue increased 25.4% for the quarter, with organic growth rate of 6.9%, a sequential increase from Q2 of 2011. 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 in-stock rates. Aftermarket and refurbished revenue from acquisitions grew 18.3%.

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