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Executives

Sarah Lewensohn - Director IR

Joe Holsten - President and CEO

John Quinn – EVP & CFO

Rob Wagman - SVP of Operations, Wholesale Parts Division

Analysts

John Lovallo - Bank of America-Merrill Lynch

Tony Cristello - BB&T Capital Markets

Sam Darkatsh - Raymond James

Craig Kennison - Robert W. Baird

Scot Ciccarelli - RBC Capital Markets

Scott Stember - Sidoti & Company

Presentation:

LKQ Corp (LKQX) Q4 2009 Earnings Call February 25, 2010 10:00 AM ET

Operator

Greetings, and welcome to the LKQ Corporation Fourth Quarter and Full Year 2009 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Ms. Sarah Lewensohn, Director of Investor Relations for LKQ Corporation. Thank you Ms. Lewensohn. You may now begin.

Sarah Lewensohn

Thank you. Good morning, everyone and thank you for joining us today. This morning, we released our fourth quarter and full year 2009 financial results.

With me today from LKQ Corporation is Joe Holsten, President and Chief Executive Officer, John Quinn, Executive Vice President and Chief Financial Officer and Rob Wagman, Senior Vice President of Operations, Wholesale Parts Division. Both Joe and John will provide some prepared remarks on our results and then we will open the call up for questions.

In addition to those that are listening by telephone, we’re providing an audio cast via the LKQ website. In both forms will have replays available shortly 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 statements to reflect events or circumstances arising after the day, on which it was made, except as required by law. Please refer to our 2008 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

Thanks. Good morning and thanks for joining us today. I would kike to begin just by saying how pleased we are with results recorded this morning. As you can see, we delivered a strong fourth quarter and overall a very solid year. If you think back to the environment that existed a year ago, I believe the results are even more impressive. Before we get into the specifics, I’d like to put our results into perspective.

At the start of 2009, there was a great deal of uncertainty for most of businesses including ours. Unemployment was rising; miles driven continue to register a decline, many auto insurance companies reported fewer claims. Around the surface, the reductions in claims might be seen as a positive for insurance carriers, declines of renewal rates and lower average premiums as consumers show less coverage on your older cars, but not built well for the insurance industry.

The auto industry was also under considerable stress. At the time, General Motors and Chrysler were planning for bankruptcy; dealer franchise agreements were being cancelled and even for those dealerships that were able to keep their franchises, many of them are struggling to keep their credit lines in place, so they could remain open. In the face of all that, we said we believed that the environment was good for alternative parts and we were going to continue to invest and expand our business despite a terrible economy.

Original guidance was for organic revenue growth for parts and services of 6% to 8% and we got right in the middle. We plan to grow EPS to between $0.80 to $0.86 and on almost any measure, we exceeded the top end of that. Cash flow from operations came in at $164 million while over our initial guidance was approximately $145 million.

During 2009, we continue to implement our strategy of creating one source for aftermarket, recycled and refurbished collision products that provide true options to new OEM replacement parts for insurance, body shops, REIT managers and consumers.

We started the year with the redesign regional organization focused around our wholesale product line. The new structure provided clear direction and goals for the operating units and led to a sharper focus on the needs of our customers. We invested in our business until both new and expanded warehouse space by building inventory and adding new product lines. And we continued to stress better sales skills and the cross selling of all types of alternative parts after market recycled and refurbished as the priority for our sales team.

Many of our investments in technology are in part, to create better selling efficiencies. These efforts supported our growth and led to the achievement of an important milestone in the history of LKQ over $2 billion in annual revenue for the first time.

Turning to the results of our business, for the fourth quarter of 2009, we reported diluted earnings per share of $0.25 from continuing operations, an increase of 150% over the prior years $0.10. Revenue for the quarter from parts and services grew by $73 million, a 17.3% over the prior year.

For the full year 2009, diluted earnings per share from continuing operations was $0.88, an increase of 28% over the prior year. On a full year basis, organic revenue growth from parts and services was 7%. Demand for wholesale, alternative repair parts, aftermarket recycled and refurbished was strong.

We are tracking the industry data for changes in the use of alternative parts. The mid-year data consolidated by both Michelin and CCC indicated alternative part usage is up, most likely at a faster pace than the historical 1 point per year growth rate that has incurred for the past decade. However, until we see the full year numbers from these agencies, we will not know the true industry growth rate.

Organic revenue growth for aftermarket and refurbished parts was 14.9% for the quarter and 8.9% for the year. Selling out of our aftermarket inventory was a key initiative during the year, we expanded the breadth and depth of the parts, reassigning some parts to different locations based on demand trends and improved unshelled fulfillment rates. Sales also have been helped by increased repairs as a result of higher used car values and resulting in fewer total losses.

On the recycling side, we saw organic revenue growth of 2.4% in the quarter. We mentioned on the last quarter's call that this category would be impacted by a drop in selling and service revenues. Without that revenue decline, the revenue growth would have been a healthier 7.4%. During the quarter, we purchased nearly 41,000 vehicles for dismantling buyer wholesale operations. Starting in Q4 and continuing into January, availability of salvage vehicles was tighter than we had seen in recent years. So, we were carefully monitoring our purchases and looking for additional sources of vehicles outside the arch.

Included in the 41,000 cars we bought, for 5,500 Cash for Clunkers for our wholesale operations. By now, way of our decision to press out most of the Clunkers we bought and although the vehicles were lower in cost, they average less revenue per car than the typical wholesale car that we buy.

We believe that our parts supply program differentiate our aftermarket, recycled and refurbished products from the competition. Our customers tell us they are looking for ways to control repaired costs without compromising quality. They appreciate that our programs can make it easier to use alternative parts.

We customize parts programs to provide our customers with a broader selection of aftermarket parts, as well as provide them tracking ability from the repaired car back to our vendor.

I’d mentioned Keyless before talking about our programs. This slates availability of alternative parts with the estimate in the system. The software makes it easier for our repair shop to consider parts availability and cycle time in determining what part they want to use for a job. More than 2,000 repair shops now have access to Keyless and their use of the system that is growing. In January, it generated 120,000 estimates that are linked to our inventory.

Our self-served operations rebounded near normalized levels compared to the impact we felt from the collapse in the commodity market in the fourth quarter of last year. Scrap prices we received and the cost repaid for cars were more inline with the historical spread from the period before the run up in scrap prices.

During the fourth quarter, we purchased 56,000 lower-cost, self-service and crush-only cars including about 5,000 Cash for Clunkers. The average cost of the self-service cars we bought was 7% higher than the average for the fourth quarter of 2008. We made a number of the important acquisitions during the fourth quarter. The largest was Greenleaf Auto Recyclers, which we talked about briefly on our previous earnings call. The integration of this business is progressing well and on schedule.

Our facilities have been converted to LKQs operating systems and have access to our aftermarket and refurbished inventory as well as, recycled products. The integration of Greenleaf with LKQ is on schedule to meet the financial charges we set for 2010, when we first announced the transactions.

Highway Truck [ph] in Fresno, California was also acquired during the quarter. It provides our heavy-duty truck network with a critical vision point on the West Coast. And finally, the purchase of Capital Auto Parts, a wholesale recycle parts business in Albuquerque, New Mexico. After this access to New Mexico and the opportunity to expand in the South.

With the addition of Highway Truck, we now have seven distribution points in our heavy-duty truck network. While the economic environment continues to wait on the business, they are using this time to network the operations in a seamless organization.

The installation of a common network inventory system, which is currently in progress, will enhance the benefits of cooperative vehicle procurement end-pricing tool. Additionally, we are in the process of identifying best practices and creating standard operating inventory and pricing factors that should further improve the financial performance of this business segment.

(inaudible) group identified sales opportunity that individually would not have been possible. I will now turn this discussion over to John, so he can provide more detail on our financial results and then I will wrap up with some summary comments.

John Quinn

Thanks Joe and good morning everybody. As Joe mentioned, we are very pleased with the way that the business performed in Q4. Hopefully, everyone has had the chance to look at our 8-K, which we have filed with the SEC earlier today.

There is a lot going on in the income statement that relates to the accounting for the Schnitzer transaction. So, I will be pointing those items out, so you can make adjustments to get back to a more normalized income statement.

We mentioned in last quarter that eight operations we divested or closed in conjunction with the Schnitzer transaction have been classified as discontinued operations in our financial statement.

The results of these are eight businesses have been removed from the section of our income statement shown as continuing operations and presented as one-line item labeled loss or income from discontinued operations. All periods present a reflective accounting treatment.

Our revenue for the fourth quarter increased $91.1 million to $555.9 million compared with $464.8 million for the same period last year, an increase of 19.6%. On a full year basis, 2009 revenue was $2.048 billion compared to $1.909 billion in 2008, an increase of $139.4 million or 7.3%.

For Q4, our organic growth was 12.1% and acquisitions accounted for 7.5% of growth. Within the organic growth figure, other revenue which was when we record our scrap commodity sales was up 34%, commodity prices were higher on a year-over-year basis.

So, if we exclude the improvement in other revenue, the organic growth to the balances business was 9.8% and I think that’s the real story here. We saw solid growth in our salvage parts operation and our aftermarket sales were particularly strong.

Our acquisition revenue growth is dominated by the acquisition of GreenLeaf, which was completed in our total around 2009. This transaction accounted for approximately 5% of the acquisition related revenue growth. For the full year, we saw organic growth of 1.9% with parts and service organic growth was a full 7%.

Gross margin for the fourth quarter 2009 was 45.5%, which was up from 42.3% in the same period 2008. In our full year basis, the gross margin for 2009 was 45.3% compared to 44.2% within the same period of 2008.

These improvements are primarily related to our self-service operations as commodity prices stabilized in 2009 compared to the dramatic drop we experienced in Q4, 2008. We also benefited from steadily improving aftermarket margins.

Our facility and warehouse expense for the quarter increased 14.4% or $7 million as compared to the same quarter 2008. Approximately, $4.2 million of the growth was related to business acquisitions. In addition, we incurred $1 million charge in the quarter related to future events on some abandoned facilities.

Facility and warehouse expense as a percentage of revenue in the quarter showed an improvement at 10.1% versus 10.5% in 2008. On a full year basis, facility and warehouse expense grew $18.9 million or 10.4% over 2008 with $16.8 million of the growth related to business acquisitions.

As a percentage of revenue, facility and warehouse expense was 9.8% compared to 9.5% in 2008. The percentage of deterioration for these expenses for the full year was related to our self-service operations, as they run at a higher percentage of revenue for these types of costs and in particular was primarily due to our acquisition of Pick-Your-Part in Q3, 2008.

Distribution expenses for the quarter increased $6.3 million or 14.6% from Q4 2008 or $2.7 million of the growth related to business acquisitions. The remaining growth is primarily wages for truck ransom maintenance due to the increased part sales. As a percentage of revenue, distribution cost actually improved to 8.9% in Q4 2009 from 9.3% in Q4 2008.

On a full year basis, distribution expenses increased by $2.3 million or 1.3% from 2008 with $6.6 million of growth related to business acquisitions. While we saw their cost categories increase, these are offset by a decline of $10.6 million in fuel costs. As a percentage of revenue, distribution expenses fell to 8.9% compared to 9.4% in 2008.

Selling, general and administration expenses grew $13.5 million or 21% over the fourth quarter of 2008 with $3.8 million of the growth related to business acquisitions. As a percentage of revenue, selling, general and administration expenses was 14% in Q4 compared to 13.9% in the same period in 2008.

With the dramatic revenue growth, we'd have like to seen a little bit leverage here, but the quarters’ cost were impacted by increased bonus accruals of about $3.6 million related to year-over-year improvement results and increased professionally on some of the costs about $2.2 million of incurred in the quarter.

For the full year, SG&A expense grew by $26.7 million or 10.7% over 2008 or $13.1 million of the growth related to business acquisitions. As a percentage of revenue, selling, general and administration expenses were $13.5 million compared to $13.1 million in 2008.

During the quarter, we had restructuring expenses of $644,000 as part of the operating expenses, essentially all of which were related to the Greenleaf acquisition, primarily severance cost. Our operating income was $59.7 million in Q4 2009 compared to $30 million in Q4 of 2008. And for the year, our operating income was $231.4 million compared to $193.3 million in 2008.

In Q4 2009, our self-service facilities operating income and their margins continued to improve sequentially. In Q4 2009, revenue from our self-service business and continuing operations was $44.6 million or 8% of total revenue.

Approximately 43% of this revenue was part sales included in recycling and related products revenue and 57% scrap and car sales, which is included in other revenue. For the full year 2009, total revenue for our self-service businesses and continuing operations was $161.7 million or 7.9% of revenue.

The split on this revenue was approximately 46% parts, included recycling and related parts and 54% of scrap and car sales included in other revenue. Back in Q4 2008, our self-service businesses had revenues of $32.8 million in continuing operations. For the full year of 2008, they had $155.7 million on revenue in continuing operations.

Net interest sales for Q4 2009 was $7.8 million compared to $8.6 million in the same quarter last year. For the year, net interest expense was $30.9 million compared to $35.5 million in the same period 2008. These decreases are the result of lower interest rates and lower debt balances, primarily due to scheduled debt repayments.

Note that included in other income expenses was a $4.3 million gain on bargain purchase price related to the GreenLeaf acquisition. Under (inaudible) that used to be considered negative goodwill is now taken directly to income statement in the period recognized. The Q4 2009 pretax income from continuing operations was $56.5 million for the quarter, compared to $22 million for the same quarter of 2008.

For the year, pretax income from continuing operations of $205.3 million in 2009, compared to $159.1 million in 2008. Our effective tax rate was 38.1% for 2009, compared to 39% for 2008. Excluding various changes in discreet benefits or reserves, the effective tax rate would have been 39.5% for 2009.

We have a couple of items below the income from continuing operations line and we have broken those out in financial tables included in the press release. For the quarter, the total income related to discontinued operations was $0.7 million, including an after-tax loss of $1.8 million on discontinued operations, which included $2.3 million of restructuring expenses on an after-tax basis and the earnings of the businesses sold.

There is also a gain on sales of discontinued operations of $2.5 million on an after-tax basis for the operation sold in Q4 2009. For the full year 2009, the total gain on discontinued operations was $0.4 million, including $2.3 million restructuring expenses on an after-tax basis incurred in Q4, a $2.2 million fixed asset impairment on the after-tax basis incurred in Q3 of 2009. These were offset by the earnings throughout the year with the businesses sold and the after-tax gain on the sale of discontinued operations of $2.5 million reported in Q4.

Our Q4, 2009 net income was $37.2 million compared to $13 million for the same quarter of 2008. For the full year, net income was $127 million compared to $99.9 million in 2008. Our fully diluted EPS was $0.26 for Q4 2009 compared to $0.09 in Q4 2008. For the year, our fully diluted EPS was $0.89 for 2009, compared to $0.71 in 2008.

To summarize the impacts of restructuring expenses and the gain on bargain purchase of GreenLeaf on net income and EPS from continuing operations, restructuring cost and the gain on borrowing purchase agreement, a total of net positive $4 million on an after-tax basis or $0.03 of diluted EPS for the quarter. For the full year, they had an impact on income of $2.8 million or $0.02 on diluted EPS.

So, we adjusted these items, our fully diluted EPS from continuing operations would have been $0.23 for Q4 and $0.86 for the year. Our fully diluted weighted common shares outstanding used for EPS calculations were as follows: Q4 2009, 144.6 million, Q4 2008, 142.4 million for the year and 144 million for 2009 and 141 million for 2008.

With respect to our 2009 cash flow, we generated $164 million in cash from operations during the year. We grew our inventory $20.4 million, this growth being primarily related to aftermarket and refurbished products. Capital expenditures were $55.9 million in 2009, excluding business acquisitions.

We spent $65.2 million in acquisitions and we received proceeds from asset sales of $18.5 million. The proceeds were primarily related to the sales of certain service yards to (inaudible). During the year, we issued approximately 2 million shares of stock related to the exercise of stock options and that resulted in $17.9 million in cash, which includes related tax benefits. That at the end of the year was $603 million including $595.7 million under our secured credit facility. Cash and equivalence was $108.9 million at 12/31/09.

In addition to our mandatory scheduled debt payments in the fourth quarter, we prepaid $22.4 million of term loan payments that were scheduled for 2010 and we also paid off the September 30, 2009 revolver balance of $8.9 million. Given our strong cash flow and the negative carry for having cash on the balance sheet, does seem to make sense.

Earlier this month, we prepaid the final scheduled 2010 payment of $7.5 million required under the term loan for this year. As of the close of business on February 23, we have approximately $145 million of cash and equivalents.

Today, we have no draw on our $100 revolving credit facility and approximately $23.9 million letters of credit that are backstopped by the facility, leaving $76.1 million availability for future borrowings. Combined with our cash balances, the fact that we have prepaid our mandatory term loan payments for 2010, we believe we have adequate liquidity.

Moving to 2010 guidance, as Joe indicated earlier, the economic environment while improving remains choppy. While we anticipate annual organic revenue growth for 2010 for parts and services will exclude the other revenue category to grow at a rate between 6% and 8%. Excluding the impact for restructuring charges, impairments or gain losses related to acquisition or divestitures, we anticipate our full year 2010 net income from continuing operations will be in the range of $145 million to $155 million and fully diluted earnings per share to be in the $1 to $1.6 range.

Net cash provided by operating activities in 2010 is projected to be approximately $160 million. We expect to continue to grow inventory and working capital and to support the sales growth and cash taxes are expected to grow a little faster than income.

The company estimates 2010 capital expenditures related to property and equipment, excluding expenditures of acquired businesses will be between $85 million to $95 million. This figure include some carryover spending from projects that are delayed in Q4 2009.

And with that, I'd like to turn back to Joe for some closing comments.

Joe Holsten

Thanks, John. I’ll begin our call today with a reminder of some of the overall market conditions that existed at the beginning of 2009. While there has been improvement, many of those conditions are still broadly present today, an ugly environment for employment and consumer disposable income and insurance industry under pressure to keep market share and to manage severity and auto industry under stress in terms of sales and now quality for selected manufactures, weakened auto dealerships and tight credit markets, which impact our competitors’ inventory levels.

Since buying Keystone, we have been laying the groundwork and executing on our business plans to be the number one provider of alternative collision parts. Our results this year reflect our success, but I believe we are only beginning to realize the benefits from creating our wholesale parts group that offers a full breadth of options to the professional auto repair industry.

Our outlook for 2010 is positive and builds from the momentum we created during 2009. The strong earnings and cash flow we generated last year leaves LKQ in an even stronger position to execute our strategy and to continue to invest in our network and inventory.

We are now ready to open for Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question today comes from line of John Lovallo, with Bank of America-Merrill Lynch. Please proceed with your question.

John Lovallo - Bank of America-Merrill Lynch

Couple of quick questions for you here. In terms of the Allstate’s decision to use co-partners and exclusive provider, I mean do you guys anticipate any impact in the buying environment?

Joe Holsten

No, I don’t think we would. We attend about 280 auctions per week and quite frankly the auction company is pretty irrelevant to us, we simply buy it from everybody.

John Lovallo - Bank of America-Merrill Lynch

Okay, fair enough. In terms of your operating margin expansion, I mean certainly integrating Greenleaf will be helpful, what other opportunities do you guys see, I mean particularly at the cost of goods sold line, can you kind of talk about that?

Joe Holsten

I actually probably see more opportunities for expansion of operating margin probably below the line; I think historically our gross margins have been relatively consistent. I think it’s typically expressed a business model that’s not really based on improving our gross margins, but really based on improving our operating income margins. And broadly the largest thing that happened there is, quite frankly is just pushing more volume through the system we have in place today. I view the systems having a lot of either fixed or semi-fixed parts and just purely increasing our volumes in deliveries, leveraging our network and sales organization. Historically, I think if we go back over five years we have seen operating income margin improvements ranging from 50 to 75 basis points, that’s been our target, and it remains our target over the next several years.

John Lovallo - Bank of America-Merrill Lynch

Okay, fair enough. Just getting back to the cost of goods sold, in terms of buying strategy and things of that nature, other things you can do to kind of leverage that?

Joe Holsten

We are always certainly in the aftermarket side the business, and we are always in negotiations with new suppliers to seek out equivalent quality or improve quality products at the same or lower prices than what we’ve paid historically and we will continue those efforts. Probably I would say our focus in the next year or two will probably be more in the area of discounts, managing discounts very tightly with our customers, and that’s where I think, if we have some room to grow our gross margins is probably managing that aspect of our business pattern.

John Lovallo - Bank of America-Merrill Lynch

If I could sneak one more quick one in. Your allowance for doubtful accounts has kind of crept up since the first quarter of 2008. Is that something that is kind of business mix related or what would you attribute that to?

Mark Spears

I think it is just normal fluctuation.

Operator

Your next question comes from Tony Cristello - BB&T Capital Markets.

Tony Cristello - BB&T Capital Markets

One question Joe. You touched on the supply, the auction being a little bit tighter, is that a function of total loss. Is it a function of fewer claims, is it a function of fewer vehicles in the park or is it a combination of all? Can you shed any color on that?

Joe Holsten

The fourth quarter, the volumes, we saw at the auctions were probably lower than what we had seen historically. Some of that is seasonal even compared to last year, I think it was a little late and I think you have to attribute that to the total losses and I would probably link that to used car prices more than anything else. The Cash for Clunkers program did strip a lot of products out of the market that ordinarily would have been in the market in the used car lots and I think every data point I have seen suggests that used car prices spiked in the second half of the year.

We would expect that to normalize I think during 2010 and we are beginning to see the usual seasonal improvement in the volume of product at the auctions, but we are also seeing pricing moving up pretty rapidly.

Tony Cristello - BB&T Capital Markets

Did that have an impact on gross margin for you in the quarter, I mean obviously you put up a solid gross margin number, but could there have been some possible drag just as a price at auction has increased to you?

Joe Holsten

I don’t think so because most of what was going to our cost of goods line in the fourth quarter would have been what we bought during the third quarter and our third quarter buying was one of our lowest average cost quarters in the history of the company.

Tony Cristello - BB&T Capital Markets

So from an inventory standpoint and/or fill rate standpoint, do you still believe or feel that you are pretty confident that, that is not going to be an issue as we go through sort of the balance of this seasonally strong period.

Joe Holsten

Well, certainly we are in very good shape on our aftermarket products. The fill rates there have improved nicely over the last 12 months. The recycled product are not in stock percentages as an average for plan or among the lowest we’ve seen, but I’d just say we remain vigilant to closely monitor the buying process we have coupled our markets, they are a little tighter on buying salvage right now than what we’d like to see, we think that’d probably correct itself here in the winter months as volumes spike in the first quarter. The other one known here is how many competitors have really been out of the auction market for five or six months? We are aware of many competitors who loaded their yards up with Cash for Clunker and quite frankly they were away from salvage auction pools for almost half the year. At some point, those competitors are back in the pools having really bought nothing, out of the pool for a while, so I think those buyers coming to market could create kind of a temporary blip in the salvage platform.

Tony Cristello - BB&T Capital Markets

Okay and then may be if I could just ask a question on AQRP [ph], any update on how that’s progressing sort of any new additional participants that have been added and then how are you targeting that from a growth standpoint as we progress through this year and is this in any way going to help with sort of the noise that’s surrounding this rebar and everything else that’s going on with that after market piece of business?

Rob Wagman

We decided that what we are not going to be disclosing more details about our parts supply programs in the future. We believe that give us competitive advantage especially in light of as you said the noise on the rebar issue. We feel that our activity with our customer has increased dramatically concerning future program, so it’s fair to say that our activity with our customers was up greatly and it’s relating to programs and services we can offer them directly, so we think it’s a positive that there is so much activity with the carriers to create new programs for us with us.

Tony Cristello - BB&T Capital Markets

Okay, may be just one last follow-up. When you look at what Allstate did in signing sort of an exclusivity, is there an opportunity then in this side of the business to see some type of exclusivity given the broad range of parts you now have and access to parts that you have or is that something that may still remain rare.

Rob Wagman

Well, we continue to push our one stop shop comes out with customers and we’re calling a bundling concept where we can supply all their alternative parts, so it is an opportunity for sure as people look to consolidate the amount of people they call, the amount of customer or vendors they have to deal with, so we believe that’s a very positive trend for us as well.

Joe Holsten

Maybe perhaps instead of focusing on exclusivity (inaudible) we are highly focus on all these being the first call.

Operator

Our next question comes from the line of Sam Darkatsh - Raymond James.

Sam Darkatsh - Raymond James

Couple of questions just broad based. You mentioned the metro data showing the upswing in alternative part usage and it seems as though your organic growth throughout 2009 accelerated and yet your guidance is suggesting 6% to 8% organic growth in 2010, which is a bit of a deceleration on the growth side. Is that conservatism or are you seeing something perhaps in the second half that gives you a little bit of pause, because I’m guessing that the recent demand trend and snow in Q1 is going to continue to give you some pretty healthy growth rates at least in the first half. Can you give us a sense of what your thinking is for organic growth and the drivers of that 6% to 8%?

John Quinn

Well, certainly 2009 was pretty lumpy if you kind of go back to the quarter. So we saw at this point to kind of stick with the results we had averaged during 2009 was probably a reasonable way to present our business plan. I will say that the year started at a stronger pace than that in January. February, quite frankly, the weather has been full severe that it has actually resulted in some business closures for two or three days. But the business is certainly off to a stronger start than what we budgeted.

Sam Darkatsh - Raymond James

Talk about the acquisition pipeline and John you mentioned the liquidity, but what are the chances of a deal of some size coming about in the next six to nine months or so?

John Quinn

It is interesting, I guess I’d say from the date that President Obama has made kind of an initial announcement of the budget package indicating the capital gains are going up, it seems like Walter Hanley’s phone started ringing the very next day. I would say that we are working the best backlog in late model salvage yard acquisitions that we’ve been working for some time. But that also means that these are modest deals. I think that’s okay, those have been kind of the bread and butter of our acquisition growth plan, I think we closed 85 transactions in 10 years.

The business is really dissolves the unique skill set for rapid integrations of acquired businesses. So, personally I love to see businesses that are in $5 million to $10 million revenue range that have a lot of growth upside. We are seeing good opportunities in late model salvage, we will target two to three deals in the heavy-duty truck market in 2010. In the self-serve area we have a couple of Greenfields and progress right now on Georgia, Atlanta, North Carolina they are moving along well. We’re about ready to begin on in Texas and that business line will continue to target Greenfield as a way to grow our business.

We’ve looked at the Mexico market recently, we have been very impressed, but some of the insurance drivers they have successfully propelled the alternative of parts industry in the United States are live and well and being practiced aggressively in markets of Mexico. So, we are also entertaining an expansion into a couple of northern Mexican markets as well. However, the capital allocation priority clear in a way is into the U.S. and Canadian markets.

Sam Darkatsh - Raymond James

Thank you. The other couple of questions real quick. CapEx in 2010, I know you mentioned there was a little bit of carry forward, but it seems a little heavy of that $85 million to $95 million if you could some specificity as to where some of that capital was headed and then finally you may have mention is in your prepared remarks, but the self-service retail vehicles process, did you have the number that would be great?

John Quinn

On the capital, I will take that one maybe the, we have a number of fairly large projects around the Country where we just have grow the facilities, frankly. So, we are investing in some buildings in New York and some of our bigger facilities there is some spending on the IT associated with some of the projects that we are doing in that area. And obviously there is some carryover from Q4, (inaudible) but under last year what we had projecting some of that’s just carryover.

Joe Holsten

In terms of the volumes into the self-service yards, I think we gave 56,000 of the number for the quarter, which was include to both Clunker cars and any crush on my cars.

Operator

Your next question is from Nate Brochmann - William Blair & Company.

Nate Brochmann - William Blair & Company

Just wanted to ask just kind of a detailed question, I assume that's been really come up so it’s not a big deal, but in terms of some of the problems with Toyota, has that had any carry through to you in terms of any inventory risk?

Joe Holsten

We are probably accelerated pedals or accelerator systems and the break through the other issue, I think and we don’t sell breaking systems or pads, whether that is specific unit loss, we would have nothing on our book or on our general ledger for any of the products that’s been recalled?

Nate Brochmann - William Blair & Company

Or there wouldn’t be any flow through in terms of consumer demand maybe for that type of vehicle wanes a little bit at least temporarily in terms of whether that might have any impact on a broader basis for you?

Joe Holsten

I don't think so. The best we can sell even, I think the used vehicle pricing market for Toyota is actually held up pretty strongly, I was surprised by that that our flats checking on that, which was yesterday morning I don’t think there has been a lot of the moment yet.

Nate Brochmann - William Blair & Company

Okay that's good enough. And then just wanted to push you a little bit Joe on the opportunity for some margin improvement you talked about kind of the general range that you had looking for historically, I would think with Keystone being kind of on a platform at this point that there would be some broader opportunity for some margin improvement throughout the organization in terms of maybe better leverage in terms of more cohesive buying power et cetera. I was just wondering if there was some possibility for a few extra twigs maybe not to first half of this year, but later this year.

Joe Holsten

And your focused on the gross margin?

Nate Brochmann - William Blair & Company

No, more on the operating margin side.

Joe Holsten

Operating margin, I don’t feel, compelled or commit to something stronger than 30to 75 basis point range that’s kind of been the sweet spot of the company. Keep in mind that though we’re acquiring businesses all the time frequently when they come into the network industry they are slightly diluted to our margins and may take two years before you get them to run rate margins of the business. I mentioned our strategy and self-service operations typically to Greenfield and Greenfield operations typically lose money for the first three to five quarters and today’s accounting standards don’t allow you to put that in the balance sheet like you could a number of years back.

It is certainly a strong focus of management and we’re always looking for new systems, new best practices, routing systems. We are consequently looking for ways to kind of reinvent and prove ourselves. I feel we have allowed to see something higher than 75 basis points in that and commit to you, we’re working our butts off to do that, that’s as far as I know prepared to go there.

Operator

Your next question comes from Craig Kennison - Robert W. Baird.

Craig Kennison - Robert W. Baird

So, you mentioned Mexico as an international opportunity, has the Board had a chance to review opportunities in Europe and if so, where does that sit and given all of the opportunities to have both in the U.S and outside the U.S?

Joe Holsten

We will update the Board probably at our May meeting on the European markets as we see them. We continue to invest both our own time and to retain some consulting of systems in the European markets who better understand the insurance market, the legal situation, the status of policies, the consumer interest and how those variables maybe different by different countries with the larger car parks.

And as I think, we’re rapidly coming to some conclusions on the market, certainly it is hard to know a market of that size, but they set up front. Certainly, the primary focus in 2010 is on the domestic market. We do believe that the increase in capital gains, they are almost coming in 2011, I think that will cerate a one-off opportunity and we certainly don’t want to miss a single good quality transaction in the United States, because I haven’t come on working on a deal in some place in Europe.

Craig Kennison - Robert W. Baird

That’s helpful and then I understand your desire not to reveal competitive information about your aftermarket programs, but could you just give us a sense for the revenue associated with any bumpers that you are not selling currently. Is it material?

Joe Holsten

I think you mean re-barred.

Craig Kennison - Robert W. Baird

Yes. okay.

Joe Holsten

It is not material Frank, it is less than 0.5% of our overall revenue and one thing that I think we got to keep in mind is that there are substitutes available. We sell recycled, we have some OE take on and we have quite an extensive line of already tested products. So, the run into exposure is very minimal.

Craig Kennison - Robert W. Baird

And lastly, John I’d be interested in your perspective as somewhat of a newcomer to the business for opportunities you may see that you have had a chance to share with the company?

John Quinn

Well, I think that the main thing that we are looking at is just in terms of market share for individual and as where are we relative to what we think the capacity and the ability of the toe-end of those markets are. We are still working on the analysis, but I think those markets identify potential new Greenfield places, Joe mentioned and those are some of the bigger opportunities I think just to grow our leverage of the foot print that we have and to expand into some new geographical markets within the business.

Operator

Your next question comes from Scot Ciccarelli - RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets

A quick question, regarding the service revenue that you kind of exclude from the recycling calculation. Can you just tell us what it was this year and what it was last year in dollars?

Joe Holsten

Last year in 2009 it was around $12.12 million as I recall. I don’t have the number in front of me for the prior year, but I think it is safe to say that Q4 we had about $2 million to $3 million in that category and we expected to be in that neighborhood next year per quarter.

Scot Ciccarelli - RBC Capital Markets

And then, I know you don’t want to discuss specifics about the AQRP program, but any impact from the Ford settlement, there was suggestions before that, that could wind up helping you on a couple of different levels, certainly psychologically with some of your customers, without being specific, can you kind of talk about the impact that has had?

John Quinn

Yes the Ford (inaudible) patented program is what you are talking about. There are about a couple of hundred parts that are in that program, it’s not like we have 60,000 skews, so it’s not a major impact whatsoever to the overall revenue. It obviously has provided us to have some exclusivity with our customers and of course with the manufactures as well, but in the grand scheme of things, it is a small amount of skews that are reflected by the whole process.

Scot Ciccarelli - RBC Capital Markets

Okay, and then that the last quickie is, was there any benefit to the organic growth from the facilities you closed. I’m assuming you are able to keep some of that business, which is run through a different facility, so kind of that reverse cannibalization if you will, if there was any impact that?

Mark Spears

Are you referring to the operation in the Schnitzer transaction? Well, we sold our self-service operations and we are essentially active at those businesses and those markets.

Operator

Your next question comes from Scott Stember - Sidoti & Company.

Scott Stember - Sidoti & Company

You talked about the number of the vehicles that you bought at auction on the wholesale side. It sounds like it was down slightly versus a year ago? Could you talk about a price that you paid for these vehicles?

Mark Spears

Yeah, looking sequentially, I had mentioned that the third quarter of this year was probably one of the lowest quarters we have ever experienced in our cost of cars. So, our cost for the fourth quarter is still a pretty low cost was up around 24% over the third quarter. If we are looking to quarter-on-quarter from a year ago, the cost was actually still down and down around 10% from a year ago.

Scott Stember - Sidoti & Company

And the volume you said was down modestly year-over-year?

Mark Spears

Year-over-year, for the fourth quarter alone, we were just up very, very slightly. And that was probably what would have been on those solely due to the probably to the (inaudible).

Scott Stember - Sidoti & Company

And just lastly, could you just maybe take a step back and talk about how the trucks part businesses they are really starting to evolve right now. You have had about a year and a half to two years of making acquisitions there. Could you just talk about where you stand and how you plan to attack that business.

Mark Spears

The main work that we have been doing so far has been on identifying and selecting a common inventory management system to be used and we are in the midst of converting our seven facilities under that system right now. I think we have completed four of the seven and in conjunction with that our operating management in the field has been working on coming up with kind of all the nitty-gritty standard and inventory parts descriptions solely, but everything that comes with an engine would be different probably between every truck recycler in the United States. So, you have to define, when you buy an engine what all do you get? So a lot of the work that we've been doing has been on standard part description and how is it entered into system developing common inventory management systems.

And then the next step will be to develop common pricing, because the pricing is varying between the markets. So exciting things as when that is competed and sales people across the country just like they do on the other side of the business are going to have visibility to the entire part network throughout LKQ that will not only include parts, but also old trucks, we do sell some old trucks.

We think the system will be pretty powerful for the export buyers in particular and today an export buyer typically comes into Houston and they get on plane and they fly to Chicago and they fly to the West Coast and they stop at half a dozen truck cards before they build their shopping list.

So, certainly our hope is that what these foreign buyers will get into one of our facilities and they can save themselves travel time around the country and get what they expect. So, we continue to feel that the dynamics of the business will play out very attractively for our shareholders.

Joe Holsten

Okay. I appreciate that. I just want to thank everybody for joining the call today. And we’ll be back soon in about 60 days to overview our first quarter. Thanks again.

Operator

Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: LKQ Corp Q4 2009 Earnings Call Transcript
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