LKQ Corporation (LKQ) Q2 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the LKQ Corporation Second Quarter 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. Thank you. Sir, you may begin.

Thanks, Christine. Good morning, everyone, and thank you for joining us today. This morning, we released our second quarter 2012 financial results and updated our full year 2012 guidance. In the room with me today are Rob Wagman, President and Chief Executive Officer; and John Quinn, Executive Vice President and Chief Financial Officer. Rob and John have some prepared remarks, and then we will open the call up 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'd 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 statements 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. 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. We're very pleased with the results we reported this morning. Diluted earnings per share from continuing operations in Q2 was a record of $0.43, an increase of 34% as compared to $0.32 for the second quarter of 2011. As noted in our press release, the second quarter 2012 diluted earnings per share included a gain equal to $0.04 per share that resulted from a favorable legal settlement, partially offset by restructuring and acquisition-related expenses and change in fair value of contingent consideration liabilities totaling $0.02. Revenue for the quarter was $1.01 billion, the second highest quarterly revenue achieved by LKQ, second only to Q1 2012, despite the fact that insurance carriers reported fewer claims in Q2. Industry sources have reported overall claims volumes are down circa 2% year-over-year mainly as a result of fewer catastrophe claims. Despite the continued challenges of a mild winter we witnessed in the first quarter, the effect of which carried into Q2, and the volatility in the scrap metal, aluminum and precious metal markets, we still achieved 6.3% organic growth for parts and services and 3.7% total organic growth. The softness in the scrap market negatively affected our results by $0.02 of EPS and caused our gross margin to decline by 50 basis points. Revenue growth from acquisitions was 29% in the quarter. The continued growth in organic parts and service revenue in 2012 is a combination of the increased use of alternative parts by insurers and the Direct Repair Program networks to reduce claim costs and our continued success at gaining market share from the competition. As mentioned on the last quarter call, we still believe alternative part usage in 2012 will realize a 100 basis point improvement over 2011 alternative part usage levels. Next I'd like to share some operational statistics. During the second quarter, we purchased nearly 67,000 vehicles for dismantling by our wholesale operations, which is an 18% increase over Q2 2011. As for volumes at the auctions, supply remains strong throughout Q2 and continues to meet our needs early in Q3. With inventory already on hand and a continuation of our current run rate for acquiring cars, we should have sufficient inventory to grow our recycled parts operations. I'd also like to mention that we are starting to see some pricing relief at auction. According to industry sources, wholesale used vehicle prices were down 3.7% in June compared to May and down 3.6% relative to June 2011. We are starting to realize corresponding price reductions in our vehicle procurement, including our self-service operations which we hope will positively impact our gross margin. But please note that our gross margin may be negatively affected by scrap price reductions, going forward. Turning to our self-service retail business. During the second quarter, we acquired over 107,000 lower-cost self-service and crush-only cars, as compared to 91,000 in Q2 of 2011, which is an 18% increase. In our heavy-duty truck operations, during the second quarter we purchased roughly 1,700 units for resale or parts as compared to 1,600 in Q2 2011. We continue to be excited about the growth prospects and customer demand for this business, which posted solid double-digit organic growth in the quarter. Turning to Euro Car Parts. We continue to be extremely pleased with the performance of Euro Car Parts, with its ability to capture market share and open new store branches. In Q2, ECP achieved organic growth revenue of 22% versus pre-acquisition periods, and we opened 11 new branches, with an initial 2 branches opened this month to bring our total branch count to 112. As of July 12, we have opened 23 locations since we acquired ECP in early October 2011, and we are on target to open a total of 30 branches in 2012, which I mentioned on our First Quarter Call. I would also like to update everyone on the collision parts program in the U.K. that we initiated late -- back in late March. While still early, we are encouraged by our progress thus far, with our primary focus on meetings with insurers and repairers in attempt to educate the industry on the value of alternative parts. Daily sales are advancing to plan as we continue to market this product line. Moving onto acquisitions. During the quarter, we acquired 7 companies. We purchased a chrome accessories distribution business headquartered in Nebraska, a self-service operation in New Hampshire, a self-service operation with 2 locations in Florida, a wholesale salvage operation in West Texas, a paint distribution business with 4 locations in California, we added a precious metal extraction business based in Rhode Island and, finally, we purchased a self-service operation with 5 locations in Maryland. I'd like to briefly highlight 2 of these acquisitions. In June, we acquired 5 self-service operations in Maryland that operate under the trade name Crazy Ray's. This acquisition reflects our strategic goal of building out our national footprint in all lines of business. Prior to this acquisition, the company serves the Maryland market with our aftermarket, heavy-duty and salvage lines of business but not self-service. Also in June, we acquired Material Sampling Technologies, a precious metals extracting business based in Rhode Island. This acquisition will increase the efficiency of our scrap recovery process by improving the yield of precious metals from our salvage vehicle parts such as catalytic converters, vehicle on-board computers and vehicle sensors. As you can see, we've been very busy with acquisitions, and our pipeline should continue to present opportunities for additional growth for the company. Acquisition candidates exist across all of our business lines in terms of product types, as well as geographic opportunities, as we continue our plan to put additional facilities in key underserved markets. At this time, I'd like to ask John Quinn to provide some more detail on our financial results for the quarter.

Thanks, Rob. Good morning, and thank you for joining us today. I'm going to speak to a few highlights of the financial statements and then provide some color around our guidance thoughts for the balance of the year. Starting with revenue. This is our second quarter reporting revenue in excess of $1 billion. Revenue in Q2 was $1,007,000,000, representing a 32.5% growth over the second quarter of last year. Acquisitions grew -- drove 29% of the growth, representing $220 million. Our organic growth was 3.7% in total and parts and services organic growth was 6.3%. Please note that the parts and services growth number includes revenue associated with the new branches opened by ECP since our acquisition. This contributed about 120 basis points to the growth. Revenue for ECP was $165 million in the quarter, and while we didn't own ECP in Q2 last year, we believe it grew 22% over the same quarter last year when it billed $135 million. I'd also point out that we saw negative organic revenue change of 8.2% in other revenue. Other revenues were, we record, scrap and core sales. This negative organic growth was almost entirely driven by a fall in scrap prices, particularly aluminum from our furnace operations. We also saw a drop in scrap steel, we estimated we saw an 8.3% drop in scrap for our crush cars on a year-over-year basis. Total gross of other revenue was positive 90 basis points primarily due to acquisitions slightly more than offsetting the fall in pricing. Right now with the revenue conversation, we did see about a negative 30 basis point impact from foreign exchange on our revenue. This primarily relates to the Canadian dollar as we get in to the anniversary of thee acquisition in Q4 2011 of ECP. After Q3 2012, this number may be a little more volatile, with a larger base of foreign revenue coming into play. In Q2 2012, revenue for our self-service business was $84 million or 8.3% of LKQ's total revenue. Approximately 33% of this revenue was part sales included in recycled and related products and 67% scrap and core sales included in other revenue. Our reported gross margin was $422 million or 41.9% of revenue. Last year, we reported a gross margin of 42.4%, so our gross margin fell 50 basis points year-over-year. Included in this change, the legal settlement that Rob mentioned, was $8.4 million or a favorable 80 basis point impact. This is partially offset by ECP which caused a 40 basis point unfavorable impact year-over-year. And Rob mentioned that we saw scrap prices fall during the quarter. We estimate the impact from the fallen scrap prices was $0.02 or about 50 basis points. And we also paid more for some of our self-serve cars, which caused an additional 50 basis point compression to our margins. The balance of the margin changes were primarily mix. Our facility, warehouse, distribution and SG&A expenses were 29.4% of revenue in Q2 2012 compared to 30.2% in 2011 Q2. Rob and I were pleased to see that we appear to be getting a bit of leverage out of these cost again, as well as revenue is growing. Facility and warehouse costs were 8.2% of revenue compared to 9.1% in Q2 last year. This decrease was primarily due to adding ECP, which has a lesser amount of facility and warehouse expenses than out North American operations. However, having said that, we did see about a 20 basis point labor savings in the North American operations. Distribution costs were flat at 9.1%, both this quarter and the same quarter last year. ECP drove the 20 basis point increase which is offset by lower fuel costs in North America. Selling and G&A expenses were 12.1% of revenue in Q2 this year compared to 12% last year. ECP actually drove this percentage 50 basis points higher, but we saw improvements in North America, contributing 40 basis points of improvement as we saw some leverage in both the sales and administrative costs. During the quarter, we recorded $2.2 million of restructuring and acquisition-related expenses. Depreciation and amortization for the quarter increased $3.6 million to $15.4 million primarily as a result of acquisitions. The amortization of intangibles and depreciation associated with ECP was the primary driver of the increase. Net interest expense of $7.4 million was $2.7 million higher than the same quarter last year. This increase was mainly due to our higher debt levels, but we did see an improvement in our average borrowing cost. Our effective borrowing rate on our bank borrowings was 3.2% in Q2 2012 compared to 3.4% in Q2 2011. We are showing an expense related to the change in contingent consideration liabilities of $1.2 million. That's primarily related to accretion on the liabilities we've recorded. Our tax rate for the quarter was 36.8% compared to 38.4% in Q2 last year. We continue to see some benefit from the lower foreign tax rates as we earn more income offshore. On a reported basis, diluted earnings per share was $0.43 in Q2 2012 compared to $0.32 in Q2 2011, an increase of $0.11 or 34%. Last year, we included a $0.01 of restructuring costs offset by $0.01 of several adjustments to contingent purchase price. We view last year as being $0.32 on an adjusted basis. In Q2 this year, the $0.43 includes $0.04 income related to the legal settlement and $0.02 expense related to the restructuring costs and acquisition purchase prices. On an adjusted basis, Q2 2012 EPS would've been $0.41, again compared to an adjusted 32% for last year. A few comments on the 6-month year-to-date cash flows and uses of cash. Cash flow from operations for the first 6 months of 2012 was $121 million compared to $101 million in 2011, an improvement of $20 million. Year-to-date, EBITDA improved $65 million, but we had higher interest expense of $4 million and $19 million higher cash taxes in 2012. In 2012, we've made additional investments in inventory. The investments were $11 million higher in Q -- in 2012 compared to 2011. We did this particularly to support the growth in the U.K, which accounts for $27 million of the $31 million total increase in our year-to-date inventory growth. Compared to 2011, we also saw higher payroll expenses, being an $11 million greater use of cash. Year-to-date, we've spent $42 million on capital expenditures. We've also spent $120 million on acquisitions, of which $95 million was in the second quarter. As of June 30, 2012, we had $1 billion of debt and cash and cash equivalents of $59 million. These figures compare to the $956 million of debt and the $48 million of cash and cash equivalents at December 31, 2011. Availability under our credit facility at quarter end was $395 million after taking into account letters of credit drawn against it. With the cash of $59 million on our balance sheet, our total availability is $454 million. At quarter end, our debt under the credit facility was 66% fixed and 34% floating. Now turn to guidance. As we've stated in the past, our guidance excludes any restructuring costs and transactions costs, gains and losses in contingent purchase price adjustments and capital expenditures or cash flow related to acquisitions. We increased our guidance for organic revenue growth from parts and services to 5.5% to 7%. You'll note that after a soft Q1 we improved to 6.3% rate in Q2. Year-to-date, we've achieved a 4.9% growth, but we expect the second half of the year to be stronger as we don't expect to have the weather impacts we had in Q1 and in Q4 we'll start reporting all of ECP's growth as organic. Our revised guidance for net income is $265 million to $282 million, which equates to $1.77 to $1.88 diluted earnings per share. This change incorporates into our guidance the legal settlement gain recognized in Q2. We've left unchanged our guidance for cash flow from operations of $250 million to $280 million and we continue to expect our capital spending to be in the $100 million to $115 million range. As normal, I'll give you an update on some of the larger things Rob and I consider that could impact the guidance. Rob mentioned that we're on pace to open 30 new branches with ECP. I mentioned in the last few calls that new branches are generally unprofitable for a few months, so that development activity will be a bit of a drag in 2012 earnings particularly since the remaining branches will be opening later in the year. I still believe it's a strategic thing to do because in the long run we'll see these locations contributing both to dollars and operating income. The original cash flow guidance didn't contemplate as much inventory build as these branches required, so although we brought up the bottom end of the income guidance, we haven't changed the cash flow guidance until we get a better understanding of the impact of the accelerated growth in the U.K. and how it could impact our cash flow. On the North American side of the business, we started with a fairly low, at least for us, organic growth, which we attributed to the severe winter in 2011 and the mild winter in 2012. Rob mentioned that it appears we're getting into more normalized weather patterns, and people seem to be responding to lower gas prices by driving a bit more. But if the economy slows and Q4 is mild, that could be a risk to our assumptions. Moving on to scrap prices, let me explain what happened in Q2 and what we've seen so far this quarter. Prices in April and May for scrap steel were fairly stable, but we saw a drop in June and we have seen another drop in July. We have adjusted our car volumes fairly well because we think that we'll have a return to more normal gross margin dollar per car, going forward. But we have a couple of months of backlog to work through. I mentioned that we believe that scrap impacted our EPS by $0.02 in Q2. Based on July prices and our inventory turns, we think we probably have another $0.02 to $0.04 impact that will hit us in Q3. Obviously, we haven't completed July, so this is our current best estimate. The full year guidance assumes pricing roughly in line with today's scrap prices. Scrap steel is approximately 25% lower at the moment than we saw in Q3 last year and is approximately 80 -- 18%, than we've averaged in Q2 2012. LKQ doesn't give line item or quarterly guidance, but I did want to make you aware of the potential impact of this drop on other revenue where we record scrap and core sales. Total other revenue was 13% of our total revenue in Q2 this year compared to 17% or 18% in Q2 last year. So our exposure as a percentage of our revenue to commodity prices continues to lessen, but as we repeatedly pointed out, they can cause short-term fluctuations in our EPS. The decline in scrap pricing is going to impact gross margins for at least the first 2 quarters -- excuse me, at least the first 2 months of Q3. Again, we don't give quarterly guidance but I do expect to see some pressure we had on Q2 gross margins carry into Q3. And then assuming that scrap remains stable, we'd see some recovery in Q4 relative to Q3. Rob mentioned our car buying. The average price we paid at auction for recycled cars has been fairly stable for several quarters. We have seen a slight tick down the back half of June, but that may simply be the fall in commodity value built into the cars. Having said that, the Manheim used car index will start to move off its peak if used car prices start to fall, and that impacts our cost beyond the impact of scrap, but we may start to see margins and the late model recycle business improve later this year. Finally, the precious metals processing acquisition completed this quarter is similar to our furnace operations in that they process a high volume of lower-margin revenue. We expect this acquisition to negatively impact our Q3 gross margins by approximately 30 to 50 basis points. We value this company on its own merits and cash flows, but we believe it will allow us to achieve better yields from the non-ferrous metals we get out of cars such as the platinum in the catalytic converter. When Rob and I look at that, we believe that if we can achieve an extra $2 or $3 per vehicle with an annual car purchase and around 700,000 units, the acquisition would provide a very attractive return to our shareholders. I'd like to turn the microphone back to Rob to summarize before we open the call to questions.

Thanks, John. As we enter the back half of 2012, our outlook continues to be positive for the balance of the year. I'm encouraged by the tailwinds of lower fuel prices, the increased in miles driven, anticipated alternative part usage growth and a recent reduction in vehicle pricing we are witnessing. I am equally proud of how our group of over 19,000 valuable employees have attacked the headwinds we face in the first half of the year. We believe our unique competitive advantage and the actions we have taken in response to the challenging operating environments have translated to consistent earnings growth since our founding. We continue to focus on other ways to improve our gross margin, build partnerships that increase the acceptance of alternative parts and identify strategic opportunities to provide results for our stockholders. Christine, we're now prepared to open the call for Q&A.

[Operator Instructions] Our first question is from Sam Darkatsh with Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: A couple of quick questions here. First off, what -- the 7 companies that you acquired, what are the annualized sales?

Sure, I can get that through. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And how would that break out among aftermarket, collision -- I'm sorry, aftermarket recycle then the -- and other?

Sure. The acquisitions -- in Q2, there was about $6 million of revenue included from those, but the trailing 12-month revenue is about $130 million. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And how would that break out index-wise?

I'll just follow up with that. Why don't we go to another question? I'll see if I can grab that. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Sure, that's fine. And then there's obviously a lot of moving parts in gross margin with the scrap. You've got your precious metals impact and you've got the lower wholesale costs. By my math, and I'm probably forgetting something, but would -- it looks like gross margins in Q3 might be 10, 20, 30 basis points lower than Q2. Is that about right, or am I forgetting something?

Sorry, could you -- what were you at? Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Gross margins in Q3 versus Q2. Based on all the moving parts you gave, it looks like it'll be down slightly. Is that correct, or am I missing something?

Oh sure. Good question. The -- let me just hit on what we think is going to happen with the margins. Again, we don't give quarterly guidance to you on the gross margin line. But I'll just reiterate a few things we said. Other than seasonality, when winter time, we tend to see a little bit better margin when the shops are very busy. Our gross margin discussions tend to make more sense on a sequential basis rather than year-over-year, so -- but let me just walk you go through that. In Q2, we saw our gross margin was 41.9%, and that included the legal settlement. Without that legal settlement, our margin would have been 41.1%. So let's just start with that as a base. If we assume that scrap stays where it is today, we'll -- Q2 had a 50 basis point impact from scrap, and I mentioned we believe that, based on today's prices, there's pricing impact of $0.02 to $0.04 in Q3. If it's only $0.02, then scrap isn't really going to impact the margin in Q3, but it will cause Q4 to snap back by about 50 basis points because you won't to see -- we won't have that impact in Q4, if that make sense? If it turns out that scrap is higher -- a higher impact in Q3, say it was $0.04, that will cause an additional drag of probably another 50 basis points. But then the snapback in Q4 is going to be 100 basis points, a cumulative impact as we work through that inventory. The other thing I mentioned was that we expect to see the precious metal business negatively impact margins by Q3. But we think that's going to be somewhere in the 30 to 50 basis points drag. And that change will -- and this should be a new run level for us. Over time, we'll be able to mitigate some of that as we're able to move more of our non-ferrous metals to that facility and get better yields from each car. But that is going to take some time. The other 2 things we normally talk about are car acquisition costs and pricing. AS -- the Manheim index has come down some. We've seen a reduction in the car prices that we're paying at auction. But at the moment, I think that reduction is probably just offsetting some of the scrap reduction, but then the value of those cars, as opposed to improving our margins. But if we continue to see those drop, we may see some benefit from the -- on the gross margin line in later quarters. And then on the pricing front, just to give you a little update while I got you on the gross margin comments: we continue to work on our modeling. We've been running some tests. I think there's a little reticence on our part to pull the trigger on some of those with the low volumes in Q1. So we'll probably put that on hold for 3 to 6 months. And we had run some tests. We've had some encouraging things. We're running additional testing. So I think that's probably been pushed out a few months versus what we had originally planned for Q4. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Okay. Last question, then I'll defer to others. ECP specifically, if you just take a look at their same-store or same-location sales growth, what was that? And then I also noticed that the EBITDA margin sequentially declined in ECP from Q1 to Q2. Is that typical seasonal? Or is that -- have to do with a bunch of opening costs and such?

On ECP EBITDA margins, you have to be careful because some of those contingent purchase price adjustments are in there. So in Q1 we had a favorable contingent purchase price of $1.3 million and $1.1 million unfavorable in Q2. If you adjust those out, you're right, there is a little bit of a step-down of about 90 basis points. And that -- we're attributing that mainly to the drag of the new locations being opened. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And the same-location per -- sales growth?

I'm sorry? Sam Darkatsh - Raymond James & Associates, Inc., Research Division: The ECP comps, the same-store sales growth in the quarter.

Year-over-year -- we didn't own them obviously in Q2 last year. They grew about 22% year-over-year, which was essentially all organic. Not necessarily the same-store. I don't really have the same-store sale number for that, Sam.

Our next question comes from the line of Bret Jordan with BB&T. Bret David Jordan - BB&T Capital Markets, Research Division: On the -- following up on the ECP line of questioning. Could you give us a feeling for what we are seeing on collision sales in the U.K.?

Sure, Bret. We're very pleased with our progress there. We knew this was going to be a long curve to get done, with their alternative part usage in the 5% to 8% range. It was more of an educational process and we're continuing that process. We're meeting with insurers and repairers. And it's -- our daily sales are progressing to what we expected. We know it's going to be a long haul and we're on it as we speak. The -- all the estimating data has been uploaded to Audatex Solera. We're also working with a company called Glassmatix, that's the other estimating company in the marketplace. So we're working directly with them, and the sales are growing daily. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. So within that 22% growth of ECP, there was some collision contribution but not meaningful collision contribution?

That'd be fair to say. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And I guess in -- on the U.K. side of the business, there was one primary competitor over there to ECP. Do you have any sort of color as to how they are doing? Were they restructuring or under new ownership? And what the competitive environment in the U.K. looks like?

They are still in their restructuring process. They just need a new CEO over there. So they are working through that as we speak, but we continue to obviously take market share, we believe, from them as well as others with the growth that we're having. So we continue to lead the way at the marketplace and grow the market share and with -- the store openings have been very well received. As we mentioned, we've done 23 stores already but we will have the other 7 done by hopefully the end of Q3. And we plan on continuing to grow that business aggressively. Bret David Jordan - BB&T Capital Markets, Research Division: Okay, great. And one last question, on the core side of the scrap and core, do you see anything shifting on core pricing or core demand? I mean, it seems like we are seeing some signs of some softening demand in aftermarket parts. Are you seeing any read-through you're distributing the cores?

No. Core business is healthy, other than the fact that pricing is down a little bit on some of the precious metals. And again, we hope that our precious metal acquisition will help us recover some of that. But no really bad signs in that respect.

Our next question comes from the line of Nate Brochmann with William Blair. Nathan Brochmann - William Blair & Company L.L.C., Research Division: I just want to kind of follow-up on that a little bit. I mean, I think that obviously the strength of the overall business remains pretty strong and maybe even a little bit surprising given some of the economic malaise that we read about here a lot recently, particularly with the unemployment trends getting a little bit worse but you guys continued to do better. Obviously, part of that is driven by just APU, but could you talk a little bit -- maybe a little bit further in terms of any additional efforts on the sales front or just execution? Or is it just simply winning share from the smaller guys that don't have the same inventory levels?

I think there's quite a few organic growth drivers that we've witnessed lately that are really encouraging. First, fuel is coming down, Nate. It's really good to see that fuel is coming down. Through May, we have miles driven in the country up 1.2%, so we're seeing a positive trend there as well. We're encouraged by the sell rate as well. Now, the latest figure we saw was about $14 million cars. That's obviously going to impact the number of fully insured drivers. We did see the average model year car now in the United States has reached now 11 years old, which is good for our mechanical side of the business, perhaps not as good for our collision side of the business. But with the sell rate coming up, we'll start to see that shift towards a better trend. Our backlog in the old and salvage business is -- really, I don't think it's ever been stronger than what it is today in the summer. We've just seen greater volumes at the auctions. We've been able to pad that. As you saw, we announced the 18% growth in the salvage acquisition vehicles. So we're being able to buy our inventory quite easily today. One other thing that we're really excited about is -- on the aftermarket side is that certification programs continue to gain strength. Just some year-over-year stats: cap rate year-over-year from Q2 to Q2 is up 25% in the number of certified parts. NSF has doubled their year-over-year count, and our AQRP program, still strong and with strong interest by the insurance carriers to help increase their alternative part usage, so -- and finally, we did predict that -- and we are still predicting, that we're going to see 100 basis point improvement in alternative parts. I guess I would add that we are obviously taking market share. I did in my prepared remarks, mentioned that insurance companies are seeing softer claims and yet we're still growing the business. So we are certainly taking market share as well. But alternative part usage and those other tailwinds are really helping the business. Nathan Brochmann - William Blair & Company L.L.C., Research Division: And then just in terms of -- one of the things that you did heading in this year, you made some efficiency improvements in some of your routes within your intra-regional trade networks. Anything more to update there in terms of any newer initiatives to continue to drive some of those efficiencies?

The biggest thing is just filling in some of those holes in our maps. We've done now 11 deals this year. We've announced 11 deals and each one of those will get plugged into those distribution networks and help offset some of the costs. So that's the main driver there, just putting more -- filling in more holes and getting more facilities into those distribution networks. Nathan Brochmann - William Blair & Company L.L.C., Research Division: Okay, great. And then John, just one bookkeeping question on that gain from the legal settlement. It sounds like that ended up falling into the cost of goods sold line. Is that true? And what is the exact dollar amount of that?

Sure. That's correct. And it's $8.4 million.

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

Just a couple of clarifications. John, in what you're looking for in your projections, you're basing your projections on scrap prices that are today, what the scrap prices are. You're not extrapolating that they could go lower.

Correct.

Okay. And then, as far as the guidance goes, again I just want to be clear, there's -- it excludes all non-recurring gains, losses. So you had about $0.05 of positive gains over the first 2 quarter, net, is that correct?

I'm sorry, we had $0.05 gain with respect to which?

First 2 quarters of this year.

It -- the guidance is including the legal settlement. It's excluding anything associated with restructuring or anything to do with contingent purchase price adjustments.

So it includes the legal settlement but excludes the restructuring?

Correct. And it excludes the contingent purchase price adjustments.

Gary, if I could just add one thing to that, on scrap, one thing we have seen. We saw the rapid deterioration, as John mentioned, in June into July. But there are signs that it looks like the market is stabilizing. There isn't a sign of rebound but it appears that the market does appear to be stabilizing, so we're not expecting a further drop at least in August.

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

Rob, would you just clarify just a little bit some of those, the -- some of the tests that you're talking about as far as being more aggressive for the fourth, that you're going to push out a little bit? Remind us a little bit about what those are, how aggressive they are, how they could help and what they can mean, say, for '13?

Pushing out, what, the price increases?

Yes. Well, I just -- the -- you're talking about some tests that you were playing with. John mentioned some tests as far as either on pricing programs or the way you were going to market them.

Sure, sure. We -- yes. John, it's John Quinn speaking. We've been modeling, trying to understand the elasticity of product lines and the customers with -- and we've been using testing in one region on a segment of the customers. And we -- I don't think we're prepared to say yet how much that could drive gross margins. We --- the early returns were that they were some positive things, and we think it is meaningful. But we're redoing the second test with another larger sample, so -- we would -- originally planned to do a lot of that in Q1 when the volumes are very soft. In Q1, we decided to hold off because we didn't think that, that was a sort of a normal market. We do want to make sure we've got some good data. So we've done some testing here earlier this year, we're redoing it this quarter. And so I'd probably give you a better update on that in the next call. But it is still progressing.

So it's basically just an overall price optimization type of program?

Exactly. And we do continue, John, our work with the inside sales reps on deviation controls, and those are still in place as well.

Our next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Just to finalize on the guidance. In the second quarter, you had a $0.04 legal benefit, which is being included in your guidance. Did you expect that when you initially gave guidance after last quarter?

It was not included in the guidance last quarter. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Is it -- and so if we'd look at that just operationally without the legal benefit, are you signaling any deterioration? Obviously not, but just need to ask a question.

We're not going to try and signal anything in particular. I think what -- if you peel back the onion a little bit, what you'll see is there's a couple pennies of improvement that are coming out of that legal settlement that was not in the guidance and that's probably offset by some scrap that wasn't in the guidance either. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: That's fair. And then in terms of your acquisition pipeline, we've got a change in tax policy that is looming. Is that providing an incentive at all for some of your potential targets to go ahead and join LKQ now?

We were sort of thinking it's correct in that it will -- as I said, we've done 11 deals in the first half of the year. Last year, we did 21, so we're certainly on pace to have a record year. And we do anticipate that there might be a little bit of aggressiveness in the back half of the year as that tax -- looming tax increase comes. Our pipeline has been as active as it's ever been. And then just let me touch on just our business lines and what we're seeing across the business: We're going to continue our aftermarket strategic tuck-in list, similar to the 2 we mentioned -- that we announced today, the core accessories and the paint distribution. We have plenty of opportunities in that side of the business. Self service, we announced 3 acquisitions this quarter. And we're doing a lot of greenfields as well. But great opportunities there as we continually build that marketplace. We remain -- we're in pretty good shape, we believe, on the engine side. We certainly continue our zest to find a transmission rebuilding company, so we think that's a great opportunity for us and we'll continue to work in that respect. Full serve, we're actively looking for opportunities as well. That facility in West Texas was more a strategic place because it's a new geographic market for us. And we're announcing -- just did a deal up in Western Canada to start a greenfield. So there's plenty of opportunities there and I'd expect, because of that tax consequence coming, that we'll active throughout the rest of the year. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: And then one follow-up related to ECP and acquisitions. I mean, now that you've made very good progress on ECP in the aftermarket side, at what point would you be willing to look at the recycled side or moving on to Continental Europe?

We are actively looking at opportunities there. We're going to focus more on the northern half of Europe at this time. I think that the Scandinavian countries and Northern Europe can be a little more stable than perhaps the economies in Spain or Italy or Greece. So we are actively looking at that opportunity, nothing imminent I can say, but that -- certainly attractive as we -- we're pretty pleased with the success we've had at ECP and the opportunities that the salvage market provides in Continental Europe as well as the U.K. as well.

Our next question comes from the line of Richard Hilgert with MorningStar.

I also had a question on the European outlook there. I was thinking that, with currency being what it is at this point, the economy being what it is over in Europe, you might have some businesses over there that are more willing to sell now than what they've been in the past. Are you seeing that in terms of your pipeline, some of the M&A stuff going on over there?

We -- I think it's fair to say that we have active sellers in the marketplace. However, some of them are -- in those economies, we're not particularly excited about at this time. And it seemed to be -- you know what would happen is -- Richard, is that we enter a new marketplace, we do get inquiries that tend to be more from companies that may be struggling and looking for a exit strategy right away. So we're actively looking, as I said, and we want to -- our strategy has been and will continue to be to buy the best performers in the marketplace. So what -- we just want to make sure we do our due diligence correctly and have time to really assess the marketplace. But I would say that the opportunities in Europe are as good as they are here in the States.

Some of the softness in the aftermarket, we've got the retailers talking about some of that softness too. I was wondering, are you seeing some of the other aftermarket parts providers working with their pricing right now?

Yes, I think we differ a little bit than the standard big box retailer here in the United States. Ours is more driven from an insurance company. 85% of all insurance claims are -- actually, automobile accidents are paid for by insurance companies. We have a little bit of a different driver, I think, in terms of our sales, whereas I think they're more retail-oriented. Even when they're selling in the commercial markets, it's a retail person making that decision. So I think their pricing is a little bit separate from ours in terms of I think they're much more competitive in terms of each other whereas we're really focusing on taking market share from the OEs which are really outside of our competition per se. So I think their pricing strategy may be different than ours.

And given the current fundamentals going on in our market here in the States, the softness that we're talking about, the economic conditions not being the greatest, has that driven some of this penetration -- additional penetration into your side of the business versus the OEs where you've got obviously a huge price differential between the 2?

Yes, there's no doubt there's a direct correlation to a weaker economy and the strength of our business. People want to save money. But with that being said, even in a stronger economy with the insurance companies again paying 85% of parts and repairs, they have a financial incentive, good economy or bad economy. But we do see, certainly in a tougher economy, that we become a much more viable option. From this perspective -- 2 perspective, actually: People are keeping the cost longer, so the average model year car now is 11 years in the United States. So more things will break, and when things break they'll certainly tend to deplete more of their pocket. So we think -- one that John and I talked about is that one of the greatest tailwinds we can see is a lower unemployment rate with more people commuting to work and having money obviously to do those repairs. So we've certainly believed, though, a weaker economy does not hurt us at all.

Yes, and I think one thing just to add to that is the insurance companies, when in a weaker economy, they're very price competitive and they're still struggling to get any kind of return on their investments. And so in -- within that difficulty raising the top line and difficulty gaining a new investment income, really the only place they can squeeze that is metal, which is where we're there to help.

We have no further questions at this time.

Well, with that, thank you, Christine. Thank you, everybody, for joining the call. We look forward to joining you in about 90 days to give you the results of our Q3 Call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.