Joseph P. Boutross - Director, Investor Relations Robert L. Wagman - President, Chief Executive Officer & Director Dominick P. Zarcone - Chief Financial Officer & Executive Vice President.

Nate J. Brochmann - William Blair & Co. LLC Jamie Albertine - Stifel, Nicolaus & Co., Inc. Craig R. Kennison - Robert W. Baird & Co., Inc. (Broker) Anthony F. Cristello - BB&T Capital Markets Benjamin Bienvenu - Stephens, Inc. William R. Armstrong - C.L. King & Associates, Inc. Bret Jordan - Jefferies LLC Jason A.

Rodgers - Great Lakes Review Christopher Van Horn - FBR Capital Markets & Co..

Greetings and welcome to the LKQ Corporation Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joe Boutross, Investor Relations for LKQ Corporation. Thank you, Mr. Boutross. You may begin..

Thank you, Devon. Good morning, everyone, and welcome to LKQ's third quarter 2015 earnings conference call. With us today are Rob Wagman and Nick Zarcone. Please refer to the LKQ website at lkqcorp.com for our earnings release issued this morning as well as the accompanying slide presentation for the call. Now let me quickly cover the Safe Harbor.

Some of the statements that we make today may be considered forward-looking. These include statements regarding our expectations, beliefs, hopes, intentions or strategies. 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. For more information, please refer to the risk factors discussed in our Form 10-K for 2014 and subsequent reports filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release as well as the slide presentation. And, with that, I'm happy to turn the call over to Rob Wagman..

parts procurement, route optimization, dismantling centers of excellence and sales force effectiveness. We have identified several significant opportunities in each of these key areas. However, I want to highlight an example with the sales force effectiveness test that we launched in Q3 at our Florida locations.

The intent with this test was to create a defined sales and operations structure in Florida to enable a greater focus on improving the customer experience, while simultaneously developing high levels of productivity.

For example, in order to gain efficiencies within our sales effort, we began leveraging a centralized phone system that is networked throughout the entire state. This system creates a seamless flow of calls between facilities, which reduces the time our customers wait for the next available representative and the risk of a lost sale.

In addition, to drive increased sales productivity, we've established key performance indicators or KPIs. KPIs are primarily focused around maximizing total clock time and outbound call levels and coaching time, which is the time inside sales managers spend developing the effectiveness of our sales representatives.

Though early in this initiative, we're quickly witnessing a reduction in personnel overlap, which has resulted in positive cost savings thus far. Now moving to our European operations.

In Q3, our Wholesale European segment had organic revenue growth of 7.2% and acquisition growth of 5.7%, which was offset by a decrease of 9.9% related to foreign exchange rates. ECP's continued positive performance drove organic revenue growth up 10.1% in the quarter. And for branches open more than 12 months, ECP's organic revenue growth was 6.2%.

During the quarter, ECP opened four additional branches, bringing our UK network to 198 with four additional branches scheduled to open in Q4. During Q3, collision parts sales at ECP had year-over-year revenue growth of 34%. ECP continues to execute on growing the collision business.

And through the end of Q3, ECP operates 14 collision parts distribution centers dedicated to supporting the collision sales of their branch network. The targeted number of collision parts distribution centers necessary to cover the UK is 20. And we expect this to be completed by the second half of 2016.

And, lastly, on ECP, I'd like to provide a brief update on our new 750,000 square foot national distribution warehouse, currently under development in the UK. This large project is currently on-time and on-budget. At this point, the shell of the warehouse is fully complete.

And we're now planning the next phase, which is primarily focused on internal equipment infrastructure and the launching of the automation and logistical build out. For the quarter, we did not incur any material costs related to this project. Turning to Sator business.

During the quarter, Sator witnessed additional gross margin benefit year-over-year, which contributed to a positive 260 basis point year-over-year improvement to our European gross margins. Also, during the quarter, Sator acquired four additional distributors of aftermarket automotive products in the Netherlands.

These acquisitions largely completed our efforts of converting a portion of Sator's network to a two-step model and achieve our goal of operating over 80 branches of the market.

Once fully integrated, this branch network should strengthen Sator's long-term prospects and margin profile and position the business well for our expected entry into the alternative collision parts market in the Benelux region, which we anticipate launching in 2016. Now onto the Specialty segment.

Our Specialty segment continued its strong performance by posting year-over-year revenue growth of 41% in the quarter, including the benefits of the Stag Parkway and Coast acquisitions and strong organic revenue growth of 10%. During the quarter, all integration activities from the October 2014 Stag acquisition were completed.

In total, our Specialty team integrated 12 Stag warehouses into six existing KAO distribution centers, an impressive accomplishment in just one year. In addition, during Q3, our Specialty team opened a new 360,000 square foot warehouse in Michigan.

This warehouse will provide improved inventory availability and service levels for our customers in the Great Lakes and Midwest regions. We're scheduled to begin receiving inventory at this warehouse mid-Q4 and begin distributing products early Q1 2016.

And, lastly, on operations, in addition to the Netherlands distributors, during the quarter, our corporate development efforts included the closing of the previously announced acquisitions of Parts Channel, The Coast Distribution System and eight self-service yards in California from Ecology Auto Parts.

At this time, I'd like to ask Nick to provide more detail and perspective on the financial results of the quarter..

Thanks, Rob, and good morning to everyone on the call. Over the next few minutes, I will address the consolidated results of our company and review the performance of each of our three segments before touching on the balance sheet and addressing our revised guidance.

For those of you who accessed our earnings presentation on the website, you will notice that we have included detail on both the third quarter ended September 30 and the first nine months of 2015. My comments will generally follow the flow of the presentation. But to be concise, I will focus on the quarterly results.

The short version of our financial performance in the third quarter of 2015 would be that save for our self-service operation, we had a great quarter. We experienced solid revenue growth despite continued headwinds from lower scrap prices and the strong dollar.

And except for our self-service operations, each of our businesses drove solid margin increases relative to the third quarter of 2014. As Rob mentioned, consolidated revenue for the third quarter was $1.83 billion, representing a 6.4% increase over last year.

That reflects a 10.7% increase in revenue from parts and services, partially offset by a 30.8% decrease in other revenue, primarily related to the decline in prices for scrap steel and other metals, which I will address in a few minutes.

The components of the parts and services revenue growth include approximately 6.8% from organic, 8.1% from acquisitions, before backing out 4.2% for the translation impact of FX. I will provide a bit more detail on the organic growth of each business as I walk through the segment results.

As noted on slide 11 of the presentation, consolidated gross margins improved 30 basis points to 38.9% in the quarter.

The uptick reflected approximately 70 basis points of improvement from operations, offset by 40 basis points of decline due to the revenue mix as the revenue growth of our Specialty business, which has the lowest gross margin structure, outpaced that of our other operations.

We lost about 10 basis points of efficiencies in our operating expenses, largely due to our self-service operations. This operation experienced a meaningful decline in revenue related to the lower scrap steel prices and an uptick in expenses, the combination of which resulted in materially higher cost as a percent of revenue in each expense category.

Outside of the impact of metal prices, our consolidated distribution costs as a percent of revenue benefited from lower fuel prices and our SG&A expenses benefited from the acquisition integration synergies in our Specialty operation. Segment EBITDA totaled $207 million for the quarter, reflecting an 8.2% increase from 2014.

And, as a percent of revenue, segment EBITDA was 11.3%, a 20 basis point increase over the 11.1% recorded last year.

The increase in EBITDA, when combined with the lower relative levels of depreciation, amortization and interest expense, allows pre-tax income to increase by 10.8% during the third quarter of 2015 compared to the same period last year and the pre-tax margins expanded by 40 basis points from 8.1% to 8.5%.

Our tax rate during the third quarter was down to 33.9% as compared to 34.0% in 2014. The tax rate reflects an effective rate of 34.75% for the quarter as well as a favorable adjustment to get us to that level on a year-to-date basis as we have been estimating an effective tax rate of 35.1%.

As Rob mentioned, fully diluted EPS for the quarter was $0.33 a share compared to $0.30 last year, a 10% increase. And adjusted EPS was $0.34 a share compared to $0.31, again, approximately 10% improvement.

As highlighted on slide 13, the composition of our revenue continues to change due to varying growth rates of our different businesses and the impact of acquisitions. Since all of our segments have different margin structures, this mix shift does impact the trend in consolidated margins. And, with that, let's get into the details on the segments.

Revenue in our North American segment during the third quarter of 2015 increased to $1,037 million or about 1% over last year. This is a combination of a 7.9% growth rate in parts and services, offset by a 31.1% decline in other revenue, the latter of which was due primarily to lower prices received for scrap steel and other metals.

Organic growth in the North American parts and services was 5.9%, reflecting a 6.5% increase in the core recycling and aftermarket activities being offset by minimal revenue growth from part sales in our self-service business. All in all, this was a very solid quarter for our North American operations.

Gross margins in North America during the third quarter increased 30 basis points relative to the comparable period of the prior year from 41.9% to 42.2%. This increase was primarily due to our improved procurement in our salvage operations and a mix shift away from self-service, which has lower gross margins than our Wholesale operations.

With respect to operating expense in North American, we lost about 80 basis points of margin compared to the comparable quarter of 2014. On the upside, we continue to experience improvements in fuel costs relative to last year as diesel averaged $2.63 a gallon as compared to $3.84.

As a percent of revenue, fuel costs declined by 40 basis points while we experienced some modest increases in facilities and SG&A expenses, resulting in an overall 10 basis point reduction in operating expenses as a percent of revenue for our Wholesale business.

Unfortunately, the improvement in Wholesale was more than offset by our self-serve unit, which experienced a slight increase in operating expenses but meaningfully lower revenue due both to the significant decline in scrap prices and a modest reduction in the number of cars processed.

As a result, operating expenses as a percent of revenue of our self-service operation increased very significantly on a year-over-year basis.

And while self-service only represents a little bit less than 9% of total North American revenue, this large increase had a 90 basis point negative impact on the total operating expenses as a percent of revenue for North America.

So we were up 10 basis points due to Wholesale, down 90 basis points due self-serve for a negative impact of 80 basis points. Slide 16 takes a closer look at the scrap steel prices over the past 21 months. You will note that the average price we realized in the third quarter of 2015 was approximately $123 a ton. We're down 43% compared to last year.

In total, the lower pricing for scrap steel reduced our revenue for the quarter by approximately $29 million on a year-over-year basis. It is important to note that while we ended the quarter at approximately $109 per ton for scrap steel, the prices we have been receiving recently have fallen further.

So we expect additional pressure in the fourth quarter of 2015. The decline in scrap steel prices had approximately a $0.02 negative impact on our earnings per share during the third quarter.

While we have been dealing with falling scrap steel prices for a while, during Q3, we also experienced a material decline in the prices received from other metals that are a residual of our recycling activities, including aluminum, copper, platinum, palladium and rhodium, which were down materially compared to the third quarter of last year.

So while revenue from scrap steel was down $29 million during the quarter, revenue derived from selling aluminum, precious metals and catalytic converters was down an incremental $17 million compared to Q3 of last year.

In total, EBITDA for the North American business during the third quarter of 2015 was $129 million, reflecting a 2.5% decline compared to last year. As a percent of revenue, EBITDA for the North American segment was 12.4% in Q3 of 2015, a 50 basis point decline over the comparable period the prior year.

In both, dollar and percentage terms, the Wholesale operations improved relative to the comparable period of the prior year. But the overall segment results were down as a result of the decline at our self-service operations, again, with the latter largely reflecting the impact of lower scrap and other metal prices.

Moving on to our European segment, total revenue in the third quarter accelerated to $511 million. Organic growth in Europe during the third quarter was 7.2%, reflecting a combination of 10.1% organic growth at ECP and nominal organic growth at Sator. The impact of acquisitions in Europe resulted in an additional 5.7% increase in revenue.

But these gains were offset by a 9.9% decline due to the translation impact of the strong dollar, creating a negative impact on revenue and resulting in total reported growth for European parts and services of 3%. On a constant currency basis, European revenue growth during the quarter was 13%.

Gross margins in Europe increased to 38.3%, a 260 basis point improvement over the comparable period of 2014.

Both Euro Car Parts and Sator experienced higher gross margins from operations, about 160 basis points collectively, as we continued to benefit from improved procurement in the UK and the internalization of the gross margin from our acquisitions in the Netherlands.

The remaining balance of the improvement relates to the impact of Sator's acquisitions in 2014 and the related accounting treatment under U.S. GAAP, which depressed margins by about 100 basis points in the third quarter of last year. These are the highest quarterly gross margins we have achieved in Europe since early 2012.

With respect to operating expenses in Europe, we lost about 70 basis points to largely due to higher SG&A expense at our UK operation, reflecting higher personnel costs to support the growth of the business, including our e-commerce development.

European EBITDA totaled $53 million, a 26.4% increase, even after taking into account the impact of the strong dollar, which had a negative effect of $4 million. As a percent of revenue, European EBITDA in the third quarter was 10.3% versus 8.4% last year, a 190 basis point improvement.

These are some of the best EBITDA margins this segment has posted in quite some time. We anticipate the normal seasonal pattern will continue in 2015. And we would expect these margins will moderate in the fourth quarter.

As noted on slide 19, relative to the third quarter of 2014, the pound sterling declined 7% and the euro declined 16% against the dollar. We estimate that for the third quarter the strong dollar reduced our European revenue by approximately $49 million compared to Q3 of last year.

As noted on this page, removing the impact of the currency swings would have resulted in third quarter European revenue growth of 13% and given the margin improvement, EBITDA growth on a constant currency basis of 35%, which we believe is quite strong.

When taking all currencies into account, the strong dollar reduced third quarter EPS by about $0.005 compared to last year. Turning to our Specialty segment, revenue for the third quarter totaled $283 million, a 41% increase over the comparable quarter of 2014.

Obviously, the impact of the acquisitions of Stag Parkway in the fourth quarter of 2014 and Coast Distribution in August of 2015 accounted for the largest component of growth, but the organic growth rate of our Specialty business was 10%, very strong.

Gross margins in our Specialty segment for the third quarter declined about 120 basis points compared to last year, largely due to procurement and pricing considerations in our Canadian operations, offset in part by a favorable mix shift towards more profitable lines.

On the bright side, operating expenses as a percent of revenue in Specialty were down about 150 basis points as we continue to see the leverage from integrating the acquisitions into our existing network as well as the benefit of lower fuel prices. EBITDA for the Specialty segment was $26 million, reflecting a 45% increase over 2014.

And, as a percent of revenue, EBITDA for the Specialty segment increased 30 basis points to 9.2% in 2015. As noted in the last call, this is a highly seasonal business, and the fourth quarter is by far the weakest as demonstrated by the graph in the upper right-hand corner of slide 20.

We expect the Coast acquisition will accentuate the margin drop in Q4. So you should expect the margins to again moderate meaningfully as the selling activity moves lower towards the end of the year.

Now, let's move on to capital allocation, which, given the working capital swings, the lumpiness of capital spending, and the timing of acquisitions, is best viewed on a year-to-date basis, as set forth on slide 22.

You will note that our after-tax cash flow from earnings for the first nine months was approximately $432 million and we experienced a $59 million decrease in net operating assets and liabilities, which were the primary drivers behind the $491 million of cash provided by operations during the first nine months of the year.

Thus far in 2015, we have deployed $254 million of capital to support the growth of our businesses, including $100 million to fund capital expenditures and $154 million to fund acquisitions and other investments.

So for the first nine months, we generated $237 million of free cash and we used approximately $215 million of that to repay our debt balances. The remaining $22 million was added to our liquidity. And we closed the quarter with approximately $137 million of cash, of which about $87 million is held in Europe.

At the end of the quarter, we had $1.6 billion of total debt outstanding, which, on a GAAP basis, was approximately 2.0 times our latest 12 months EBITDA. The available capacity on our credit facility was approximately $1.3 billion, which we believe provides adequate liquidity to fund the continued growth of our business.

Finally, as noted in our press release, we have adjusted our guidance on some of the key financial metrics for the year as we lace to organic growth for parts and services. We are at 7.3% through the first nine months.

We have tightened the full year range from what was 7% to 8.5% to 7.0% to 7.5%, which essentially implies 6% to 8% organic growth during the fourth quarter. In terms of earnings per share, we're narrowing the guidance a bit to $1.39 a share on the low end to $1.44 on the high end.

This all assumes that the pound sterling, euro and Canadian dollar remain at current levels and, importantly, that scrap remains at current levels as well. The corresponding net income guidance is $428 million to $442 million.

We have adjusted guidance for cash flow from operations up from $450 million during our last call to $525 million to $550 million, reflecting the continued solid cash earnings of the company and a moderate investment in working capital during the fourth quarter.

And, finally, we have moved the guidance for capital spending down a bit to $135 million to $150 million, basically, reflecting the fact that we are at $100 million for the first nine months. And, with that, I will turn the call back over to Rob..

Thanks, Nick. Looking at the remainder of the last quarter of 2015 and preparing for 2016, our outlook continues to be optimistic.

We're laser-focused on our mission statement of being the leading global value-added distributor of vehicle parts and accessories by offering our customers the most comprehensive available and cost-effective selection of parts solutions, while building strong partnerships with our employees and the communities in which we operate.

In North America, I am encouraged by the trends in miles driven, the continued growth in the average number of parts per claim, the increase in the per unit share of APU, the increased costs of repairs pushing carriers to seek alternative parts to lower their costs and the consistent pipeline of acquisition opportunities we're witnessing across all of our business lines.

In Europe, the macro trends are also attractive. In the UK, new car registrations are annualizing at the highest level since 2005 with vehicle miles through June at the highest rolling annual total ever.

Europe, as a whole, in 2014 witnessed its first registration increase since 2007, a positive long-term trend for the types of aftermarket mechanical and service parts we offer in this segment. In Specialty, the size of the SEMA market is material and fragmented, a cornerstone to our business model and founding strategy.

We continue to identify deals within Specialty that, through acquisition, create tremendous synergies and scale within our existing network.

And, in closing, I want to thank our over 31,000 team members who daily endeavor to drive organic sales, promote the use of alternative parts and implement operational efficiencies to enhance the productivity of our organization and enhance the experience of our customers, which, ultimately, will reward our stockholders now and over the long-term.

And, with that, Devon, we are now prepared to open the call for Q&A..

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Nate Brochmann with William Blair. Please proceed with your question..

Good morning, everyone, and congrats on a good, solid quarter..

Thanks, Nate. Good morning..

So a couple things. I wanted to talk about a little bit in terms – over in Europe in terms of like ECP. You just mentioned, obviously, some good macro trends in terms of miles driven going on over there and, obviously, we have more parts injections.

But, as you slow, obviously, that increase in branch count, we mature that, which we're getting close to, could you talk about the big drivers over the next several years like kind of in terms at least the footprint you have today beyond any additional acquisitions in terms of what are the opportunities, breaking it down in terms of just market share gains versus new product injections, et cetera?.

Sure. Certainly, Nate, we're at the tail end. This year – so the end of Q4, we'll be over 200 locations. And we've always said the right number is 225. So we're certainly at the tail end. Obviously, the new park introductions are going to be huge for us. We plan on bringing reman parts into the marketplace, recycled parts as well.

So there's a lot of opportunity to bring the products we have here in the U.S. over to the UK. So we do think the overall market conditions are good. On top of some of the tailwinds you mentioned, the strong surge in SAAR rate that we're seeing here in the U.S. is also occurring in the UK and on the continent.

And we know when those cars come out of warranty they're going to be a real driver of the business. The average age of the car part in the UK is 7.8 years old, but it's expanding. And on the continent, it's 8.6 years old and expanding. So we think as these cars get older, it's going to provide a nice tailwind.

The other thing that I do want to talk about really, what we've really been focusing on this last quarter is the focus on the gross margin there at ECP, as you saw in the numbers.

So while initially a headwind in terms of really driving down our selling cost, our selling prices to the customers, we are going to see we believe a consistent effort to grow our top-line as well on top of that as well as the gross margin. So I think with all the macro drivers and some of the stuff we're doing internally, we're in good shape there..

Okay. Sounds good. Thanks for that. And then second question. Obviously, you pointed out some good initial results from your kind of endeavors on the consulting arrangement. And we talked about maybe seeing some benefits in 2016. And, obviously, this individual project in the small area had good results.

Can you talk about maybe what you're seeing so far in terms of the opportunity to monetize any of those initial efforts across the entire network where it could produce something that actually is meaningful in terms of results for next year?.

Yeah. Let me talk about the four different areas that we're focusing on, Nate. First, routing software. We are launching our first routing software initiative next week in Florida. So that's our first shot at that. The purchasing area that we've been focusing on, we've got a lot of RFQs out in the marketplace today.

So those will start coming in pretty soon. The sales changes I talked about in Florida are going well. And we do plan on expanding those. The last one on our list was the dismantling centers. We are bringing some Six Sigma black belts on to the payroll to work on getting those implemented.

It just really is too early to talk about what the net gain is going to be, although initially we've been very pleased with what we think we're going to be able to attain here. But it really just is too early to monetize what the net effect is going to be..

Okay. That makes sense. And I appreciate the time. And I'll turn it over..

Thanks, Nate..

Thank you. Our next question comes from the line of James Albertine with Stifel. Please proceed with your question..

Thank you and good morning, everyone..

Hi, Jim..

Good morning..

I wanted to ask as well on the European segment, just to the considerations for the fourth quarter as it relates to margins. You obviously had a great result in the third quarter but help us understand. You're balancing, I think, some easier compares year-over-year.

If I recall, there's some pull forward costs related to a competitor bankruptcy last year and some other expansion. You've got a new UK facility, though, that's starting to come online as well this year.

So how do we sort of balance that and how do we think about kind of the year-over-year trends looking forward into the fourth quarter?.

You're right, Jamie. There was a bit of a pressure on margins over Europe in Q4 of last year. We think most of that is behind us. Again, we showed solid improvement during Q3. We do anticipate that the margins in Q4 should be a little bit better than last year. But it is a seasonal business, much more than here in the U.S.

So it's important to keep that in mind. So we do anticipate that the margins will creep down in Q4 relative to where they are right now..

So if I'm hearing, we should just moderate the rate of change that we saw in the third quarter when we're thinking about our fourth quarter models?.

Yes..

That's fair..

Great. And then just a quick question as well, maybe an update really on your plan to essentially buy fewer higher quality or higher priced cars.

How is that progressing? Is it still kind of too small relative to the 200,000 or so you're buying to really be impactful? Or is that a bigger chunk of the pie than we're giving it credit?.

We're starting to see the benefits of that, Jamie, for sure, buying the better car. Obviously, as the car park gets a little younger, we're buying about a half a model year better for the same price. And I think what's really impacting our cost at auctions, quite frankly, is the strong dollar is keeping a lot of the exporters out.

And, of course, scrap is bringing it down as well. But that's a strategic initiative we're moving forward. And we're very pleased with the results. We're actually getting more dollars per car than we did with the older car..

Okay.

Well, I would imagine an ancillary benefit though is probably pretty small, is sort of the reduced exposure to scrap in the sense that you're buying fewer cars, right?.

Absolutely, yeah. That would certainly be a positive. But it's basically we're flat. We're down 1.4% year-over-year. And I think we'll be in that same range of about the same number of cars here going forward. We did have a healthy backlog coming out of Q1 and Q2, which did allow us to buy a little bit less in Q3..

Got it. Well, thank you so much and congrats on a great third quarter. And good luck in the fourth..

Thanks, Jamie..

Thank you. Our next question comes from the line of Craig Kennison with Robert W. Baird. Please proceed with your question..

Good morning. Thanks for taking my questions as well. Nick, the free cash flow upside this year has been the talk of investors, I guess, early this morning.

What are the key factors behind that and how sustainable is it given it's driven by some working capital benefits?.

Thanks, Craig. There's no doubt that we have benefited on the working capital side. Again, the $491 million of free cash or operating cash flow, if you will, for the first nine months reflects strong earnings, basically $432 million, but then a net decrease in working capital.

I don't believe that we're going to be able to run the business for the next several years continuing to reduce the amount of working capital.

Again, some of that has to do with the fact that Q4 of last year at year-end – again, we really bulked up the inventory in anticipation that there could be some issues at the ports during the first quarter and second quarter. And so our inventory balances are actually coming down from the end of last year.

Again, we had some increase in payables as well, which helped matters. So we took the guidance for the year up just reflecting the fact that we're well ahead of where we anticipated we would be.

But, again, I think, for modeling purposes, folks should assume that, on an ongoing basis, we're going to need to increase working capital pretty much in line with our revenue growth..

As a follow-up, just given the upside, even though it may not be entirely sustainable, but still strong, is there an opportunity to go to your rating agencies and look for a re-rating of any kind?.

Probably not. I mean, we keep in constant dialogue with both Moody's and Standard & Poor's. We think we've got a great relationship there. At the end of the day, it's going to take a little bit more than just an uptick in free cash flow, if you will, I think, to get us to investment grade land..

And then just, lastly, on your facility in the UK, the new distribution center you're working on. I'm curious if you can quantify what you think might be some of the benefits from a fulfillment rate perspective or a delivery frequency perspective.

I'm trying to compare it really to a competitor in the U.S., O'Reilly, which has used really some scale advantages as a distribution center operator to take meaningful share. And I'm wondering if that's a decent analogy..

I think it is correct. We will be able to service our branches much better. And with the excess capacity, we'll have deeper inventories as well. So I think we can buy better as well. Hopefully, we'll be able to buy bulk, much larger and be able to service our branches and our hubs much quicker with that facility.

It's going to be fully automated – a good portion of it's going to be automated that will allow us to be real efficient in terms of space and everything else. So a real positive and I think it's going to really allow us to get a lot more efficient on both the sales and service side of the business..

Okay. Thank you..

Thanks, Craig..

Thank you. Our next question comes from the line of Tony Cristello with BB&T Capital Markets. Please proceed with your question..

Hi, Good morning..

Morning, Tony..

Morning..

The first question I have – and it looks like all of your businesses outside of sort of the metals exposed are doing well. But when you look at the comment, I think, you talked about 2016 introduction of alternative parts in the Sator business.

Can you maybe give a little bit more understanding of the process that's involved there, sort of, the ramp time and what you see as the opportunity as you introduce those newer alternative parts?.

Sure, Tony. Obviously, we have 17 carriers in the UK that we're going to use them as our launching pad as we get to the continent. Many of those right also in the continent, so from the UK, so we have those relationships already built. In terms of the product, it's the same vendors we're using in the UK, so that won't be difficult.

It's really just getting – our first process was to flip from three step to two step. And now that we're virtually done with that, now we can control that last mile of distribution. So it's really going to be working with the insurance companies on the continent to show them our results that we've had in the UK.

In terms of the market opportunity, the OEs have about a 93% market share on the continent, so lots of opportunity. We've been very successful in the UK, as we mentioned in my script, 34% growth year-over-year. And the numbers are getting larger and larger obviously as we continue to grow that side of the business.

So we think there's a sizable opportunity, once we get the products launched in the Holland (45:06) market..

Okay.

Is it similar to, with respect to the U.S., in terms of you get to a certain point and then maybe there's a little bit more pushback, but it's easier to introduce parts when the concentration is so heavy on the OE side right now?.

I think that's fair. And it's actually interesting. I think as we get deeper and deeper, it actually gets easier. There won't be a pushback. The initial pushback comes at the beginning, getting people to switch and trust the ability for us to service the customer. Once that's accomplished, I think, it gets so much easier, actually..

Okay. And then if I could ask one more question. The self-serve side of the businesses, we're talking a lot about scrap and the negative overhang on metals. I'm assuming the demand side at your self-service business is still very strong and robust relative to the market.

And, one, is that true? And then, second, as you look at scrap, these prices are down at levels we saw back in 2008 and 2009 after being up at $250, $300 a crushed ton. Do you get the same lag time in terms of recovery as you do feeling the pressure? So you got 60 days, 90 days of recovery on between the time you buy the car and when you crush it.

On the flip side, coming out of it or if scrap prices reverse, do you then get the benefit on that lag time as well?.

Yeah. I'll take the question about the demand and I'll let Nick talk about the scrap. The demand, our admissions have never been higher actually at our facilities. The average model year car in the United States is 11.4 model years old. So the demand is very strong. That's not an issue whatsoever.

What we're seeing a little bit is scrap prices have dropped. Some of the people that we procure the product from, the tow yards, the municipalities, et cetera, some of these people are hoarding the inventory until scrap comes up. So it's a little more difficult to purchase our products, but the demand is as high as it's ever been..

Yep. And on the scrap, self-service has roughly a 90-day, maybe 120-day time between where the cars – we purchase the cars. They are then fed into our facilities and then ultimately head to the crusher. So, on the full service side, obviously, that's a much longer duration.

But three months to four months we basically turn the inventory on the self-serve side. So, in theory, as prices begin to head in a northward direction as opposed to a southward direction, we should get benefit there as well. It all has to do with the price that we paid for the car and the underlying value that we're getting from the scrap.

And we've actually been able to buy pretty effectively. We're bringing our purchase price for the cars down as scrap prices has fallen. But, again, there is always that lag there. And that lag will be there on the way up as well..

And just to put some color on that, Tony. Our average price at a self-serve location is down $103 per car year-over-year. So, we've taken a lot of cost out of the purchase. And the full service is down $18 year-over-year. But, again, I think that's a little misleading because we are buying a better car.

So I think we're actually doing much better than the $18 shows..

Okay. That's great. Very helpful. Thanks, guys..

Thanks, Tony..

Thank you. Our next question comes from the line of Ben Bienvenu with Stephens. Please proceed with your question..

Thanks. Good morning..

Good morning, Ben..

Just touching on the specialty industry.

Following the Coast acquisition, are there any other sizable competitors there or anyone of any meaningful competitive threat? And then, when you think about the product offerings that you offer today, are there any offerings that you would like to bring onboard or that you could potentially bring onboard through bolt-on acquisitions?.

Yeah, Ben. There are sizable competitors in the marketplace still. Remember, we operate in the entire SEMA market which is well over $34 billion. We're only operating in the $5.6 billion part of that segment. So lots of competitors out there still and a lots of opportunities to keep growing the business.

And that pipeline in our industry – that acquisition pipeline is very active actually, that side of the business..

Okay. Great. And then just touching on the ECP same-store sales, branch growth. Obviously, strong new car sales, I suspect, are creating a little bit of a near-term headwind, obviously a long-term tailwind.

Is that mid to high single-digit growth expectation you laid out for the full year on the last call still a reasonable expectation?.

I think it is. I think with just some of the macro trends, they're benefiting from miles driven increasing. The new car park, as we just mentioned, as I said earlier, once that car ages three years, gets out of the warranty side of the business, we expect our business to be very strong there, so, on that side. The collision is still doing very well.

I think our paint business is dragging down the organic. It was never going to grow at the size of the parts business. So that's kind of bringing in the number a little bit. But I do feel pretty confident that strong single-digits, low double-digits are going to be achievable with the macro trends we're facing..

Okay. Great. I'll hop back in the queue. Thanks..

Thanks, Ben..

Thank you. Our next question comes from the line of Bill Armstrong with C.L. King & Associates. Please proceed with your question..

Good morning, gentlemen. So kind of related to that last one. In Europe, your organic growth was 7.2%, which is below the trend we've seen elsewhere. ECP is still is pretty strong, about 10%.

Anything to call out in the Netherlands in terms of the organic growth rate?.

Yeah. Two things on the Netherlands, Bill, that are probably worth noting. We had a really strong Q2. It was a very mild spring on the continent. And we believe a lot of that repair work may have been pushed from Q3 into Q2.

And the other thing that we're doing is obviously with the heavy acquisitions we're doing from three-step to two-step, there's a lot of revenue moving as we acquire new businesses we're cannibalizing from other locations.

So it may be shifting from an older location that was comping to a newer location that we didn't get the benefit of the organic growth. So we do think that's going to start to level out again and will be back to where we think we should be, which is mid single-digits of organic growth..

Got it. And then a question maybe for Nick. You had a $3 million other income item on your P&L.

What was that?.

Most of it related to FX items..

So kind of non-cash then or the hedges or what?.

Yeah. Mostly non-cash items, Bill. Again, nothing material..

Okay.

So not – and also, I guess, sort of non-recurring then? I mean is that something we should be looking for in the quarters ahead?.

No. I mean, the FX goes along with where the currencies are swinging and the like. So we would never kind of plan on that being a recurring item..

Understood. Okay. Thank you..

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question..

Hey. Good morning, guys..

Hi, Bret..

Just housekeeping.

Could you give us what you have for the alternative parts penetration year-over-year in North America and then the UK number?.

In the U.S., we get quarterly updates, but it's really moving. But it's in that 36% to 37% range. And in the UK, we're closer to 9% plus. The last figure we got from Solaire (53:21) at the time. Up from 7%, we got in the business, Bret, in 2012..

Okay. And then, in Specialty, as you're looking around the M&A environment, I guess, you wouldn't be buying a manufacturer. Would you buy a to-consumer brand like a Summit or a JEGS or a QuadraTec or is that too much sort of a catalog retail presence? You need more of a distribution model..

We do play in that performance side of the business, Bret. That is one of the segments we are in. We certainly would look at anything that we could obviously lever. They do have – both of those companies have a strong e-commerce presence, which is attractive to us. But at this point, we're just looking at all of the opportunities.

And since they are in that segment, we certainly would be interested in that business..

Okay. And then, one last question.

On ECP, the 6.2% comp, do you have a feeling for what the underlying market growth was there? I mean, that would seem to be a share gain comp, but do you know what the number that you're selling against was?.

The 6.2% comp?.

Yeah. I think you said the 12 month and older ECP stores were up 6.2%.

What was the market up do you think?.

We've been told the market is growing circa GDP, so 2%ish..

Okay. Thank you..

Thanks, Bret..

Thank you. Our next question comes from the line of Jason Rodgers with Great Lakes Review. Please proceed with your question..

Hello, guys..

Hi, Jason..

Good morning..

Just looking at FX and scrap, assuming that rates and prices remain at current levels, what do you expect the EPS impact will be in the fourth quarter?.

Again, if FX rates stay where they are today, again, probably a little bit less than $0.005, on the scrap side, figure $0.02 relative to last year. I mean we continue to chunk down. And the scrap prices really didn't start to come in meaningfully until early Q1 of this year. So we won't get the real benefit..

And then, how about the tax rate for the fourth quarter?.

You should assume for the year that we'll be at the 34.75%. That's our best estimate at this point in time..

Okay. And then, finally, if you wouldn't mind providing an update on the State Farm aftermarket chrome bumpers, as well as your JV in Australia..

Sure. Jason, on State Farm, the bumpers, the ones that they are writing in the aftermarket were up 16.6% year-over-year, so really impressive growth. We now have 467 certified parts available just in the bumper line, so very pleased with that. We talk to State Farm all the time, nothing more than that.

On Australia, we keep moving forward with the partnership there. And it's a slow, steady race, but growing our top-line very nicely and expect to do a little bit more here in the coming quarters in terms of potential acquisitions and more product entry..

Thank you very much..

Thanks, Jason..

Thank you. Our next question comes from the line of Christopher Van Horn with FRB (sic) [FBR] (56:47) Capital Markets. Please proceed with your question..

Hey, guys. Thanks for taking my call. Just a quick question on Sator and I apologize if you went over this.

But could you just update it now that you've kind of completed these four acquisitions, update us on the competitive landscape over there and where you guys are kind of positioned? And have you quantified kind of the addressable market for that business after these acquisitions?.

Yeah. It's a competitive marketplace. We're now in a position to really control that last mile of distribution. So we do still have some wholesale customers as well. So we're kind of playing in both of the markets. The car park is growing there. And it presents a great opportunity.

We think that our small entry into France – we have three locations in France – provides another opportunity to keep growing the business. So we think it's a great opportunity to really grow the business in all segments of the markets we operate, the Benelux, as well as the France markets as well..

And these last four really puts you at a competitive advantage over some of the other guys over there, right?.

We certainly believe that now that we're pretty much where we need to be in terms of the three-step to two-step, we're in a great position because our inventory is strong. We can leverage not only our existing inventory in the Netherlands, but we have backup in the UK as well. So we think we're in a great position..

Okay. Good stuff.

And then secondly on Coast, have you guys talked about – is the dynamics in that market similar to auto in terms of the sweet spot of the age of the vehicle? And what kind of trends are you seeing in the addressable market there?.

Yeah. Remember the Coast business and our accessory business really isn't tied to collisions. It's more tied to the upgrading of the vehicle or accessorizing of the vehicle. So it's really tied to the SAAR rate. As new car sales and new RV sales continue, people are more likely to accessorize their vehicle at time of purchase.

So we think we're in a great position on all side of the accessory business because of that strong SAAR rate. People are going to do this, most likely upgrade their vehicle at the time of purchase. The other thing that's attractive about that is the dealerships often finance those type of upgrades. So they roll right into the notes.

So we're pretty optimistic. As long as the SAAR rates stay strong, we've got a nice tailwind there..

Okay. Thanks for taking the call again. Thanks..

Christopher..

There are no further questions at this time. I'd like to turn the floor back over to management for closing comments..

Thanks, Devon. Thank you, everyone, for your time this morning. And we look forward to speaking with you in February when we report our fourth quarter and full year 2015 results. Have a great day..

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